Galliford Try Holdings plc (GFRD) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the Galliford Try Holdings plc half year results investor presentation. [Operator Instructions] Before we begin, we would like to submit the following poll. And if you give that your kind attention, I'm sure the company will be most grateful. And I'd now like to hand over to Andrew Duxbury, CFO from Galliford Try Holdings. Good afternoon, sir.

Good afternoon, and thank you everybody, and glad to be here with you again. So my plan this afternoon to spend maybe 15 minutes or so just explaining and talking through the Galliford Try half year results to the end of December of 2021, and then we'll obviously go to Q&A. So in summary, to start with the highlights. We're very, very pleased with our half year performance. I'll pick up on some headlines now, and we'll come back to these themes later on in the presentation. Overall, we're making very, very good progress on the strategy that we set out in September of 2021. All the key metrics for the business have improved in the half year. And you can see on the slide there, in particular, our profit before tax, our operating margin and our dividend have all increased over the same period last year. We made an acquisition in October 2021, which we are integrating very, very well. That's progressing on plan, and I'll come back to that a little bit later in the presentation. We're continuing to focus on the core disciplines of the business, and that's helping us to manage the current economic conditions, managing inflation effectively, and that's not had any impact on the trading resource or our targets. Our order book and our pipeline is very, very strong. And so we're well on track for our targets that we set out through to June 2026. So just going through the half year results in a little bit more detail. You can see that revenue in the period was up 10%, and that's controlled growth, and we're very focused on making sure we only grow revenue in a controlled and disciplined way. And that revenue growth was across both divisions, building up 3% and infrastructure up 25%, particularly driven by the improvement in our water business. Our margin improvement has also improved across both businesses, building and infrastructure, both up by 0.6 percentage points to an overall divisional operating margin of 2.2% and that improvement driven by improved contract performance. And that really demonstrates the strong operational performance across the business. We did incur some exceptional costs in the half year. These were investments in the acquisition that I've already referred to and also investment in a new ERP accounting commercial finance systems, part of our digital investments. And our low tax rate due to some roll forward losses means that our GBP 7.1 million profit before tax translates into a post-tax GBP 6.5 million, that's pre-exceptional and an earnings per share of 5.9p. Equally as important as the performance is our strong balance sheet. So just to remind you and tell those of you who are new to the company, we've got no debt. We've got no pension liabilities. We've got a cash back balance sheet. And you can see that our average cash in the period was GBP 180 million. That's average month-end cash. And we achieved that increase whilst also improving our payments to our supply chain. So very importantly, we now pay 98% of invoices within 60 days, and our average days to pay all invoices is now 25 days. So excellent payment performance. And that's really important. I'll come on to that later on. We also have a portfolio of PPP assets valued at GBP 48 million and that portfolio generated GBP 2 million of interest income in the half year. So this strong balance sheet provides us a real platform for sustainable growth. So how do we use the balance sheet? Well, firstly, it is to support our strategy to support the operational performance of the business. A strong balance sheet in this sector is a real differentiator. It's a competitive advantage in terms of winning work. It's also a competitive advantage in terms of engaging with the best supply chain, and we want the best of the supply chain to want to work for Galliford Try. So very important in terms of delivering our strategy. And the strong balance sheet also gives us the options to progress our strategy to pursue strategic bolt-on acquisitions such as the acquisition that we completed in October of 2021. Secondly, the balance sheet allows us to mitigate risk and uncertainty, particularly if the market were to move in adverse direction in the future. The balance sheet means that we've got the space and time to choose the right contracts to work for. We're not under any pressure to sign up to contracts just to generate short-term cash and those are the kind of short-term decisions, which we've seen in construction in the past. And as you all are aware, a strong balance sheet gives us a space to make decisions and sign contracts for the long-term benefit of the business. The strong balance sheet allows me to have the certainty that we can pay sustainable regular dividends. We've improved our dividend policy in our announcement last week. I'll come back to that in a moment. And then finally, the strong balance sheet allows us to really continually review the cash requirements of the business. And at the right time, if we have sustainable excess cash in the business, then we will return that to shareholders. So just picking up on the dividend. So we've improved our dividend policy. We previously had a policy of a dividend cover of 2 to 2.5x, and we've improved that to a dividend cover policy of 2x pre-exceptional earnings. So that means we'll return 50% of our earnings to shareholders as annual dividends. And alongside that, our interim dividend has increased by 83% to 2.2p that we paid to shareholders in early April. So that covers the performance in the period. And I just want to look a little bit more to the future. This slide is a reminder, for those who are on the presentation in September, of our strategy. We announced this strategy in September 2021, and the strategy takes us out through to June 2026. There's really 4 main elements of the strategy. You can see on the slide in the top left quadrant, there is our focus on progressive culture, people-orientated progressive culture driven by our value. So that's all about making sure we do the right thing in terms of health and safety, the right thing about driving the right culture and getting the right people in the business. The bottom left side, our socially responsible delivery. This is about climate change, decarbonization. It's about social value, and all of these are increasingly important to our people and to our clients, of course. The top right quadrant is about delivering excellence through quality, through innovation. That's about digital. Innovation is about working closely with our clients. It's about working very closely with our supply chain. All of which in the bottom right quadrant there allows us to deliver sustainable financial returns. And so this sustainable growth strategy is all about building the business on a sustainable basis over time. So how will we deliver that growth? And it's worth being very clear here that we will grow revenue because the market is there to support revenue growth at the moment. But our focus is on proper risk management and is about margin and bottom line growth. So that's far more important to us than growing the top line. In the little diagram on the right-hand side there, you can see there's 2 main strands to our growth strategy. The first is to deliver more through our existing markets and existing businesses. And we'll come on to what those sectors are in a moment. And then on top of that, we look to move into what we call adjacent markets. So these are markets which have slightly higher margin profiles, a higher-margin opportunities. And there's 3 specific examples of these adjacent markets. The first is the private-rented sector. So we already do a lot of construction work in the private-rented sector. What we're looking to do is to move earlier in that value chain to get involved in the development, go through planning commission, getting their consent on sites. And that should have the opportunity to significantly increase the overall margin that we had obtained on private-rented market. And we've got our first such scheme, got planning commission at the end of last calendar year, and we'll start on sites on that later this calendar year. The second adjacent market is the green retrofit. So if you like, decarbonizing or making more energy-efficient buildings, which are already in existence. So this complements our existing facilities management business and allows us to work with clients to help them lower the energy usage of buildings which are already built. And the third area is in the water sector where we're looking to move from design build construction, so CapEx part of water, into the asset optimization and capital maintenance, certain parts of the water segment. So that's a summary of the strategy and how we'll start to deliver that strategic growth. And during the period in October 2021, we made an acquisition, an acquisition of a company called nmcn or more particularly the water business from nmcn, which had unfortunately fallen into administration. We bought the water business there for a headline consideration of GBP 1 million. And this acquisition is fully aligned with the strategy that I've just outlined. So in particular, this acquisition really brought 3 things. So first was additional geographic footprint. So we now work for almost all the water companies across England and Scotland. So that increased our existing market footprint in the water sector. Secondly, the acquisition brought with additional capabilities, in particular, our design teams, some off-site build capabilities, some automated control panel capabilities. And this is part of that adjacent market sector, the capital maintenance and asset optimization for water, which I referred to a moment ago. And thirdly, the acquisition brought around 900 excellent people into the business, people who are aligned with our culture and our values, and that integration of nmcn is really progressing well and really sets us up well for the future. We were able to transact very quickly on the acquisition because of the strength of our balance sheet. And this will really help us grow in line with those strategic targets. I should make the point that the acquisition contributed relatively little in the first half year because of the timing of the acquisition, but the annualized revenue from nmcn will be around GBP 100 million, GBP 120 million something of that order. I said that the market is there to grow the business, and you can see some of the drivers of that growth on the slide. And in particular, these drivers are very strong in the sectors that we work in. And bear in mind that 90% of our order book is in the public and regulated sectors. So the fact that government is investing in leveling up in decarbonization and so on, we work very heavily with the public sector. And we're also seeing a very, very good pipeline of opportunities at the moment. So lots of tendering opportunities for us. And so those drivers of market growth translate into an excellent order book. Yield book increased from GBP 3.3 billion at the end of June 2021 to GBP 3.4 billion at the end of December 2021. But for me, the most important thing of the order book is the quality of that order book. And just to give you a few metrics just to try and sort of tease out some of the quality in there. So we've got 95% of this year's revenue for the year to June 2022, already secured. And we've got 81% of revenue for the year to June 2023 already secured in that order book. So what that means is that nobody in the business is under pressure to win contracts just to generate revenue in the current financial year. You can see that 87% of that order book is through frameworks, frameworks bringing established terms and conditions, bring relationships with clients on a well-established basis. And 93% of our order book is with repeat clients. So those kind of statistics I'm giving you there just to show some of the quality of the contracts in that order book. The reason that order book quality is so important is because we've spent a huge amount of time over the last few years focusing on risk management, focusing on the discipline and the controls in the business to make sure that we can read the sustainable growth targets. And our focus on risk remains absolutely front and center whether that be on contract selection or indeed on project management as we work through the contracts. So you've seen this slide in September, if you were in the presentation then, the slide still applies and it's still worth just spending a moment on just to reflect on that focus on risk management. And that's particularly important at the moment in the context of inflation. So how do we manage inflation? You can see that a number of features of the way that we manage inflation. I suppose just to summarize, the key is to price contracts properly. So that's making sure that we take current pricing and an expectation of future inflation into all of our jobs. We built in inflation allowance in all of our projects. And so the risk to us, if you like, is the difference between what actual inflation is versus what we expected inflation when we priced the jobs. We procure early, whether that be materials or subcontractors. That has 2 advantages. It allows us to lock in the price with our supply chain. It also helps us to guarantee availability, which means we can protect the program and the timetable of our projects. And we engage very, very closely with our supply chain. And this is why it's so important that we pay our supply chain properly, as I referred to when I was talking about the balance sheet strength earlier on. So putting all those things together, we've been able to effectively manage inflation, such that there's been no overall impact on our trading or indeed on our margin targets going forward. So just coming back to the strategy slide, and this is a sustainable growth strategy. So our ESG measures are embedded into our strategy that's on all the way through. And I've just put on here a few of the metrics that we measure. We measure a number of our ESG metrics on an annual basis rather than at the half year. But just to pick a couple out here. In health and safety, our accident frequency rate of 0.07 is a very good score in the industry. Our objective is zero harm. It's no harm. So our objective is that everybody leaves our sites safe and well at the end of the day. So we continue to focus very, very heavily on health and safety. Our early careers percentage, where I remember of this 5% Club, so that means we've committed to having at least 5% of our employees in early career training programs, and you can see that we're ahead of that at the moment. And you can see those while our considerate construction scores, 41.4, that's above the sector average. That's an excellent score. Again, that's all part of working closely with our community. So these ESG metrics sewn all the way through our strategy. And our financial targets are equally as important, and you can see our financial targets to 2026. And in particular, you can see that we've made good progress against all of those targets in the half year through December just gone. So in summary, it was a really good performance in the half year. We're very, very pleased with everyone in the business for their contribution and the performance that we had up to December 2021. We've got an excellent position in terms of our balance sheet, our order book and the pipeline that we can see at work coming through. And so overall, we're very, very confident in the outlook and confident of meeting those targets through to June 2026. And so with that, I'll hand back to [ Mark ], and we'll take any questions.

That's great, Andrew. Thank you very much indeed for updating investors this afternoon. [Operator Instructions] But just while Andrew takes a few moment to review those questions submitted already, I'd like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A, can be accessed via your Investor Meet Company dashboard. [Operator Instructions] Andrew, we did have 1 pre-submitted question. I wonder if I may just start off the Q&A by posting that to you, and it reads as follows, can we have an update on the outstanding litigation? It's been at least 18 months outstanding. So it would be helpful to get a feel for the time line and a range for the outcome from this point.

Okay. Yes, of course. So it's a good question. And we've given a fairly extensive disclosure in our half year statement around this particular matter. I guess the summary of this is it's ongoing. It is progressing through the legal process, which is a slow process. I'm afraid arbitration is not a quick process. So this will still take, perhaps, another 18, 24 months to conclude. I guess for me, the key thing here is this is about us recovering costs. So this is a job that we've been off site now for 3 or more years. So if you like, the cash has gone in terms of that project. This is about us trying to seek recovery. So [ as ] litigation progresses, it progresses slowly, which I'm afraid is just the nature of the beast. And we will, of course, update the market when there is anything material to say in terms of updates in that process.

That's great, Andrew. If I may ask you to turn to the live questions, and thank you to all those investors that have taken time to submit questions. And Andrew, if you could just read out the question and give response where it's appropriate to do so, and then I'll pick up from you at the end.

No problem at all. So the first question, I'll read these questions as you say, [ Mark ], and then answer. So first question, has the acquisition of nmcn water business been fully integrated? And what does the pipeline of future acquisitions look like? So to take the first of those, we're really pleased with the progress on the integration. So we spent much of the time in the run-up to Christmas, if you like, remobilizing and restarting the various projects, which have been stopped through the administration process, and that's been done at the start of this calendar year in January. We restructured the environment senior leadership team, so the ncn (sic) [ nmcn ] business and the Galliford Try environment business are now fully integrated from a management and operational perspective. And of course, we're now working through making sure that various elements of the business processes are now adopted consistently across that whole business. But -- and I would say it's now on our financial systems. It's paid throughout payroll systems. It's reporting its numbers through our normal monthly reporting processes. So the integration is progressing very, very well. And I would just pause and say that that's a really, really good acquisition for us. It's going to really help Galliford Try grow, but it's also -- we've brought with us, say, around 900 people who have really rolled their sleeves up and going -- and got on board with Galliford Try being their new parent company. So really sort of pay tribute to the people who came across from nmcn as well. The second part of that question was what does the pipeline of future acquisitions look like? And so we are open minded. So our strategy does not rely on acquisitions. Our strategy is organic. But where we can see bolt-on acquisitions, which will accelerate the strategy, will support it, probably through -- more through additional capabilities than through, if you like, just trying to buy additional volume. Then we are very open minded to those bottom acquisitions. And of course, we keep those under review all the time. So there may well be future bolt-on acquisitions to support the strategic targets that I set out earlier on. The next question is post pandemic, which is actually I have to say, the nicest way to start the question I've had for a long time. So post pandemic, have you seen the tendering process for new contracts becoming less or more competitive? I guess your balance sheet will make you the preferred bidder. Would you consider exposure outside of the U.K.? So the market is competitive. I think what we're seeing is you see obviously a different -- slightly different levels of competition in different regions and different sectors, that's for sure. What we typically see in the public sector is a split between a quality bidding and pricing. So typically, the public sector will look to procure 70% may be based on quality and 30% based on commercial terms, it's a lot like the price. And those quality criteria include things like ESG credentials. It includes things like the strength of our balance sheet, the quality of our people. So that's really -- we're very strong in all of those quality areas, and that's really, really helpful in terms of making sure we can win, work. And of course, different clients view financial stability and balance sheet strength in different ways, but we've got examples of jobs that we've been invited to negotiate because of the strength of that balance sheet and the certainty that, that gives for our clients. So the market is still very competitive, but there is a huge pipeline of work coming through both the public sector and the private sector at the moment. In terms of exposure outside the U.K., that's not something that we would look to do. So we're very comfortable working in the U.K. I think I mean just to explain that, I think if you go outside the U.K., you're moving into geographies that you don't know and understand into supply chains that you have no relationship or knowledge with and with clients who you don't know either. So if you think about, from a risk management perspective, working with repeat clients with an established supply chain in markets that we know and understand with experience, that really directs you to stay in the U.K. The next question, do you continue to experience problems with the supply chain? Or does your prompt payment policy mitigate it? So absolutely paying our supply chain properly, I mean, it's the right thing to do, first and foremost. But undoubtedly, in a period where the supply chain has got more choices of who they work for, it's really important that Galliford Try is seen as a contractor of choice. So we have a program, which we call Advantage through Alignment. This is a program which brings our supply chain closer to Galliford Try in terms of giving them access to our pipeline, giving them access to our health and safety training and other training programs and so on. It brings cultural alignment between the supply chain and Galliford Try. And typically, we have sort of 60% of our work is through, what we call, aligned suppliers. There will always be a large amount which isn't because different projects might have bespoke in different requirements. But -- and that's why then the culture, make sure we pay and have a record of paying our supply chain properly is a really important part of getting the best supply chain working for Galliford Try. So I think at the moment, in the last 6 months, the supply chain has been resilient. And of course, we continue to monitor that in times of inflation and given the volume of work which is available at the moment. But we work very, very closely and very pleased with how closely we've been able to work with our supply chain over the last year or so. The next question is, of the GBP 180 million average cash on the balance sheet, how much is truly owned by the company, and how much is customer deposits? So just to be clear, that GBP 180 million is our average month-end cash position. Typically, somewhere around GBP 10 million of that also might be tied up in joint ventures. The rest is in the company bank account. So that's all our money. And that cash has stayed in a very narrow balance. We track the cash, as you would expect day by day as well as kind of month by month. And that cash has stayed in a very narrow balance. So it stayed above GBP 100 million every single day of the year. And so you can see that sort of band within which the cash is operating. So of course, there's a cycle in terms of the cash kind of churns through as we get new projects involved and as we pay the supply chain. But that cash is very, very resilient, and that is cash in our bank account and cash which is available to the company.

That's great. Andrew, I think you've taken very kindly every question that's come from investors. And of course, if we see any more questions, Andrew, rather than hold you on your busy day, I will make sure they're available to you after today's meeting. I know investor feedback is important to you and to the company, and I'll shortly redirect those on the call to provide you with their thoughts and expectations. But before doing so, Andrew, if I may, just ask you for a few closing comments to conclude.

Yes. So to say thank you, everyone, for taking the time to watch the presentation. We have had a very good half year. We're very, very pleased with the half year performance. We've got an excellent position as we stand here today, strong balance sheet, strong order book, good pipeline of opportunities. And so we're very, very confident that the future for Galliford Try is one where we'll be able to meet those strategic targets and continue to progress forward as we head into the rest of 2022.

That's great. Andrew, thank you once again for updating investors this afternoon. Can I please ask investors not to close this session as we'll now automatically redirect you for the opportunity 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.