Galliford Try Holdings (LSE:GFRD) — Interim Results

0:00 Good morning, ladies and gentlemen. Welcome to the GALLIFORD TRY HOLDINGS PLC half year results investor presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged. They can be submitted at any time via the q and a tab that's situated on the right hand corner of your screen. Please just simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company will review all questions submitted today and publish responses where it's

0:31 appropriate to do so. Before we begin, I would like to submit the following poll. And as usual, if you could give that your kind attention, I'm sure the company would be most grateful. I'd now like to hand you over to CFO, Andrew Duxbury. Good morning, sir. Morning. Thank you very much. Welcome, everybody. Thank you for taking the time to to join. The picture on the screen there, that's 280 Bishopsgate. That is a refurbishment project that we've just completed in Central London, an excellent project for us. This So morning, my plan is to spend a little bit of time doing a review of the half year to December 2022, and then we'll spend some time focusing on the outlook and our strategy going forwards. So let me start with some headlines, and the key thing is that we're really pleased with our performance in the half year. And that, of course, is thanks to the hard work and effort of my colleagues up and down the country.

1:24 You can see on the slide, we've delivered disciplined growth in revenue and in operating margin, and all of our businesses are performing well. And the three acquisitions that we've done in the last eighteen months are all settling in really nicely, and that bodes very well for the future. There were some delays in converting preferred bidder work into starting new contracts on-site during calendar year 2022. But despite that, we've managed to increase our half year profit before tax to £11,700,000 with a divisional operating margin 2.3%. And importantly, our balance sheet remains very strong and robust as well. Our interim dividend is declared at 3p compared to 2.2p this time last year. That's an increase of 36%.

2:13 And as we look forward, the order book is very robust. Our markets are also robust and resilient with a strong pipeline of opportunities that we're looking at. And so we're very confident of achieving our targets to the full year of June 2023. And as such, we increased our guidance towards the upper end of the analysts' range of expectations. And since we said that earlier this week, we have seen some upgraded forecasts from the analysts as a result. Before I come back into the results in more detail, let me just remind you of our investment case. GALLIFORD TRY is a high quality business. We operate in robust market sectors, and we're growing increasing returns for our shareholders.

3:00 So in a bit more detail, you can see that the market the market sectors that we operate in are very strong. They're supported by continuing good levels of government investments. We're continuing to see a strong pipeline of new opportunities across all of our market sectors. Importantly, we've got the right culture to deliver our strategy. Culture is embedded across our business focused on risk management and discipline with everybody aligned to what we're trying to achieve. And that's really important as part of our risk management strategy is that as well as having the right processes, we've got the right culture and alignment of purpose and vision amongst our people. Our financial position is very strong, and increasingly, we're demonstrating a track record of delivering consistent, predictable financial results. And our results to the end of December twenty twenty two are another step along that journey.

3:51 And importantly, we've got a clear strategy, and that strategy will deliver further increases in shareholder returns as we go forwards.

4:04 So coming back to the half year results in a little bit more detail. Revenue was up 14% in the period compared to the same period last year. The split in there, buildings revenue, as you can see on the left hand graph, buildings revenue was up 3.5%, and that was despite seeing some of those delayed contract starts that I referred to earlier. Importantly, those delays are now starting to ease, and what we saw was a a delay elongated decision making in government. But they were delays, not cancellations. We're now seeing that work coming through, and, course, that gives us a great outlook as we go forwards. Infrastructure's revenue was up 35% in the period. That's really driven by our environment business. So additional work with the water companies, and that benefits from the acquisition that we made towards the back end of calendar year 2021.

4:54 But more importantly, the right hand graph, you can see that the divisional operating margin increased in both Building and Infrastructure to 2.3%, and that's showing good progression towards our 3% divisional operating margin target. Putting that together, profit before tax was up 65% to £11,700,000 That includes a £3,600,000 profit on disposal of a non core joint venture business. Below that, we also then reported exceptional costs of £4,500,000 These exceptional costs relate to an investment in IT systems. We discussed these in our last presentation in September, and that project is progressing according to plan.

5:41 Two or three years ago, those costs would have been capitalized on the balance sheet and amortized over a prolonged period of time, maybe ten years. We're no longer able to do that through accounting standards, which is why we report those costs separately. We had a tax rate which is starting to normalize towards the standard rate. So our tax rate in the half year is 19 and a half percent, just below the standard corporation tax rate. So putting all that together means that we had earnings per share of 8.8p in the half year. That's a 49% increase on the same time last year. Importantly, our balance sheet remains very, very strong. This is important because this helps us in the marketplace. This helps us to win work with good clients, and it also helps us to make sure that we have the best quality supply chain wanting to work for GALLIFORD TRY because we are able to give certainty about payment performance. And I'll come back onto that in a moment.

6:40 Importantly, well, we've got no pension deficit. We've got no pension fund liabilities to fund at all, and we've got no debts. And that position, as I say, helps us in the market because it gives us certainty for our clients. And that cash position is robust and resilient. Every single day of the year, we have a net cash position, and we think that's where good contracting companies should be. In the half year to December, we generated £2,000,000 of interest income. That was through a combination of our cash balances and also our PPP investments, which you can see on the balance sheet there right at £46,000,000. And we also have the potential for an additional cash recovery from a claim that we're pursuing against a former client, and we give full disclosure of that in our interim report, which you can find on our website.

7:31 So month end average cash was very robust, 154,000,000 with the spot cash at the end of December, 196,000,000. That is a little bit lower than last year, but still really strong cash performance. And let me just explain the movement in a a little bit more detail. Towards the right hand side of the chart there, you can see exceptional items, £5,000,000. That is the investment that we've made into our digital improvements, which I referred to earlier on. And you can also see that we returned £10,000,000 to shareholders through dividends and through our share buyback program. Operating cash flow showed a small outflow in the period of £3,000,000.

8:18 That was impacted by some of the delayed contract starts that I referred to earlier and also by the acquisitions that we made in in the last eighteen months, and in particular funding some of the acquired liabilities with those acquisitions. So you can see that there's specific reasons for the for the movement, and that's still a very, very robust position. And really importantly, really importantly, on the right hand side of the of the slide, you can see that we continue to pay our supply chain properly. 98% of invoices paid within sixty days. We pay on average in twenty six days. And for our small suppliers, so those with less than 50 employees, we paid 89 percent of those invoices within thirty days. Now that payment performance is really good in the sector. It's really good across really any sector, and that's really important mechanism for us to help make sure that we are attractive place for our supply chain to work, and we want to encourage the the best supply chain to want to work for GALLIFORD TRY.

9:20 In terms of capital allocation, we continue to prioritize that strong balance sheet. For all the reasons I've said, that helps us maintain a competitive advantage in the marketplace. It also helps us have bandwidth to invest in the business, whether that's the digital investment that I've already spoken about, whether that's looking at additional bolt on acquisition opportunities. And we did two acquisitions in the six months to December, MCS Control Systems and Hambaker, both in our environment business. I'll come on to that in a little bit more detail in a moment. The strong balance sheet also gives us the confidence to be able to to to declare sustainable dividends and sustainable returns for our shareholders. We've got our full year dividend cover policy set at two times earnings, so we pay 50 p in the pound back to our shareholders.

10:10 And then we've also said that where we see excess cash on the balance sheet, we will look to return that to shareholders as well. And we've initiated a £15,000,000 share buyback, which we started in October, and that's we spent about five of the 15,000,000 to date. So that's that's ongoing.

10:33 Putting this together, you can see the excellent performance in the period, that strong balance sheet, and the strong outlook which I'm about to come on to to cover has given us the confidence to increase our dividend by 36% to three p, and that we paid later on this spring. And, of course, importantly, as we deliver our strategy, so as we grow the business, as we improve the margin, the profitability of the business, then our dividends will continue to grow accordingly. Which that's a good moment then for me to look forward and start start to talk a little bit more about the strategy and the outlook. So the first thing to say is that the markets that we operate in are still really robust. We see really good opportunities and a really good pipeline of new opportunities coming through the door all the time.

11:23 Importantly, those markets then like, the the the growth opportunity in those market really kind of underpins our own growth expectations. And we can see that growth opportunity in both our core sectors and some adjacent markets, which I'll come on to. We've got really strong positions across all of those core sectors. Examples include education, so building schools, health care, which is typically sort of bolt on health care facilities, water treatment works, roads and highways projects. Importantly, these are sectors where the fundamental need for reinvestment in in that infrastructure continues to be strong. So we see these as good resilient sectors, you know, despite what you what you hear about about the current kind of economic outlook. Importantly, we're also able to support our clients' requirements for decarbonization.

12:12 So in particular, reducing their operational carbon footprint of their built environment. And this is an increasingly important route to market for us as a business. And then we also see those macroeconomic conditions improving. In particular, we see inflation starting to ease. I'm not talking about deflation, but I'm talking about more predictable pricing that we're able to get from our supply chain and offer to our clients. And we're seeing the issues of materials availabilities easing compared to this time last year as well. So we're actually seeing some of those fundamental macroeconomic conditions as better than they were this time last year. But, look, we do live in the real world. The calendar year 2022 had some challenges, and what I want to do with this slide is really just to demonstrate how we responded to those challenges through the last calendar year, how we've managed to manage our way through the particular issues with the outcome being that there would be no overall significant impact on our financial performance.

13:15 So just to pick up a few of the themes on on on this particular slide. Inflation, obviously, has been at the the the front of everyone's mind. And we've been able to manage this by really, first and foremost, retaining our attitude to risk, making sure that we were able to price inflation sensibly into our contracts. And this is one of the reasons that we saw a delay in some contracts as we were able to work our way through to make sure that the the pricing was appropriate, or making sure that we've got the right contractual protections for inflation going forwards. And, of course, this was really helped by having a collaborative working relationship with our clients and also with our supply chain. And, of course, supply chain failure, you can see there on on on the second line. That's your potential risk in the current environment, and we spent more time doing additional financial due diligence on our supply chain. We work very closely with what we call our aligned supply chain, so our key and largest suppliers.

14:13 And, of course, as I said earlier, we pay our supply chain promptly and properly, which helps to provide a a stable platform for their own businesses. Materials availability, generally no longer an issue, but we've maintained some of the disciplines that we brought in previously, such as making sure that we procure materials early on jobs and make sure we protect our programs accordingly. And, of course, retaining our excellent people is really important as well as attracting good new people to the business. And we spend a lot of time here. We invested heavily in our people. We we made a million pound cost of living payment to our lower paid people in the autumn. We've got a very low voluntary churn rate, of 11.7%, and we've got a growing early career population in the business. So that's graduates, trainees, and apprentice apprentices.

15:05 And we early adopted the increase in the real living wage last autumn. So we spend a lot of time making sure that we're a good place for people to work so that we can retain our good people and attract new people to the company. So hopefully, that's a useful backdrop to 2022, some of those macro challenges and to our markets. And hopefully, that's useful context for just reminding you of our sustainable growth strategy. We have this very simple aspiration of delivering high quality buildings and infrastructure, delivering that in a socially responsible way, and doing it in a way which provides sustainable returns for our shareholders. And you can see the building blocks of our strategy on the slide. So first of all, that focus on being a people orientated progressive business.

15:53 This is about making sure that everybody can go home safe and well at the end of the day. It's about making sure people can come to GALLIFORD TRY and grow their careers with GALLIFORD TRY as well. So we spend a lot of time focusing on our people. We also want to make sure that we can deliver in a socially responsible way. So this is about climate change, so low carbon, and we have our own decarbonization targets. It's about focusing on things like biodiversity and water usage, and it's about delivering social value for our communities. And that's about about local employment using local supply chain possible so we deliver additional value to the communities in which we operate. And then we want to make sure we deliver excellence for our clients. This is about a culture of quality, quality, innovation, digital investment, and that really helps making sure that we work closely with our clients and supply chain in a very collaborative way. And if we get these building blocks right, then we will deliver a sustainable return for our shareholders.

16:55 And what the strategy will deliver in terms of financial results, can see on the slide here. Our targets for 2026 are turnover of £1,600,000,000 with a divisional operating margin of 3%. And we're making good progress towards these goals. So how will we do this? We'll do this by growing in our existing markets. That's on the left hand side of the slide. So our existing markets environment, which is largely water and wastewater treatment works, highways for both national highways and local authority road schemes, and in building sectors such as education, health, defense, custodial, and so on. These are our core sectors, and we see growth opportunities in all of those. Those sectors are all performing well, typically through framework positions that we have, which I'll come on to in a moment. And we've got a very strong order to support or order book to support growth in those markets.

17:51 We also see the opportunity to grow further in three what we call adjacent markets, which are three higher margin markets that we're looking to move into. You can see these on the right hand side the private rented sector, the green retrofit of existing buildings, and the capital maintenance sector part of the water sector. And just to touch on each of those three, the private rented sector, that part of the market actually had a slight hiatus following the the mini budget in the autumn as the private rented providers were starting to revisit their liabilities and the cost of delivering schemes. But we think the fundamentals of that market are still very, very strong. We expect that market to come back later on this year. The green retrofit of existing buildings is a market which is a huge opportunity, and that's a which is really starting to grow, we're starting to do it more and more work and surveying work for our clients in the public sector.

18:47 And the example on the front screen of Bishopscape, which I showed you, is is an example where we can take an existing building and refurbish that to make that much more carbon efficient in use, which is what we've done with with that particular building. And I think that the adjacent market that has accelerated the furthest and fastest in the last the last year has been like capital maintenance part of the water sector. And that's been aided by three acquisitions. The acquisition of NMCN in autumn of twenty twenty one, and then the acquisition of MCS Control Systems in July 2022, and of Hambaker in November 2022. And those businesses all give us a real foothold in that capital maintenance part of the water sector, which is a real opportunity for us to grow to grow into the water sector further.

19:37 And all of these growth targets are underpinned by sustainability commitments. So we don't have a separate sustainability strategy. This is absolutely tied in with our core strategy. And just to pick a couple of the examples on the bottom of the screen there, we received the bronze award from Clear Assured, and that's an award for diversity and inclusivity. On the right hand side there, you can see we were named, contractor of the year in the water sector. And we also work as a member of The UK net zero carbon building standards to try and help develop building standards for the future. So really important parts of our overall strategy.

20:14 But importantly, and really importantly, we'll only grow the business in markets that and and with clients and with contracts that align with our risk appetite. So we're able to grow the business because the market's there to support it, at the moment, but it's really important to make sure that we do that with the right risk approach. So we have the aligned culture across the business. So as well as having processes for risk management, we've got a culture where everybody understands what we're trying to achieve and is aligned to the purpose that we've set out already. The incentives in the business are aligned from the boardroom all the way through the business. The incentives are on profits, cash, and ESG. Nobody in the business is incentivized to take on turnover, to take on the wrong type of contracts or the contracts with the wrong risk profile.

21:03 We make sure that we have that understanding of risk through the business, that we look at the contractual mechanisms to make sure that whatever type of project we're taking on, whether it be a target cost cost reimbursable contract or a fixed price contract, that we understand the the risks that we're taking on, and we've got various mechanisms and processes in the business to assess that risk and to make sure that is managed through the life of the of the project. And importantly, that's that means that as, of course, as we have some projects which are a little bit better and overperforming and some which may be slightly underperformed compared to expectations, there is no individual job in our business, in our order book, which will harm the business individually. So in a sense, I make no apology if you've seen this slide before. It's really important because that focused risk management is front and center to the way that we're going to continue to grow the business as we go forwards.

21:56 And what people what our people, what our culture, what our risk management processes lead to is this really high quality order book, £3,500,000,000. And every single project in that order book is the kind of projects that we want to work through. It's all come through that risk management process that I've just described. And everything in that order book supports our growth and our margin aspirations as we go forwards. So just maybe to call out a couple of the statistics on on the slide here. You can see in the the bar charts in the middle of the of the page that our order book is, give or take, ninety ten split between the public and regulated sectors and the private sector. And everything, by the way, in the private sector there is with blue chip clients. That's all as good quality as the the work in in the public sector.

22:44 You can see the split by by market sector on the left hand side, which I've touched on already. But importantly, 87% of that work has come through framework positions. Our frameworks provide us with long term high quality work. They give us really good visibility of future opportunities. It means that we can generate work based on established terms and conditions with known repeat clients. So frameworks are an excellent route to market. I'll come on to that in a little bit more detail in a moment. The one of the statistic maybe just to call out there is that 79%. So as at the end of December, we had 79% visibility for the for the financial year to June 2024. So really good long term visibility from the order book in the business.

23:32 And I mentioned frameworks a moment ago, and you can see on this slide some examples of the framework positions that we have in the business. I think for me the important thing to take from this slide is you can see that we've got framework positions which go out through our strategy period well beyond 2026. And you can see we've got framework positions in each and every one of the sectors that we operate in. So these frameworks really underpin that culture of risk management that we've got across the business.

24:03 So to summarize, the group is in a really good position. We had a strong half year performance through to December 2022. And just as importantly, we've got a really strong outlook through to not only June 2023, but beyond to our targets through to 2026. We're progressing against those targets, and we're doing and delivering what we said we would do, building that track record of consistent, predictable financial performance. We're financially strong. We're operating in robust markets, and we're delivering increasing shareholder returns. And so with that, I'm going to pause and then in a moment we'll take some q and a. Andrew, that's great. And thank you very much indeed for your presentation this morning. Ladies and gentlemen, please do continue to submit your questions just by using the Q and A tab that's situated on the top right hand corner of your screen.

24:54 But just while Andrew takes a few moments to review those questions that were submitted already, I would like to remind you that a recording of this presentation along with a copy of the slides and the published q and a can be accessed via your investor dashboard. Andrew, as you can see there in the q and a tab, we've received a number of questions throughout your presentation this morning. And thank you to all of those on the call for taking the time to submit their questions. And, Andrew, if I could just hand back to you to respond to those where it's appropriate to do so, and then I'll pick up from you at the end. Thank you. Okay. Thank you very much. So what I will do is I'll I'll read the questions out and then respond to them so everybody on the call has awareness of what the question is. So the first question from Tim. Are we concerned that the recent apparent reductions or delays in billions of pounds of government spending programs like HS two or large and and the large road projects?

25:43 And will this negatively affect our revenue and profit growth from years two onwards? So obviously, Tim, we saw you know, we're not involved in HS2 at the and and we saw those those delays. You know, what we have seen through 2022, as I said earlier, was was some elongating of of, the time taken to get new contracts signed, firstly, because of inflation and then because of, you know, difficult, public sector decision process, through through the autumn after the mini mini budget. But we're actually seeing that starting to ease in the sectors that we operate in and the size of projects that we operate in. Across our building business, typically our projects are about £20,000,000 on average. Let's say buildings, primary schools, for example. And and we see no letter no diminishment in the number of opportunities coming through there at all. And actually, I think, you know, I don't think that the government changing their position on some of these really huge CapEx projects will change the the part of the market that we're operating in, which is probably quicker to to to get started on-site and quicker to get those projects delivered.

26:50 And fundamentally, the drivers of the need for investment in our markets remain. So whether it's a changing demographic, whether it's the the sort of, you know, the deteriorating quality of some of the aging infrastructure in those sectors. So we we don't see that that the likelihood that that's going to bring the the market down. And our growth strategy in terms of revenue is is obviously predicated on those markets remaining strong and robust, which is exactly where we see them at the moment. Next question is regarding capital allocation. So is the current share buyback programme likely to be extended when it ends given our large net cash balance, or will we instead towards more bolt on acquisitions? So we're very pleased with the the share buyback program and how that's working so far. And what we said when we started that was that that was a initial share buyback, and and, you know, we will keep under review whether, yeah, at the right time, we continue to monitor whether we have got excess capital on the balance sheet and and how and the best way to return that to shareholders.

27:57 But, clearly, I mean, one of the advantage of doing a buyback over a period of time is it does allow us to stay reactive to opportunities such as potential bolt on acquisitions. I should say that our strategy doesn't rely on any acquisitions. So to get to those 2026 targets, we don't need to go out to the market and and and do any other bolt ons. But that's not to say that we won't do if we find you know, we keep ourselves appraised of the market. We keep very alive to opportunities and opportunities which will support and accelerate delivery of that strategy. So, yeah, there may there may be further bolt ons. There may not be. Depends on, yeah, whether we can find the right opportunities, which we think will be enhancing to the business. And if that's not the case, then we'll continue to review the the balance the cash balance on the balance sheet, you know, and and look to return additional capital to shareholders when it's appropriate to do so. Yeah. I think we're very comfortable, either way, with our ordinary dividend policy, which is up two times cover. We think that's the right place for the business as we go forwards.

28:59 Next question is from Steve, actually a similar question. Do I have any m and a plans moving forward to drive growth? So yes, Steve, as I I guess as I've just said, absolutely, no need to do further m and a. But the the m and a we have done in the last eighteen months has been really successful. It's really given us additional foothold in the in the water sector and really grown our our capabilities in capital maintenance. Particularly, we're now starting to win framework positions in capital maintenance that we probably wouldn't have been able to do without those acquisitions. So the acquisitions we've done have been really good at accelerating the strategy. We'd always identified capital maintenance in water as an adjacent market, and we've been able to accelerate our move into that market through the through the acquisition.

29:44 So we are alive and alert to further opportunities that might arise. But as I said, importantly, we're absolutely not requiring to do that. So we're not we're not out there desperately looking for acquisitions. Otherwise, we won't be able to deliver our strategy. That's not the case at all. So hopefully, Steve, that that that's clear in terms of our approach to future m and a. So the next question is from Tim. What are the expected margins in PRS, green retrofit and capital maintenance vis a vis our 3% margin target? So our 3% so we always said, as we said, that 3% margin target, that those adjacent markets markets would deliver really towards the back end of the the strategy period because as we as we grow ourselves into that. But each of those each each of those adjacent markets is a higher margin opportunity. So we do a lot of PRS work already where we're acting as contractor for for third parties.

30:41 The move into this adjacent market is to get more involved in the development phase, not not building and then hoping to sell the buildings. We'll do the development. We'll take it through a statutory consents, and then we'll go and find the forward funder, the pension fund, whoever, to to then fund the building of the of the cont of of the of the PRF scheme. And we expect across the life cycle of that, probably the margins will be double our normal margins. You know, this we're not gonna do more than one, two, three of these a year, so we're not gonna try and tilt the business and get the business out of kilter by PRS, but they are margin accretive. Similarly in green retrofit, you know, that's run through our facilities management business, which is already a relatively small part of the group, but a higher margin business. So again, you'd be looking at higher single figures margins in that part of the business. And similarly with with with the capital maintenance part of water. So relatively small at the moment, but again, higher single figures margins across that piece. So all of those adjacent markets, we expect to have significantly higher margins than our standard construction margins.

31:51 So a question from Justin. So firstly, Justin, thank you for your kind comments about comprehensive presentation and good performance with a solid outlook, which is exactly the summary that I would like you to take from the presentation. So Tim's question, when do we expect to become substantially cash generative? Well, I mean, Tim, we have been cash generative operating cash generative across, you know, yeah, the last few periods. As I say, the last six months, we had a a small operating cash outflow because of funding of the acquisitions. And across the group, it was a combination really of funding the acquisitions and the returns to shareholders. So, you know, as a business, we expect to be operating cash generative as we as we grow the business. So we expect that cash performance to continue to be strong and robust. And, of course, that is what in turn gives us the opportunity to return additional funds to shareholders as we go forward.

32:51 Thank you for taking the time to listen to the presentation and to attend this morning. GALLIFORD TRY is in a very good shape. We had a good half year performance to the December 2022, and we've got a really good outlook and position in line with our strategic targets as we look forward. So we're very optimistic that we will be able to achieve the targets that we've set out, and you can see both the outlook for 2023 and beyond is very strong. So we're very happy with the performance and where we are as a business and say thank you very much for taking the time to listen this morning. Andrew, that's great. And thank you once again for updating investors this morning. Could I please ask investors not to close this session as you'll now be automatically redirected for the opportunity to provide your feedback in order that the management team can better understand your views and expectations?

33:39 This will only take a few moments to complete, but I'm sure will be greatly valued by the company. On behalf of the management team of GALLIFORD TRY HOLDINGS PLC, we would like to thank you for attending today's presentation. That now concludes today's session, so good morning to you all.