Galliford Try Holdings (LSE:GFRD) — Full Year Results to 30 June 2023’

0:00 Good afternoon, and welcome to the GALLIFORD TRY HOLDINGS PLC investor presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and can be submitted at any time via the Q and A tab situated on the right hand corner of your screen. 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 is appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Andrew Duxbury, CFO. Good afternoon,

0:31 sir. Good afternoon. Many thanks, Lily, and welcome, everybody. It's really good to be with you again. So, what I plan to do is present for, you know, twenty minutes or so, and then we'll go to to questions and hopefully address all the questions that you might have. So what I'll do is I'll cover a review of the financial year ended 06/30/2023, and we'll then move on to focus a bit more on the strategy and the outlook for the business.

1:02 So to start with some headlines before coming back to these in a little bit more detail, we are really pleased with our performance in the year to June 30. And, of course, that's been achieved thanks to the hard work and the contribution of everyone in the business and across our supply chain. So our thanks absolutely go to go to all those people. And it's worth remembering this was delivered against a really challenging economic backdrop. And in that context, all of our businesses have performed well, and we're pleased with the position of each of those businesses going forwards. In particular, the acquisitions that we've made, we've made three acquisitions over the last eighteen to twenty months. Those acquisitions are really starting to settle in well and will start to really contribute to the growth of the business as we go forwards.

1:49 Our pre exceptional profit before tax is up 23% in the year, and our full year dividend is up 31% in the year. I'll come onto those numbers in a little bit more detail in a moment. Looking forward, the order book is in really good shape, £3,700,000,000. That's our our largest ever order book. And more importantly, the quality within that order book is is really excellent. And beyond that order book, we also have a strong pipeline of further opportunities that we're currently looking at and assessing. It's worth remembering that we're a noncyclical business, and, of course, our forward visibility, that order book takes us through beyond the next general elections. That gives us some really good certainty going into f y twenty four and beyond.

2:38 Looking at that, we're increasingly confident of our performance in the new financial year to June 2024. And so last week, we raised our guidance to say that we'd be at the upper end of the current range of analyst expectations, and that was 24 to £28,000,000 of profit before tax, and we said we'll be at the upper end of that range. We're also increasingly confident in meeting our f y twenty six strategic targets. And partly due to that confidence we've increased our dividend further and improved our dividend cover policy again. I'll come back to that a little bit later in the presentation. So this is just a brief reminder of our investment proposition. So GALLIFORD TRY is a high quality business. We operate with leading positions in market sectors that are non cyclical and that are showing good growth potential.

3:30 And we're generating, as a result of that, increasing returns for our shareholders. The growth opportunities in our sectors remains very strong, and we've got seeing good levels of government investment in the sectors in which we operate. And increasingly, we're seeing increasing barriers to entry based on quality, and that's really important to help us deliver profitable growth going forwards. The risk profile of our portfolio of projects is very, very good, and we've got excellent forward visibility of the order book as I mentioned earlier. We've got the culture and the right culture embedded across our business to focus on discipline, focus on risk, and that will help the business to deliver our strategy of sustainable growth. And our financial position is very strong, and we're demonstrating a track record of delivering predictable financial results year on year.

4:24 And you can see that here on this slide. It's three full financial years since we demerged from our house building business, and since then, we've been delivering consistent profitable growth. And this slide is really important. This slide is the evidence of the strong foundations that we've built in the business, and this slide forms the basis of the confidence that we've got for our future growth. And it's worth just noting those numbers there. Revenue growth, pre exceptional profit before tax has grown faster, pre exceptional earnings per share has grown, and dividends per share has grown 123% over the last two years since FY21. So just coming back to the results for the last financial year. Our performance is in line with the strategic targets we set ourselves. We set our targets in 2021 through to 2026.

5:15 We're two of the five years through that period, and we're on track to meet those targets we set ourselves for FY '26. Revenue in the last financial year was up 12.5%, and that was reflecting particularly strong growth in our environment or our water business. Our divisional operating margin has remained stable, 2.4%, but that includes some one off costs that I'll come back to in a moment, and so gives us good confidence that we're on track for our 3% margin target. Pre exceptional profit before tax is up 22.5%, and that excludes the effect of the one off contract settlement that we announced in June this year. And just to remind everybody, that contract settlement brought to an end the last legacy contract. It was a long running dispute, and it resulted in a cash receipt to GALLIFORD TRY of £26,000,000.

6:09 The result to June does include a £3,600,000 profit on the sale of a joint venture investment stake that was a non core investment. And, also, we reported exceptional costs, £10,600,000. That was related entirely to our investment in new cloud based digital systems. I described that last time we met. And importantly those systems are now live. Altogether, our pre exceptional earnings per share has increased by 18% compared to the same period last year. The quality of our order book is really important in delivering that strong contract portfolio, and that continues to be the key driver of our margin improvement target.

6:57 And you can see in the year to June, operating profit before amortization increased by £3,500,000 to £21,900,000 and that was helped by our volume growth. But what I really want to draw out on this slide is that the margin includes about 3,400,000 of cost of living and acquisition costs. So that was just over £2,000,000 of net losses on two acquisitions that we made in the year, MCS and Hambaker. And those losses were because of the state of those businesses when we acquired them. They were both in or close to administration. We also made a £1,000,000 cost of living payment in October 2022 to our to about half of our employees. So without these two expenditures, our 2.4% margin would have been 2.6 margin, and that's why it provides us real confidence in our growth trajectory going forward. But one point I would just stress, both of those two things, the cost of living payment and the acquisitions were really good investments in the future, in our people and in our future capabilities in the water sector.

8:06 We operate with a very strong balance sheet, and that balance sheet is really important. It helps us in the market. It helps us to win work because our clients like it. Our clients like to work with a contractor who they've got confidence will be there to deliver that project. And it also helps us to work with the best supply chain in the industry, which helps us to deliver high quality products to our clients. And, again, our supply chain like the fact they've got certainty of payment, and we pay our supply chain on average in twenty six days with 98% of invoices paid within sixty days. So again, very good statistics in the sector. To remind everybody, we've got no pension funds and we've got no debt. Our cash position is strong, is robust, is positive every single day of the of the year, just as we think contractors' balance sheets should be.

8:56 We have a strong portfolio of PFI investments worth £45,000,000 and importantly those investments generate around £4,000,000 of annuity interest income each year. So I will come back to that a little bit later in terms of how we share the value of that with our shareholders. Our monthly, average month end cash position was a £135,000,000, a little bit lower than last year because of the investment in the acquisitions I've mentioned, because the investment in that digital cloud systems, and because we're partway through doing a share buyback program. So during the year, we we we distributed £20,000,000 to our shareholders through dividends and share buyback.

9:41 So overall, a really strong balance sheet, very helpful for the business. In terms of how we use that balance sheet and how we, our capital allocation policy, most importantly, we would continue to retain and, and focus on retaining that strong balance sheet. I've already talked about the competitive advantage it brings in terms of clients and supply chain. It also allows us to invest in the business, whether that be in quality, in digital tools, in our people, or in further acquisitions, bolt on acquisitions at the right time. Our strategy doesn't require any further bolt on acquisitions, but we've got the balance sheet strength and agility to respond to opportunities that may arise. The strong balance sheet also gives us the confidence that we can pay a growing and sustainable dividend to our shareholders, and again that dividend has improved significantly in the year just finished.

10:34 Where appropriate, we will return excess cash to our shareholders. This is the case over the last year, we have been undertaking a £15,000,000 share buyback program. We've also announced a 12 p special dividend that will be paid in October. Coming on to the strategy and the outlook, and some of you will have seen, this slide before. There's four cornerstones to our strategy. What we're looking to do is to focus on being a progressive business, a business which is socially responsible in its delivery, a business which focuses on quality, and we think by doing that, we'll continue to deliver growing financial returns to our shareholders.

11:22 And you can see as we grow towards 2026, we expect our revenue to grow up towards £1,600,000,000 and our divisional operating margin to grow to 3%. We'll do this by focusing on growth in our existing markets and through growth in higher margin adjacent markets. Our existing markets include buildings, so that includes education, health care, justice at courts and prisons, and defense, as well as commercial offices and rented accommodation. In highways, we work for local authorities and for national highways, and our environment business works for all of the major water companies across The UK. Our adjacent markets include moving into the developer end of the PRS markets, that's putting our balance sheet to use to make sure we get some developer gains as well as constructing PRS accommodation.

12:18 It's about moving into the capital maintenance and asset optimization part of the water market, where we think higher technology and water technologies will help us deliver higher margin returns in that part of the market. And increasingly using our facilities management business to deliver green retrofits to our clients, helping to reduce the operational carbon footprint of existing buildings.

12:44 Importantly, all of these markets are resilient and these markets underpin our growth aspirations. What's really important and has changed probably over the last five to ten years is that our clients are now procuring their work in a much more mature way, focusing on value and not just lowest cost. And that's really important. You should all be encouraged by that, by the fundamental improvement in the way that the large procurement bodies are operating as well as our top tier private sector clients. What this does is it generates a sustainable environment with high levels of collaboration between contractor and client, and that's a good outcome for everybody. It means we can deliver higher quality products and we can deliver that in a more predictable way for our own shareholders.

13:32 Our supply chain has proved resilient through the difficulties and the economic challenges of the last eighteen months or so. That, of course, benefits from our focus on our advantage through alignment program, bringing our supply chain very close to the business. And, of course, we benefit from the good payment record that we have with our supply chain.

13:54 About this time last year, we introduced what we call our enhanced supply chain checks, additional financial due diligence process that we've put in place to make sure that we're staying really close to our supply chain, that we're preempting any issues that there might be to, again, make sure that we can protect our projects and make sure we can deliver quality projects going forwards. The market opportunities remain really robust. The markets we operate in, the markets I've mentioned, are non cyclical, and we can see that solid pipeline of opportunity even beyond that current order book. And most of that work will come through long term frameworks, and those frameworks give us established clients with established terms and conditions. And through that framework, we can see to 2026 and well beyond. We've got some really good framework positions that take us out in some cases to 2030.

14:47 What this slide shows you is the procurement route of the typical scoring mechanisms in the way that we win work in our order book. And you can see on the left hand I'm sorry. Let me just go back to the previous slide. I'm sorry. So so what this what this slide shows you is is the breakdown of the order book between building and infrastructure. So you can see on the left hand side how the building order book breaks down between education, defense, custodial, health care, and on the right hand side, you can see between environment, which is largely water companies, and highways. Importantly, everything in that order book has come through our clear risk management process, but what I want to call out is those statistics on the right hand side. So when we started the new financial year to June 2024, we had 92% of our revenue already secured, and we've got about 75% of revenue secured for the following financial year through to June 2025. So that puts us in a really, really strong position.

15:49 And you can see that the median contract size in our building business is less than £20,000,000. What that demonstrates is the large portfolio of relatively small projects, which is really aligned to our risk management priorities.

16:06 And what this slide then shows you is the way that we have procured work in that £3,700,000,000 order book. So the left hand bar chart there shows the procurement route, and you can see 98 and a half percent of our workers come through some kind of negotiated two stage process. So that's where we get appointed to the project based on our quality, based on our people, based on our experience, and we then negotiate the price in a one to one negotiation based on established designs and based on detailed quotes from our supply chain. And the bar and and the pie chart on the right hand side shows an indicative scoring criteria for one such job. And you can see most of the score come through nonfinancial metrics, such as our management team, our project delivery capabilities, in some cases, social value, sustainability, low carbon credentials, and so on, with relatively few marks on the financial aspects, which includes balance sheet strength, how we pay the supply chain, as well as price and embedded fee.

17:09 And it's really important that this shows you that our order book, about £3,700,000,000, has all been procured in a very risk managed way, very disciplined way, and in support of our 3% margin targets.

17:24 I mentioned earlier that most of our work comes through frameworks, and you can see on the slide here some examples of those positions. Frameworks provide us with long term high quality workloads and really good visibility of the future. They provide established terms and conditions, as I said earlier, with repeat clients. So this is an excellent route to market for us. You can see that we use frameworks across all of our sectors, and you can see how this extends well into the future with those lighter green bars representing potential future renewals. Importantly, those framework positions take us well beyond the next general election and take us therefore well beyond any uncertainty that may arise, you know, as we go through an election year.

18:11 So pulling this together, in the three years since we demurrage the housebuilding business, we've declared ordinary full year dividends of 23p per share, £25,000,000. We've declared a special dividend of 12 p per share, which we paid in October this year. And we've declared a £15,000,000 share buyback program, of which we're currently 14 of the £15,000,000 through. And that share buyback program will increase earnings per share by about seven and a half percent every year going forward. During the last year, as I mentioned earlier, we settled a long running dispute and consistent with our capital allocation policy, we're returning half of those proceeds, the 12 p special dividend, to our shareholders, with the remaining half being invested in growth into the business.

18:59 And this year we've also improved our ordinary dividend cover policy to 1.8 times cover. The basis for that, alongside the confidence in the future outlook of the business, we want to do is to reflect the value in that PFI portfolio, the £45,000,000 PFI portfolio on the balance sheet. So essentially, what that 1.8 times cover represents is twice covered dividends on our operational earnings and full return of the annuity interest income from that PFI portfolio, and that gives us a blended 1.8 times dividend cover. So what that means is that we declared last week a seven and a half p final dividend, 10 and a half p full year dividend for the financial year, 31% increased on the year before.

19:44 And of course, really importantly, as we deliver our strategy, as we deliver revenue growth and margin growth, our dividends will continue to increase in line with our growth in profit and in earnings per share.

20:01 So to summarize, we're in a really good shape as a business. We had a really good performance in the year just finished to June 2023. Importantly, we've got a really strong outlook and a really strong start to the year for the new financial year to June 2024. We've got increasing visibility through to 2026 on our financial targets and beyond through our framework positions. We're progressing well against the targets that we set, and importantly, we're doing and delivering exactly what we said we would do. And what that means is that we're able to provide increasing returns to our shareholders. And with that, I'll hand back to Lily, and then we will take any questions that you may have. Andrew, thank you very much for your presentation this afternoon. Ladies and gentlemen, please do continue to submit your questions just by using the q and a tab situated on the top right hand corner of your screen. Just while the company take a few moments to review those questions submitted today, I'd 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.

21:04 Andrew, as you can see, we have received a number of questions throughout today's presentation. Could I please ask you to read out the questions and give responses where appropriate to do so, and I'll pick up from you at the end. I will do. Lily, thank you very much indeed. So the first question comes from James. So thank you, James. The question is capital allocation. What can we expect from dividends and buybacks, and are we seeing further opportunities to reinvest cash rather than return it? So what we're trying to do, James, is make sure we get the balance between investing in growth and providing returns to our shareholders. So we think the 1.8 times cover gets that balance right. So we're we don't have any pension fund to to to to to put our cash to. So effectively, we give a good return on our profits to our shareholders, but we are then able to invest in growth in the business. And the areas that we really see that one is in the PRS space. So putting some investment into the developer development phase of the PRS schemes, and we've just done financial close on our first PRS scheme. We've got a pipeline of other PRS schemes that we are looking to invest in, looking to to take options on the land, take those through the planning and the the the development phases before we sell them to to other forward funds.

22:18 We also potentially see further opportunity in the water space particularly. So as I said earlier, we're not requiring and we're not having to do any further m and a, but there may well be other opportunities for bolt on m and a as we go forward, having done three very successful acquisitions. So we're trying to make sure we get the balance right between growth and returns to our shareholders, and we think the the dividend cover policy just about gets that gets that right. Second question also from James about inflation. So the question is managing inflation in long term projects and contracts. How do we manage this to maintain our margins? So there's a few things there, James, just to to pick up. And what we are seeing on inflation is that we're seeing that really stabilizing certainly compared to this time last year or or even eighteen months ago.

23:07 So what we're not seeing prices come down, but we are seeing a bit more stability and able to to predict prices much much easier than we were. So and what's important to remember, of course, is that across that large portfolio of relatively small jobs, each of those jobs is is tendered based on current pricing. So whenever we get a negotiation and we discuss pricing with a client, we're doing that based on current pricing, pricing submitted by our supply chain. And what we look then to do is to lock those prices in as soon as we lock our pricing with our with our clients. So that that makes sure we mitigate any change in inflation. We, of course, include inflation risk allowances in our pricing as well, but we're really then looking at the the delta between, you know, prices that have been set by the supply chain and and what might happen in that in in a short, you know, in a short window.

23:57 Importantly, everything in our environment and highways businesses, that is all delivered on a target cost cost reimbursable basis. So when you set that target cost based on supply chain pricing at the outset, we then pay that actual costs up against that target. So again, there's inflation mitigations in that form of contract. And what we found last year, even when inflation was really spiky, we were able to put some inflation mitigations into some of our other fixed price contracts. But what's really important, James, is that because of that large portfolio of contracts, because of the way that we set the business and the risk appetite of the business, if we find that there was inappropriate terms and conditions or if we find that a client is not, if you like, accepting the fact that prices are more expensive now than they were eighteen months ago, then we are quite happy to walk away and not take on those contracts. So there's nobody in the business is under any pressure to take on contracts which don't have the right pricing or the right terms and conditions. And so by maintaining that discipline, that then helps us deliver the margin growth that we're looking to achieve.

25:05 So the next question is from David. So can contracts on frameworks be delayed or slowed down, and what impacts can this have? And is all the work we were intended? So, David, thanks for the question. So so there are different types of of framework. So some of the frameworks we're on are effectively sole position. So once we're appointed to the framework, this is the case in some of the regions of some of the water companies, then effectively all of the work in that particular area would would come to us. We'd then negotiate on the pricing. And, course, if we can't agree the pricing, there's no obligation to undertake the work. Other frameworks are more, if you like, prequalification, so kind of shortlist for future work so that the client may put four or five contractors onto a framework. And then what they'd look to do is to bring each piece of workouts to those parties who are on the framework.

26:00 And then again, we can decide whether we want to negotiate for that particular piece of work or not. So there are different mechanisms in the way that the frameworks work. But importantly, all the work that comes through it is on those established terms and conditions within established embedded margins, and it's all about negotiating the price. And so it's not about tendering kind of the lowest cost wins. It's all about negotiating pricing. And if the pricing doesn't work, then we would not undertake the work. A question from Alastair. Are we likely to benefit from the issues with rack concrete? So, yes, topical question, Alastair. And, you know, of course, our expectation is that there is rack in more than just schools, by the way. There'll be rack in in in all sorts of other buildings. Although, typically, it's in parts or elements of buildings rather rather than the whole buildings.

26:53 What we're seeing at the moment, particularly if I focus on schools, is I think there's a 174 schools that are currently being identified with RAC issues. That's out of a state of 22,000 schools. So it's a relatively small population of schools which are affected. Obviously, it's a huge issue if it's it's the school that you or your your children attend. So what we see is that the Department of Education are we expect them to continue to deliver the new build program, which they are delivering at the moment and which we are working on and delivering new schools under. There may be in the unallocated elements of those budgets, some reallocation between schools, you have to do some more of the rack work or and, course, the rack where they've identified it in those schools, some of that will be very minor.

27:38 Some will you know, the whole school will need to be brought down and rebuilt. So where there is additional school building, I think we would stand to benefit, but we don't see this as actually having a significant impact on the outlook for our workload across education or other sectors. Question from John. What are our new non ERP system IT costs, and how have they been impacted by the new ERP system implementation? So so, John, we have of course, we have a whole plethora of of different IT systems. The key thing, of course, is that we try to make sure that they are as integrated as possible. So our new ERP system, which is an Oracle cloud based system, that takes us all the way now from our pipeline reporting. So if you like, our customer CRM system all the way through to to finalization and delivery of of the projects, all the commercial, the procurement, the finance, as well as all of our HR systems.

28:37 Of course, there's a whole series of other systems that we use, whether that be for design or for health and safety and and and so on and so forth. So there's a whole series of systems which which interface with that Oracle system, is our core ERP system. So but what we've done in in the upgrade is by going on to the cloud based system, what we now do is we get a process of continual improvement. So every quarter, we get the latest updates. We're able to roll those updates out into the business. So rather than this sort old fashioned way of implementing a system and then waiting kind of, you know, ten years until it goes out of support and then having to implement a new system, well, now we get this constant upgrade, constant improvement, constant business improvement as a result.

29:23 So, actually, this is really exciting that we'll be able to deliver improvement across the business. And and I should say that system went live earlier this month. We've already made payroll payments. We've already made supplier payments. We've already raised invoices to customers. So actually, that system has landed really successfully, we've had some really good feedback from across the business, which is which is really encouraging. Lily, for the time being, that that concludes the questions which are on the, q and a. Andrew, thank you. And I think you've addressed all those questions that you can from investors. And of course, the company can review all questions submitted today, we will publish those responses on the investor me company platform. Before redirecting investors to provide you with their feedback, which I know is particularly important to yourself and the company, could I please just ask you for a few closing comments?

30:13 Yeah. Thank you, Lee. So so what I'd really summarize is that GALLIFORD TRY is in really good shape. We're operating in markets such are robust. They're not cyclical. They're not affected by the political cycle as we go into a general election year. We've got a really strong outlook for the new financial year to f y to to June 2024 and increasing confidence in our in meeting our strategic targets through to 2026. Putting that together, our dividend for the year just finished increased 31%, and we see great opportunity for increasing that dividend further as we grow our revenue, as we grow, more importantly, our profit through to 2026. So as we make good progress against those targets, we expect to continue to deliver increasing shareholder returns.

31:01 So that's really the the message that I would leave everybody with. Andrew, thank you for updating investors today. I please ask investors not to close this session as you'll now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. This will only take a few moments to complete, and I'm sure will be greatly valued by the company. On behalf of the management team of GALLIFORD TRY HOLDINGS PLC, we'd like to thank you for attending today's presentation. Good afternoon to you all. Thank you.