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

Good afternoon, and welcome to the Galliford Try Holdings plc investor presentation. [Operator Instructions] Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Andrew Duxbury, CFO. Good afternoon, sir.

Good afternoon. Many thanks, Lilly, and welcome, everybody. It's really good to be with you again. So what I plan to do is present for 20 minutes or so, and then we'll go to questions and hopefully address all the questions that you might have. So what I'll do is I'll cover a review of the financial year ended 30th of June 2023, and we'll then move on to focus a bit more on the strategy and the outlook for the business. So I'd start with some headlines before coming back to these in a little bit more detail. We are really pleased with our performance in the year to 30th of June. And of course, that's been achieved, thanks to the hard work and the contribution of everyone in the business and across our supply chain. So our thanks absolutely go to all those people. And it's worth remembering, this was delivered against a really challenging economic backdrop. And in that context, all of our businesses have performed well, and we're pleased with the position of each of those businesses going forward. In particular, the acquisitions that we've made, and we've made 3 acquisitions over the last 18 to 20 months. Those acquisitions are really starting to settle in well and will start to really contribute to the growth of the business as we go forward. Our pre-exceptional profit before tax is up 23% in the year, and our full year dividend is up 31% in the year. I'll come on to those numbers in a little bit more detail in a moment. Looking forward, the order book is in really good shape, GBP 3.7 billion as our largest ever order book. And more importantly, the quality within that order book is really excellent. And beyond that order book, we also have a strong pipeline of further opportunities that we're currently looking at and assessing. It's worth remembering that we're a noncyclical business. And of course, our forward visibility, that order book takes us through beyond the next general election. So that gives us some really good certainty going into FY '24 and beyond. Looking at that, we're increasingly confident of our performance in the new financial year to June 2024. And so last week, we raised our guidance to say that would be at the upper end of the current range of analyst expectations, and that was GBP 24 million to GBP 28 million of profit before tax, and we said we'll be at the upper end of that range. We're also increasingly confident in meeting our FY '26 strategic targets. And partly due to that confidence, we've increased our dividend further and improved our dividend cover policy again. I'll come back to that a little bit later in the presentation. So this is just a brief reminder of our investment proposition. So Galliford Try is a high-quality business. We operate with leading positions in market sectors that are noncyclical, and that are showing good growth potential. And we're generating as a result of that increasing returns for our shareholders. The growth opportunities in our sector remains very strong, and we've seen good levels of government investment in the sectors in which we operate. And increasingly, we're seeing increasing barriers to entry based on quality, and that's really important to help us deliver profitable growth going forward. The risk profile of our portfolio of projects is very, very good, and we've got excellent forward visibility of the order book, as I mentioned earlier. We've got the culture and the right culture embedded across our business to focus on discipline, focus on risk, and that will help the business to deliver our strategy of sustainable growth. And our financial position is very strong, and we're demonstrating a track record of delivering predictable financial results year-on-year. And you can see that here on this slide. It's 3 full financial years since we demerged from our housebuilding business. And since then, we've been delivering consistent profitable growth. And this slide is really important. This slide is the evidence of the strong foundations that we've built in the business. And this slide forms the basis of the confidence that we've got for our future growth. And it's worth just noting those numbers are revenue growth. Pre-exceptional profit before tax is growing faster. Pre-exceptional earnings per share has grown, and dividends per share has grown 123% over the last 2 years since FY '21. So just going back to the results for the last financial year. Our performance is in line with the strategic targets we set ourselves. We've set our targets in 2021 through to 2026, where 2 of the 5 years through that period, and we're on track to meet those targets we set ourselves for FY '26. Revenue in the last financial year was up 12.5%, and that was reflecting particularly strong growth in our Environment or our Water business. Our divisional operating margin has remained stable at 2.4%, but that includes some one-off costs that I'll come back to in a moment, and so it gives us good confidence that we're on track for our 3% margin target. Pre-exceptional profit before tax is up 22.5%, and that excludes the effect of the one-off contract settlement that we announced in June this year. And just to remind everybody, that contract settlement brought to an end the last legacy contract. It was a long-running dispute, and it resulted in a cash receipt to Galliford Try of GBP 26 million. The result of June does include a GBP 3.6 million profit on the sale of a joint venture investment stake. That was a noncore investment. And also, we reported exceptional costs of GBP 10.6 million. That was related entirely to our investment in new cloud-based digital systems. I described that last time we met. And importantly, those systems are now live. So altogether, our pre-exceptional earnings per share has increased by 18% compared to the same period last year. The quality of our order book is really important in delivering that strong contract portfolio, and that continues to be the key driver of our margin improvement target. And you can see in the year to June, operating profit before amortization increased by GBP 3.5 million to GBP 21.9 million, and that was helped by our volume growth. But what I really want to draw out on this slide is that the margin includes that GBP 3.4 million of cost of living and acquisition costs. So that was just over GBP 2 million of net losses on 2 acquisitions that we made in the year, MCS and Ham Baker. And those losses were because of the state of those businesses when we acquired them. They were both in or close to administration. We also made a GBP 1 million cost of living payment in October 2022 to about half of our employees. So without these 2 expenditures, our 2.4% margin would have been 2.6% margin. And that's why it provides us real confidence in our growth trajectory going forward. But one point I would just stress, both of those 2 things, the cost of living payment and the acquisitions, were really good investments in the future in our people and in our future capabilities in the water sector. We operate with a very strong balance sheet, and that balance sheet is really important. It helps us in the market. It helps us to win work because our clients like it. Our clients like to work with a contractor who they've got confidence, will be there to deliver that project. And it also helps us to work with the best supply chain in the industry, which helps us to deliver high-quality products to our clients. And again, our supply chain like the fact they've got certainty of payment, and we pay our supply chain on average in 26 days, with 98% of invoices paid within 60 days. So again, very good statistics in the sector. To remind everybody, we've got no pension funds, and we've got no debt. Our cash position is strong, is robust, is positive every single day of the year just as we think contractors balance sheet should be. We have a strong portfolio of PFI investments worth GBP 45 million. And importantly, those investments generate around GBP 4 million of annuity interest income each year. So I will come back to that a little bit later in terms of how we share the value of that with our shareholders. Our monthly average month-end cash position was GBP 135 million, a little bit lower than last year because of the investment in the acquisitions I've mentioned, because of the investment in that digital cloud systems and because we're part way through doing a share buyback program. So during the year, we distributed GBP 20 million to our shareholders through dividends and share buyback. So overall, a really strong balance sheet, very helpful for the business. In terms of how we use that balance sheet and how we -- our capital allocation policy. Most importantly, we will continue to retain and focus on retaining that strong balance sheet. I've already talked about the competitive advantage it brings in terms of clients and supply chain. It also allows us to invest in the business, whether that be in quality, in digital tools, in our people or in further acquisitions, bolt-on acquisitions at the right time. Our strategy doesn't require any further bolt-on acquisitions, but we've got the balance sheet strength and agility to respond to opportunities that may arise. The strong balance sheet also gives us the confidence that we can pay a growing and sustainable dividend to our shareholders. And again, that dividend has improved significantly in the year just finished. And where appropriate, we will return excess cash to our shareholders. And this is the case over the last year, we have been undertaking a GBP 15 million share buyback program. And we've also announced a 12p special dividend that will be paid in October. So coming on to the strategy and the outlook. And some of you will have seen this slide before. There's 4 cornerstones to our strategy. What we're looking to do is to focus on being a progressive business, a business which is socially responsible in its delivery, a business which focuses on quality. And we think by doing that, we'll continue to deliver growing financial returns to our shareholders. And you can see, as we grow towards 2026, we expect our revenue to grow up towards GBP 1.6 billion, and our divisional operating margin to grow to 3%. We'll do this by focusing on growth in our existing markets and through growth in higher-margin adjacent markets. Our existing markets include Building, so that includes education, health care, justice, courts and prisons and defense as well as commercial offices and rented accommodation. In Highways, we work for local authorities and for National Highways, and our Environment business works for all of the major water companies across the U.K. Our adjacent markets include moving into the developer end of the PRS market, that's putting our balance sheet to use to make sure we get some developer gains as well as constructing PRS accommodation. It's about moving into the capital maintenance and asset optimization part of the water market, where we think higher technology and water technologies will help us deliver higher margin returns in that part of the market and increasingly using our facilities management business to deliver green retrofit to our clients, helping to reduce the operational carbon footprint of existing buildings. Importantly, all of these markets are resilient, and these markets underpin our growth aspirations. What's really important has changed probably over the last 5 to 10 years is that our clients are now procuring their work in a much more mature way, focusing on value and not just lowest cost. And that's really important. You should all be encouraged by that by the fundamental improvement in the way that large procurement bodies are operating as well as our top-tier private sector clients. What this does is it generates a sustainable environment with high levels of collaboration between contractor and client, and that's a good outcome for everybody. It means we can deliver higher quality of products, and we can deliver that in a more predictable way for our own shareholders. Our supply chain has proved resilient through the difficulties and the economic challenges of the last 18 months or so. That, of course, benefits from our focus on our Advantage through Alignment program, bringing our supply chain very close to the business. And of course, we benefit from the good payment record that we have with our supply chain. About this time last year, we introduced what we call our enhanced supply chain checks, so additional financial due diligence process that we put in place to make sure that we're staying really close to our supply chain that we're preempting any issues that there might be to, again, make sure that we can protect our projects and make sure we can deliver quality projects going forward. The market opportunities remain really robust. The markets we operate in, the markets I've mentioned are noncyclical. And we can see that solid pipeline of opportunity even beyond that current order book. And most of that work will come through long-term frameworks, and those frameworks give us established clients with established terms and conditions. And through that framework, we can see to 2026 and well beyond. So we've got some really good framework positions that take us out in some cases to 2030. What this slide shows you is the procurement route of -- and the typical scoring mechanisms in the way that we win work in our order book. And you can see on the left hand -- I'm sorry, on the -- let me just go back to the previous slide. I'm sorry. So what this slide shows you is the breakdown of the order book between Building and Infrastructure. So you can see on the left-hand side how the Building order book breaks down between education, defense, custodial, health care. And on the right-hand side, you can see between Environment, which is largely water companies, and Highways. Importantly, everything in that order book has come through our clear risk management process. But what I want to call out is those statistics on the right-hand side. So when we started the new financial year to June 2024, we had 92% of our revenue already secured, and we've got about 75% of revenue secured for the following financial year through to June 2025. So that puts us in a really, really strong position. And you can see that the median contract size in our Building business is less than GBP 20 million. What that demonstrates is the large portfolio of relatively small projects, which is really aligned to our risk management priorities. And what this slide then shows you is the way that we have procured work in that GBP 3.7 billion order book. So the left-hand bar chart there shows the procurement route. And you can see 98.5% of our work has come through some kind of negotiated 2-stage process. So that's where we get appointed to the project based on our quality, based on our people, based on our experience. And we then negotiate the price in a 1:1 negotiation based on established designs and based on detailed quotes from our supply chain. And the pie chart on the right-hand side shows an indicative scoring criteria for one such job. And you can see most of the score come through nonfinancial metrics, such as our management team, our project delivery capabilities, in some cases, social value, sustainability, low carbon credentials and so on, with relatively few bucks on the financial aspects, which includes balance sheet strength, how we pay the supply chain as well as price and embedded fee. And it's really important that this shows you that our order book of GBP 3.7 billion has all been procured in a very risk-managed way, very disciplined way and in support of our 3% margin targets. I mentioned earlier that most of our work comes through frameworks. And you can see on the slide here, some examples of those positions. Frameworks provide us with long-term, high-quality workloads and really good visibility of the future. They provide established terms and conditions, as I said earlier, with repeat clients. So this is an excellent route to market for us. You can see that we use frameworks across all of our sectors. And you can see how this extends well into the future with those lighter green bars representing potential future renewals. Importantly, those framework positions take us well beyond the next general election and take us, therefore, well beyond any uncertainty that may arise as we go through an election year. So pulling this together, in the 3 years since we demerged the housebuilding business, we've declared ordinary full year dividends of 23p per share, GBP 25 million. We've declared a special dividend of 12p per share, which will be paid in October this year. And we've declared a GBP 15 million share buyback program, of which we're currently GBP 14 million of the GBP 15 million through. And that share buyback program will increase earnings per share by about 7.5% every year going forward. During the last year, as I mentioned earlier, we settled a long-running dispute. And consistent with our capital allocation policy, we're returning half of those proceeds, the 12p special dividend to our shareholders with the remaining half being invested in growth into the business. And this year, we've also improved our ordinary dividend cover policy to 1.8x cover. The basis to that alongside the confidence in the future outlook of the business, what we want to do is to reflect the value in that PFI portfolio, the GBP 45 million PFI portfolio on the balance sheet. So essentially, what that 1.8x cover represents is twice covered dividends on our operational earnings and full return of the annuity interest income from that PFI portfolio, and that gives us a blended 1.8x dividend cover. So what that means is that we declared last week a 7.5p final dividend, 10.5p full year dividend for the financial year, 31% increased on the year before. And of course, really importantly, as we deliver our strategy, as we deliver revenue growth and margin growth, our dividends will continue to increase in line with our growth in profit and in earnings per share. So to summarize, we're in a really good shape as a business. We had a really good performance in the year, just finished, to June 2023. Importantly, we've got a really strong outlook and a really strong start to the year for the new financial year to June 2024. We've got increasing visibility through to 2026 and our financial targets and beyond through our framework positions. We're progressing well against the targets that we set. And importantly, we're doing and delivering exactly what we said we would do. And what that means is that we're able to provide increasing returns to our shareholders. And with that, I'll hand back to Lilly, and then we will take any questions that you may have.

Andrew, thank you very much for your presentation this afternoon. [Operator Instructions] Just while the company take a few moments to review those questions submitted today, I'd like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A can be accessed by our invested dashboard. Andrew, as you can see, we have received a number of questions throughout today's presentation. Can I please ask you to read out the questions and give responses where appropriate to do so, and I'll pick up from you at the end.

I will do, Lilly. Thank you very much indeed. So the first question comes from James. So thank you James. The question is capital allocation. What can we expect from dividends and buybacks? And are we seeing further opportunities to reinvest cash rather than return it? So what we're trying to do, James, is make sure we get the balance between investing in growth and providing returns to our shareholders. So we think the 1.8x cover gets that balance right. So we don't have any pension fund to put our cash to. So effectively, we give a good return on our profits to our shareholders, but we are then able to invest in growth in the business. And the areas that we really see that one is in the PRS space, so putting some investment into the developer -- development phases of PRS schemes, and we've just done the financial close on our first PRS scheme. We've got a pipeline of other PRS schemes that we are looking to invest in, looking to take options on the land, take those through the planning and the development phases before we sell them to other forward funds. We also potentially see further opportunity in the water space, particularly. So as I said earlier, we're not requiring and we're not having to do any further M&A, but there may well be other opportunities for bolt-on M&A as we go forward, having done 3 very successful acquisitions. So we're trying to make sure we get the balance right between growth and returns to our shareholders. And we think the dividend cover policy just about gets that right. Second question also from James about inflation. So the question is managing inflation in long-term projects and contracts, how do we manage this to maintain our margins? So there's a few things, James, just to pick up. And what we are seeing on inflation is that we're seeing that really stabilizing certainly compared to this time last year or even 18 months ago. So we're not seeing prices come down, but we are seeing a bit more stability and able to predict prices much easier than we were. So -- and what's important to remember, of course, is that across our large portfolio of relatively small jobs, each of those jobs is tendered based on current pricing. So whenever we get a negotiation and we discuss pricing with the client, we're doing that based on current pricing, pricing submitted by our supply chain. And what we look then to do is to lock those prices in as soon as we lock our pricing with our clients. So that makes sure we mitigate any change in inflation. We, of course, include inflation risk allowances in our pricing as well. But we're really then looking at the delta between prices that have been set by the supply chain and what might happen in a short window. Importantly, everything in the Environment and Highways businesses, that is all delivered on a target cost, cost reimbursable basis. So when you set that target cost based on supply chain pricing at the outset, we're then paid our actual costs up against that target. So again, there's inflation mitigations in that form of contract. And what we found last year, even when inflation was really spiky, we were able to put some inflation mitigations into some of our other fixed price contracts. But what's really important, James, is that because of that large portfolio of contracts, because of the way that we set the business and the risk appetite of the business, if we find that there was inappropriate in terms of conditions or if we find that a client is not, if you like, accepting the fact that prices are more expensive now than we were 18 months ago, then we were quite happy to walk away and not take on those contracts. So there's nobody in the business is under any pressure to take on contracts, which don't have the right pricing or the right terms and conditions. And so by maintaining that discipline, that then helps us deliver the margin growth that we're looking to achieve. So next question is from David. So can contracts on frameworks be delayed or slowed down? And what impact can this have, and it's all the work we were intended? So David, thank you for the question. So there are different types of frameworks. So some of the frameworks we're on are effectively sold position. So once we're appointed to the framework, this is the case in some of the regions or some of the water companies, then effectively all of the work in that particular area would come to us. We'll then negotiate on the pricing. And of course, if we can't agree the pricing, there's no obligation to undertake the work. Other frameworks are more, if you like, prequalification, so kind of short list for future work, so the client may put 4 or 5 contractors onto a framework, and then what they've looked to do is to bring each piece of work out to those parties who are on the framework. And then again, we can decide whether we want to negotiate for that particular piece of work or not. So there are different mechanisms in the way that the frameworks work. But importantly, all the work that comes through it is on those established terms and conditions with the established embedded margins, and it's all about negotiating the price. And so it's not about tendering kind of the lowest cost wins. It's all about negotiating pricing. And if the pricing doesn't work, then we would not undertake the work. A question from Alastair. Are we likely to benefit from the issues with RAAC concrete? So yes, a historical question, Alastair. And of course, our expectation is that there is RAAC in more than just schools, by the way, there'll be RAAC in all sorts of other buildings, although typically it's in parts or elements of buildings rather than the whole buildings. What we're seeing at the moment, particularly if I focus on schools is, I think there's 174 schools that have currently been identified with RAAC issues. That's out of a state of 22,000 schools. So it's a relatively small population of schools, which are affected. Obviously, it's a huge issue if it's the school that you or your children attend. So what we see is that Department for Education, we expect them to continue to deliver the new build program, which they are delivering at the moment and which we are working on and delivering new schools under. There may be in the unallocated elements of those budgets, some reallocation between schools to do some more of the RAAC work. And of course, the RAAC where they've identified it in those schools, some of that will be very minor, some will -- the whole school need to be brought down and rebuilt. So where there is additional school building, I think we would stand to benefit, but we don't see this as actually having a significant impact on the outlook for our workload across education or other sectors. Question from John. What are our new non-ERP system IT costs? And how have they been impacted by the new ERP system implementation? So John, we have -- of course, we have a whole plethora of different IT systems. The key thing, of course, is that we try to make sure that they are as integrated as possible. So our new ERP system, which is an Oracle cloud-based system, that takes us all the way now from our pipeline reporting. So if you like, our customer CRM system, all the way through to finalization and delivery of the projects, all the commercial, the procurement, the finance as well as all of our HR systems. Of course, there's a whole series of other systems that we use, whether that be for design or for health and safety and so on and so forth. So there's a whole series of systems, which interface with that Oracle system, which is our core ERP system. So -- but what we've done in the upgrade is by going on to the cloud-based system, what we now do is we get a process of continual improvement. So every quarter we get the latest updates. We're able to roll those updates out into the business. So rather than this sort of old fashioned way of implementing a system and then waiting kind of 10 years until it goes out of support and then having to implement a new system. Well, now we get constant upgrade, constant improvement, constant business improvement as a result. So actually, this is really exciting that we'll be able to deliver improvement across the business. And I should say that system went live earlier this month. We've already made payroll payments. We've already made our supplier payments. We already raised invoices to customers. So actually, that system has landed really successfully, and we've had some really good feedback from across the business, which is really encouraging. Lilly, for the time being, that concludes the questions which are on the Q&A.

Andrew, thank you. And I think you've addressed all those questions that you have from investors. And of course, the company can review all questions submitted today, and we will publish those responses on the Investor Meet Company Platform. Before redirecting investors to provide you with their feedback, which I know is particularly important to yourself and the company, could I please just ask you for a few closing comments.

Yes. Thank you, Lilly. So what I'd really summarize is that Galliford Try is in really good shape. We are operating in markets that are robust. They're not cyclical. They're not affected by the political cycle as we go into general election year. We've got a really strong outlook for the new financial year to June 2024 and increasing confidence in meeting our strategic targets through to 2026. Putting that together, our dividend for the year just finished, increased 31%, and we see great opportunity for increasing that dividend further as we grow our revenue as we grow, more importantly, our profit through to 2026. So as we make good products against those targets, we expect to continue to deliver increasing shareholder returns. So that's really the message that I would leave everybody with.

Andrew, thank you for updating investors today. Can I please ask investors not to close this session as you'll now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. This will only take a few moments to complete, and I'm sure will be greatly valued by the company. On behalf of the management team of Galliford Try Holdings plc, we'd like to thank you for attending today's presentation. Good afternoon to you all.

Thank you.