Caledonia Investments (LSE:CLDN) Q2 2027 Earnings Call

0:00 Good morning everyone and thank you for joining us today for Caledonia Investments plc half-year results presentation. The presentation will commence shortly. A copy of the presentation slides is also available to download from the results center on Caledonia's website www.caledonia.com. After the presentation we'll conduct a Q&A session. If you wish to ask a question, you'll be able to do so either through the Zoom webinar link provided separately or by submitting written questions using the Ask a Question button on the Spark Live webcast page. Please note that this call is being live streamed to a webcast for a wider audience and will be recorded. I'd now like to hand over the call to Matt Masters, Chief Executive Officer, to open the presentation. Please go ahead.

0:54 Hello I'm Matt Masters CEO of Caledonia Investments and welcome to our results presentation for our half year ended 30th September 2026. We have had a positive first half delivering a NAV total return of 5.4% with all three investment pools contributing to growth. Over 10 years we've delivered an annualised NAV total return of 9.1% at the top end of our target range of inflation, plus 3-6%. That reflects the strength of our model, proactive portfolio management and backing good businesses. A standout development was the completion of the sale of Stonehay Fleming. We received £290 million, delivering a 3.2x money multiple and a 33% uplift to the March 2025 carrying value. A great result, demonstrating the significant value within our private assets and the benefits of our long-term partnership with management.

1:59 We've also put capital back to work. Investing approximately £110 million in Blue Diamond Garden Centres and Conquip Engineering. Both excellent businesses with attractive growth prospects where we believe our capital and support can make a real difference. We have a strong balance sheet and a financial capacity to pursue further investment opportunities. From time to time following significant realisations we may pay special dividends. After balancing investment opportunities and liquidity requirements. In keeping with this approach, alongside our interim dividend of 3.84 pence per share, today we are pleased to announce a special dividend of 20 pence per share, representing an additional dividend return of 5% of market cap to all shareholders.

2:55 This special dividend on one hand provides the ability to distribute some of the proceeds from occasional significant realisations and on the other hand provides a mechanism to do this in a way that treats all shareholders equally. A way of looking at it is that we are returning proceeds at par. It complements our progressive ordinary dividend which we have increased for the last 59 years and continued share buybacks, reflecting our commitment to delivering long-term shareholder value. This slide shows how our NAV total return has developed over the last decade. The orange line represents inflation, plus 3%, the lower end of our target range. As you can see, progress hasn't been a straight line.

3:48 There have been periods of market weakness, particularly in 2020, but taking a longer view helps put those movements into perspective. Over 10 years, our annualised NAV total return has exceeded inflation by 5.5%, towards the top end of our target range. Before we get into the portfolio, let me update you on two team changes. Today, we're announcing that Jamie Kayser-Colvin will step down as head of funds from January 2027. He'll remain an executive director and investment committee member and support the funds team through 2027. Eloise Fox and Milan, who run our North America and Asia portfolios respectively, will lead the pool.

4:37 Jamie has made a huge contribution to Caledonia, both as head of funds and more broadly as a member of the leadership team, and we look forward to him continuing to do so. We've also previously announced that Theo Tisard, who has been a valued member of Caledonia since 2017, will succeed Tom Leder as head of private capital in December. We thank Tom for his significant contribution and leadership. So on to the first of our investment pools, public companies. We have $980 million invested in around 30 high-quality businesses. The approach is straightforward. Really understand the fundamentals, buy well and then hold for the long term. Our permanent capital gives us the patience to wait for attractive opportunities and the conviction to invest when they arise.

5:28 The pool delivered a return of 12.3% over the six months with a strong recovery following market weakness in March. We continue to manage positions proactively, investing 32 million and realising 102 million, giving a net realisation of £70 million. The pool has delivered 9.5% a year over 10 years, with the capital pool returning 11.6%. That demonstrates the benefits of owning good companies over time. On to private capital. This is where we partner with management teams, mainly in UK mid-market businesses to help them grow over the long term. We now have approximately £760 million invested across nine companies.

6:17 We look for control positions or a preferred minority where we can be influential and we sit on the board. We invest from our permanent balance sheet so there's no fixed timetable for an exit. We can focus on what is right for each business. while remaining conservative on debt, typically around 2-2.5 times EBITDA. The polls delivered a modest return of 0.6% over the six months. Positive contributions from AirServe Europe, Kabipa and the remaining games on Stonehenge Fleming were largely offset by a reduction in the valuation of Kirkoptics, where demand for its established cinematography lenses remains weak.

7:03 Our two new investments are also held at cost. We completed the sale of Stonehaig Fleming during the period. Most of that gain was recognised in the previous financial year. A great result, demonstrating the value of our long-term partnership with management. And we have been putting capital back to work. Investing approximately £110 million in two fantastic businesses, Blue Diamond and Concryp. Both exactly the type of businesses we like, and let me take you through why. First, Blue Diamond, the largest garden centre operator in the UK and Channel Islands, where we invested £60 million in July for a stake of around 18%.

7:50 The business is led exceptionally well by Simon Burke and Alan Roper, it operates 54 garden centres Combining gardening with home and leisure retail, food and hospitality. Really a portfolio of businesses under one roof. What attracted us was the combination of a market leading business and an excellent management team with an exceptional track record. Since 2013, revenue has grown by around 17% a year and EBITDA by 21% through both acquisitions and improvements to the existing centres. It's a highly cash generative business operating in a large fragmented market with further opportunities to grow and our role is to support the team in pursuing those opportunities which we're very excited about.

8:42 Of our initial £60 million investment £40 million provides growth capital with a balance providing liquidity to existing shareholders. We've also agreed a framework for up to a further £40 million of investment over five years, subject to agreed conditions. This is exactly the kind of partnership we look for, backing a proven management team with the capital and time to build on what they have already achieved. Our second new investment is Conquip Engineering. We invested £50 million in August for a 61% stake. Concrete designs, manufactures, sells and hires specialist equipment used across infrastructure, utilities, energy and construction.

9:38 Its products support customers on complex projects, with the business operating through a network of nine regional locations. What attracted us was the quality of its products and solutions. A strong management team, led by Dan and George Critchley and an excellent track record. These are the foundations we look for when backing a business for the long term. Our majority position allows us to play an active role bringing both capital and support to the business and as with Blue Diamond we can give the team time to pursue the opportunities ahead without a fixed deadline for an exit. There are clear opportunities to support further growth, expanding the rental fleet, developing new products and pursuing selective acquisitions.

10:32 We look forward to working closely with management as they deliver those plants. The bubble chart plots realised IRR against uplift to carrying value for our major realisations. And you can see Steinhague Fleming there with a 33% uplift. Since 2012, We have generated £1.4 billion of proceeds, returning around £700 million of net cash, with Realized Investments delivering an excellent 17% IRR and a two times more pool on cost. And with that, I'll now hand over to Rob to talk through our funds pool and our financials.

11:13 Thank you, Matt. Good morning, everybody. I'm Rob Minnitz, CFO. Our funds pool partners with managers to provide access to two significant market opportunities. These funds tend not to market in Europe, meaning we are often the only European investor, a real differentiator. The pool nab of $998 million is a diverse portfolio invested in some 83 funds by 46 managers and in more than 600 underlying businesses. 60% of the NAV is focused on the North American lower mid-market buyouts. They are typically the first institutional investor into relatively small, often owner-managed businesses that are profitable and cash-generative.

12:01 The playbook is to transform the companies by strengthening the management team, improving operational efficiency, growing sales by product and geography, both organically and through bolt-on acquisitions. These improved companies with greater scale provide fees to mid-market private equity. It's a very pure form of capitalism. The remaining 40% is invested in Asia, where we target two megatrends. The first is focused on domestic consumption and supply chains, fuelled by the ageing population, grey middle class and tech adoption. The second is world-leading innovation, where we invest in government-supported new technologies. The pool has delivered a solid return of 12.2% per annum over a 10-year period.

12:51 We are pleased that in Asia, the improved IPO and fundraising environment that we experienced over the second half of last year has continued. This has led to an excellent return of 13.3% for the six months in local currency. The North American portfolio is predominantly focused on US domestic end markets. With durable revenue streams The underlying businesses continue to make good operational progress. However, the subdued exit activity, which has been experienced across the private equity market, has limited the number of uplifts from realisations. This has left returns flat over the period. Overall, the pool produced a six-monthly return of 5.5% in local currency and 4.7% in sterling.

13:41 So for the numbers. During the period our NAV total return was 5.4% growing our NAV to 3.1 billion of which 2.7 billion is invested in a diversified portfolio of listed and privately held companies and funds that have global reach. We have received the 290 million of proceeds from StoneAid Fleming and reinvested in the portfolio including Blue Diamond and Concrete. Our balance sheet remains strong with cash of £277 million and this enables us to pay the Special Dividend enhancing dividend returns to all shareholders. The Special Dividend of 20p per share along with our interim of 3.84p per share will be paid to shareholders on the 6th of January 2027.

14:32 And now to my beloved waterfall chart. This chart shows the movement in NAV over the period. We started the year at £3 billion The portfolio return of $161 million includes the negative impact of foreign exchange We then deduct management expenses of $18 million There is then the cash return to shareholders $38 million allocated to share buybacks and $20 million for the prior year final dividend resulting in a closing NAV of $3.1 billion We have a robust balance sheet with no structural leverage Walking you through the cash movements We started the year with $90 million and net $239 million was realised from the portfolio. The investment income from our assets was $27 million and we have consumed $20 million in the cash costs and management expenses.

15:24 Next is the payment of the prior year final divvy, $20 million and $38 million allocated to share by banks, resulting in that closing cash position of $277 million. The discount recovered from its position at the end of March of 43% to 36%, which has improved total shareholder returns during the period. But we continue to believe this fundamentally undervalues the quality of the portfolio, our track record and prospects. Overall, we have a prudent capital allocation policy to investments, our progressive ordinary dividend and, when appropriate, share buybacks and special dividends. Special dividends are not a new component of returns from Caledonia, with specials being paid in 2022 and 2017, enabled by a confluence of factors.

16:14 We completed the sale of StoneAid Fleming, receiving $290 million of proceeds. At the year end, we said that we will want to deploy a meaningful share of the proceeds into new private capital companies. We have done so with investments into two great businesses, Blue Diamond and Conquit. Alongside other investment activity, we increased the pacing of share buybacks, deploying 38 million, accreting NAV per share by 4.3p. And at the end of the period, we still had cash on balance sheet of 277 million. We feel it is therefore appropriate, in addition to increasing our interim dividend to 3.84p, to pay a special dividend of 20p per share, being approximately 5% of our market capitalisation. and enhancing dividend returns for all shareholders.

17:07 I'll now pass back to Matt.

17:10 Thank you, Rob. So, to close, in a world where there is continued uncertainty, we've made positive progress in the first half with all three investment pools contributing to NAV growth. This demonstrates the resilience of our model, investing in high-quality companies with strong fundamentals. Our permanent capital is allows us to be patient support management teams and give good businesses time to grow and our strong balance sheet gives us the flexibility to pursue those opportunities selectively while producing returns to shareholders through dividends and share buybacks the sale of Stonehay Fleming our two new investments and the special dividend demonstrate that approach in practice realising value reinvesting for future growth and sharing the proceeds with shareholders.

18:06 We remain focused on compounding NAV over time, maintaining our progressive ordinary dividend and addressing the discount so that shareholders can benefit from the value we create. Thank you for your time. We'll now take your questions.

18:31 Morning everybody and thank you for joining us today. We'll begin by taking questions from the analysts and then we'll take questions from the webcasts. Where questions cover similar themes, we'll group those together and address them collectively and if we're unable to get to your question during the session, we'll be sure to follow up with you via email shortly after the event. I'll now pass over to the moderator to assemble the queue. Participants who have joined via Spark Live can submit questions in written format via the webcast page by clicking the Ask a Question button. If you've dialled into the call and wish to ask a question, please use the raised hand function at the bottom of your Zoom screen. If you are dialling in via phone, you can raise your hand using star 9 and unmute yourself by pressing star 6.

19:21 We'll pause for just a moment to allow these to assemble the queue. There are currently no questions on Zoom, so I'll pass over to Rob to cover the written questions. Please go ahead.

19:42 Great, thank you. We've had a few questions coming in about Cook Optics. Obviously, we're disappointed to further write down that asset, just by way of background such that everybody is familiar. The business was heavily affected by the Hollywood Writers and Actors Strike in 2023, but the improvement in the film production activity has not translated into a recovery of demand for the established lenses. The rental houses are continuing to use effectively their existing supply of equipment before committing to new purchases. There's been some good interest in the new products which the business has developed, but they are slow to build scale and there has been some challenges with the supply chain related to, I guess, the geopolitical challenges at the moment.

20:41 We've restricted the cost base, but the business still remains in a pretty precarious position at loss making and it's fallen well short of our expectations. Our current focus is absolutely on managing cash closely, working on the new product development and assessing the options to bring best value for Caledonia. I recognise that's a bit of an uncertain response to the question, but it is a pretty difficult position. We've now written the asset down to £5 million, so a very small number within our NAV and clearly at £5 million and we wouldn't expect it to impair performance in the future. We've had a couple of questions from people who rightly referred to the discount still being significantly higher than certainly where we feel that it should be and whether we'd considered a tender offer and whether a tender offer would be a better use of capital.

21:52 First of all, the addressing of the discount on a sustained basis is driven by investment performance, clear communication and then discipline allocation, capital allocation, which as you know includes share buybacks for us. We've considered a tender offer and the tender offer is an acceptable way to allow shareholders who want to leave to exit tender at a 20 cent or a 15 cent discount would mean paying more per share than we are currently paying with the current buyback program and that generates less in our accretion for continuing shareholders and so you know we're obviously sort of balancing that the need for capital within the organization we believe that paying a special dividend strikes the right balance and it returns capital to all shareholders on a consistent basis and and you know we were able to do that whilst funding investment in the portfolio plus increasing the pacing of the share buybacks which we've done in theory you'll see that we've invested 38 million we actually invested 35 million for the full financial year in the prior year and that level of pacing we can continue at that rate whilst paying the special and also investing in the portfolio.

23:24 We've had a question which relates to will we carry on with share buybacks and I think I've sort of addressed that in the last part of that question whereby We will continue with share buybacks because they're accretive to NAV for share and everybody can make, all continuing shareholders can make progress. We did 38 million in the first half and that level of pacing we can certainly continue to afford as part of our capital allocation plans. I think we've got a question that's coming in from Ewan at Numis on the live Q&A. If we can enable that, please.

24:10 Yep, Ewan Lovett-Turner from Deutsche Numis. Please unmute your line and go ahead.

24:16 Yeah, thanks. Probably a couple of things. Kirk, I'm just wondering if you could add whether you would commit any further capital and then just with the team changes, whether you're expecting any sort of changes in the way that you do things within those balls would be interesting. Thanks.

24:39 Thanks Euan. In terms of committing further capital, we have a commitment to the management team to fund the restructuring of the business and to support the new product development. And that's really as far as I want to say at the present time. And Matt, why don't you talk through the people changes?

24:59 Yeah, certainly. We've already announced that Tom Leder was stepping down and Theo Fisog was taking over and there are no planned changes to what private capital are up to. That's a straight handover of the baton. In the funds pool was Jamie stepping back from running the team. is different in that he's leaving the team and Min Aung and Eloise Fox will effectively report directly into the Asian funds and Eloise runs the American funds but they'll carry on with their strategies as they are doing and so no other further changes planned at this stage

25:54 Okay, thanks. And just on the opportunity set, given returning capital, does that sort of give an indication that you're not seeing the deal failure you'd like or pricing isn't there?

26:08 No, I don't think so. I mean, I think we said at the year end that we wanted to redeploy a meaningful portion of capital into private capital, which we've done with those two investments. um we can continue to appraise other investment activity therefore you know it's very much a balance in terms of the strength of the balance sheet where we currently are um and sharing a bit of that from the from the disposal of stone hay flaming with with continuing shareholders thanks thank you um I think there are no further questions that have come through so thank you everybody for your time today and I will pass over to the moderator to close out the call. Thank you.

27:06 Thank you very much. That concludes today's session. You may now disconnect.