Chairman's Statement

Overview

This has been a year of transition for Van Elle as we seek to transform business performance and set the platform for future growth under our new CEO, Mark Cutler, and a strengthened leadership team.

Disappointingly, current year performance has been impacted by a combination of uncertainty which has affected a number of our most significant markets and, as previously highlighted, we experienced operational weaknesses in the General Piling division in Q3.

Since joining Van Elle, Mark Cutler has undertaken a thorough review of operations and is implementing a three-phase transition plan with the aim of improving operational performance and establishing a platform for growth.

Significant progress has already been made under phase one of the transition plan, supported by an enhanced and strengthened leadership team, including streamlining the divisional structure, improving engagement with strategic customers, fostering an improved commercial and business development focus, and strengthening performance review and commercial processes across the business. In addition, a high level of focus is being applied to staff engagement and retention.

Notwithstanding current market uncertainty, the Group remains a leader in the UK geotechnical engineering services market where significant opportunities exist across our target markets of Housing, Infrastructure and Commercial & Industrial, much of which remain well-funded and/or are underpinned by long-term structural growth dynamics. The Group finished the year with a strong order book, with particular focus on longer-term partnerships and building on existing client relationships.

Capital allocation

The Group's capital structure is kept under constant review, taking account of the need for, and the availability and cost of, various sources of finance. The Group's objective is to deliver long-term value to its shareholders whilst maintaining a balance sheet structure that safeguards the Group's financial position through economic cycles.

Given the current wider market uncertainties, the priority focus continues to be strong management of working capital and net debt reduction. Investment over recent years has positioned the Group strongly, with a large, modern rig fleet, capable of delivering a broad range of services efficiently. In the short term, capital expenditure on rig fleet expansion will continue to be considered on a selective basis where a compelling investment case exists. Bolt-on acquisitions are not currently a key priority for the Group, but we remain watchful for opportunistic situations that might arise from the current uncertain market conditions.

Cost reduction programmes are ahead of previous targets and ongoing, benefiting from the co-location of all operations to our main site in Kirkby.

Dividend

In light of the Group's performance and reflecting the importance of prudent management of cash reserves, the Board is recommending a final dividend of 1.0p (2018: 2.3p), making a total of 2.0p (2018: 3.7p).  If approved, the final dividend is payable on 27 September 2019 to shareholders registered on 6 September 2019. 

Board and governance

In August 2018, our new CEO Mark Cutler joined the Board following the retirement of Jon Fenton in May 2018 (and the intervening period with Steve Prendergast as interim CEO). Mark brings significant sector and leadership experience to the role, with a clear strategy to stabilise the business and build a platform to pursue sustainable profitable growth.

In May 2019, Paul Pearson resigned from his role as Chief Financial Officer and Director of the Company and so will leave the Company in November 2019. On behalf of the Board, I would like to reiterate our thanks to Paul for his many years' service, which included the successful IPO of Van Elle in 2016. The Company is progressing the process of finding a successor to Paul.

As a Board, we are committed to promoting the highest standards of corporate governance and ensuring effective communication with shareholders. We are committed to applying the Quoted Companies Alliance for Corporate Governance Code, complemented with other suitable governance measures appropriate for a company of its size.

People

During a year of significant transition, the senior leadership team has been strengthened to ensure we have the optimal mix of experience and capability as we build a platform from which to grow the business.

In the year, Peter Handley and Malcolm O'Sullivan joined the leadership team in key roles, both bringing significant industry experience to the business. On behalf of the Board I would like to welcome Peter, Malcolm and all new employees to the Group. 

As a Company, we have worked hard to bring together a team that has the right combination of sector knowledge and corporate experience to enable us to deliver on our vision and strategy.

Van Elle remains a market-leading business with an outstanding group of employees. I would like to thank all employees for their hard work and ongoing contribution to the business.

Outlook

Despite the uncertain market conditions and impact on investment decisions due to the protracted Brexit negotiations, and a general slowdown in contract deployment, the improved customer focused approach and positive order book development underpins the Board's confidence in the prospects for the Group in the coming years.

As a Board, we are mindful that market uncertainty and the resultant volatility may persist further into the current financial year.

Van Elle fundamentally remains a market-leading business with a clear strategy. The Board is confident that with the benefits of our implementation plan, we are well placed to capture significant opportunities across our target markets today and into the future.

Adrian Barden

Non-Executive Chairman

24 July 2019

Chief Executive's Statement

Overview

This year has been a challenging year amidst a general slowdown in construction activity and uncertainties around investment decisions and project starts. The first half continued to see market uncertainty as a result of the liquidation of Carillion in January 2018 and delayed contract decisions arising from Brexit uncertainty. 

Reflecting these more challenging market conditions and the need for internal performance and efficiency improvements, the business is in a transition period during which efficiencies are being delivered, improved processes are being implemented and enhanced capability is assembled.  In parallel a strategic review of markets and customers has been undertaken to enable the actions for sustainable growth and margin enhancement to be delivered over time. As a key element in ensuring strong, long-term performance, the Group is now far more focussed on closer customer relationships in its core sectors.

Part of the streamlining of the Group has seen the number of operating divisions reduced from eight to five and the integration of all staff previously spread across four separate offices into a single co-located office in Kirkby during Q4.  In addition, the size of the total rig fleet has been reduced while future capex is more selectively considered, although Van Elle continues to hold the broadest and most modern range of specialist piling rigs in the market.  In parallel, efficiencies to the overhead have been delivered in excess of £1.0m on an annualised basis, part of which has been reinvested in key hires, and further opportunities continue to be delivered, including the benefits of co-location on a single site.

Notwithstanding the difficult backdrop, the business continues to innovate and develop new products and services to ensure we remain competitive and diversified, as well as to meet opportunities in its core sectors.  During the year new rigs have been built in-house for Vibro stone columns (VSC) in support of the Housing sector, a unique award-wining, road-rail geotechnical investigation vehicle, the VEmog has been commissioned and excellent progress has been made with our patented track bed stabilisation (TBS) system applicable to the Rail sector.  FY19 has also seen the effective deployment of the three large rotary rigs procured in FY18 on several important case study projects. 

Our diversified business model continues to be focussed on mid-sized projects (once again delivering circa 1000 projects in the year) across three core sectors where we believe there is sustainable demand for our services.  In addition, our commercial risk remains relatively low as we complete projects quickly after typically short lead-times and this approach rarely leads to commercial disputes.  Progress is indicated by our improved cash conversion of 106% (FY18 86%) which has supported our year-end net-debt reduction to £4.2m (FY19 £5.9m).

Significant focus has been put into staff engagement and retention, particularly during the challenging times described above and while streamlining and cost reduction programmes are being delivered.  These initiatives include strengthened internal communications, priority training and development programmes and recognition programmes.  Our first company awards event will be held in December 2019.

Strategic Approach

Since joining Van Elle in August 2018, I have undertaken a thorough review of the business and identified a range of opportunities to enhance the performance of the Group both in terms of operational performance and commercial development.

The Group remains a leader in the UK geotechnical engineering services market and our strategy is predicated on simultaneously:

1.   Enhancing the performance and profitability of the business through a range of business improvement activities; and  

2.   Accelerating growth by increasing our market share in our targeted sectors, maximising our integrated solutions offering, broadening our range of products and services and extending our geographical footprint into high growth markets across the UK.

At the half year we described the three phases of our transition plan (below).  The phase one activities commenced in FY2019 and will continue throughout FY2020.  Progress is measured against medium term key performance indicators and supported by annual objectives across the leadership team, which are cascaded through the business via individual personal appraisals and linked to individual incentive arrangements.

At the half year we reported on a range of immediate actions to help deliver improvements under phase one. For the year as a whole, significant progress has been made with actions undertaken including:

·      'Back to basics' operational improvement programme and introduction of strengthened commercial processes;

·      Significantly strengthened leadership team;

·      Streamlining and simplifying the Group's operational structure;

·      Consolidation of the Group's operations into a single site at Kirkby;

·      Increasing engagement with strategic customers;

·      Re-focused work winning approach;

·      Initiatives to improve asset (rig) utilisation; and,

·      Improved employee engagement

The Group is beginning to generate a stronger pipeline of opportunities, particularly larger projects with an increasingly strategic customer base which integrate several of its specialist capabilities and enable early involvement.

Strengthened commercial processes are expected to support consistent contract margin delivery, tighter risk management at bid stage and improved cashflows.  The streamlined divisional structure has already reduced unnecessary complexity in the Group as well as reducing overhead costs, including anticipated annualised cost savings of over £1.0m for FY2020.

The co-location of all personnel formerly dispersed across four offices in Pinxton and Kirkby has further improved internal collaboration and efficiency.  This will be further enhanced when all plant and maintenance operations are also co-located at the same site later in FY2020.   

Target markets

As a Group we operate a diversified business model, targeted at growth markets where there is sustainable demand for our services. We see significant continued opportunity across our core target markets, being Housebuilding, Infrastructure and Industrial & Commercial, which are supported by favourable long-term trends and where Van Elle's range of services are of critical importance. Across each of these markets our work mix is carefully monitored to ensure we retain the essential regional strength of the business across mid-sized projects but blended with carefully selected larger schemes that deliver greater utilisation and margin certainty and meet our cashflow and risk management criteria.

·      Housebuilding remains the most important end market for Van Elle, making up the majority of the Group's revenues and continues to be a key target market. As widely reported, the UK has a structural under supply of new-build housing with cross-party support to increase housing output. With strong levels of demand, Van Elle expects to see increasing opportunities to support the delivery of homes quickly and efficiently, particularly with growing pressure to build on brownfield and marginal land.

·      Infrastructure investment in the UK continues to grow as major spending plans are underpinned by national demand and essential maintenance requirements. Van Elle is well-positioned having delivered numerous case study projects across all major infrastructure segments and is able to meet the increasingly complex and technical requirements of these projects.

·      Industrial & Commercial is supported by the Government's industrial strategy to increase productivity across the country. The market is seeing significant growth, particularly in distribution and logistics, as an increasing amount of industrial and warehouse space is needed to support demand from online retailers to sort and distribute orders efficiently. Large-scale projects have increasingly complex and technical requirements.

Operating performance

As previously reported, during FY19 the business experienced operational weaknesses in General Piling which were addressed by operational review and management changes in late 2018. The 'back to basics' imperative that emerged from this review is applicable to all divisions and has been a continuous feature of leadership focus through FY19 and into FY20. The introduction of our Perfect Delivery performance model, incorporating eight simple and transparent measures is intended to consistently ensure the highest standards are achieved on every project in the Group.

In terms of FY19 performance, revenue reduced by 15% to £88.5m compared to FY18 (£103.9m) against a backdrop of challenging market conditions. Underlying operating margins reduced from 10.7% to 5.9% and reported operating margin from 9.3% to 5.2% from a combination of lower contribution to overhead from reduced sales and weaker operational performance from some divisions.

Markets

In our end markets we saw a broadly balanced exposure to our core sectors. Performance across our markets has been impacted by a combination of lower customer confidence, delayed decision making and in turn, increased competition and pricing pressures.

The Rail market is currently experiencing a lull in activity following the completion of electrification schemes and reduced spend towards the end of the current funding period CP5, and ahead of the start of CP6.

Highways remains a buoyant market, where the Group continues to have significant bid success, but which has also been impacted by delays to project start dates.

In Commercial & Industrial, the period saw a notable slowdown in London, which has driven competition further afield outside the capital. However, the Industrial market presents a significant growth opportunity with the wide-spread development of 'big shed' logistics capacity which the Group's Vibro techniques will help us to capture.

The reduced proportion of sales to the housing sector is explained primarily by fewer large projects in General Piling to multi-story developments. However, we have seen notable continued success with our integrated piling and Smartfoot foundations offering.

The Group is developing a more strategic approach to work winning, focussed on longer term customer partnerships. This focus has resulted in the Group securing positions on attractive, long term contracts which underpin a portion of FY20 performance whilst setting firm foundations for future growth across our markets.

Fleet and operating structure

Rig investment in the year has been modest with no new rigs procured but instead the business has concentrated on actions required to improve utilisation, reliability and self-build of new VSC rigs, the benefits of which will be seen in FY20.  We have also disposed of nine rigs, with a net reduction to our total feel size from 123 to 115. The Group continues to benefit from a well-invested and modern fleet with significant flexibility to redirect resources to reflect short-term trends in our markets; a key strength of the business.

This year we report our operating performance in three segments rather than the previous four.  This better reflects our streamlined divisional structure.  The three segments, all on a national basis, are as follows:

·      General Piling: open site, larger projects; key techniques being large diameter rotary and CFA piling as well as larger precast driven piling

·      Specialist Piling: restricted access, rail, smaller rigs and engineering techniques; including soil nails and anchors and drill and grout projects

·      Ground Engineering Services: modular foundation solutions (e.g. Smartfoot) and geotechnical services (trading as Strata)

The former Ground Engineering Products segment has been discontinued as a standalone reporting segment as the in-house production of pre-cast piles and Smartfoot beams are now considered as a cost centre in support of the above three segments as required; catering solely for our internal needs.  Our production facilities continue to operate from three sites in Glasgow, Kirkby and Dereham, supplemented by external supply as necessary to meet peaks in demand. 

General Piling

The General Piling division has the largest fleet within the Group and offers a wide variety of ground engineering solutions for open-site construction projects.

Revenue contracted by 15.6% in the year to £37.2m (2018: £44.1m), suffering from the uncertainties in the markets for the reasons described above.

The subdued markets resulted in low utilisation of our large diameter rotary and CFA piling rigs that not only supressed revenue, but also impacted on margin mix as these techniques command higher gross margins.   Weaker than anticipated operational execution of contracts, particularly in Q3, further compounded gross margin performance, resulting in a reduction in operating profit to £1.2m (2018: £5.4m).

The causes for the poor operational delivery were identified and actions taken in November 2018 to resolve the issues, which included a change of divisional leadership with the appointment of Malcolm O'Sullivan, former managing director of Balfour Beatty Ground Engineering, as the new General Piling director just after year-end.

Specialist Piling

Revenue was approximately 24.9% lower at £28.6m (2018: £38.1m). Approximately £4.5m, or 45%, of this reduction reflects the decision to cease exposure to lump sum drill & grout activities following poor margins from works delivered in 2018. The remaining reduction in revenue, as with General Piling, reflects the impact of lower levels of confidence and demand in our end markets, particularly in the infrastructure sector and the non-repeat of a small number of very large projects in FY18.

Rail-specific revenues fell by 10.9% over the year, with major electrification programmes coming to an end and reduced spend towards the end of the current funding period CP5 and ahead of the start of CP6, which is expected to see momentum in spend.  

In the second half of the year, whilst Rail saw strong demand for its services over the Christmas and Easter periods, other Specialist Piling contracts had contract start dates delayed, particularly on several highways projects that were due to start in Q4 FY19.

As a consequence of the reduction in revenue, operating profit fell to £2.7m (2018: £3.6m). However, a recovery in gross margin performance enabled operating margins to be maintained despite a lower contribution to overhead.

Ground Engineering Services

Revenues of £22.6m represented a 4.6% increase on the prior year (2018: £21.6m).

Our integrated piling and Smartfoot foundation beam sales to the housebuilders increased by £1.8m (9.8%).  As the housing sector moves increasingly to modern methods of construction the time and resource savings of modular foundations are becoming better appreciated.  In parallel our relationships with national housebuilders are maturing.  As a Group; rigs and personnel have been deployed effectively to meet the increased demand.

Our in-house pre-cast concrete pile and beam production facilities at Kirkby are working to maximum capacity such that we procured strategic supply chain partners to service the internal demand for our concrete products.

Strata, our Geotechnical division, reported revenues of £4m; £0.4m down on last year, primarily impacted by reduced pile testing volumes as a result of the Piling division's lower revenues and maturing external business development activity.  We delivered our first contract with our new, first in class VeMog, which provides on-track site investigation capabilities to the rail infrastructure.

Operating profit for the year was £1.3m, down from £2.1m due to additional costs associated with scaling up operations to meet the demand for Smartfoot-related sales.

Summary & outlook

This has been a year of transition for the business, having taken action to strengthen the leadership team, refine the Group's commercial approach, streamline operations and re-focus on our customers.

Whilst it is disappointing to report that performance across the year has been impacted by a combination of widely-reported market uncertainties and previously highlighted operational weaknesses, we are seeing tangible signs of operational improvement as a result of the transition plan we are implementing. Our strengthened commercial approach is gaining traction as evidenced by recent contract wins and an encouraging orderbook.

Nevertheless, the Group is continuing to experience customer uncertainty as well as some heightened competitive pressure, resulting in a quiet start to the current year in some segments and increased volatility in month on month performance. Whilst the improved customer focused approach and positive order book development underpins the Board's confidence in the prospects for the Group in the medium term, the Board is mindful that challenging market conditions and the resultant volatility is persisting into the current financial year and impacting visibility.

Whilst the benefits of our self-help initiatives should drive improved performance in the business, the ability to make overall progress in FY20 will require supportive market conditions as we progress through the year.

Van Elle fundamentally remains a market-leading business with a clear strategy. Having seen the positive impact of the initial actions undertaken as part of phase one of the transition plan, we are confident that these steps, as well as the further commercial and operational initiatives that will be deployed in the current year, will leave us well placed to capture significant opportunities across our target markets today and into the future.

Mark Cutler

Chief Executive Officer

24 July 2019