Galliford Try H1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
March 5, 2025

There are 4 speakers on the call.

Operator

Hello, everybody, and welcome to Galliford Tri's half year results for the period ending December 24. I'm Bill Hocking, chief exec, and I'm here with Chris Hampson, CFO. The photo you see here is a large below ground buffer tank, which is an example of the type of infrastructure that the water companies are building to control storm flows as part of their regulatory framework. Here's the agenda for today. As usual, we've retained the format and substance of many of the slides from previous years, which hopefully aids understanding and demonstrates consistency of message.

Operator

This is a photo of an education facility for the energy sector, which we completed recently in Blythe under the Procure Partnerships Framework. We've had a really good half year with revenue up 13% at just over £900,000,000. Divisional operating margin is up at 2.7% from 2.5% last time with adjusted PBT up 22% at £20,500,000 which is a great performance and produces earnings per share of 15.7 p and a half year dividend of 5.5 p. Cash performance was excellent with average month end cash of a hundred and £76,000,000 up 32%. Our strong order book stands at £3,900,000,000, up £200,000,000 on the same period last year with 92% repeat clients and 98% work secured for this year.

Operator

These figures are a reflection of the expertise and talent of our 4,300 excellent people in Gallipard Tri, our culture, 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 and allows us to guide the market to revenue and PBT for the full year above the top end of current market expectations. Before I hand over to Chris, I'd like to briefly remind you of our strategy through to 02/1930. We are targeting revenues in excess of £2,200,000,000 and an operating margin of 4% in 02/1930. Our original target of 3% operating margin in '26 remains a waypoint en route to that 4% in 02/1930.

Operator

We achieved growing shareholder returns in line with our 02/1930 targets in four main ways. We continue to grow revenue and margin in our big three operating businesses of building, highways and environment, and the outlook absolutely supports this, all non cyclical long term markets with great opportunities for disciplined growth. We grow our specialist higher margin businesses in adjacent markets and are making good progress here. Our new water technologies facility in Paisley is up and running, supporting Lindtot and Hambaker's operations in Scotland. We reentered the affordable homes market and had further success in securing places on the main frameworks in the sector.

Operator

Please remember that our definition of this market is mid rise blocks of flats for registered providers and local councils. Finally, we leverage our geographical framework and client footprint across the whole of The UK, selling more Galliford Tri services to existing customers and and sectors that value our balance sheet, reputation, and ability. And all of this comes together to underpin our trajectory of growing shareholder returns over the long term. There continues 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 support 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 Gallipard Tri part of the solution.

Operator

All of our sectors are aligned to the government's growth priorities. Here are the drivers of margin growth. The left hand boxes are the mainstay of margin growth, sensible procurement methods from mature clients and robust risk management and set activity from Gallipard Troy. Then there are a host of operational and process efficiencies, which work together to further enhance our margins, modern methods of construction, and tools that allow us to construct virtual reality and identify measures which then improve 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

Our excellent people and high quality supply chain relationships underpin all of this as I'll talk about later. I'll now hand over to Chris to take you through the financials.

Speaker 1

Thanks, Bill, And good morning, everyone. Before I take you through the financials, I thought I'd say a few words about my first six months. I've toured the group, meeting our operating businesses and support functions, and completed nine site visits. This is an image of the Melton Mowbray distributor road project that I visited in November. It is a large highways project to divert traffic away from the busy center of Melton Mowbray and on completion will support economic growth for the town.

Speaker 1

In the image, bridge beams are being installed using innovative technology that you can see halfway up the lift straps called a Vita Load Navigator. This uses fans that sense rotation of the beam and self activate to correct any rotation during the lift. This enables precision lifting, improving safety, and on time delivery. My tour of the group has confirmed my very early impressions on the qualities of the group and why I have great confidence in both the outlook and the returns it will generate. The strong macro factors in our target markets and the reputation Gallipard Tri has for technical expertise and reliability are clear.

Speaker 1

Moreover, the tour has reiterated the very robust and selective approach we take to risk management in the business. All I've seen so far underpins why the group is going to be successful in the delivery of its twenty thirty sustainable growth targets. So let me tell you about the financials for the first half of twenty twenty five. As you can see on the slide, we have renamed our adjusted performance measures from pre exceptional to adjusted as this aligns with best practice. We have also changed the definition of adjusted PBT and adjusted EPS to exclude amortization of acquired intangibles.

Speaker 1

This brings into line our adjusted profit measures and aligns with practice in our sector. A comparison of the changes can be seen in appendix nine and full details are in note 17 of the half year statement. All other measures and definitions remain unchanged. Onto the numbers. We are pleased to report another strong set of results for the first half.

Speaker 1

As demonstrated on Bill's slides earlier, this is our ninth consecutive half year of growth, and this serves to add further weight to the predictability of our results. Sticking faithfully to our strategy works. Revenue at circa £923,000,000 is up 12.7% on the prior year, driven primarily by strong deliveries in the AMP seven water programs in our environment business. Adjusted operating profit of £17,700,000 is up 25.5%, and divisional adjusted operating margins are up 24 basis points to 2.7%, reflecting strong revenue growth, improved contract delivery, and operational leverage. We have now grown margins consecutively from a base of 2% in 2021.

Speaker 1

We're making good progress towards our original margin target of 3% in 2026 and our updated sustainable growth target of 4% for 2030. Adjusted profit for tax is also up strongly at £20,500,000, up 22% as a result of operating profits and interest income on our cash balances. The adjusted effective tax rate for the half is 22.9 and for the full year is expected to be circa 24%, marginally lower than the standard rate reflecting prior year deferred tax adjustments. Adjusted earnings per share for the half are therefore 15.7p per share, up circa 11% versus the prior year. On the basis of this performance and our increased confidence in the full year, we are announcing an interim dividend of 5.5p per share, up circa 38%.

Speaker 1

And we are also uplifting our full year guidance with revenue and adjusted profit before tax expected to be above the top end of the range of current market expectations. The improved guidance is reflective of the strong trading performance and momentum. Moving on to segmental performance. Both building and infrastructure have contributed to revenue growth, demonstrating the continued success of our framework model and quality based negotiated contracting. Building revenue is up 4.8%, driven by strong project delivery across all of our core markets.

Speaker 1

Infrastructure also saw strong progress, both in AMP seven deliveries and across our highways business, with revenue up circa 25% to £452,000,000. We are working with our water clients on the transition to AMPATE starting in April. We expect AMPATE activity to ramp up in the 2026 financial year and beyond and expect a relatively flat weighting in revenue and profit for the group between the halves for f y twenty twenty five. The building division's adjusted operating profit is up circa 18% to £12,500,000 with a 29 basis point improvement in margins versus the prior year. Similarly, the infrastructure division has adjusted operating profit up £3,000,000 or circa 32 to £12,300,000 with a 15 basis point improvement in margins versus the prior year.

Speaker 1

The lower profits and investments reflect the lumpy nature of the business. H one twenty twenty four included the financial close of the Guildford Crescent PRS scheme. Central overheads are up slightly at £7,000,000, reflecting higher share based payment and incentive charges on higher profits. On the adjusted operating profit bridge, you can see the £2,700,000 volume improvement at prior year margins and the £2,200,000 impact of the higher operating margins, which are a direct result of the consistent focus on our drivers of margin growth. The consistency of revenue growth conversion to profit and margin remains positive.

Speaker 1

Our balance sheet remains robust with £210,000,000 of cash at the half year. And more importantly, average month end cash rose to circa £176,000,000, up from £155,000,000 at year end twenty twenty four. Again, this primarily reflects the quality of the projects we select and how tightly we manage them. For the period, we continue to have no debt or pension liabilities, and our PPP assets remain cash generative and are highly marketable. We are pleased to announce the establishment of a £25,000,000 revolving credit facility.

Speaker 1

The facility, supported by pool of three major banks, is unsecured and on attractive commercial terms, reflecting the group's strong balance sheet, positive momentum, and long term outlook. It is a standard financing tool for PLCs of our size and sector and will provide further agility, optionality around M and A financing, and resilience throughout the group's 02/1930 sustainable growth strategy period. Moving on to the cash bridge, we have turned £20,000,000 of statutory PBT into £19,700,000 of cash from operating activities, representing 99% cash conversion, another consistent performance. Typically, in the first half of the year, we see a seasonal reduction on our monthly cycle of working capital balances, and this year follows the trend with an outflow of circa £33,000,000. This includes maintaining payments to our suppliers on average in twenty six days with 97% of invoices settled within sixty days.

Speaker 1

As stated in October, we received a circa £10,000,000 corporation tax refund and announced returning this as a share buyback. We have purchased £3,800,000 of the shares in the half resulting in the net circa £6,600,000 inflow on the chart. The corporation tax refund provided a tailwind to our first half average balance, which will unwind as the buyback completes before the year end. We've also paid out nearly £12,000,000 for the 2,024 final dividend. Finally, we've received a net £1,800,000 for interest and tax and a small £200,000 of other outflows.

Speaker 1

Overall, another strong cash performance. Moving on to capital allocation. While we have reformatted the slide to demonstrate the model more clearly, we have not changed our capital allocation policy. As we've stated before, we will prioritizing using our cash from profits for reinvesting in the business organically and acquisitively. The four strategic bolt on acquisitions over the last four years are growing and are margin accretive to our bottom line.

Speaker 1

We will continue to assess any potential future acquisition opportunities in line with our strategic priorities and financial hurdles. Secondly, we will continue to support our sustainable ordinary dividend policy of having EPS cover dividend 1.8 times, which is leading for the industry. Finally, where we have excess cash, we will return this to shareholders through special dividends and or share buybacks as we have done three times over the last three years. On the right hand side, you can see the total of our shareholder distributions since 02/2001, totaling circa £84,000,000. We have allocated more than £46,000,000 as ordinary dividends, £25,000,000 via the share buybacks, and £12,500,000 through the special dividend in October 2023.

Speaker 1

We continue to believe that the clear explanation and implementation of our capital allocation model is attractive to investors. The strong balance sheet and average cash are also really important to customers who value our ability to complete schemes, to suppliers who want to know that they will be paid for their work, and to our people who value the security of working for a strong group. In conclusion, we are pleased with the continued predictable track record of outputs across all of our key financial metrics, demonstrating that our strategy is working. Total shareholder returns of close to 250% over the last four and a half years are further evidence. Looking ahead, our aspirations for growth are aligned with the strong macro factors in the industry as described by Bill earlier.

Speaker 1

This gives us confidence that we can continue to drive further strong TSR growth going forward. Indicatively, by delivering our 02/1930 targets, this would imply a dividend for 02/1930, broadly double our twenty twenty four full year dividend. There is plenty of opportunity in front of us. Bill will now take you through the operating model and how that is demonstrated in the recent successes of the business. Thank you.

Speaker 1

Thanks, Chris.

Operator

Here's a photo of our Guildford Crescent PRS development on the ground and ready to be transported in the right sequence to site. And here we see the project as it was a few weeks ago, and actually it's three stories higher as we speak. The photos make it look easy, and it's the result of an enormous amount of detailed design, planning, expediting, and logistics by us and our supply chain. You'll be familiar with this slide. This is a philosophy of how we run our business.

Operator

We start with the core of the company, 4,300 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. Most of our order book is in long term frameworks with repeat clients, and so we get good visibility of the Ford 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 already strong balance sheet.

Operator

We have disciplined risk management processes at the preconstruction stage, and once in contract, we have robust commercial and project controls and a regular system of cross business peer reviews and project health checks. Here's a precis of our sustainable growth strategy. There are four 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 Gallipot Troy. We operate in a socially and environmentally responsible manner and deliver social value around our projects through employing local people and by procuring goods and services through local companies as far as possible.

Operator

We deliver high quality products for our clients using modern methods of construction, off-site manufacture, and digital tools to improve quality and efficiency. A high 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 to provide good returns to our shareholders through our core and adjacent markets. This is an important message.

Operator

I've said repeatedly that investors should be encouraged by the fundamental improvement in procurement methods by public regulated and private clients. The construction playbook has driven a more mature, sustainable contracting environment with an emphasis on quality over price, as you see on the right hand side of the slide, and an 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 that 99% of our order book comes through some form of negotiated route, be it two stage target cost cost reimbursable or directly negotiated work. We have an excellent half year order book at billion, up million on the same period last year.

Operator

In building, you can see that custodial, defense, and education are very robust, and infrastructure reflects the excellent framework success in Ampeit. The split between the public and regulated sectors and the private sector remains steady at ninety ten. This order book has all the attributes to underpin our goals in terms of its quantum, its longevity, and sensible risk profile through frameworks with a high proportion of repeat clients at 92%. At the December, we had 98% of this year's work secured and 81% already in hand for full year '26, which is an excellent position and reinforces our ability to remain very select. Here's a little more granularity on some of our recent wins, which you can read at your leisure.

Operator

In addition, we have handed over 2,500 school places so far this financial year, have 8,800 places under construction as we speak, and a further 6,400 secondured and waiting to start on-site. These are some of the frameworks we have at the moment, and you can see the excellent forward visibility of work that we get through our framework positions across all of our sectors. You can see a solid pipeline of work supporting growth through our 02/1930 strategy period. We 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 three lines to represent the frameworks in England and Scotland.

Operator

This is the position in more detail. We have 55 separate m seven and amp eight frameworks with all 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 14 frameworks now 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. As well as this, we have five capital maintenance frameworks with the Environment Agency closely aligned to other work in the water sector. As you can see, we've been working with all of these companies for an average of seventeen years. In summary then, we're in very good shape with a strong balance sheet, high quality order book, no debt, and no pension fund liabilities.

Operator

We've had a good first half to the year with a growing dividend and a good operational performance, which allows us to upgrade our guidance for the full year and gives us confidence in the long term outlook. We have 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

Speaker 2

you. First question comes from the line of Andrew Nussey from Peel Hunt. Please go ahead, Andrew. Yes. Good morning, Bill and Chris.

Speaker 2

A couple of questions from me. First of all, when we walk through the water sector, obviously strong performance towards the end of AMP7. Seven. But as we progress into AMP eight, do you expect any sort of degree of hiatus? And sort of allied to that, you obviously referenced in the deck 19 frameworks for AMP seven going to sort of 36 for AMP eight.

Speaker 2

What might that mean in terms of volume of activity? And the second question, Trade Press obviously linking you to some custodial work that ISG had been involved in. I don't expect you to comment on press comment, but just more broadly sort of the opportunities that you've sort of seen from the administration of ISG and equally any issues around supply chain? Thank you.

Speaker 3

Okay. Thanks, Andrew. Yes. So in water, what we've seen is typically at this stage in the cycle, we see a demand AMP7 tails off and AMP8 starts to tail up. And of course, it certainly starts at the end of this month is the is the cut over date.

Speaker 3

So what we've seen so far is a very strong AMP seven, so there'd be no tail off as yet. And we see the water companies, working on their their plans for for Ampeight. So so far, what I'd say is that we see a smoother transition than we've had in the past. That's how I see it. With regard to the number of frameworks, obviously, the the the AMP seven frameworks will tail off over time.

Speaker 3

But bear in mind that we could be awarded an AMP seven project now, which will take, you know, eighteen months to complete. So there's there'll be AMP seven work going on for another considerable period of time whilst AMP eight ramps up. So we expect the volumes to to steadily increase over time, and and and hopefully, there won't be any hiatus on the back of that. With regard to ISG, yes, we have seen some upside. I don't wanna sound too mushy about this, but we have seen some upside from ISG's demise, and we have picked up some custodial work as a result of that, which which actually, also in education, not just custodial.

Speaker 3

With regards to supply chain, we've not seen any significant supply chain issue so far. We've seen one or two minor blips, but nothing material. So, so far, so good on that front.

Speaker 2

Great. Thank you.

Speaker 3

Thank you.

Speaker 2

There are no further questions from phone lines, so handing over to Tilly to take webcast questions. Thanks, Francois. So we've got a few questions from Alastair Stewart from Progressive Equity Research. He's asking, could you discuss any opportunities in defense in the current environment and whether government is stepping up its discussions with you or the industry? Any indication that other government department construction budgets may suffer?

Speaker 3

Okay. Hi, Alistair. Well, you know, beyond the Defense Estates Optimization Program, we've just picked up a few weeks back on RF Digby, a £63,000,000 scheme. So we do see momentum in defense. I wouldn't say that's significantly more than we've seen in the past because, of course, all of these projects have a gestation period.

Speaker 3

So they're all in the pipeline. They're all coming through. But, we see a continued momentum in defense. We don't see any diminishment at all in any other government departments. Education, custodial health carries on as usual.

Speaker 2

Thank you. A follow-up as well. Does mid rise bring you into the remit of the building safety regulators gateway authorization?

Speaker 3

Yes. In the fullness of time, but we don't have any projects in in that, in that at the moment. So we're not affected by the current hiatus in the billing safety regulator.

Speaker 2

Great. Thank you. That's all the questions we've got from the webcast. So I'll hand back over to you, Bill, for any closing remarks.

Speaker 3

Okay. Well, delighted, there's so few questions. It must be in the presentation. It was nice and clear. So thank you very much, everyone, for joining, and look forward to seeing you again in the full year.

Speaker 3

Thank you. Bye bye.

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