Galliford Try H2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 3, 2024

There are 7 speakers on the call.

Operator

Hello, everybody, and welcome to Gallipard Dry Full Year Results for the Year Ending June 2024. I'm Bill Hocking, Chief Exec, and I'm here with our new CFO, Chris Hampson. So firstly, a warm welcome to Chris, who we'll hear from you in a minute. Here's the standard agenda for today. We've retained the format of many of the slides from previous year, which demonstrates consistency of message.

Operator

We've had a really good start to our 2,030 strategy with revenue up strongly at GBP 1,800,000,000 Divisional operating margin is 2.5%, up from 2.4% last time with PBT up 40% at GBP 32,700,000 which is a really good performance and produces earnings per share of GBP 27.9p. I'm pleased to announce a final dividend of 11.5p, which brings the total dividend for the year to 15.5p, up 48% on the previous year, and another good performance for our shareholders. Cash performance was good, and we ended the year with average month end cash of GBP 155,000,000 up 15% in the same period last year and whilst paying a supply chain in 26 days on average. We're also announcing a GBP 10,000,000 share buyback this morning, and Chris will expand on this in a minute. Our strong order book stands at GBP 3,800,000,000 with 92% high quality work already secured for this year, And I'll expand on the order book later on in the presentation.

Operator

These figures are a reflection of the skills and talent of our 4,200 excellent people in Galliprantri, the culture that we have in the business around robust risk management and performance on the ground. The continuing momentum that we see in our chosen sectors gives us confidence in the outlook for the business. The significant revenue growth you see here was driven by good underlying growth, augmented by the downstream impact of the mini budget back in 2022 and the resultant inflationary spike. During that period, we are very disciplined about not taking on new work until we were happy that we had the right commercial and contractual protections in place. This led to a hiatus in revenue at the time, and what we see here is that work flowing through in 2023 2024 and driving revenue up.

Operator

Revenue growth will return to more normal levels this year, and margins will continue to improve with a positive outlook and improving operational efficiencies. So those are the highlights. Over to Chris for more detail on the numbers.

Speaker 1

Thank you, Bill. Good morning, everyone. I'm delighted to take up the role of CFO at such a positive time for Galliprant Triumph. The last 4 years of growth have shown that the strategy that the business has put in place is the right one, focusing on people, ESG and quality delivery through our robust risk framework. The strategy is leading to sustainable financial returns, a stronger balance sheet, and I am excited because there remains a significant opportunity for further shareholder value.

Speaker 1

Whilst I've only been here for 1 month, please don't ask me too many difficult questions. I have already been impressed with a fantastic team and the whole management focus on delivering the 2,030 targets. But for now, let me update you on the results the team have delivered for this financial year. I am very pleased to report a strong set of financials for the full year, with the group growing revenues by more than 27% or £379,000,000 to more than £1,770,000,000 with good organic growth across all the divisions and acquisitive growth through the completion of the AVRS acquisition in quarter 4, 2023. Pre exceptional operating profit before amortization rose faster than revenue, up by more than 35% or circa £8,000,000 to £29,600,000 demonstrating operational leverage and the output of our robust risk management model.

Speaker 1

Preexceptional profit before tax increased by 39.7 percent to £32,700,000 This year's pre exceptional effective tax rate of 14.6 percent benefited from in year one time deferred tax asset increases. We expect the rate to revert towards UK Standardized Corporation tax rates in future years. Within the P and L tax charge, we have recognized a group corporation tax relief credit totaling £9,600,000 plus associated interest of £800,000 both treated as exceptional. These have been booked in the 2024 financial statements as they were confirmed prior to close and the cash has been received since the year end. As a result of the growth in profits augmented by the successful completion of the 2022 share buyback program, pre exceptional earning per share have grown strongly, up circa 48 percent to 27.9p per share.

Speaker 1

Moving on to the segmental analysis. We can see strong growth performances across all the divisions, with Building growing by 17.7%, reflecting strong consistent demand arising from the reputation we have built for quality consistent delivery, alongside the completion of work that was previously delayed by macro factors, as explained by Bill earlier. Infrastructure delivered very strong revenue growth, totaling 38.8%, reflecting the same high quality delivery and strong AMP7 demand in Water. We are pleased to say the early contract awards on the much larger AMP8, such as the Wessex Water Awards last week, have started well. These frameworks include both traditional design and build schemes and high margin capital maintenance schemes, which together will underpin our 2,030 targets.

Speaker 1

Finally, investments delivered growth of more than 150 percent to circa £15,000,000 as a result of delivering the financial close of our first private rent scheme development in Cardiff. Turning to profit, we can see that the divisions turned the growth in revenue into pre exceptional operating profit of £29,600,000 up circa £7,700,000 This resulted in a combined divisional margin of 2.5%, up 13 basis points on 2023. We're building up circa 23 basis points and infrastructure holding last year's margin improvements. The overall margin improvement reflects the output of the higher quality order book that we have been building over the last 4 years through our disciplined risk management and contract selection model. We remain confident that our growth trajectory will continue at the level required to hit our 2,030 targets as our growing order book is delivered and Bill will tell you more about the outlook shortly.

Speaker 1

Exceptional costs in the full year period relating to digital systems implementation totaled £2,600,000 with no further costs incurred in the second half of the year and the implementation is now completed with no further costs expected. The systems are working as planned and we are pleased to be moving into the next phase of the project where we seek to maximize value from this element of our digital strategy. Turning now to the bridge in year over year profits. As explained at the half year, the removal of the prior year one time JV gain normalizes the ongoing 2023 profit delivery. Starting from a normalized base, therefore, of £18,300,000 we can see the organic volume related profit growth of circa £8,700,000 at prior year margins, coming predominantly from Building and Infrastructure and £2,200,000 of incremental margin delivered by operational leverage, and this margin progress alone represents an increase of more than 10% within the year.

Speaker 1

Finally, you can see the £400,000 impact in the year of the AVRS acquisition completed in Q4 2023. The strong trading profits and tight balance sheet management have driven uplifts in both net assets and cash. Year end cash rises from £220,000,000 to £227,000,000 up 3.1%. More importantly, average month end cash rises to £155,000,000 from GBP 135,000,000 in the prior year, up nearly 15%, demonstrating our ongoing monthly focus on cash delivery. Our PPP portfolio valuations have reduced as a result of capital redemptions and the high interest environment on our discount rates.

Speaker 1

There remains a strong secondary market for such assets and the annuity income of GBP 3,800,000 continues to provide a stable, lower risk cash income within our trading profits. The PPP cash supports our dividend policy. And as explained at the half year, dividend cover of 1.8 times can be explained as being made up of the annuity income and circa half of pre exceptional profits. We continue to have no bank debts and no pension liabilities and the full year delivery of increased cash means our balance sheet has been strengthened even further. This chart explains the movement in year end cash and cash equivalents, which have risen sequentially by circa £7,000,000 to £227,000,000 Operating profits have converted like for like into cash from operating activities and tight cash management has driven a £7,000,000 improvement in working capital.

Speaker 1

Alongside this, higher interest rates on our stronger cash balances have generated more interest income, which has been offset by the cash expenditure in H1 2024 on the digital ERP investments. We have returned circa £29,000,000 of cash to shareholders in the period, reflecting growing dividends on growing profits, the payment of a special dividend of £12,000,000 on the 6th October 2023, completion of our 2022 £15,000,000 share buyback program during the year. Our total cash returns in the period are broadly in line with our pre exceptional operating profits. Our net M and A activity of £2,000,000 reflects the M and A cash flows of the Avios consideration, partially offset by the disposal of rock and alluvium in the period, and £2,000,000 has been spent on share capital movements relating to our employee share programs. The year end cash result is especially pleasing in a year where we have both implemented our new ERP system and maintained our strong ethos of paying suppliers on time, with 96% of invoices paid within 60 days.

Speaker 1

Overall, a really strong cash performance. We continue to prioritize a strong balance sheet, and our capital allocation framework remains unchanged as we enter the refresh strategy period. As Bill said at the Capital Markets Day and many times before, the strength of our balance sheet provides a competitive advantage, which helps deliver our sustainable growth plans. It is valuable to our clients who see the importance of financial stability and ensures that we are partner of choice for our supply chain. Our balance sheet also allows us to invest in future growth by investing in people, in digital assets, and where appropriate, acquisitions.

Speaker 1

We have completed 4 acquisitions since 2021, delivering annualized revenues of £124,000,000 As we said at the Capital Markets Day, our targets do not rely on acquisitions, but we will continue to assess any potential acquisition opportunities in line with both our strategic priorities and our capital allocation requirements. Our strong balance sheet gives us confidence that we can pay a growing and sustainable dividend covered by EPS at 1.8 times cover, in line with the policy implemented in 2023. If we have excess cash and it makes the right financial sense, we will return it through special dividends or share buybacks, as we have done in the recent past. Alongside our full year dividend at 15.5p per share, the Group is announcing today a further share buyback program of a maximum of £10,000,000 reflecting both the corporation tax refund and our confidence in future cash generation, whilst maintaining flexibility for M and A opportunities as they arise. In summary, 2024 has been a year of broad based strong progress for the group, a year where revenue grew by more than a quarter, whilst also growing margins and delivering strong cash conversion at the same time.

Speaker 1

Further, it is the 4th consecutive year of revenue and profit growth, and a great start to the delivery of the 2,030 sustainable growth strategy targets. It is worth reminding ourselves that over the last 4 years, we have generated total shareholder returns of circa 144%, And we are looking forward to continued revenue and profit growth in 2025, in line with the required trajectory of our strategy. The operational and financial foundations are in place, and we have a confident outlook supported by our high quality order book. Bill will now take you through the operational side of this strategy in more detail. Bill, back

Operator

to you. Thanks, Chris. This is a photo of our Brent Cross PRS scheme for related argent, the 4th such project they've asked us to construct for them. The modern method of construction you see here using precast panels is similar to that used at our Ryhill Prison project, which we presented at the Capital Markets event back in May. As you can see, the panels come complete with glazing, balustrades, etcetera, and this is the same method of construction that we are using on our PRS scheme down in Cardiff.

Operator

Many of you will be familiar with this slide. This is the bedrock of our business. We start with the core of the company, our excellent people. We have a culture of discipline and risk awareness supported by good processes and aligned incentive mechanisms. Being very selective about the type of work we take on leads to a high quality order book, which we can deliver reliably and which underpins our margin targets.

Operator

Most of our order book is in long term frameworks with repeat clients, and so we get good visibility of the forward order book and can align our people and our supply chain accordingly. This leads to a consistent and predictable operating performance, which further strengthens our balance sheet and so the wheel turns. We have disciplined risk management processes at prequalification and bid stage. And once in contract, we have robust commercial and project controls and a system of cross business unit peer reviews and project health checks, which are carried out regularly. Here's a reminder of our strategy to 2,030.

Operator

Continue to grow revenue and margin in our 3 big core businesses: building, infrastructure, which is predominantly highways at the moment and environment, which is predominantly water and wastewater, all big long term markets with great opportunities for disciplined growth. Secondly, grow our specialist businesses in higher margin adjacent markets across all of our business sectors. Thirdly, reenter the affordable homes market and remember that our definition of this market is mid rise blocks of flats for RPs and local councils. Fourthly, leverage our geographical and client footprint across the UK, selling more services and cross selling to our clients. And all of this comes together to continue our trajectory of growing shareholder returns over the long term.

Operator

Here's a precis of our sustainable growth strategy on a page. There are 4 cornerstones of our strategy: people and the drive to be a values driven progressive business, where the safety of everyone on our sites comes first. We focus on retaining and developing our people and attracting new good people to Gallipotri. We operate in a socially and environmentally responsible manner, striving to achieve our net zero carbon targets for 2,030 and 2,045 and delivering social value around our projects through employing local people and by procuring goods and services to local companies as far as possible. We deliver high quality products for our clients using modern methods of construction, off-site manufacture and digital tools to improve quality and efficiency.

Operator

A significant proportion of work is delivered through our supply chain, and so retaining a high quality supply chain is important, as is paying them promptly. Our supply chain has proved resilient, and we continue to perform enhanced financial due diligence on the larger subcontracts or program critical activities, which has proved effective to date. And all of this comes together to maintain our strong balance sheet and provide good returns to our shareholders. There continue to be robust long term demand across all of our sectors, driven by aging social and economic infrastructure, which needs to be repaired, improved and replaced to cater for a growing population, the effects of climate change and to underpin and enhance the UK's productivity. We have leading positions in the sectors and frameworks that are responding to these challenges and see a solid pipeline of opportunity well into the future with Galliphers Tri part of the solution.

Operator

The transition through to the new government has been smooth, and we've not seen any hiatus from a contracts award perspective. Here are the drivers of margin growth. The left hand boxes are the mainstay of margin growth, sensible procurement methods from intelligent clients and robust risk management and selectivity from Gallipetri. Then there are a host of operational and process efficiencies which work together to further enhance our margins, modern methods of construction, off-site manufacture and digital tools that allow us to construct a project in virtual reality and identify improvements, which then improves the quality, safety and efficiency of the physical build. On the right hand side, our work mix will change over time with a higher proportion of higher margin work, and the continued growth of the business will make the overhead more efficient.

Operator

Good people and a high quality supply chain underpin all of this. Investors should be encouraged by the fundamental improvement in procurement methods by public regulating private clients. The construction playbook has driven a more mature, sustainable environment with higher levels of collaboration and a more equitable allocation of risk. As I said earlier, the combination of this more mature attitude to client procurement, allied to strong risk management, helps to drive margins in the right direction. You can see here that 99% of our order book comes through some form of negotiated route, be it 2 stage, target cost, cost reimbursable or directly negotiated work.

Operator

A real example of a client scoring criteria is the right hand side, which means we win work based on quality and not price. This is the order book as of the end of June 24, so these figures do not include the recent Southern Water and Wessex Water and paid framework wins. We have an excellent order book of £3,800,000,000 up £100,000,000 in the same period last year, and you can see the details of the order book in building and infrastructure on the left hand side. The split between the public and regulated sectors and the private sector remained steady at broadly ninety-ten, with a slight difference last year down to timing of a few private sector contracts. As I said earlier, the order book has all the attributes to underpin our goals in terms of its quantum, its longevity and sensible risk profile through frameworks and a very high proportion of repeat clients at 93%.

Operator

We came into this financial year with 92% work secured for the year and more than 70% already in hand for full year 2020 6, which is an excellent position and reinforces our ability to be very selective. This slide is a good visual representation of the forward visibility of work that we get through our excellent framework positions across all of our sectors. You can see a solid pipeline of work in all our sectors, supporting growth through our 2030 strategy period. We would also, of course, expect a high renewal success ratio as frameworks end and are reprocured, which is represented in the lighter green color. To demonstrate the depth of this framework portfolio, you can see that environment has just two lines to represent the frameworks in England and Scotland.

Operator

This is the position in more detail. We have 54 separate frameworks with all of the major water companies in the UK, a great foundation in a critical growing sector. 21 frameworks for the design, construction and commissioning of water and wastewater treatment works. 13 frameworks for capital maintenance, predominantly mechanical and electrical work. And 20 frameworks for the supply and maintenance of equipment that we manufacture motor control centers, chemical dosing plants, inlet screens and distributor arms, etcetera.

Operator

As well as this, we have 5 capital maintenance frameworks with the Environment Agency, closely aligned, of course, to all of our other work in the water sector. Many of these frameworks run beyond 2,030, and we're making good progress in establishing our higher margin specialist businesses in the sector. Outside of water, we've had some excellent wins in building, infrastructure and special services, all high quality work that underpins our 2,030 aspirations. So in the context of the strategy announced at the Capital Markets event in May, we're making good progress. I've spoken to the first two columns.

Operator

On affordable housing, we are awaiting the outcome of 2 big framework bids and are tracking or bidding in the order of 50 opportunities worth in excess of £1,000,000,000 of revenue. Overall, we're on track for our 2,030 targets in the sector, and the political direction is helpful. There's real value in the ability to sell our portfolio of services to our many existing clients who know us, who value our balance sheet, reputation and ability. We can provide a more holistic service to their businesses by coordinating within Gallipord Tri to reduce and manage interfaces and to offer services across the whole of the UK from our existing office network. This is a real differentiator in the market.

Operator

We've just opened our new water technologies facility in Paisley, just outside Glasgow, for our specialist businesses, including Lindtot and Hambaker. Here are some of the metrics by which we measure our business, and there's a full schedule in the appendices. All of these metrics are sewn through the fabric of the business and help us to continuously improve the business as well as underpinning our work winning credentials. We're pleased with our progress in reducing Scope 1 and 2 carbon emissions towards our 2,030 net zero goal, and the transition of our car fleet to pure electric or plug in hybrid is nearing completion in support of those goals. Our accident frequency rate has improved significantly in the period, although, of course, we will not be happy until that reaches 0.

Operator

Early in the year, we were very pleased with the results of our employee engagement survey, with 87% of our people strong advocates of the company, and we're delighted to be voted number 1 apprentice employer and number 2 graduate employer in Construction and Civil Engineering by the job crowd. We're pleased that even through the transition to a new ERP system, we have maintained payment to our supply chain in 26 days on average. In summary, we're in very good shape with a strong balance sheet, high quality order book, no debt and no pension fund liabilities. Full year 2024 has been a strong year. We've announced a growing dividend, a further share buyback, and we've had a good operational start, which gives confidence in outlook for the full year and beyond.

Operator

We've got momentum in the business, and our robust attitude to risk remains front and center as we grow resilient existing and adjacent markets in a disciplined manner towards our 2,030 targets. That concludes the presentation, and I'll hand back to the operator to take any questions. Thank you.

Speaker 2

And our first question comes from Andrew Nosey from Bill Hunt. Please go ahead.

Speaker 3

Yes. Good morning, Bill. Good morning, Chris. A couple of questions from me. First of all, when you look at the pipeline of new opportunity and if we could delve into 2 particular areas.

Speaker 3

Firstly, government related activity. Are you seeing any hiatus from the changing government and what they may or may not be thinking? I also recognize you referenced to be no issue in terms of framework drawdown. And secondly, in the water sector, following the Southern and Wessex wins, are there still outstanding bids there? Or is that really now the pipeline of work in place?

Speaker 3

And secondly, if we look at the infrastructure margin, you held at 2.5%. Were there any drags there from bid related costs and mobilization costs given the growth in the top line that you delivered in the period? Thank you.

Speaker 4

Hi, Andrew. Thank you for that. So I've heard you write that down. Hopefully I can remember them. On the pipeline question, the transition to the new government has been really smooth from our perspective.

Speaker 4

We've seen no hiatus at all in the award of public sector contracts, which is really encouraging. So the short answer is no really smooth transition through all the departments. With regard to water, we've had a really good run-in Ampage, Andrew. We've Southern West is with the latest ones. We've got one significant outstanding bid, which we hope to hear on imminently.

Speaker 4

And then a few more beyond that are smaller ones. But pretty much regardless of those, to be honest, we've had a really good run-in Ampage. We've established a great foundation through to 2,030 and indeed beyond because remember that most of these frameworks are for typically 5 years, extendable by another 5 years. So a lot of this work will go out on well beyond 2030. So we've established a really good foundation for the next decade in water.

Speaker 4

And in infrastructure, the market stayed the same probably because of the delays in mobilization of some of the jobs. So it's well publicized that quite a few projects across the country, not just for us have been delayed by various appeals. Those have now gone away and we're starting to mobilize. So that would have had a bit of an effect on infrastructure last year.

Speaker 3

Got it. Great. Thank you very much.

Operator

Thanks, Andrew.

Speaker 2

Thank you. We'll now take our next question from Joe Brite from Liberum. Please go ahead.

Speaker 5

Good morning, gentlemen. Good morning, Joe. Three questions, if I may, and if I can do them 1 at a time. Firstly, very interested to hear your view on the impact of ISG on the industry.

Speaker 4

Okay. I'll take that one, Joe. Firstly, the pity is, well, our sympathies are with the people and the supply chain and I'll go into each of those in a bit more detail. Firstly, with regard to people, the good news of course is that, the industry is in need of lots of people. So I'm confident that the majority of those people will find a home, which is positive and we are talking to ISG's HR department with regard to taking on some people.

Speaker 4

On the supply chain, I think it's fair to say that ISG has been a bit wobbly for a while now. So I suspect that the supply chain has put in place mitigation against that. So either advanced payment or very short payment cycles, Joe. So I'm hoping that the supply chain contagion from that will be limited. And so far, I've not heard of any substantial ones personally.

Speaker 4

What we do, of course, is that we do enhanced financial due diligence checks on our bigger suppliers and that includes making sure we know who else they're working for. And I'm aware of only 2 suppliers which we're working for ISG and ourselves. You've spoken to both of them. They're both of substance and neither of them they've taken a little bit of payment, but nothing too bad. So no contagion that I'm aware of in the supply chain.

Speaker 4

Overall, of course, it's not good for the industry. But in the same breath, I think that the vast majority that the list of tier 1 contractors and the other private tier 1 contractors are well run and have sensible risk management outlook. So from an industry perspective, it's not a good look, but I don't think that it should sell the rest of the industry. I think that other tier 1 contractors are well run and have sensible attitudes to risk.

Speaker 2

Thank you. We have a follow-up question from Joe actually. One moment please. Please go ahead. Your line is open.

Speaker 5

Thank you. Two questions if I may. The first remaining question is around the trajectory of water spend. How do you expect water spend to sort of progress from 2024 to 56?

Speaker 4

Now Joe, typically we would have a bit of a hiatus between AMPS. What we saw last year was a really strong AMP7 year and we would have expected traditionally a bit of a flattening off I suppose this year. In the past it would have been a downturn, but I think we expect a flattening off. That has not happened as yet anyway. What we're seeing is a continued really strong trajectory.

Speaker 4

The awards companies have I think been pretty good at getting ahead of the curve and securing a good quality supply chain in the main. So far we see continued really good spending in water and be very well placed to, as I said earlier, with all of our wheels ramp 8 and there's that slide in the deck that shows what we've got. We're really well placed. And the really good thing for us is that we've advanced quite strongly our capital maintenance and our water technology scripts. Those are all higher margin activities.

Speaker 4

And again, probably 10 years duration.

Speaker 5

Fantastic. Thank you. And then finally, interested to hear your perspective on labor's apparent focus on decarbonizing social housing and where you see the opportunities

Speaker 4

there? Well, I think if I interpret it correctly, Joe, that's decarbonizing existing housing stock and that's not our cup of tea. But what we do see is continued focus by departments on decarbonizing their new buildings and particularly in DFE where if you can't build a net zero carbonate operation school, you don't work for DFE. It's that simple really. So we do see a continued focus on decarbonization.

Speaker 4

And I would expect that that focus will move over time from net zero in operation to net zero embedded carbon, which is of course much more difficult and complicated not to crack. So overall, I don't think that the government's attitude to decarbonizing their projects is going to change significantly from our perspective, but we're not in the social housing economy.

Speaker 5

Thanks so much, Ben.

Speaker 4

Thanks, Joe.

Speaker 2

Thank you. And as there are currently no further questions in the phone queue, we'll move now over for the web questions. So Tilly, over to you.

Speaker 6

Thanks, Sergey. So we've just got one question from the webcast from Guy Hubert from Cavendish. And he's asking, what would you say are the key pressures your supply chain is facing or will face and how are they addressing them?

Speaker 4

Well, the supply chain want to work for companies with strong balance sheets who provide them with good, safe working areas. They can be productive, they can deliver quality work and they can make a profit. And that is what Galliphers try seeks to offer. So that's what we do in our sites and we pay our supply chain in on average 26 days. And I think in the current environment, it just brings into more focus of the fact that companies with strong balance sheets attract the best people and the best supply chain.

Speaker 4

In the supply chain itself, inflation has gone away as an issue. Available to materials has gone away as an issue. I would say that there are a couple of pinch points every now and again in certain trades. But apart from that, it's relatively settled is how I see the market at the moment. I hope that answers the question.

Speaker 6

Thank you. We have no further questions from the webcast, so I'll hand back over to you for any closing remarks.

Speaker 4

Okay, great. Well, I'll take those short lack of questions to be a mode of confidence that our presentation is really comprehensive. So in conclusion, everyone, we've had a really good year at 2023, 2024 and a really good start to the current financial year and a very positive outlook going forward. So thank you all for joining the call and take care.

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Earnings Conference Call
Galliford Try H2 2024
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