Galliford Try Holdings (LSE:GFRD) — Half Year Results to 31 December 2023

0:01 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 just 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 can review all questions submitted today, and we'll publish those responses where it's appropriate to do so on the Investor Meet company platform. And before we begin, as usual, I would just like to submit the following poll, which will just appear on your screens now. And I would now like to hand you over to CFO, Andrew Duxbury. Andrew, good morning, sir. Morning. Thank you very much indeed. Pleasure to be here with you again. So morning, everybody.

0:47 The plan this morning, I'll present for twenty minutes or so, and then we'll take questions. So if you got any questions, please put those into the question box. Just before I start, a reminder, GALLIFORD TRY, we're a UK wide construction business.

1:02 Our building business constructs prisons, schools, defense accommodation, commercial offices, built rent, apartment blocks, and so on. And our infrastructure business constructs highways and clean water and wastewater treatment works predominantly. So the most important message you can see on the slide there, we're really well placed with momentum across all parts of the business, and we've got continued growth again across all parts of our business. So this is a summary of the investment case. You can see we're a high quality business. We operate in robust markets. I'll touch on various elements of these of these features through the course of the presentation. But importantly, everybody, our markets are very robust. There's a good pipeline of opportunities.

1:50 And really importantly for everybody to understand, our markets are not cyclical. So So we we have have really long term visibility, and we can see across all of our sectors. And, also, we have increasing barriers to entry, barriers to entry based on quality criteria, which is really important. We have an embedded culture of risk management and discipline across the business. That means that we're really selective about the jobs that we do and don't accept. And, again, that leads really well into the the results of the business. We've got a very progressive culture, 4,200 people across the business aligned to our purpose and to our values, and we have a very strong financial position, strong balance sheet, and a track record of predictable, profitable delivery.

2:34 This slide just summarizes our philosophy of how we deliver these consistent, predictable financial results. So it starts with those 4,200 excellent people. On the left hand side, you can see we've got that strong embedded culture of discipline and of risk awareness. So nobody in the business has any incentive to take on revenue. Everybody knows that they should walk away from a prospective job rather than take on the wrong project. What that does is that leads to a really high quality order book, 3,700,000,000, and long term visibility of the future pipeline through our framework positions. That means that we can deliver consistent, predictable, profitable performance, which in turn strengthens an already very strong balance sheet. And importantly, that strong balance sheet underpins and encourages the culture in the business, and so the wheel turns again.

3:30 And the results of that, you can see, in the six months to December 2023. Revenue was up 21%. Our divisional operating margin increased to two and a half percent. Profit before tax was up 33%. Earnings per share were up 50%. Interim dividend was up to 4p per share of 33 p, and we retained average month end cash through the period of a £150,000,000. And just as importantly as those excellent results, we've got real confidence in the future. So for the full year to June 2024 and in meeting our 2026 strategic targets that we set out back in 2021. So really confident the business is well placed to continue delivering profitable growth.

4:20 And you can see here a summary of that. The excellent performance is showing that real positive earnings momentum over the last four years. You can see continual, predictable, consistent growth in revenue, in profits, in earnings per share, and, of course, importantly, for our shareholders in dividends per share. And in fact, if you look at the profit before tax chart on this slide, you can see that the profit that we made in the half year to December 2023 was substantially more than the profit in the full year to June 2021, showing the benefits of the strategic growth plan that we've put in place. So I'll just delve in a little bit more detail into the results for the half year through to December 2023. And you can see that revenue and operating margin increased in both of our main divisions, building and infrastructure.

5:11 So building grew by 12%, and that comes off the back of a couple of flatter years. And what we saw in 2022 were some contract delays primarily caused by the spike in inflation and then by the political delays that we saw in the autumn of twenty twenty two. What What it meant was we were able to hold our nerve, keep our discipline. If projects were more expensive, we would wait until the class were able to afford the new budget, and we were able to just wait and let those projects come through in due course. We're now seeing that bell wave of work coming through, hence, the increase in revenue. But more importantly, we increased our margin in building as well. So what that shows is that we held our nerve to make sure that we would only take on the contracts when we could be sure that we could take them on with the right embedded margins.

6:01 In infrastructure, really, there's significant growth there. 31% increase in turnover, margin up to 2.6%. And that's really largely driven by water business that we build and commission clean clean water and wastewater treatment works. We work for all of the major water companies across The UK. And, everybody, the investment in that space is going to grow. So we're the the regulator works in five year cycles. We're in the middle of what they call AMP seven, which is the cycle that runs from 2020 to 2025, generating those high revenues. The overall capital spend the water companies are expecting to spend in the five years to 2030 is actually double spending at the moment. And I would expect that to continue for the next five or ten years. That doesn't mean we'll double our revenue, by the way, by 2030, but it shows the strength of that sector and the ability for us to choose the clients that we want to work with and the framework positions that we want to work on.

7:03 I've already mentioned a couple of times our strong balance sheet, and you can see that on the screen here. So average month end cash was a £150,000,000 in the six months. Our period end cash at the end of December was £209,000,000. And importantly, everybody, we've got no debt. We've got no pension liabilities. So that means that actually at the moment, we're seeing increased interest income because of the increase in base rates through 2023. And you can also see on the the balance sheet there, the second line, we've got 43,500,000 of PFI assets. So these are assets in PFI projects that we built and that we're receiving on an annual basis about £4,000,000 of interest income from those assets, and we pass that interest income back to our shareholders through our dividend policy.

7:52 Some of you may notice that net assets reduced in the six months, and that's because as well as being profitable, we also returned £25,000,000 to our shareholders in the six months in a combination of last year's final dividend and a special dividend that we paid out in October. So that's the reason for the the the reduction in net assets. The reason that we prioritize a strong balance sheet, and we'll never apologize for having a strong balance sheet, is because it really supports our operations and it supports the culture in the business. Our clients like the strong balance sheet because it gives them the confidence that we'll be here to deliver their projects and be here to the end of their projects. A lot of our clients have had experience here back in the day with Carillion or Intaserve where they found that the the problem with the contractor not being there to deliver the project.

8:42 So our clients really value our strong balance sheet and so does our supply chain. We want the best quality supply chain wanting to choose to work for GALLIFORD TRY. That helps us to deliver quality projects to our clients. We pay our supply chain properly on average in twenty four days. And so that balance sheet gives confidence to our clients and to our supply chain and helps us to win work. Strong balance sheet also allows us to invest in the business, whether that be in digital technologies, in our people, or in acquisitions. We've done four acquisitions in the last two and a half years, most recently in November 2023 where we bought AVRS systems into our capital markets part of our water offering. We're able to pay a sustainable dividend, which is growing, of course, as we grow the business and grow the profitability of the business.

9:31 Our dividend cover is 1.8 times earnings, which, broadly speaking, is twice covered our operational earnings and then giving back all of the PFI interest income that I referred to earlier. And that dividend will grow as we continue to grow the business. And where appropriate, we will return excess cash to our shareholders. So the strong balance sheet is there. It's very important, but we don't need the balance sheet to grow beyond a certain size. And where that's the case, we will return additional cash to our shareholders. And in the last fifteen months, we've returned £15,000,000 through a share buyback, which incidentally has added about 8% to earnings per share and to dividends going forwards, and we returned £12,000,000 through a special dividend in October.

10:17 So let me turn to our strategy for sustainable growth. We set this strategy out in 2021, and our objective was to grow the business from 1,100,000,000 revenue to 1,600,000,000, and more importantly, to grow our margin from 2% to 3%. And we're making really good progress against those targets at the moment. The strategy has got the four cornerstones that you can see on the the screen. We want to be a people orientated progressive business. Health and safety absolutely is our number one priority, but we want GALLIFORD TRY to be somewhere that people can come, develop their careers, and attract good new people to the business. We want to operate and deliver high quality projects for our clients and work with the best in the supply chain in order to do that. That means we can deliver the best projects to to the public. And, of course, this is the social and economic infrastructure that we all see around us and we all use.

11:11 We want to operate in a socially responsible way. That means social value using local labor where we can be, using local supply chains, making sure that we're very conscious of our environmental footprint, whether that be about carbon or biodiversity or water usage. And putting all those things together will allow us to deliver predictable sustainable financial returns. You can see at the bottom of the slide there, the growth at 1.1 to 1,600,000,000 will be largely through our existing markets, building, highways, and environment, which is the water sector that I've referred to. But alongside that, we've also identified three what we call adjacent markets. So these are markets that we know and understand, but which give us the opportunity to deliver higher margin products. So the first of these is the build to rent or the private rented sector, where we've always built private rented apartments for our clients. What we're now looking to do is to do some of the development work. So we identify the land.

12:08 We take it. We design the building. We take that through the planning and the various statutory consents. And we have the first of those schemes that we've developed is now under construction in Cardiff. So those private rented schemes that we develop gives us a developer margin on top of the regular construction margin. We've always always been been strong in water, as I've mentioned a couple of times. What we're looking to do in water as well is to move from design building commission of clean water and wastewater treatment works to also the capital maintenance and the asset optimization of those works. And through acquisition, we now have four factories across The UK, in Norwich, in Plymouth, in Coventry, and just opening one in Paisley outside Glasgow, which are building motor control centers and building chemical dosing plants for the water companies. And, again, that's a higher margin part of the business and using digital technology and software engineers to help us deliver those products.

13:03 And we also see through our facilities management offering the opportunity to move more into green retrofit of existing buildings. This is about decarbonizing the footprint of the existing built environment across The UK.

13:18 So our margin improvement, we're looking to get to 3%. At the moment, we've increased up to 2.5%, and that's driven by a raft of operational measures. It begins, of course, by selecting the right contracts with the right clients and the right terms and conditions. But then we also look to improve the margin through a whole series of measures, as you can see some of these on the on the screen. We want to work with the best quality supply chain. That means that we can deliver the right quality first time and avoid rework and avoid defects. We want to use digital tools, virtual reality planning, again, to make sure that we can get the right the right quality delivered first time. We can get the product delivered to sites in the right order at the right time, so making the the the operations more efficient.

14:05 And where appropriate, we will use off-site manufacturing tools, again, to derisk the construction process. I want to just talk you through an example of that now. So on the right hand side there, you can see some wall panels for a prison that we're building for the Ministry of Justice. And you can see these wall panels are coming. They are precast concrete and with a brick facade already on them. That's manufactured in a factory in a controlled environment, not subject to variations like weather conditions and so on. And we can deliver these to site on the back of a lorry and lift them into position. These panels already have electrical and plumbing embedded within them. What this does is it gives us increased certainty around the program because we're less reliant on weather conditions. It means we can reduce the number of people on-site because we're doing the construction in a controlled environment. That, of course, is better for health and safety risks.

15:06 And, also, it gives us a more controlled production environment, which leads to higher quality and less rework required on these schemes. And just to really you know, all of these benefits drive efficiency and help drive our margin improvement program. And just to really show you just a little bit more detail, you can see that the the the the the kind of development of this scheme here. So on the left hand side, we'll build the foundation slab in the situ, of course, that needs to be built on the site. You can't build that in a in a factory. But then those panels that you saw coming in the lorry, you can see those getting lifted into position on

15:45 the top right hand side. They get propped up whilst they get fixed in position in the bottom left. And then once that floor plate is completed, which, of course, is is very quick and straightforward, on the right hand side, we'll then put a precast concrete slab across the top, and then we go on and build the next layer above. So you can see the the the it becomes a more of a manufacturing and installation process than on-site construction.

16:13 And margin, of course, is also driven by that initial contract selection criteria, as I've said a couple of times. You can see on this slide on the left hand pie chart, 98 and a half percent of our £3,700,000,000 order book has been generated on non price competitive basis. So either through a target cost cost reimbursable basis, through two stage process where you get appointed based on quality, and then you agree the price, or just straight negotiation where we get asked, we just we've got this building. We'd like you to build it. Can we negotiate the price, please? And on those two stage ones where we get appointed based on quality, you can see an example of the scoring. This is a a a real example on the right hand side where the scoring criteria value very heavily our people, our project delivery skills, our health and safety record, our sustainability and social value records. And, of course, if you score highly on those quality criteria, then actually you can score potentially a little bit less highly on some of the financial criteria. And there are lots of examples across the business that we've won projects with the higher highest embedded fee, but because our quality scores outweigh that additional cost base. So really importantly, that, you know, this is a route to market that we operate through, which is about not lowest price wins. It's not about a real fight to the bottom. This is about raising barriers to entry by increasing quality and being awarded

17:44 work on a quality basis.

17:49 We do see our markets are robust and are growing. They're noncyclical, as I've said. They operate water operates through the regulatory cycle, not the economic cycle. The work we do in, for example, schools and prisons, again, is driven by the need of the country as opposed to short term economic or political factors. As you go around the country, you can see the need for replenishment and replacement of The UK social and economic infrastructure. We can all see the impacts of demographic changes, whether that be about people moving within the country or or or growing population. We know that the impacts of climate change and the need for decarbonization. So our drivers of revenue growth are very robust, and that's driving the opportunity for us to continue to grow in a profitable way.

18:36 What that leads to is a really high quality order book, £3,700,000,000 as at the end of December. You can see the split on the left hand side there between these different sectors that we work in. Typically, as you can see in the middle, somewhere it it it ebbs and flows a little bit, but somewhere between 8590% of our work is with public sector and the regulated sectors. The water companies are in that regulated space. And we're, by the way, equally choosy about the private sector clients we work with. We'll only work with really top drawer blue chip private sector clients. And you can see on the right hand side, for the year ending June 2024, we've already got 98% of our revenue in hand for the current year. Even more impressively, we've got 83% of our revenue in hand for the year to June 2025 and over 50% the year to June 2026. What that means is it gives us a really long line of sight. It means we can plan the business with certainty of what's coming.

19:37 And, of course, it also means that we've got a line of sight and an order book that takes us well through general election cycle. So we're very relaxed about the general election cycle that will happen at some point this year.

19:52 So just to to summarize before we come on to questions. We've had a really excellent half year. There's great momentum, and that momentum is in all parts of the business and growth, and improved performance across all parts of our business. We've got a really high quality order book with excellent visibility for the future and the the right strategy to continue to deliver sustainable growth. We're confident for the remainder of the 2024 financial year and our head of program on achieving our 2026 financial targets. And And as a result of that, on twenty third of May this year, so in a couple of months' time, we'll be holding a capital markets event where we'll update our strategy and update that strategy through to 2030.

20:39 So thank you all for listening. And what we'll do now is we'll turn to questions. I'll just wait for a moment just to let you have a chance to write your questions into the chat box. Perfect, 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 right hand corner of your screen. But just while the team take 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, we have 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. Andrew, at this point, if I may just hand back to you, sir, just to read out those questions and give your responses where it's appropriate to do so, and then I'll pick up from you at the end. Thank you.

21:29 Okay. Thank you very much. So I'll I'll just take the questions in the order in which they they've come in. So the first question is from David, which says, could I elaborate on the group's capital allocation prioritize priorities, including the strategy of maintaining strong balance sheet, investing in the business, and providing sustainable dividends? So, David, you'll have seen the the the slide. I'm not sure whether your question predated me getting to that slide or or was a a response to the slide. But but, absolutely, you know, as I've said, the priority balance sheet which gives our clients and our subcontractors confidence and which underpins the the the culture in the business of risk awareness and of discipline. And we have been able to invest very heavily. The four acquisitions that we've done all in the water sector, actually, as it happens, but have given us some real critical mass in water and have given us the real opportunity to build that capital maintenance part of the business. And there there may well be opportunity for further investment and further acquisitions in due course.

22:31 If that's the case, I'd expect those acquisitions

22:33 to be further bolt on capabilities that we're bringing into the business, not buying volume because we actually we've got the volume that we need across all the sectors that we want to be operating in already. And returning share money to dividend to shareholders is very, very important to us. Over the last three years, we've returned about £25,000,000 in ordinary dividends. We've returned £27,000,000 in in additional returns in buybacks and specials. And the and the interim dividend, 4p, is up 33% on this time last year. So as well as good share price growth, we've given good total returns to our shareholders as well. So that's our capital allocation policy. You know, investing in growth in the first instance and making sure that we can give good sustainable growing dividends to our shareholders.

23:23 Next question comes from Mark, which is about inflation. So while build cost inflation has been running at a high level and is now normalizing, do our frameworks offer protection from it going forwards? That's a really good good good question, Mark. And as you kind of alluded to, something like 85% of our order book and our contracts come through long term framework positions, frameworks which set out the the terms and conditions and the and the clients that we work with. So, importantly, what those frameworks do, they set out the terms and conditions. They'll probably set out the kind of may maybe in some cases, the overhead and profit structure. But what they don't do is set out the price of each individual piece of work. So each individual piece of work under a framework, so maybe you've got a a five year framework and you take out lots of individual projects under that. Each project is priced in current pricing at the start. And if we don't agree to pricing, we don't do the work. So each so I suppose in what that means is we don't have one set of build cost inflation in the business.

24:24 If we've got two or 300 jobs on the ground at any one time, each of those jobs has its own kind of inflationary cycle. So we make sure that each of those jobs we price properly at the outset, and then we procure the supply chain and the materials as soon as we price the job with the clients. We insulate ourselves from any change that may come to inflation during this life cycle of that particular project. But what we absolutely are seeing, Mark, as you as you allude to, is really this was an issue big issue in 2022, and that led to this delay in signing new contracts because we'd rather just delay rather than sign with the wrong pricing. Actually, the issue has really normalized now. So we're seeing of course, we see inflation, but in some products and not others, but it's definitely much more in line with how we would normally see it. And we continue to keep the same disciplines in the business.

25:17 Samuel asked me a question. You operate across a number of diverse sectors, education, defense, health, and commercial, and so on. How do we prioritize and capitalize on the growth opportunities within these sectors? Yes. That's really, really interesting question, Samuel. So what we do is we we we regularly look at the sectors that we operate in and indeed the sectors that we don't operate in to make sure that we feel like we've positioned the business in the right place. And that's a combination of the revenue opportunities, making sure that that we think there is there is a growth opportunity in their sectors, understanding as well things like clients, who the clients are, what's the client behavior, all these clients that we do or don't want to be working with. So we make sure that we are operating in sectors that we we know we understand and and have got the right commercial terms and conditions for us to succeed in.

26:07 And then what we make sure is that each each of those sectors, we have the way we operate our our our business is is through local delivery through regional offices. So my building business has got nine regional offices, so local delivery. But across that, we have sector specialist teams. We have an education specialist team, a health health specialist team, a justice specialist team, and so on, you know, who really understand those markets and are able to make sure that we are able to capitalize on the opportunities that come. And that's proved really successful for us. And, really, just to just to expand on that, over the last twelve months, we've been looking at the affordable housing market. It's a market that we weren't allowed to operate in following the sale of our house building business until last year, and now brought in that sector specialism to really start to look at that market. And, actually, we've had some success of being appointed onto our first frameworks in that part of the market as well. So where there's a market that we know and understand and we can bring that specialism into the business, then then we can look at those additional markets as well.

27:12 A question from Tim. How could I'm sorry. How big could the PRS side of the business become when we take all of the development margin rather than just construction margin? So I suppose this, Tim, for me is a question of how big do we want it to be because, clearly, in our view, the PRS market has got huge potential. So the question is how much of our business do we want to? How capital do we want to allocate, and how much risk do we want to allocate that way? So we've always worked and delivered lots of apartment blocks, for example, to our clients as just pure contractor. By moving into the developer space, you know, our objective would be probably to have one, two, most kind of of three of these coming through the the the sausage machine at any one time. We don't want the business to be tilted out of balance in favor of PRS because it is there is you know, it's relatively lumpy in terms of when you get planning permission, when you can get these schemes on-site. So we want to make sure the business continues and that the PRS development piece is incremental to the broader business and doesn't become a distraction. So I would expect, you know, when we get to cruising altitude, you know, two or three of these schemes coming through across the country at any one time.

28:21 At the moment, we site as you know, we've got our first one underway in in the autumn. Financial close and then started on-site in the autumn down in Cardiff. We've we're a preferred bidder and going through the planning process on other schemes at the moment in Milton Keynes, in Nottingham, and in Leicester. So, you know, we expect to see these starting to come through one or two a year. Would you know, maybe up to three would be the kind of order of magnitude. And then the final question at the moment, so if anyone else has got any questions, then please pop them in in in the box, comes from James, which is, are there any plans for further m and a? And so I think, James, the answer is maybe. You know, importantly, I think and I think this is this is important. Our strategy doesn't require us to do any m and a. So we can deliver our targets through organic growth through the business structured as it's currently structured.

29:18 But where where we see opportunity to accelerate that growth, to accelerate that delivery through bolt on m and a, then absolutely, we're alive to those opportunities. Because we've now done four acquisitions in the last two and a half years, you as you would expect, we get a lot of inbound inquiries. We've shown that with the balance sheet, and we're able to act quickly. We're able to transact. We're able to integrate the businesses well. So, actually, people want to transact with GALLIFORD TRY. And, of course, we also proactively look and keep an eye on the market, particularly in the sectors that we're operating in, to see if there's any opportunity to accelerate our strategy. So we don't need to do any m and a, but there may well be some further opportunities for further bolt ons, you know, bringing additional capabilities into the group in due course.

30:08 Andrew So I hope you answered those questions clearly and fully. But that that's all of the questions in the in the box. So I'll I'll just just wait a moment to see if any other, questions come through. Andrew, what what I'll do at this point, if I may, is just jump back in there. And thank you very much indeed for for answering all those questions that came in for investors this morning. And, course, if there are any further questions that do come through, we'll make these available to you immediately after the presentation has ended just for you to review to then add any additional responses, of course, where it's appropriate to do so. And we'll publish all those responses out on the platform. But, Andrew, perhaps before really just looking to redirect those on the call to provide you with their feedback, which I know is particularly important to yourself and the company, if I could please just ask you for a few closing comments to wrap up with, that would be great.

30:56 That's fine, Adam. So I've just come back to this slide. So just to remind everybody, there's really good momentum. All parts of our business are growing and delivering, good results at the moment. We're very confident for the outlook for the full financial year. We're making great progress against our targets. We're not cyclical. We're not worried about general election cycle. And everybody will be setting out further targets through to 2030 later on in May. So I'd like to leave you all with that that feeling of momentum, of of growing confidence, and grow a growing successful business. So thank you very much for taking the time to listen. 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 for the opportunity to provide your feedback in order the management team can really better understand your views and expectations.

31:44 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.