CALEF (CALEF) Q2 2027 Earnings Report, Transcript and Summary

Good morning, everyone, and thank you for joining us today for Caledonia Investments plc Half-Year Results Presentation. The presentation will commence shortly. A copy of the presentation slides is also available to download from the results center on Caledonia's website, www.caledonia.com. [Operator Instructions] Please note that this call is being live streamed to a webcast for a wider audience and will be recorded. I'd now like to hand over the call to Mat Masters, Chief Executive Officer, to open the presentation. Please go ahead.

Hello. I'm Mat Masters, CEO of Caledonia Investments, and welcome to our results presentation for our half-year ended 30th of September 2026. We have had a positive first half, delivering an NAV total return of 5.4%, with all 3 investment pools contributing to growth. Over 10 years, we've delivered an annualized NAV total return of 9.1% at the top end of our target range of inflation, plus 3% to 6%. That reflects the strength of our model, proactive portfolio management, and backing good businesses. A standout development was the completion of the sale of Stonehage Fleming. We received GBP 290 million, delivering a 3.2x money multiple and a 33% uplift to the March 2025 carrying value, a great result, demonstrating the significant value within our private assets and the benefits of our long-term partnership with management. We've also put capital back to work, investing approximately GBP 110 million in Blue Diamond Garden Centres and Conquip Engineering, both excellent businesses with attractive growth prospects where we believe our capital and support can make a real difference. We have a strong balance sheet and the financial capacity to pursue further investment opportunities. From time to time, following significant realizations, we may pay special dividends after balancing investment opportunities and liquidity requirements. In keeping with this approach, alongside our interim dividend of 3.84p per share, today, we are pleased to announce a special dividend of 20p per share, representing an additional dividend return of 5% of market cap to all shareholders. This special dividend, on one hand, provides the ability to distribute some of the proceeds from occasional significant realizations and, on the other hand, provides a mechanism to do this in a way that treats all shareholders equally. A way of looking at it is that we are returning proceeds at par. It complements our progressive ordinary dividend, which we have increased for the last 59 years, and continued share buybacks, reflecting our commitment to delivering long-term shareholder value. This slide shows how our NAV total return has developed over the last decade. The orange line represents inflation, plus 3%, the lower end of our target range. As you can see, progress hasn't been a straight line. There have been periods of market weakness, particularly in 2020, but taking a longer view helps put those movements into perspective. Over 10 years, our annualized NAV total return has exceeded inflation by 5.5%, towards the top end of our target range. Before we get into the portfolio, let me update you on 2 team changes. Today, we're announcing that Jamie Cayzer-Colvin will step down as Head of Funds from January 2027. He'll remain an Executive Director and Investment Committee member and support the Funds team through 2027. Eloise Fox and Min Ong, who run our North America and Asia portfolios, respectively, will lead the pool. Jamie has made a huge contribution to Caledonia, both as Head of Funds and more broadly as a member of the leadership team, and we look forward to him continuing to do so. We've also previously announced that Theo Tizard, who has been a valued member of Caledonia since 2017, will succeed Tom Leader as Head of Private Capital in December. We thank Tom for his significant contribution and leadership. So on to the first of our investment pools, Public Companies. We have GBP 980 million invested in around 30 high-quality businesses. The approach is straightforward, really understand the fundamentals, buy well, and then hold for the long term. Our permanent capital gives us the patience to wait for attractive opportunities and the conviction to invest when they arise. The pool delivered a return of 12.3% over the 6 months with a strong recovery following market weakness in March. We continue to manage positions proactively, investing GBP 32 million and realizing GBP 102 million, giving a net realization of GBP 70 million. The pool has delivered 9.5% a year over 10 years with a Capital pool returning 11.6%. That demonstrates the benefits of owning good companies over time. On to Private Capital. This is where we partner with management teams, mainly in U.K. mid-market businesses, to help them grow over the long term. We now have approximately GBP 760 million invested across 9 companies. We look for control positions or a preferred minority where we can be influential, and we sit on the Board. We invest from our permanent balance sheet. There's no fixed timetable for an exit. We can focus on what is right for each business, while remaining conservative on debt, typically around 2x to 2.5x EBITDA. The pool delivered a modest return of 0.6% over the 6 months. Positive contributions from AIR-serv Europe, Cobepa, and the remaining gains on Stonehage Fleming were largely offset by a reduction in the valuation of Cooke Optics, where demand for its established cinematography lenses remains weak. Our 2 new investments are also held at cost. We completed the sale of Stonehage Fleming during the period. Most of that gain was recognized in the previous financial year, a great result, demonstrating the value of our long-term partnership with management. And we have been putting capital back to work, investing approximately GBP 110 million in 2 fantastic businesses, Blue Diamond and Conquip, both exactly the type of businesses we like, and let me take you through why. First, Blue Diamond, the largest garden center operator in the U.K. and Channel Islands, where we invested GBP 60 million in July for a stake of around 18%. The business is led exceptionally well by Simon Burke and Alan Roper. It operates 54 garden centers, combining gardening with home and leisure retail, food, and hospitality, really a portfolio of businesses under one roof. What attracted us was the combination of a market-leading business and an excellent management team with an exceptional track record. Since 2013, revenue has grown by around 17% a year and EBITDA by 21% through both acquisitions and improvements to the existing centers. It's a highly cash-generative business operating in a large fragmented market with further opportunities to grow, and our role is to support the team in pursuing those opportunities, which we're very excited about. Of our initial GBP 60 million investment, GBP 40 million provides growth capital with the balance providing liquidity to existing shareholders. We've also agreed a framework for up to a further GBP 40 million of investment over 5 years, subject to agreed conditions. This is exactly the kind of partnership we look for, backing a proven management team with the capital and time to build on what they have already achieved. Our second new investment is Conquip Engineering. We invested GBP 50 million in August for a 61% stake. Conquip designs, manufactures, sells, and hires specialist equipment used across infrastructure, utilities, energy, and construction. Its products support customers on complex projects with the business operating through a network of 9 regional locations. What attracted us was the quality of its products and solutions, a strong management team led by Dan and George Critchley, and an excellent track record. These are the foundations we look for when backing a business for the long term. Our majority position allows us to play an active role, bringing both capital and support to the business. And as with Blue Diamond, we can give the team time to pursue the opportunities ahead without a fixed deadline for an exit. There are clear opportunities to support further growth, expanding the rental fleet, developing new products, and pursuing selective acquisitions. We look forward to working closely with management as they deliver those plans. The bubble chart plots realized IRR against uplift to carrying value for our major realizations. And you can see Stonehage Fleming there with a 33% uplift. Since 2012, we have generated GBP 1.4 billion of proceeds, returning around GBP 700 million of net cash with realized investments delivering an excellent 17% IRR and a 2x multiple on cost. And with that, I'll now hand over to Rob to talk through our Funds pool and our financials.

Thank you, Mat. Good morning, everybody. I'm Rob Memmott, CFO. Our Funds pool partners with managers to provide access to 2 significant market opportunities. These funds tend not to market in Europe, meaning we are often the only European investor, a real differentiator. The pool NAV of GBP 998 million is a diverse portfolio invested in some 83 funds by 46 managers and in more than 600 underlying businesses. 60% of the NAV is focused on the North American lower mid-market buyouts. [indiscernible] typically the first institutional investor into relatively small, often owner-managed businesses that are profitable and cash generative. The playbook is to transform the companies by strengthening the management team, improving operational efficiencies, growing sales by product and geography, both organically and through bolt-on acquisitions. These improved companies with greater scale provide feedstock to mid-market private equity. It's a very pure form of capitalism. The remaining 40% is invested in Asia, where we target 2 megatrends. The first is focused on domestic consumption and supply chains, fueled by the aging population, growing middle class, and tech adoption. The second is world-leading innovation, where we invest in government-supported new technologies. The pool has delivered a solid return of 12.2% per annum over a 10-year period. We are pleased that in Asia, the improved IPO and fundraising environment that we experienced over the second half of last year has continued. This has led to an excellent return of 13.3% for the 6 months in local currency. The North American portfolio is predominantly focused on U.S. domestic end markets. With durable revenue streams, the underlying businesses continue to make good operational progress. However, the subdued exit activity, which has been experienced across the private equity market, has limited the number of uplift from realizations. This has left returns flat over the period. Overall, the pool produced a 6-monthly return of 5.5% in local currency and 4.7% in Sterling. So to the numbers. During the period, our NAV total return was 5.4%, growing our NAV to GBP 3.1 billion, of which GBP 2.7 billion is invested in a diversified portfolio of listed and privately held companies and funds that have global reach. We have received the GBP 290 million of proceeds from Stonehage Fleming and reinvested in the portfolio, including Blue Diamond and Conquip. Our balance sheet remains strong with cash of GBP 277 million, and this enables us to pay the special dividend, enhancing dividend returns to all shareholders. The special dividend of 20p per share, along with our interim of 3.84p per share, will be paid to shareholders on the 6th of January 2027. And now to my beloved waterfall chart. This chart shows the movement in NAV over the period. We started the year at GBP 3 billion. The portfolio return of GBP 161 million includes the negative impact of foreign exchange. We then deduct management expenses of GBP 18 million. There is then the cash return to shareholders, GBP 38 million allocated to share buybacks and GBP 20 million for the prior year final dividend, resulting in a closing NAV of GBP 3.1 billion. We have a robust balance sheet with no structural leverage. Walking you through the cash movements, we started the year with GBP 90 million and net GBP 239 million was realized from the portfolio. The investment income from our assets was GBP 27 million, and we have consumed GBP 20 million in the cash cost of management expenses. Next is the payment of the prior year final divi, GBP 20 million, and GBP 38 million allocated to share buybacks, resulting in that closing cash position of GBP 277 million. The discount recovered from its position at the end of March of 43% to 36%, which has improved total shareholder returns during the period. But we continue to believe this fundamentally undervalues the quality of the portfolio, our track record, and prospects. Overall, we have a prudent capital allocation policy to investments, our progressive ordinary dividend, and when appropriate, share buybacks and special dividends. Special dividends are not a new component of returns from Caledonia, with specials being paid in 2022 and 2017, enabled by a confluence of factors. We completed the sale of Stonehage Fleming, receiving GBP 290 million of proceeds. At the year-end, we said that we will want to deploy a meaningful share of the proceeds into new Private Capital companies. We have done so with the investments into 2 great businesses, Blue Diamond and Conquip. Alongside other investment activity, we increased the pacing of share buybacks, deploying GBP 38 million, accreting NAV per share by 4.3p. And at the end of the period, we still had cash on balance sheet of GBP 277 million. We feel it is therefore appropriate, in addition to increasing our interim dividend to 3.84p, to pay a special dividend of 20p per share, being approximately 5% of our market capitalization and enhancing dividend returns for all shareholders. I'll now pass back to Mat.

Thank you, Rob. So to close, in a world where there is continued uncertainty, we've made positive progress in the first half with all 3 investment pools contributing to NAV growth. This demonstrates the resilience of our model, investing in high-quality companies with strong fundamentals. Our permanent capital allows us to be patient, support management teams, and give good businesses time to grow. And our strong balance sheet gives us the flexibility to pursue those opportunities selectively, while producing returns to shareholders through dividends and share buybacks. The sale of Stonehage Fleming, our 2 new investments, and the special dividend demonstrate that approach in practice, realizing value, reinvesting for future growth, and sharing the proceeds with shareholders. We remain focused on compounding NAV over time, maintaining our progressive ordinary dividend, and addressing the discount, so that shareholders can benefit from the value we create. Thank you for your time. We'll now take your questions.

Good morning, everybody, and thank you for joining us today. We'll begin by taking questions from the analysts and then we'll take questions from the webcast. Where questions cover similar themes, we'll group those together and address them collectively. And if we're unable to get to your question during the session, we'll be sure to follow up with you via e-mail shortly after the event. I'll now pass over to the moderator to assemble the queue.

[Operator Instructions] There are currently no questions on Zoom. So I'll pass over to Rob to cover the written questions. Please go ahead.

Great. Thank you. We've had a few questions coming in about Cooke Optics. Obviously, we're disappointed to further write down that asset. Just by way of background such that everybody is familiar, the business was heavily affected by the Hollywood writers' and actors' strike in 2023. But the sort of improvement in the film production activity has not translated into a recovery of demand for the established lenses. And the rental houses are continuing to use effectively their existing supply of equipment before committing to new purchases. There's been some good interest in the new products, which the business has developed, but they are slow to build scale, and there has been some challenges with the supply chain sort of related to, I guess, the sort of geopolitical sort of challenges at the moment. We've restructured the cost base, but the business still remains in a pretty precarious position with loss-making, and it's fallen well short of our expectations. Our current focus is absolutely on managing cash closely, working on the new product development, and assessing the sort of options to bring best value for Caledonia. We recognize that's a bit of an uncertain sort of response to the question, but it is a pretty difficult position. And we've now written the asset down to GBP 5 million. So a very sort of small number within our NAV and clearly at GBP 5 million, and we wouldn't expect it to impair performance in the future. We've had a couple of questions from people who sort of rightly referred to the sort of discount still being significantly higher than certainly where we feel that it should be, and whether we had considered a tender offer and whether the sort of tender offer would be a better use of capital? I think first of all, the addressing of the discount on a sustained basis can only be driven by investment performance, clear communication, and then disciplined capital allocation, which, as you know, includes share buybacks for us. We've considered a tender offer, and the tender offer is an acceptable way to allow shareholders who want to leave to exit. Tender at a 20% or a 15% discount would mean paying more per share than we are currently paying with the current buyback program. And that generates less NAV accretion for continuing shareholders. So we're obviously sort of balancing the need for capital within the organization. We believe that paying a special dividend strikes the right balance. It returns capital to all shareholders on a consistent basis. And we are able to do that whilst funding investment in the portfolio, plus increasing the pacing of the share buybacks, which we've done in the period. You'll see that we've invested GBP 38 million. We actually invested GBP 35 million for the full financial year in the prior year. And that level of pacing, we can continue at that rate whilst paying the special and also investing in the portfolio. We've had a question which sort of relates to will we carry on with share buybacks. And I think I've sort of addressed that in the last part of that question, whereby we will continue with share buybacks that are accretive to NAV per share. And everybody can make -- all continuing shareholders can make progress. We did GBP 38 million in the first half, and that level of pacing, we can certainly continue to afford as part of our capital allocation plans. I think we've got a question that's coming in from Ewan, Numis, on the live Q&A. We can enable that, please.

Yes. Ewan Lovett-Turner from Deutsche Numis.

Probably a couple of things. I was just wondering if you could add whether you would commit any further capital? And then just with the team changes, whether you're expecting any sort of changes the way that you do things within those pools would be interesting.

Thanks, Ewan. In terms of committing further capital, we have a commitment to the management team to fund the sort of restructuring of the business and to support the new product development. And that's really as far as I want to say at the present time. And Mat, why don't you talk through the people changes?

Yes, certainly. So we already announced that Tom Leader is stepping down and Theo Tizard was taking over, and there are no planned changes to what Private Capital are up to. That's a straight handover of the baton. In the Funds pool with Jamie stepping back from running the team, it's different in that he's leaving the team and Min Ong and Eloise Fox will effectively report directly to me on the Asian funds and Eloise runs the American funds. But they'll carry on with their strategies as they are doing. There are no other further changes planned at this stage.

Okay. And just on the opportunity set, given returning capital, does that sort of give an indication that you're not seeing the deal flow you'd like or pricing isn't there?

No, I don't think so. I mean I think we said at the year-end that we wanted to redeploy a meaningful portion of capital into Private Capital, which we've done with those 2 investments. We continue to appraise other investment activity. Therefore, it's very much a balance in terms of the strength of the balance sheet, where we currently are, and sharing a bit of that upside from the disposal of Stonehage Fleming with continuing shareholders. I think there are no further questions that have come through. So thank you, everybody, for your time today, and I will pass over to the moderator to close out the call. Thank you.

Thank you very much. That concludes today's session. You may now disconnect.