Caledonia Investments plc

You've got Will Wyatt, I'm the CEO, and also Tim Libet, our finance director, on this Zoom call straight video. And we'll run through the results that we announced the 1st of March 2020, which of course has got interesting timing. Next slide, please. So just a reminder, Caledonia's aims are to grow net assets and dividends over the long term whilst managing risks to avoid permanent loss of capital. And that long-term record is there for, obviously we compounded about compounding of the long run at about eight and a half percent and a decent 10 year record as well at just under slightly under seven. and a 53-year record of increasing our dividends. We have an absolute return mindset, and not that that means we're not going to go backwards, but we measure ourselves in absolute terms rather than relative terms. Next slide. So the overview of the year, NAV decreased by 8% for the year. The discount as measured on the 31st of March was actually considerably wider than it has been for a while at 25%, but that was right in the eye of the storm. It's come back into about 18 now. We've got a COVID, you know, at this time, it was quite an interesting time for us. I think we were one of the first quoted companies to have to try and value its assets. and we'll go into some detail about how we did that. There's an element obviously of quite a lot of volatility in markets. And the real story is that we had quite a good first 11 months of the year, and then everything jumped around a bit in March. So we'll take you through that and try and explain that. We've got a strong and resilient balance sheet. We've got 115 million of cash in significant facilities. So we're ungeared at PLC level. and overall I think it actually 8% down was not a bad result considering what's been going on and the dividend the board again recommending to shareholders an increase in the full year dividend of 3% so onto the performance track record just to remind you in slightly more detail so our our aim to uh to grow net net assets over the long run um really reflects into a um we're trying to grow about we're trying to grow ahead of inflation by three to six percent over the medium and long term and that's represented on this chart uh by the yellow band there that you can see And over five and 10 years, we're not a million miles off that. But overall, all periods, we're significantly ahead of markets. So if there's one thing it shows, at least we're doing a reasonable job on that basis. And I hope with a bit of luck over the next year or two, we'll be able to bring back the track record back up there again. The underlying portfolio is in perfectly good shape. It's just going through a difficult period. And so that gives you an idea of what we're trying to do. And if we can go to the next slide, Andy. In terms of the way we manage Caledonia, We've got three pools of capital, as we call them. We've got the quoted equities pool, the private capital pool, which is our investments in private businesses, and then the funds pool, which is predominantly a private equity portfolio. The quoted pool really produced, I think, a cracking good result considering what was going on, being flat for the year, slightly off, 0.3% off. which was fantastic considering that, you know, the FTSE was off 18 and a half percent and the American markets, which are probably more relevant for them, were off somewhere between 10 and 12 percent. So I think that was a good proof of strategy in the eye of the storm. So they did really well. It's a good result. Private capital portfolio of 11 investments we have. generally traded quite well for the first part of the year, but we do have some businesses exposed to the consumer leisure sector, which were forced to close, or some, you know, their businesses have been seriously curtailed. And we've marked to market reductions on those businesses, which results in the portfolio being marked down by about 18%. um on that particular side the funds um again quite a robust performance here of only of three percent despite the fact that we had applied a 16 valuation overlay onto the value onto the value that the fund managers have given us but nearly all of the private equity valuation we were working from with December so we had to bridge the gap to March and that really came out in the 16 valuation overlay that bought the overall result back to three percent and there you can see the cash bringing the portfolio up just a mention as well income for the year was 54 million which was flat up slightly up on the year before and we had a two percent positive tailwind or positive impact from FX. And I think that's the overall story for the year, giving us this minus 8.1% total return. If you click to the geographic page, I think if you look in that left-hand graph in terms of the exposure really through the revenue source of where the business is we're invested in, um trade we've got a pretty balanced uh exposure to the global economy uh it's slightly nuanced in the currency uh department bottom right where you can see as at the year end we had about a 70 exposure to sterling that really reflects that we had uh post the general election and the brexit vote we had we have a natural exposure to the US dollar of about half the portfolio. We hedged a third of that with the expectation that sterling at the time was very weak. And that gave us a 70% exposure to sterling at the year end. Subsequently, and following the response of governments to the COVID crisis, we removed the overlay as we believe that just putting further pressure on sterling. So that's the currency story. In terms of the COVID, obviously March saw a huge increase in the volatility of markets and indeed valuations. In terms of how that actually impacted us in the quoted equity piece, the strategy that the team there follow is very much investing in compounding businesses with high margins which generally avoids some of the more volatile sectors such as resources, retail and leisure and I think that really gave them the foundation to their exceptionally good performance for the year. Private capital, as I mentioned earlier, we do have some direct exposure through the leisure sector um and uh buzz bingo liberation which is a pub's business um and a smaller investment sis which uh it derives all its revenues from horse racing um actually have felt the effect of uh particularly um have been impacted by by covid so that the management teams have been focusing on liquidity and trying to minimize the cash burn and buzz and liberation for instance businesses are both closed and their pubs and clubs remain closed at the moment you know and and the companies have utilized the government's furlough scheme remainder of the portfolio is predominantly financial industrial only really marginally affected to date, and we'll go into some more detail than that in a minute. And on the fund side, I think I mentioned that we had put this currency, we put the overlay on to try and take account of COVID, and their portfolio is mostly, it's two thirds exposed to healthcare, IT, industrials, consumer discretionary, so less directly affected by the COVID outbreak. And we've got detailed slides in each phase in a second. The next slide covers strategy and allocation. At the year end, we had a third of the portfolio in both the listed and the private capital piece, as you can see in the right-hand pie chart, and a further 25% in funds. And we had 9% in cash at the year end. So one of the things you might remember us talking about is the half year as we actually instigated a strategic review of our income pool. At that time, we'd had an indifferent period of trading and felt that we needed to attack that a different way. The income pool at the time had a yield target of 4.5%. which really pushed it into some very high yielding stocks in the portfolio. So we conducted a review. The outcome of that meant that the income pool is now managed by the quoted equity team. And we've adopted a slightly different strategy based on one strategy, one operational model, but running two portfolios. The first of which is the capital portfolio, which is as is. That doesn't have a yield mandate at all, and it targets 10% TSR. So that allows that portfolio just to invest without too many restrictions. We then have an income portfolio that targets a 7% TSR, but within that, it has a 3.5% target yield on cost of investment. And that's going to allow us to have a higher quality and less volatile income portfolio. We need some of the income coming in, and we don't want to saddle the capital portfolio with a yield requirement. So we think that will result in a portfolio that's more in tune with Caledonia and less exposed to some of the very high yielding businesses that we had previously. In fact, then this meant that we sold down about 60 million of the non-core assets in the income portfolio, which is quite fortuitous timing. It meant we missed the volatility in the market. With that, some of that money has gone back into the portfolio, as you'll see in a second when I turn the slides. So if you flip the page over to the quoted equity. That's it, thank you. So if you look at in terms of performance, I think the capital portfolios perform really quite well over that time. As you can see, it's only just below the 10% Annualised performance line, even including a flat year this year, the income pool slightly not quite as good, but both of those are significantly ahead of the FTSE Orsha. Not that that is our benchmark, but it is a relevant market that we use to have a look at. I think those returns, as I said, have been strong contribution from US equities. And throughout the year, they took a bit of money off as and when the portfolio, particularly companies, had had strong spurts of growth and went outside valuation ranges. So I think they've had a good year. And if you flick over the page, you can see how that portfolio looks. It has got some really quite a lot of exposure to technology, healthcare, consumer goods and industrials there. And that, I think, you know, means it is quite a, it's quite a greasy style of portfolio, good cash flows, high margin businesses that can compound over the long run. And that, that inevitably means that we have quite a large exposure to America. So they've done well. And again, if you flip over to the income portfolio, this is a portfolio very much in transition. We've got quite a lot more money to go back into it in due course when we get the right opportunities. And again, you can see that quite a lot of that basic income is coming out of the UK. So we hope that those are the 50% that haven't cut their dividends. um but that is a portfolio in transition and we will add to it in due course and it'll look a bit more there will be crossover into the capital portfolio but we will continue to look at that on a risk management basis across the two um so turning to private capital um so you had uh this 18 um reduction in valuation this year against our target return, which is 14% made up of nine of capital and five of income. That's quite significantly lower than the private equity market, which is generally aiming at 20 to 25%. That enables us, A, we don't want to overgear our businesses. We're a sort of lower risk style investor. And B, we also want to take significant income out of these businesses. So you can't load them up with too much debt, even if you wanted to. And that allows us to take that longer term, more conservative view. valuations were it's a bit of subtlety here they're impacted to an extent of course by the mark to market of of the multiple uh that the market was trading at the time when you when you value one of these businesses you take the last 12 months of profits and you multiply those by a market multiple of a basket of relevant companies so When we did our valuation exercise, the stock market provided a certain amount of that information straight up. But, for instance, with businesses like the leisure businesses, when you know looking forward that they're going to be shut and the profits are going to be sharply adjusted, you then have to put an overlay on top to account for that. So it's a mixture of those two that brought in the overall valuation. So that was minus 18%. overall um on the next page the new investments um for the year uh we completed the acquisition of a of a stake minority stake 37 in stonehage fleming which is a high net worth wealth um business it's not it makes um the majority of its money out of charging services to uh hmws rather than um straight fund management fees it does have a small part of its revenue that comes from AUM, so to speak. But the majority of the revenue comes from services. It had a really good first year in the portfolio. We're very happy with it, and it's in a fast-growing part of the market. I hope it continues to be a fast-growing part of the market post-COVID, but it's a good business and well-spread and well-found. I should think you guys probably know it a bit. Otherwise, We made two small continuation follow-on investments, 10 million into Buzz Bingo. Buzz went through a rebranding exercise. It used to be called Gala. We launched a new online gambling site for playing bingo. and that involved having to do a rebranding exercise and so that was launched it's actually gone quite well I'll talk about that in a second and another five million into Liberation Group to help with improvements in the pub estate and indeed doing a couple of refurbs there so that that's the new money that went in on the trading update front our largest private capital investment is in a business called DSE. It's sort of misleadingly called Deepsea Electronics. It doesn't do anything of that sort at all, but in fact, it manufactures Genset and auto transfer switch control modules. battery chargers, power supplies. It's in that whole power part of the market. It's got a manufacturing base in North Yorkshire and it's traded strongly. It's had a good year of trading, double digit returns, and in fact has hardly had any impact from COVID. All of our sites across Asia, the US and the UK have been trading normally. And in fact, demand is kept up reasonably well, albeit we do think it's bound to take a small hit in demand as the global economy has been closed down, but actually it's had a good year. So that's doing exactly what we wanted it to do, paid us a nice dividend as well. As far as bingo, temporarily closed its 118 clubs around the UK. We've minimized costs as much as we possibly can to preserve liquidity. It's a big business, employs 3,500 people, and they are on furlough. despite the fact that our online business has actually grown fantastically, unsurprisingly, in the shutdown has grown very strongly. It is not nearly big enough yet to cover the costs and the overheads of the retail venues. So that business, we had to take quite a severe haircut on the valuation there, which I think is realistic. and you know I think both these consumer businesses you know we have absolutely no sight yet of when they're going to reopen and what the restrictions will be on them and until we do it's quite difficult to see what's going to happen as a suggestion of course we would we'll be quite mindful of opening only the ones that we think can be profitable to start with and otherwise you're just going to increase the cash burn so we are being very careful about the approach to that Liberation Group which is a pub and brewing group with its pubs in the southwest of England and brewery just outside Bristol and also the Channel Islands that has closed all of its managed and tenanted pubs for the meantime The brewery remains open and is brewing to fulfill the online and some trade demand, but it's not nearly big enough to cover the overhead of that business. So again, it's cash and liquidity management as best we can. There are a couple of distribution businesses also open in the Channel Islands trading. And we just have to wait until these businesses are allowed to open up again. So, again, we've taken quite a haircut in valuation, albeit that there's obviously a large freehold estate, principally mainly freehold estate there that we own. But I think with nothing happening in the P&L, it's only sensible and prudent to take that right down. So those are the two leisure businesses. Seven investment management, which I think you guys will know reasonably well as well, has remained fully operational and trading as per normal. Obviously, AUM will have dipped in that last quarter through the stock market falls. So profits affect that to an extent. The other thing to say really there is that their defensive funds actually performed really quite well relatively and they've had some quite good asset inflows from ISAs. The majority of their AUM comes through the IFA market and they offer a number of funds for people to put their money into. So Seven continues to be a well-run, profitable, cash-generative business, albeit has taken a backward step this year in terms of valuation. StoneHague, I think I mentioned earlier on, has had a really good first year in the portfolio. It had record profits for the year. i hope that those services that they they give to high net worth individuals you know they continue to be in demand needed and that work has to be done so we would hope it hasn't had too much of an impact from from covid and our valuation really remains pretty close to the cost value of that cook optics is a manufacturing business based in leicester they make lenses for film cameras movie cameras They had to close their factory on the outbreak of or when the government put in the restrictions on social distancing so that they could reorganize the factory to be able to continue manufacturing in a way that was safe from a health and safety point of view. They reopened in April and have gradually increased their output back toward full production. Naturally, with the film market completely shut, demand for new lenses has slowed down dramatically. But they had quite a big order backlog, so there's plenty of work to get on with in the meanwhile. And the business, we hope, will return to full speed ahead reasonably soon. We're starting to see a bit of activity in Asia now. and quite a good pull through coming from China in particular, but America remains very quiet for that business. Over to the next slide, CoBEPA. This is a Belgian investment business. It's actually a company rather than a fund, which is why we keep it in the private capital portfolio. Caledonia has been an investor here for over 15 years. It's a fabulous business run by a very, very good investor. And it invests in majority position and minority position, but mostly in unlisted companies across the globe. it's got a good portfolio and I think the portfolio is in a pretty good position to withstand the Covid crisis in terms of liquidity I don't think there's any business that they see that they're going to have to put any more money in albeit there will of course and most likely be plenty of businesses in their portfolio that will go backwards and their last valuation was taken at December. So again, we've applied an overlay onto their businesses. We've looked at them one by one and applied the right market discount onto that, which overall came out with a valuation adjustment of 13%. So that brought their valuation back by seven over the year on our March to March numbers. but it remains a really good investment portfolio. One of the businesses that they own is a business called Biogiletics. We have co-invested, we put a co-investment in with that when they purchased it a year ago. And this is a bioanalytical testing solution provider. They test large molecules, which are live and so constantly constant and analyzing and they they get given these by the big pharmaceutical companies who are then trying to you know get the next vaccine or whatever they're trying to do using these large biomolecules large molecules that business had a good first year and has expanded its factory. So it's got some more capacity. It's doing a little bit of work on the COVID side of life as well, but stands well for further growth in the coming years. The valuation is slightly down year on year. We follow CoBEPA's valuation guidelines on that particular business. So that's the overall portfolio. We take quite a conservative approach to valuation, we think, and I think we've taken our medicine where it needs to be taken this year in terms of reflecting the impact from COVID. The majority of those businesses traded quite well throughout the year up until March. only two remain closed, the rest are trading normally. So, you know, most of the businesses are in a good position to deal with this tricky environment and should come out the other side okay. But, you know, it just depends on what happens in the leisure sector. So that covers the private capital portfolio. Last but not least, the funds portfolio, which is this portfolio of private equity funds We've got 46 separate funds that we're invested in across the US and Asia. It's been a fantastic performer since it was first started to be put together back in about nine years ago, 10 years ago. and good underlying returns again from the year. However, as I said earlier, they were 31st December and we had to mark them to market, bring it forward to include a COVID, which we did by applying a market overlay onto them, which then brought back the valuations by about 16%. And that overall produced a negative 2.3% return for the year. So during the year, we used to have some listed funds in this area as well. And we sold those down in Q3 and we've only got a very small exposure left there now. So really it is a private equity portfolio. um we have uh you'll note 305 million of undrawn commitments outstanding at the year end this is something we're very aware of and keep a very careful eye on uh from a plc point of view in terms of the liquidity because of course that is a commitment that could be drawn down yeah we went through that I think all of these private equity funds went through the financial crisis again everybody expecting vast door downs and they don't really you tend to get a seizure in the market and then the market unwinds but we are always very we're always very focused on that from a liquidity point of view at Caledonia as an unfunded commitment that we make we have to make sure we can we can stand behind Its returns, I think, have been really very good over the five year. I think it's quite difficult to look at one year returns for private equity portfolios because they do happen over quite a period of time. But this is targeting 12.5%. You might ask, why is it only 12.5%? if you click the page we have quite a lot of exposure to fund of funds Aberdeen Axiom and Asia Alternatives are all fund to fund portfolios and we have used those guys over the years for us to go on a journey of learning the private equity landscape in both Asia and America such that we're now really able to make most of our own decisions but to begin with we used funder funds to learn it and they produce a perfectly good net result you just pay a slightly higher fee on the way through but we take the view as long as the net result coming back to us is okay we're less worried about paying that fee If you look at the sector distribution, quite interesting. Again, you've got healthcare, technology, consumer services and goods and industrial being the principal part of those investments across Asia and America. So geographically, they're split about half and half. So I'll hand over to Tim, who's going to talk to the financial statements.

Thanks, Will. Good afternoon, everybody. So if I turn to my first slide, which looks at our comprehensive income statement. So this is a lift directly from the financial statements. And as I think you'd all understand, we look at this in two parts, the revenue account and the capital account. So from a revenue account perspective, we recorded a post-tax profit of £34.6 million for the year. That was very similar to the result that we achieved last year. As you can see from the chart, a very small increase in investment income, and we saw a reduction in our management expenses, where the impact of inflation was more than offset by some lower cash bonus costs reflecting the current year performance. And so as a result, the ongoing charges ratio declined to 0.85% for the year as shown in the bottom right. And those two positive movements were slightly offset by some adverse FX movements and a lower ability to access group relief. So that gave us a flat revenue account performance. By contrast, you see a big movement on the capital account. So we recorded a post-tax loss of 207.5 million compared to a profit of 163.6 last year. So a significant reversal. As Will's alluded to, obviously, we saw valuation write-downs at the end of the year, particularly arising from the COVID-19 events. So of that 206 that's shown on the slide, the most significant decline was in the private capital portfolio, where we registered a loss of 157 million in the year. That was dominated by the three businesses which operate in the leisure sector, so Buzz, Liberation and SIS, and they were accounted for about 77.0% of that overall decline. Obviously within the other businesses, there's a mix of performance. And then the quoted equity portfolio was responsible for a valuation decline of 24 million. A lot of that relates to the income portfolio as we transitioned out of a number of old stocks. And then there was a loss of 16 on the funds portfolio. But that number is clean net of the 86 million pound adjustment that we put through over the top of the valuations that we received from the fund managers based at the end of December. So underlying performance strong, but wiped out by that adjustment. So those were the major elements of the 206 million. And then from an expenses perspective, our performance awards line here shows a credit in the year. So a big movement year over year, as we assessed the likely level of vesting for performance share awards, which clearly has declined following this year's results quite significantly. And then on the line below, we incurred nearly £3 million of transaction costs. That's dominated by the fees that were incurred as we purchased our minority stake in Stonehake Fleming earlier in the year. And then down the bottom, it just shows you the dividends paid in the year number of 32.8. The proposed full year or final dividend payment would take the full year dividend to 33.5, which is clearly fully covered by the revenue account performance in the year. So if we move on to look at the movement in NAV over the year, we started the year just over 2 billion. and declined by 215 million over the year down to 1787. And obviously on the far right, you can see the dividend payment going out. The first four columns really break out the 173 million comprehensive income loss for the year. So starting on the left, you've got a small gain from foreign exchange during the year. We obviously benefited as sterling slightly weakened. The overall result is dominated by the investment loss column and as noted earlier, the big elements of that are particularly the private capital performance and the significant overlay we put in place over the funds performance in the year. Investment income up slightly at 53 and then the management expenses of 17 and the 12 is a mixture of items that includes some share purchases under our ESOP scheme arrangements. So that's how we moved across the last 12 months. So if we move on and just look at income briefly. So income was up 1.3 million year over year. The income here is almost exclusively derived from our investments with about 0.6 million of treasury interest income. So we really generate our income from the two pools listed, the private capital and the quoted equity areas. Funds principally generates capital returns for us. So in the private capital area, income increased slightly year on year, but that sort of masks the story of two significant first contributions from Cook and DSE, both of whom paid dividends of between £7 and £8 million in the year. And that helped us offset two very much more one-off receipts in the prior year. We received money last year from Choice Care linked to the disposal of that asset. And we also received a large dividend from SIS following this disposal of their SIS live business assets. Clearly, the private capital income will be impacted looking forward, given the business issues faced by a number of the components of that portfolio. But we would hope that it will return and offer a steady stream of income going forward. By contrast, quoted equity was very much sort of similar year on year. And you can see the breakdown between the capital portfolio and the income portfolio. Worth noting, I guess, the large contribution from the income portfolio and obviously with our plans to transition that to a new set of components, we would expect the average yield that's come through from that area to decline and hopefully deliver a stronger capital performance for us going forward. So moving on to look at cash. Over the year, our cash clearly moved up and down significantly, but the full year picture was just a very small movement of 3 million upwards to 115 at the close. Within the year, the dividend outflows that you saw earlier of 33 million were largely funded by our net operating cash flow. So effectively, the dividends we've received less our cost of operation. And then on the investing side, we realised a net 11 million from our investing activity and we deployed part of that on the ESOP share purchase arrangements. So very small year over year movement. In terms of facilities, we have 250 million pounds of committed facilities, none of which are drawn currently. Of those, £112.5 million are provided by ING, and that's on a five-year term, as it says, through to July 2022. And the balance is provided by RBSI. Those arrangements were due to expire at the end of July 2020, so this year. And so we've been through a renewal process with RBSI over the last month, which has been completed, and those arrangements now run out to May 2025. So if we then move on and just look at what's happened in terms of NAV per share and the level of discount, This chart shows you the last five years, but I think in terms of considering the last 12 months, it's worth sort of breaking that down into two parts. So over the first nine months of the financial year, we saw NAV per share grow by about 3.3%, and the share price grew broadly in line with that. It was up to 31.30 at the end of December, an increase of 5%. And as you can see from the chart, we historically trade at something of a discount. And over the last three or four years, that's been in the 15 to 20% range, largely driven, I think, by two things. One, the proportion of assets that we hold, which are private rather than public, and therefore naturally generate a degree of discount. And secondly, a reflection of our inability to take any action on buybacks because of the scale of the case of concert party holding in the company. So that was sort of normal business. The fourth quarter clearly was not normal. So from our own internal perspective, we put through the large valuation adjustments at the end of March. That clearly had a significantly adverse impact on NAV per share. And over the 12 months, NAV per share was down about 9.4%. And we also saw a significant drop in the share price, in part reflecting our own performance, but also reflecting the market as a whole and the fact that a lot of investment trusts went to quite significant discounts in that period. And so at the end of the year, the share price was 2435 and the discount was around 25%. Since that point, we've obviously seen something of a recovery. Our share price is up about 10% and the discounts now back in that 15 to 20% kind of range. So whilst it's not normal, it is normalized to some degree. So I'll turn to my last slide looking sort of slightly more broadly. Clearly the outcome for this year is disappointing. Those valuation adjustments that we have had to make in March have clearly impacted performance quite significantly. However, as we look ahead, I think we feel that the majority of our investments are in a good position to move forward positively. But we do recognise that there's still quite significant uncertainty, particularly around our investments in the leisure centre. The balance sheet is strong. We have cash clearly and we have meaningful bank facilities. So we're very well placed, we believe, to take advantage of opportunities that we believe will emerge over the coming months. We are a long-term investor, and we expect that although there will be further market volatility over the period ahead, we will continue to maintain that considered and long-term approach. And we believe that despite the setback created by COVID-19, the portfolio is well-placed to successfully generate value growth and continue to deliver dividends over the longer term. So that's my summary. I was just going to hand it back to Will for any closing remarks. Yeah, good.

Well, look, I hope that gives you an overview of what's been going on. It's quite a difficult time to draw the line at 31st of March. We're obviously very proud of what the quoted team have done, but we've got some hard work ahead of us in the private capital side, albeit the majority of the businesses there are doing fine. The leisure ones remain a concern.