HICL Infrastructure PLC (HICL) Earnings Call Transcript & Summary

Well, good morning, ladies and gentlemen. Welcome to this Annual General Meeting. My name is Ian Russell. I'm the Chair of HICL Infrastructure PLC. Before we move to the formal proceedings, I'd like to introduce my colleagues who have joined me here today. Beside me are my fellow directors, Frank Nelson, the Senior Independent Director; Susie Farnon, who chairs our Audit Committee; Simon Holden; Mike Bane; Ken Reid; Frances Davies; and Rita Akushie. Representing Aztec, I have company secretary, Chris Copperwaite and Sarah Felmingham. Representing InfraRed, the company's investment manager, Harry Seekings and Edward Hunt. And representing Link Asset Services, the registrar, Lucy Machin, who's been appointed as scrutineer to observe and assist us with the counting of votes. Before we proceed to the formal meeting, I'd like to say how great it is to be able to meet again in person after what's been an extremely challenging 6 months -- 16 months for everyone. Clearly, there are still some restrictions in place. And many of us are being cautious with travel and physical meeting attendance. But we're hopeful that the U.K. vaccination program will enable us to return to greater normality and usual stakeholder interaction in the near future. A few housekeeping points, if I may. In case of a fire alarm, please follow the instructions provided by the venue. And also, if I could ask you, please, to make sure your phones are off or switched to silent. In a moment, there'll be a short presentation by the investment manager on the company's performance over the past year. There will also be an opportunity for shareholders in the room to ask questions relating to the business of the meeting and specifically any of the resolutions proposed at the AGM for consideration by the Board. Questions which are submitted in advance will also be addressed. So I would now like to introduce Harry Seekings and Edward Hunt from InfraRed, who will lead on the presentation. After which, there will be an opportunity for questions. So Harry, if I may, I'd like to hand over to you.

Thank you, Chairman. Good morning, everyone, and a warm welcome to those of us here in Coworth Park and those who joined us by telephone. We appreciate the efforts you've made to participate in proceedings despite the challenges and the restrictions of the pandemic. As the Chairman said, my name is Harry Seekings. I'm the Head of Infrastructure at InfraRed Capital Partners, the investment manager of HICL Infrastructure PLC. Also here to talk to you today is Edward Hunt, a Director in the Infrastructure team at InfraRed and responsible for the day-to-day management of HICL. Ahead of the main business of the AGM, the Chairman has invited us to present the highlights of HICL's results for the financial year to 31st of March 2021. I'll start the main presentation in just a moment. But first, I must ask you to please note the important information at the front of your deck, in particular, in bold on Page 2, the past performance is not an indicator of future returns. Before we look at the detail of the annual results, I'd like to start with a reminder of HICL's investment proposition on this slide. HICL delivers long-term income from the portfolio of core infrastructure investments positioned at the lower end of the risk spectrum. As you can see on the left-hand side of the page, HICL offers the attractive characteristics that are a feature of core infrastructure, long-dated cash flows and inflation correlated returns with the portfolio return correlation to inflation of 0.8. It delivers these characteristics on a well-diversified portfolio of 116 core infrastructure assets. This diversification has helped the products with careful portfolio construction with the essence of the portfolios' resilience to external forces, such as those presented by the COVID-19 pandemic over the past year. And as we outlined on the right, InfraRed's approach to active management of the HICL portfolio sits at the heart of the company's business model and has never felt more important than in the last year. Our asset management team has worked tirelessly in coordination with HICL's supply chain to support delivery of services to public sector clients and to local communities in the most challenging circumstances. This active approach has ensured that assets across the portfolio have remained open and available for use by their local communities. On the following page, we can see HICL's long-term track record, which places last year's financial results into context. For over 15 years, HICL has consistently shown steady performance and delivered long-term real returns. On the top right, you can see how dividends paid alongside NAV growth had given a total return to IPO shareholders of just below 9% per annum. This has enabled HICL to outperform the FTSE 250, yet the shares also demonstrate a low correlation to the wider equity markets. You can see this in the chart on the bottom left-hand side of this slide on the green line. Key to this performance track record is HICL's and InfraRed's stakeholder-driven approach, both historically and as we look to the future. HICL is accountable to its stakeholders, including shareholders, for its sustainability performance. And both the Board and InfraRed are committed to continuously developing HICL's sustainability strategy and reporting. We fundamentally believe that long-term performance for shareholders is intrinsically linked to thinking and acting responsibly and sustainably. For example, in the year, InfraRed's carried out a full climate change impact assessment across HICL's portfolio. This enabled the company to report voluntarily across all 11 of the TCFD recommended disclosures. In HICL's sustainability report for 2021, which was published shortly after results, the company set out metrics and targets across the 3 pillars of ES&G. That's environmental, social and governance dimensions. And as the company announced in May, some of these metrics have been incorporated into an innovative revolving credit facility, which we used to finance HICL's acquisitions, and that links ESG performance to tangible financial outcomes. This initiative, along with the climate change impact assessment, are deliberate actions, along with others, which come together to demonstrate an ambitious and substantive sustainability strategy for the company. This strategy builds on the achievements to date and is not a new theme for InfraRed or for HICL. InfraRed has been rated A+ by the UN-supported Principles for Responsible Investment for 6 years. As a manager, we've been carbon neutral since 2019, and we recently signed up to the Net Zero Asset Managers initiative supporting the goal of net zero greenhouse gas emissions by 2050 or sooner. On that note, I'm now going to hand over to my colleague, Edward, to present the results for the year to 31st of March 2021.

Thank you, Harry. I'm now on Slide 6, which summarizes the key performance metrics for the year. Overall, HICL has produced a remarkably resilient result during the financial year to 31 March 2021. As you can see on the top left tile, the company's NAV held steady at 152.3p despite a year of unprecedented challenges. The top middle tile shows an annual return on a NAV basis of 5.5%. Beneath this headline is a robust 7.7% underlying return from the portfolio as well as the effect of a 0.4% reduction in discount rates across the year, and this reflects asset pricing in the market. However, these positives were offset by a number of external factors. Firstly, macroeconomic assumptions, in particular changes to U.K. taxation and inflation as well as lower deposit rates. And secondly, HICL's demand-based assets have been impacted by government travel restrictions associated with the pandemic. The dividend cash cover of 0.9x shown in the bottom right tile is in line with the previous guidance and reflects the impacts of COVID-19 on the demand-based assets with GDP sensitivity. For the current financial year, we're expecting improved cash generation with the target dividend due to be cash covered. If you look at the top right tile, you can see that HICL's dividend for the year was 8.25p, which remains comfortably the highest cash dividend in the listed core infrastructure peer group. The Board has extended HICL's dividend guidance for a further year with a target of 8.25p per share target for the year to March 2023. Holding the dividend steady enables the company to rebuild cash cover. The forecast for which has been significantly impacted by the planned increase in U.K. corporation tax rates. Looking forward, future dividend increases will be calibrated against cash cover levels as well as longer-term earnings. And looking at this next slide, Slide 7, we set out that cash generation from the portfolio over the next 40 years. Cash flow then, the [ PNC-caused ] dividend and provides confidence to the Board to provide that 2-year dividend guidance. The vertical bars show cash forecast receipts to the group. The gray bars represent increases in forecast cash flow. The hollow bars represent delays and reductions to the forecast cash flows from this time last year, mainly from those demand-based assets as a result of COVID-19 as well as the disposal of Southeast London Police Stations in the year. In the first column on the left-hand side, you can see a hollow bar. This is for the current financial year to March 2022 where we are forecasting reduced cash flows due to a slower recovery from COVID-19 than we expected a year ago. The red line on the chart shows the net present value of these cash flows, giving a projection of how the portfolio value would evolve over time, assuming no acquisitions, disposals or changes in valuation assumptions. Clearly, the investment manager and the Board are focused on improving these cash flows as we have done since day 1. The key takeaway from this slide is that HICL has a visible long-term steady income stream combined with a stable capital base. And those attributes are underpinned by the company's approach to diversification, which you can see clearly on Slide 8. As Harry mentioned at the top, diversification is a core component of HICL's investment proposition. You can see here that the portfolio remains highly diversified with the top 10 largest assets representing 46% of the portfolio, and this is spread across market segments. The largest single asset, Affinity Water, is only 8% of total portfolio value. This diversification is the result of a considered and deliberate approach to portfolio construction. This compares well against the peer group, and we believe it underpins the resilient financial results that we saw in the year to March 2021. While we talk about portfolio construction, it's important to highlight just what it is that we're looking for when we are adding to this high-quality portfolio. Slide 9 provides a useful reminder of HICL's market positioning and the qualities we seek in new investments. HICL invest in core infrastructure and always has. Over the years, infrastructure has matured and grown as a sector, and as a result, it has become broader, equating to different levels of risk and return across the spectrum. The term core infrastructure has become synonymous with those assets that exhibit the most coveted infrastructure characteristics and, therefore, sits at the lower end of the infrastructure risk spectrum. On this slide, we've set out these 3 key characteristics that we're looking for in evaluating new assets, cash flow quality, market positioning and criticality. Taken together, we're looking for essential physical assets delivering resilient cash flows from a protected market position. And this is the lens through which we approach our origination and execution activity. Stepping on to Slide 10. We continue to see significant opportunity for HICL to acquire accretive assets. The market remains competitive, and that's sees greater reliance in InfraRed's networks and partnerships across its international origination platform. And we use that to find less competitive areas of the market for HICL to make investments. This approach is reflected in each of the 4 completed investments for the year to March 2021. Going forward, InfraRed continues to secure at a pipeline of attractive investment opportunities for HICL. We've set out some thoughts on the pipeline on the bottom half of this Slide 10 organized by sector. And I can also provide a bit more color on some of the immediate pipeline that we're working through at present. And looking at that pipeline, geographically, we're seeing a weighting towards Europe and the U.K., in that order. There's a combination of both operational assets and greenfield opportunities. In terms of the revenue model, the weighting is towards contracted assets, a better combination of both availability PPPs as well as contracts with high-quality corporate counterparties. And finally, there's a blend of traditional infrastructure sectors, but also those sectors are more closely tied to the modern economy, including communications infrastructure and infrastructure associated with the energy transition. There's further detail on our thinking in this area in a case study in the annual report, and we do expect to see increasing core infrastructure pipeline in these sectors. Clearly, this is a snapshot in time. The market moves quickly, but there is plenty of keeping us busy and underlines our view and our confidence that InfraRed is able to source attractive opportunities for HICL in the current market. At this point, I'll now pass back to Harry for some concluding remarks.

Thank you, Ed. In conclusion then, this has been a resilient set of results for HICL and sets the company up well for the coming year. Firstly, despite COVID-19 and its related macroeconomic impacts, net asset value per share is unchanged. This is a testament to the underlying portfolio, which, as Ed said, has been carefully constructed to achieve diversification and to deliver core infrastructure characteristics, including inflation correlated returns. Secondly, looking forward, HICL's demand-based assets are strategically well positioned to benefit from a post-pandemic economic recovery as travel and movement resume. Third, the Board is committed to offering clear visibility on HICL's dividend. Despite the impact of planned U.K. corporation tax increases, the published target dividend guidance will facilitate improved levels of cash coverage while continuing to position HICL's paying the highest dividend in the listed core infrastructure peer group. And finally, important and substantive strides to be made this year in relation to HICL's sustainability strategy. It continues to be refined by InfraRed and the Board, and disclosure has further improved. This promotes transparency and places HICL's well to share progress in the future with our shareholders and other stakeholders. In closing, I'd just like to remind you that HICL has a healthy balance sheet to capitalize on its pipeline in the near term. And over the longer term, the company is also well placed to benefit from economic stimulus and more government-sponsored investments in infrastructure. In short, we continue to be confident about the continued evolution of the company into the future. That's the end of the formal presentation, and I'll hand it back to the Chairman.

Thank you very much indeed, Harry and Ed, for your presentation. May I ask now if there are any shareholders in the room who have any questions on the presentation? Well, thank you very much, indeed, Harry and Ed. If there are no questions, I propose that we proceed to the formal business of the meeting. The quorum for the AGM is 2 members present in person or by proxy and entitled to vote. And I can confirm that there are at least these numbers of members present, and therefore, I declare the meeting to be open. The notice convening the meeting has been made available for the statutory period. And if I may, I would like to take the notice as read. Before starting the formal proceedings, I'd like to ask if there are any questions from the room from shareholders here relating to the business of the meeting and specifically, if there are any questions on the resolutions proposed at this Annual General Meeting? So if there are no questions from shareholders in the room, let me summarize here. We have 18 resolutions. Resolutions 1 to 15 were proposed as ordinary resolutions under ordinary business, which require a simple majority to be passed. Resolution 16 and 17 were proposed as ordinary resolutions under special business, which require a simple majority to be passed. Resolution 18 was proposed as a special resolution, which should be -- require 75% to be passed. The full text of each resolution appears in the notice of the meeting. And if I may, in a moment, I will summarize them. In accordance with good practice and, more accurately, to reflect the views of all shareholders of the company, voting today will be done by way of a poll on each of the resolutions put to the meeting. A poll card was handed to shareholders as they entered the meeting. It looks like this card here. And if you have already completed a proxy form and do not wish to change the way in which you voted, there is no need to complete a poll card. The votes you've already cast will be counted. However, for those shareholders who've not submitted a proxy form or who wish to change their votes already submitted, please complete a poll card. And Link Asset Services will act as scrutineers and will count and check the votes against the register, and the final results of that will be made available on the company's website and will be announced to the London Stock Exchange as soon as possible. The resolutions are as follows: to receive and consider the annual report and accounts, including the director's report and the auditor's report for the year to 31st March 2021; secondly, to reelect Ian Russell as a Nonexecutive Director; thirdly, to reelect Rita Akushie as a Nonexecutive Director. Resolution 4 is to reelect Michael Bane as a Non-Executive Director. Resolution #5 is to reelect Frances Davies as a Non-Executive Director. Resolution 6 is to reelect Susie Farnon as a Non-Executive Director. Resolution 7 is to reelect Simon Holden as a Non-Executive Director. Resolution 8 is to reelect Frank Nelson as a Non-Executive Director. Resolution #9 is to reelect Ken Reid as a Non-Executive Director. Resolution #10 is to approve the directors' remuneration report, excluding the director's remuneration policy set out on Page 102 of the HICL Annual Report as set out in that annual report, including the proposed remuneration payable for the year ended 31st March 2022 to the Chairman, the Senior Independent Director, the chairs of each of the committees of the Board and each other Non-Executive Director for routine business and additional corporate work. Resolution 11 is to approve the directors' remuneration policy as set out on Page 102 of the annual report with effect from the 1st of April 2021. Resolution #12 is that the directors' aggregate remuneration cap be increased to GBP 500,000 -- from GBP 500,000 to GBP 700,000 per annum with effect from the 1st of April 2021. Resolution 13 is that KPMG LLP be reappointed as auditors of the company. Resolution 14 is that the directors be authorized to agree the remuneration of the auditors. Resolution 15 is to approve the company's dividend policy for the year ended 31st March 2022. Resolution 16 is to authorize the company to make market acquisitions of up to 14.99% of its own issued ordinary shares as per resolution 15 in the AGM circular. Resolution #17 is to authorize the company to allot up to 10% of the ordinary shares in issue at the date of this resolution. Resolution 18 is to approve the partial disapplication of the preemption rights giving directors the power to allot and issue up to 10% of the ordinary shares in issue as at the date of this resolution as per the circular. As announced by the company on the 9th of June 2021, shareholders were requested to submit their votes by completing and signing the proxy form that accompany the notice of the meeting. I'm pleased to report that the secretary has informed me that 356 valid proxy votes were received, representing 1,142,013,947 shares, which represents 58.96% of the company's shares in issue. Directors shares have also been voted at this meeting amounting to 95,979 shares. This accumulates in total to 1,142,109,926 shares, representing 58.97% of the company's shares in issue. And Link Asset Services as scrutineers have confirmed that all proxy votes cast have been reconciled back to the share register. As I mentioned earlier, the final results of today's meeting will be made available on the company's website and will be announced to the London Stock Exchange as soon as possible. Ladies and gentlemen, that concludes the business of the Annual General Meeting. I'd like to thank everyone here in the room and listening to us through the webcast. I'd like to thank you all for your support as shareholders of your company and for attending the meeting today, and I declare the meeting closed. Thank you all very much indeed.