Van Elle Regulatory News (VANL)

Van Elle Holdings plc

16 January 2019

Interim results for the six months ended 31 October 2018

Van Elle Holdings plc ("Van Elle", the "Company" or the "Group"), the leading geotechnical engineering company offering a wide range of ground engineering techniques and services to customers in a variety of UK construction end markets, announces its interim results for the six months ended 31 October 2018.

Highlights

* before share-based payments and exceptional costs

** defined as cash generated from operations divided by EBITDA less profit on sale of fixed assets

*** Return on capital employed calculated as underlying operating profit over net assets less cash and excluding loans and borrowings

Summary highlights

· Trading in H1 was in line with revised expectations at £42.9m (H1 2018: £52.6m) and reflected the quiet first quarter

· Underlying operating profit reduced 47.4% to £3.0m (H1 2018: £5.7m), largely reflecting lower overhead recovery despite gross margins improving slightly to 32.8% (H1 2018: 31.7%)

· The new CEO, Mark Cutler, joined in August 2018 and has implemented a full review of the business as part of a three-phase transformation programme. Steps already taken include:

o simplification of the divisional structure and associated overhead improvements

o strategic customer engagement

o initial improvements to operational project delivery and work winning performance

o initial strengthening of the leadership team with two key senior appointments, being John Foster as Commercial Director and Peter Handley as Business Improvement Director

· Good cash performance with net debt of £5.6m (H1 2018: £4.6m) reduced from the year end position, (FY 2018: £5.9m)

· An interim dividend of 1.0 pence per share (H1 2018: 1.4 pence per share), reflecting first half performance and outlook for the Group

Current trading and outlook

· Contract margin performance in the General Piling division during the third quarter has been weaker than anticipated:

o The causes have been identified and action taken to resolve the issues, including a change of divisional management

o Poor profitability in Q3 but expected to return to normal margin levels by the start of Q4

· The Company saw strong demand for its Specialist Services division over the Christmas period, particularly in the rail sector, however several contracts across the Group have had contract start dates delayed in December and January

o The Orderbook at the start of January 2019 is at similar levels to last year and, based on current enquiry levels and order conversion rates, the Board continues to expect Q4 activity to be strong;

o In light of the delays to contract start dates experienced in Q3, the Board has re-assessed workload forecasts for H2 and believes it is prudent to reduce its revenue expectation for the current year

· Despite these setbacks in Q3, the Board continues to expect the Group to deliver a stronger performance in H2 than H1 albeit for the reasons set out above, this will still result in a full year performance significantly below its previous expectations

· Longer term the board remains positive regarding sustainable, profitable growth.

Mark Cutler, Chief Executive, commented:

"First half results were in line with our revised expectations and reflected the improved performance in the second quarter after a quiet start to the year.

 "This is a transitional year for the business and since my arrival in August 2018, I have been undertaking a full review of the business. As part of this process I have been taking action to refine the Group's commercial approach, streamline operations, strengthen the leadership team and re-focus on our key customers. This is already creating a strong platform from which to pursue our growth strategy.

"The third quarter has been more challenging than we anticipated, with a disappointing performance in General Piling and several project delays. As a result and despite good momentum being carried in from the first half, we don't believe we will be able to deliver the significant step up in performance during the second half that we anticipated at the time of our trading statement in December 2018.

"These challenges have been frustrating, but it is pleasing to see outlook for the final quarter remaining robust and with a strong pipeline of target projects providing good forward visibility.

"Whilst we are mindful of the wider market environment, we are confident that the initiatives we are taking will develop a strong platform for future strong, profitable growth."

For further information please contact:

This announcement contains inside information that qualified, or may have qualified, as inside information for the purposes of Article 17 of the Market Abuse Regulation (EU) 596/2014 (MAR). For the purposes of MAR and Article 2 of commission Implementing Regulation (EU) 2016/1055, this announcement is made by Paul Pearson, Chief Financial Officer, for Van Elle Holdings plc.

Van Elle Holdings plc - Interim Report to 31 October 2018

Strategic overview

This is a transitional year for the business, in which we expect to increase resilience to external market factors affecting the wider sector, while transforming business performance and setting the platform for future growth under a new CEO and strengthened leadership team.

The Group remains a leader in the UK geotechnical engineering services market and our strategy is continues to be focused on:

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.

Since joining the Group, Mark has reviewed the business in detail and identified opportunities to enhance performance both in terms of operational performance and commercial development. A transformation plan has been initiated and, whilst this is in its early stages, a range of immediate actions have already been undertaken, supported by key senior management appointments to help deliver these improvements. The initial actions undertaken include:

· Streamlining of the divisional structure;

· Strategic customer engagement;

· Re-focused work winning approach and replacement business development team; and

· Operational performance review and introduction of strengthened commercial processes.

These actions are aimed at improving the Group's commercial effectiveness by bringing it closer to key customers and enabling it to target more actively and selectively, new opportunities. This is already beginning to generate opportunities and the Group has a strong pipeline of target opportunities, particularly larger projects with an increasingly strategic customer base which integrate several of its specialist capabilities and enable early involvement. Alongside this, the Group has strengthened senior leadership team with the appointment of John Foster as Commercial Director and Peter Handley as Business Improvement Director.

Strengthened commercial processes should support consistent contract margin delivery and the streamlined divisional structure is expected reduce unnecessary complexity in the Group as well as reducing overhead costs. A charge of £0.3m in respect of these actions has been incurred in the first half. Further efficiency and cost reduction initiatives will be rolled out over the second half, including consolidation of the Group's two largest operations into a single site. The early signs from the transformation plan have been encouraging and the Board believes more significant performance benefits should begin to be realised for FY 2020, including annualised cost savings of over £1.0m.

The first half also saw a planned slowdown in rig fleet expansion with capital expenditure of £0.6m (H1 2018: £2.7m). Investment in fixed assets over the last three and a half years now stands at over £38m and we continue to believe that this has positioned Van Elle with the broadest and most modern range of specialist piling rigs in the UK market. After five rig disposals, our fleet now consists of 119 rigs.

Whilst there remains significant scope to improve performance, we will continue to consider niche, bolt-on acquisition opportunities where appropriate, balanced with a clearer view of selective future plant investment to support organic growth in key markets. We believe that our strong financial position will enable us to act swiftly where we feel an opportunity will bring value to the Group.

Trading review in the period

As set out in our trading update of 10 December 2018, the first quarter of the current year was relatively quiet as a result of subdued UK market conditions following a challenging period for the UK construction markets in early 2018. Market conditions were more supportive in the second quarter and the Group saw a progressive improvement in performance during the latter part of the first half. As a result, for the six months ended 31 October 2018, revenue decreased by 18.4% to £42.9m (H1 2018: £52.6m), against a strong comparative period in the previous. In terms of end market performance, sales to the housebuilding sector continue to make up the majority of Group revenues at 50.8% (H1 2018: 50.0%) but decreased in the period by 17.1% to £21.8m (H1 2018: £26.3m). Infrastructure sector sales also decreased, by 22.8%, to £12.2m (H1 2018: £15.8m) with sales to the Commercial & Industrial sector increasing slightly to £8.3m (H1 2018: £8.2m).

Despite the subdued market conditions, the gross margin increased in the period to 32.8% (H1 2018:31.7%). This improvement reflected several strong contract completions in the Specialist Piling division during the first half as compared to the adverse impact of poor commercial parameters on two electrification contracts undertaken in the comparative period. Additionally, gross margin has also been enhanced this year following a review and revision to asset lives and residual values for plant and machinery depreciation rates which is reported in cost of sales.

As a result of the reduced activity, particularly the resulting impact on utilisation of larger rigs in the General and Specialist Piling divisions, underlying operating profit decreased by 47.4% to £3.0m (H1 2018: £5.7m), representing an underlying operating margin of 7.1%. Underlying profit before tax was £2.8m, a decrease of 48.1% on the same period last year (H1 2018: £5.4m) and underlying earnings per share were 2.8p, a decrease of 48.1% on the prior year (H1 2018: 5.4p).

The first half of this year generated operating cash flows of £4.8m (H1 2018: £7.1m) representing an operating cash conversion* of 100.3% (H1 2018: 86.9%). Net assets have increased by 5.6% to £41.5m (31 October 2017: £39.2m). The good cash performance has contributed to a reduction in net debt in the first half to £5.6m at 31 October 2018, compared to £5.9m at 30 April 2018,

* defined as cash generated from operations divided by EBITDA less profit on sale of fixed assets

Operating performance in the period

General Piling

The General Piling division has suffered the most from the challenging market conditions, with new housing sector revenues down 23% and infrastructure down 42% on prior year. The subdued markets have resulted in low utilisation of our large diameter piling rigs that not only supressed revenue, but also impacted on gross margin performance as these techniques command higher gross margins. As a result, divisional revenues have fallen £5.5m (24%) against the comparative period last year, resulting in operating profit of £0.4m (H1 2018: £3.5m).

Specialist Piling

Specialist Piling generated revenue of £12.8m (H1 2018: £14.1m) a decrease of 9% compared to the same period last year. Rail turnover was marginally up on prior year, with low rig utilisation in the Specialist Piling operating unit accountable for the decrease as a result of a quiet first quarter in infrastructure work. Operating margin has however increased to 16.7%, (H1 2018: 7.7%), primarily from several strong contract completions in the Rail operating unit in H1 2019, and conversely, an erosion in margins in the prior year, resulting from poor commercial performance on two electrification contracts.

Ground Engineering Services

In Ground Engineering Services, revenues are down 28% to £6.3m (H1 2018: £8.7m). Following the streamlining of the operational structure, ground stabilisation work will now be performed by the Specialist Piling division and contract bidding is done on a much more selective basis to minimise potential risk inherent in lump sum contracts. In H1, revenues are down in ground stabilisation work and Geotechnical has had a slow first half of the year with Scotland faring better with revenues relatively flat on the comparative period. Consequently, operating margin for H1 2019 was down to 1.5% (H1 2018 4.5%).

Ground Engineering Products

In Ground Engineering Products, demand for the Group's proprietary Smartfoot© foundation system continues, albeit revenues of £6.5m this half year are down 5.8% (H1 2018 £6.9m) reflecting the quiet Q1 seen in housebuilding, with operating margins at 6.6% (H1 2018 9.8%). The in-house manufacturing facilities have marginally increased production levels on a like for like basis, with some pre-cast pile products having been sold to the external market.

Board news

This year is an important one of transition for the Group, with our new CEO Mark Cutler, having joined the Board in August 2018 following the retirement of Jon Fenton in May 2018 (and the intervening period with Steve Prendergast as interim CEO).

Dividend

Being cognisant of the first half performance, greater second half weighting of profits and with confidence in the long-term prospects of the Group, the Board is declaring an interim dividend of 1.0 pence per share (H1 2018: 1.4 pence per share). The interim dividend will be paid on 6 March 2019 to shareholders on the register on 15 February 2019. The shares will trade ex-dividend on 14 February 2019.

Current trading and outlook

Whilst enquiry and order conversion rates have remained encouraging, performance in Q3 to date has been below the Board's expectations.

Performance in the General Piling division in Q3 has been below anticipated profit levels. A detailed review of this division has identified operational and commercial shortcomings which have resulted in the Group undertaking several contracts which are expected to deliver poor margins. Decisive action has been taken including the appointment of new divisional leadership, and the underperforming contracts are now largely complete. The issues in Q3 are expected to have an adverse profit impact on the Group, but margin performance in the division is expected to return to forecast levels by the start of Q4.

In addition, whilst Van Elle saw strong demand in its Specialist Services division over the Christmas period, particularly in the rail sector, a number of contracts across the Group have had start dates delayed in December and early January. As a result the Board has re-assessed workload forecast for H2 and considers that it would be prudent to reduce its full year revenue expectations.

As a result of the above, although the Board expects the Group to deliver a stronger performance in H2 than H1, it also expects the full year performance to be significantly below previous expectations.

Whilst these setbacks in Q3 have been disappointing, the orderbook at the beginning of January 2019 (which is at a similar level to January 2018), current enquiry levels and order conversion rates are encouraging. The Board continues to monitor market conditions closely, but is optimistic about the Group's prospects for Q4. The Board continues to believe that the long-term opportunities for profitable growth for the Group remain significant.

Consolidated statement of comprehensive income

For the 6 months ended 31 October 2018

All amounts relate to continuing operations. There was no other comprehensive income in either the current or preceding period/ year.

Consolidated statement of financial position

As at 31 October 2018

The unaudited interim consolidated statement was approved by the Board of Directors on 15 January 2019.

Consolidated statement of cash flows

For the 6 months ended 31 October 2018

Consolidated statement of changes in equity

For the 6 months ended 31 October 2018

Notes to the interim results

For the 6 months ended 31 October 2018

1. Basis of preparation

The unaudited interim consolidated statement of Van Elle Holdings plc is for the six months ended 31 October 2018 and do not comprise statutory accounts within the meaning of section 435 of the Companies Act 2006. These consolidated financial statements have been prepared in compliance with the recognition and measurement requirement of International Financial Reporting Standards, International Accounting Standards and Interpretations (collectively IFRSs) as adopted by the EU. They do not include all disclosures that would otherwise be required in a complete set of financial statements and should be read in conjunction with the group's annual report. The unaudited interim consolidated statement has been prepared in accordance with the accounting policies that are expected to be applied in the report and accounts for the year ending 30 April 2019.

The comparative figures for the year ended 30 April 2018 do not constitute statutory accounts within the meaning of section 435 of the Companies Act 2006, but they have been derived from the audited financial statements for that year, which have been filed with the Registrar of Companies. The report of the auditors was unqualified and did not contain statements under section 498 (2) or (3) of the Companies Act 2006 not a reference to any matters which the auditor drew attention by way of emphasis of matter without qualifying their report.

IFRS 9 Financial Instruments

The Group has initially adopted IFRS 9 Financial Instruments from 1 May 2018. IFRS 9 replaces IAS 39 Financial Instruments: Recognition and Measurement and specifies how an entity should classify and measure financial assets, financial liabilities, and some contracts to buy or sell non-financial items.

The most significant area of change which could potentially impact the Group's reported results is the introduction of an "expected loss" model for impairment provisioning, which now also includes contract assets recognised under the adoption of IFRS 15 Revenue from Contracts with Customers.

Based on an assessment of historic credit losses and the likelihood of the occurrence of future credit losses on existing financial assets, the Directors consider that there are no further material impairment losses to be recognised against the Group's financial assets as a result of the transition to IFRS 9.

In line with the below amended accounting policy, the financial assets and liabilities held by the Group at 31 October 2018 are classified at amortised cost under IFRS 9 which is in line with treatment under IAS 39. As the basis of measurement has not changed there have been no changes to the carrying amount of the financial instruments as a result of the transition from IAS 39 to IFRS 9. In addition, there have been no modifications to loans that have to be reconsidered as a result of adopting IFRS 9.

The details of the new significant accounting policies and the nature of the changes to previous accounting policies in relation to the Group's adoption of IFRS 9 Financial Instruments are set out below.

IFRS 15 Revenue from Contracts with Customers

The Group has initially adopted IFRS 15 Revenue from Contracts with Customers from 1 May 2018 and this has not been applied retrospectively. The cumulative effect method has been used to calculate any required adjustment as at 1 May 2018. The Group has elected to apply IFRS 15 retrospectively only to contracts that are not completed contracts at the date of initial application.

For all contract modifications that occur before the date of initial application, the Group has applied the following expedient:

· for contracts that were modified before the beginning of the earliest period presented, an entity need not retrospectively restate the contract for those contract modifications in accordance with IFRS 15 paragraphs 20-21. Instead, an entity shall reflect the aggregate effect of all of the modifications that occur before the beginning of the earliest period presented.

· for all reporting periods presented before the date of initial application, the Group has not disclosed the amount of the transaction price allocated to the remaining performance obligations and an explanation of when the entity expects to recognise that amount as revenue

o identifying the satisfied and unsatisfied performance obligations;

o determining the transaction price; and

o allocating the transaction price to the satisfied and unsatisfied performance obligations.

The only significant change, which could result in a transitional adjustment, in adopting IFRS 15 is that revenue relating to mobilisation of rig equipment to the customer site is now recognised over time. Under the previous accounting policy this revenue was recognised at the time of mobilisation. Costs relating to mobilisation under IFRS 15 are now capitalised and amortised over time at the same rate as revenue is recognised. Management has performed a detailed review of relevant contracts and calculated the required adjustments and concluded that no material transitional adjustment is required.

IFRS 15 provides a single, principles-based five-step model to be applied to all sales contracts, based on the transfer of control of goods and services to customers. It replaces the separate models for goods, services and construction contracts previously included in IAS 11 Construction Contracts.

The following details the amended accounting policy.

IFRS 16 Leases

IFRS 16, as adopted by the European Union, becomes effective for accounting periods beginning on or after 1 January 2019.

Adoption of IFRS 16 Leases will result in the Group recognising right of use assets and lease liabilities for all contracts that are, or contain, a lease. For leases currently classified as operating leases, under current accounting requirements the Group does not recognise related assets or liabilities, and instead spreads the lease payments on a straight-line basis over the lease term, disclosing in its annual financial statements the total commitment.

The Directors are performing a detailed analysis of the impact of adopting IFRS 16, as well as considering whether to adopt a full retrospective or a modified retrospective approach. This will be concluded prior to the end of FY2019 and the impact, both on the primary financial statements and on key performance indicators, will be disclosed in the financial statements for the year ended 30 April 2019.

Functional currency

The unaudited interim consolidated statements are presented in Sterling, which is also the Group's functional currency. Amounts are rounded to the nearest thousand, unless otherwise stated.

Accounting for fixed assets

The Group has made changes to the useful economic lives and residual values, effective from 1 May 2018, together with an associated refinement to the allocation of subsequent expenditure between repairs and capital enhancements.

Depreciation rates and residual values- change in accounting estimate

The Group has made the following changes to the depreciation rates, effective from 1 May 2018. Depreciation is calculated for plant and machinery, using the straight-line method, to write off their carrying value, less residual values, over the expected useful economic lives of 12 years, 8 years or 3-5 years respectively. Under the old accounting policy, a residual value was not applied to the carrying value and deprecation was calculated over an expected useful life of 10 years. The change has been applied prospectively and there has been no restatement of prior periods.

This change in estimates has reduced the depreciation charge reported for H1 FY 2019 and forecast for FY2019 as follows:

Expenditure on subsequent repairs and refurbishments

Also effective 1 May 2018, and consistent with the evidence considered in support of the revised useful lives and residual values of plant and machinery, the Group has reviewed the previous approach to allocating subsequent expenditure between repairs and enhancements to the existing assets. This review has identified that certain refurbishment costs which were historically added to the cost of the assets and depreciated over a 10 year period will, in future, be recognised as an expenses in the Income Statement as incurred, taking into account the revised assessment of useful economic lives and residual values, this expenditure does not enhance the value or extend the lives of the related assets. This change has been applied prospectively. In H1 FY2019 this change resulted in a charge of £48,000 to the Income Statement that would have previously been capitalised.

2. Segment information

The Group evaluates segmental performance based on profit or loss from operations calculated in accordance with IFRS but excluding non-recurring losses, such as goodwill impairment and the effects of share-based payments. Traditionally the second half of the year is stronger in turnover and operating performance than the first half of the year with work undertaken by the Specialist Piling division during the statutory holiday periods of Christmas and Easter. Loans and borrowings, insurances and head office central services' costs are allocated to the segments based on levels of turnover. All turnover and operations are based in the UK.

Operating segments - 6 months to 31 October 2018

There are no individual customers accounting for more than 10% of Group revenue in either the current or preceding period/ year.

Operating segments - 6 months to 31 October 2017

There are no individual customers accounting for more than 10% of Group revenue in either the current or preceding period/ year.

Operating segments - 12 months to 30 April 2018

There are no individual customers accounting for more than 10% of Group revenue in either the current or preceding period/ year.

3. Exceptional costs

Exceptional costs for the 6 months to 31 October 2018 are for restructuring costs as a result of consolidating the divisional structure.

The prior year other exceptional items relate to costs associated with an EGM held on 1 December 2017, due diligence fees for an aborted acquisition and a £956,000 Carillion bad debt write off.

4. Earnings per share

The calculation of basic and diluted earnings per share is based on the following data:

The calculation of the basic earnings per share is based on the earnings attributable to ordinary shareholders and on 80,000,000 ordinary shares (6 months ended 31 Oct 2017: 80,000,000 and 12 months ended 30 Apr 2018: 80,000,000) being the weighted average number of ordinary shares.

The underlying earnings per share is based on profit adjusted for exceptional operating costs and share-based payment charges, net of tax, and on the same weighted average number of shares used in the basic earnings per share calculation above. The Directors consider that this measure provides an additional indicator of the underlying performance of the Group.

There is no dilutive effect of the share options as performance conditions remain unsatisfied and the share price was below the exercise price.

5. Cash generated from operations

6. Analysis of cash and cash equivalents and reconciliation to net debt

INDEPENDENT REVIEW REPORT TO VAN ELLE HOLDINGS PLC

Introduction

We have been engaged by the company to review the unaudited interim consolidated statement in the half-yearly financial report for the six months ended 31 October 2018 which comprises the consolidated statement of comprehensive income, the consolidated statement of financial position, the consolidated statement of cash flows, the consolidated statement of changes in equity and the related notes.

We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the unaudited interim consolidated statement.

Directors' responsibilities

The interim report, including the financial information contained therein, is the responsibility of and has been approved by the directors. The directors are responsible for preparing the interim report in accordance with the rules of the London Stock Exchange for companies trading securities on AIM which require that the half-yearly report be presented and prepared in a form consistent with that which will be adopted in the company's annual accounts having regard to the accounting standards applicable to such annual accounts.

Our responsibility

Our responsibility is to express to the company a conclusion on the unaudited interim consolidated statement in the half-yearly financial report based on our review.

Our report has been prepared in accordance with the terms of our engagement to assist the company in meeting the requirements of the rules of the London Stock Exchange for companies trading securities on AIM and for no other purpose. No person is entitled to rely on this report unless such a person is a person entitled to rely upon this report by virtue of and for the purpose of our terms of engagement or has been expressly authorised to do so by our prior written consent. Save as above, we do not accept responsibility for this report to any other person or for any other purpose and we hereby expressly disclaim any and all such liability.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, ''Review of Interim Financial Information Performed by the Independent Auditor of the Entity'', issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the unaudited interim consolidated statement in the half-yearly financial report for the six months ended 31 October 2018 is not prepared, in all material respects, in accordance with the rules of the London Stock Exchange for companies trading securities on AIM.

BDO LLP

Chartered Accountants

Nottingham

15 January 2019

BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).