Caledonia Investments plc

So good afternoon and thank you for joining us on this call. My name is Will Wyatt. I'm CEO of Caledonia Investments and I've got Tim Livett, who's the finance director here on the call with me. And we're going to talk you through the results that we announced this morning, our full year results to the 31st of March 2021. So we'll put the presentation up and take you through it. There we go. Excellent. Right. So highlights for the year, NAV total return up about 26% versus a negative 8% last year. So obviously there was a good backdrop with markets being very strong over the years. They recovered from This time last year was almost the nadir of the market fall as everybody took on board the whole COVID situation. So it's been a good strong following wind and all three of our pools, our three strategies have delivered really good returns well above their targets and the board are going to propose to shareholders a 2.9% increase in the dividend which is somewhat ahead of inflation and the 54th year of consecutive increase for Caledonia and our net assets at the end of the year were 2.2 billion. So just Having a look at the performance a little bit closer, we set out to grow the capital and the income over the long run in Caledonia measured in real terms against inflation. And what that means is, in fact, trying to, in numbers, produce a return about 3% to 6% ahead of inflation. And with inflation over the last decade being 2% to 3%, that really means we're trying to grow the capital the trust at somewhere between six and nine percent a year, which is represented on that chart below by the yellow band. running for it. And you can see the blue band is Caledonia's NAV. And we've used three, five and 10 year figures on this, I think is a bit more representative of what we're trying to do. And we are, you know, on target in terms of that, that aim. And, you know, we want to stay within that band. If we're well above it, we're probably taking too much risk. And obviously if we're well below, you'll let us know very quickly indeed. You'll see that the share prices lagged a bit behind that. We have currently trading on quite a wide discount. And of course, this is all measured at 31st of March. So it doesn't actually allow for the share price reacting to an increase of 25% in the NAV. So we'll talk about that a bit in a minute. So big picture, bang on target. Looking at the allocation, we've got three strategies within Caledonia listed equities, direct private unlisted businesses that we invest in and also a private equity fund strategy. And those strategic allocations are currently within the quotas were at 32%, private capital at 37% and funds at 29% and funds has been growing. particularly well actually and we moved up the top end of that strategic allocation during the year. We've got a fixed allocation to it but the actual returns have been fantastic so it keeps busting through them and that's good news but it does put a little bit of strain on the strategic allocation because of course they're non-income generating. So having a look at the summary performance by pool on the next slide, you can see that each of those pools have done a cracking job, listed equities at 30. That's a combination of our two, both capital and income strategies. I think it's interesting sort of looking at this over two years as well, The listed portfolios last year at this time were flat. They sort of basically zeroed for the last year against a market that was nearly off 20% in the UK and maybe 10 in the States. So they not only resisted the fall, but they've charged forward and really fantastic performance by them in keeping ahead of markets. So that's been great. Private capital, a good bounce back of 18% last year, bouncing about 23% this year. And that's including having to take quite a big hit for Buzz, which we'll talk about in a second. And funds, as I said, 35%, you know, cracking good year. Investment income over the year, 44.6 this year, down 16% on the previous year. And that's really reflecting certain listed businesses and a reduction in income coming from them as they protect liquidity, but also as we slightly changed our income strategy on the income pool. But also then we, in our own private capital business, were very careful about protecting liquidity and balance sheets in those businesses. Having a look at where the money is invested, and on the left-hand side, that pie chart gives you an idea of where the businesses we're invested in. It's a look-through analysis as to where they generate their revenue. And it's actually quite a balanced picture, a balanced global picture. We're not overexposed to any particular region, but we have a good global balance of exposure. And that translates into currency at a rough split, you know, half and a half split between the US dollar and pound sterling with a small slugging in Euro. But of course that has its own implications of during the year that sterling strengthening very sharply against the US dollar, which created a 6% NAV headwind for Caledonia. Of course, we'd had the tailwind all the way leading up to the Brexit vote. So, you know, as normal, currency sort of balances itself out. And it's the way we try and deal with that is by having a foot in both camps. And we're very happy to have that dollar exposure within the portfolio. Then just sectorally. the way Caledonia invests tends to lead us towards businesses such as industrials, financials and consumer businesses. But I think on top of that, it's quite interesting if you take the healthcare and the technology exposure, We've got 20% of the balance sheet invested in those tend to be slightly higher growth areas, albeit a lot of that comes through private equity funds. So we've got quite a good and well diversified exposure to those sort of faster areas, as well as in the quoted portfolios having some shares in the likes of Microsoft and Oracle, which obviously account for that as well. So reasonably balanced, and also you'll make not much exposure to the likes of the commodity world. So we tend to avoid the more volatile areas of the market that are hugely capital intensive. So that gives an idea of where the balance sheet is invested. Looking at each of those three pools, as we call them, one by one, the quoted equity, we run two portfolios here, a capital portfolio and an income portfolio. The income portfolio has a yield requirement of 3.5%. And in fact, in the year, it produced about 3.8%. That's come down quite a lot from the previous strategy that we changed, I think, over two, two and a half years ago now, whereby the income pool, we were looking for four and a half percent and actually led the manager there to have us invested in some, I I think a load of assets that weren't a really very good fit for Caledonia. So we changed the strategy and have allowed the income pool to invest in some of the similar businesses to that of the capital pool, as you'll see in a second, in order to really get behind the quality of earnings ahead of a straight yield. And that seems to be working reasonably well. It's fairly early days. And you can see the capital portfolio there. Very US exposed. Those are the sort of businesses we're looking for. We're looking for long term compounding style businesses. And they are long term holes. We have very little portfolio turnover would be expected. well less than 10%. And it's had a very good run over the last five or six years. And those returns are really excellent. And just note the sector distribution and quite a lot in industrials. But I think a lot of those are sort of technologically enhanced industrials like Texas Instruments is, of course, you know, a huge manufacturer of semiconductors. So is it tech? Is it industrial? If you just look at the income portfolio, you can see some of the similar names there, but a bit more of a twist with the rackets. Still got Texas. Then you've got a few things like, say, insurance and some more utilities. So there's a bit more utility exposure coming into this. to give us good solid income and the geographic switches the other way around to more 60 you know two-thirds in the UK one-third in in the US but that both of those portfolios are run by a team with but each of them are headed by an individual whose specific remit is either capital or income. So the returns have been really good and you can see that the income portfolio is picking up a bit to where it was a bit disappointing over the longer term, but that is now being addressed. So moving on to private capital, this is where we take, both majority and minority stakes in unlisted businesses, the majority of which tend to be in the UK. The further you go away from the UK, the more likely you just become a checkbook rather than someone who's got knowledge of their own market. We've got a long-standing strategy in this area. Caledonia is quite well known for being one of the few people who will look at minority businesses and also businesses be happy enough. We offer this ability with a balance sheet to invest for a much longer term than is common in the private equity industry. So the year was 23% return, so overall quite good. We've had some very difficult operational problems to overcome during the year, particularly with our two consumer leisure businesses. The portfolio we've been quite active bolting on into the existing portfolio with three acquisitions during the year. which I think we hope proved to be both opportunistic and well-timed. But overall, a good year, albeit I think the medium-term performance is a bit disappointing, and that's mostly caused by buzz. Bingo, which I'll talk about in a second. Onto the next page, you'll see that the portfolio is seven businesses currently. It's a relatively young portfolio with the exception of Kobe Hold. And these businesses, we tend in the first three or four years, you put a lot of work, effort, and indeed investment into them to try and get them into the shape you want. And they really hit the turbochargers from year four to let's say year 10 or beyond. is when you get the real value build out of them. So it's still relatively young, this portfolio. It produced 23 million pounds of income for the year, which was down from 28 and a half last year. And I think of note, between the Channel Islands and the UK, it's about 83% of the investment is in those two areas, with Coby Hold being the one investment outside the UK in Belgium. So let's have a look at each of those businesses. We've grouped them into three sectors. So first of all, the consumer leisure businesses. Liberation is a pub, restaurant, hotel and drinks business. It's actually a brewery based just outside Bristol. It has a nice portfolio of about 70 pubs on the mainland down in the southwest of the UK. and then another business on the Channel Islands with pubs, another brewery there, and a distribution business. Now, obviously, this has had a horrible time being shut down. We had to use the furlough to help us with it. paying the staff but the saving grace for us has been having the distribution business and indeed some operations in the Channel Islands which have been open a lot more than the mainland and that's provided a good cost underpin and allowed us to really cover our overheads such that the business hasn't consumed too much cash. The businesses are now, you know, the pubs are not fully open, but nearly fully open. We've taken the chance to do some refurbishment. And during the year, we bought 21 pubs from Wadworth, who are the brewer of 6X. which fit very well geographically into our UK portfolio. So they're really good and we're very pleased with those. But of course, they haven't actually traded very much under our ownership. So we're just getting a hold on that and have been training up the people and such to get going. So that business is set to recover quite well. And you'll see that the valuation has gone up quite significantly. Now, part of that, of course, is the new money that we put in for the acquisition. So it's had a bounce back. And the sector, I think, is poised to touch wood that COVID is, you know, we don't have any more lockdowns, poised for a really good bounce back. The more difficult story for us during the year was Buzz Bingo, which has 120 venues where, you know, hosting bingo players across the UK. It's a very large business. And when the lockdown came, you know, it's got quite substantial overheads and very quickly it needed refinancing. And we put the business through the CVA and injected another £22 million, which we hoped would see it through to, you know, give it enough of a buffer to get the engine going again. Just as it did, we had lockdown two and that caused earlier on, early part of this year, a further requirement for capital We took the view that we didn't want to chase what we were still concerned to be a pretty unsure return to form on Buzz with further capital and decided not to participate. So we sold our interest to the debt holders, ICG. Now, obviously, that's a very disappointing outcome for us. We've had to write off less than £70 million this year. Very painful and some good lessons learned for us. and particularly um with the scale of the business and in fact i think you know on reflection you know with our risk appetite the business was just too big for caledonia um so um you know good lesson learned there and then secondly particularly the uh debt was provided by an institution rather than a bank and the institutions you know have completely different behavioral traits compared to the banks when you breach your covenant. So again, I think that for us has been a big lesson learned and one that we'll take forward. So a difficult investment. And that said, no one put in the business plan shutting the door for nine months of the year. So, you know, these things come out of the blue, but that's part of the investor's job to deal with that as well. So moving on to the financial services businesses, Seven Investment Management is a good-sized retail investment management business that we've had since 2015. A good, strong recovery in trading since the low point of March. And of course, they get a percentage of AUM. AUM has grown nicely over the year. We've made a bolt-on acquisition of a business called Partners Wealth Management. that looks after the investment management, particularly for accountants, partners at accountancy firms and legal practices. And that's how they built their business. It's a very nice fit to Seven and has made a really good start, actually. It's a good, fast-growing business, so we're really pleased with that. And a good bounce-back in valuation in the business, up to now £125 million. Next, Stonehague Fleming. We have a minority stake in this international family office business. It's had a good year, good profit growth. It's a very resilient business model. They're looking after high net worth individuals and they don't earn just off a percentage of AUM, but they also have a good, really large portion of their profits are derived from AUM. selling advice and hours of tax experts and structuring people and indeed just the day-to-day business of looking after high net worth families. So they also made an acquisition during the year of a business called Cavendish Asset Management, which was a single private office for the Lewis family. And that is fitted in extremely well. So that business is going nicely and is cash generative, pays a dividend. Last but not least, we have a minority stake in a business called Covipa, which is in Brussels. We've been involved with this since 2004. It's been a fabulous business for us there. It's permanent capital, so it's actually a company, but their prime business is investing in the wider private equity and LBO market. They have about 15 portfolio businesses. A lot of them are family backed. All of the shareholders within CoBEPA have a family angle to them. And there are a lot of the larger European families that you would recognize are shareholders in it. It had a good year. The portfolio has held up very well to the problems thrown at it by COVID. And, you know, they haven't had to put a small bit of money into one business, but that's it. In general, it's held up really well. And they made a couple of decent exits as well. So that drove the return and that was an 18% return during the year. So they continue to drive value extremely well. We've had a 15% IRR on that business since we first invested in 2004, which I think is quite impressive over such a long period of time. So that is, again, one of our long-term holds, and I don't see anything other than it continuing to be so. And then moving on to our industrial businesses, we own... alongside the management where we are by the largest shareholder by far, a business called Deepsea Electronics, DSE. This is a manufacturer. It makes electronic controllers for generators. And they... had, I think, a difficult first quarter, especially following Brexit. They had a bit of an order hiatus. It's nearly entirely an export business in the UK. It's manufacturing sites in Yorkshire, but it exports to Asia and the US. They, since the first quarter, have had a really good bounce back. They dealt with Brexit well by doing some pre-stocking abroad. So they had the kit ready to go, bit of an order hiatus across the world actually, but then that picked up very quickly and now is trading very strongly indeed. And it's a big business and actually it grew very well in the year and the valuation has gone up by some 65% to 190 million. So that continues to go well. And they've also secured themselves a very good supply and reliable supply of semiconductors, which has been a big bottleneck in a lot of businesses, which I think has given them a leap ahead of their competition as well. So long may that continue. Cook Optics manufactures cinematography lenses, so lenses for film cameras that are used to make full-scale films for the likes of MGM or whoever it may be. They have been in business since the 1880s, very, very high quality, very precise manufacturing based in Leicester. They had a difficult time when Leicester was particularly hard hit and hit quite early in the pandemic. And they had to shut down their factories and reorganise the manufacturing to be able to get COVID safe in terms of social distancing and things like that. So that caused quite an upset to production. But they've gone through that, they've opened up and they're now doing extremely well. And I think the second half is now well ahead of budget. for the year, which is great. And the long-term demand drivers, the order book is very strong. There's so much content being built that the people we sell to, who are the rental shops, who then rent the camera to the filmmakers, are screaming out for kit. And we see those drivers continuing for the long-term and witness Amazon buying MGM. They're going to continue making content for their platforms, which is good news for these lenses. So I think that brings it together for private capital, a bounce back year with some difficulty, but I think we've got a portfolio that's really well poised now actually to take advantage of things as hopefully we come out of the COVID world. Last but not least, a fabulous performance from our funds team. We invest in a portfolio of private equity firms across Asia and America. We started this strategy about nine years ago. to try and get, we wanted to get exposure to Asia, but in a way that was risk mitigated. And so indirect investing has been a good way to do it. We started by investing in funded funds and have built up our capability. And now, you know, whilst we still have a bit of fund to fund investments, we do a lot of it now directly. We're invested in about 50 funds. We commit $100 million a year to this to fund commitments, which are then drawn down over a period of time. And then hopefully the money flows back to you over the years five through to 12. So it is a long-term investment. We're getting to a sort of semi-mature stage whereby, in fact, we only net invested £22 million into the funds pool last year. So it's starting to become self-sufficient. And we would hope over the next couple of years, it'll start just being a net cash producer for Caledonia. The returns have been excellent. At the end of last year, We marked this down by 17% because we just hadn't had the, they take quite a long time for the accounts to come through from the private equity funds. We had to take into account the fact that the market had crashed. So this year you add that back in plus the tailwind from markets and good fund performance, they produced a 35% return, which when you compare it to the annual target, looks completely out of whack, but it's really two years in one. plus some excellent performance. So we've got exposure to over a thousand businesses across this area. It's really interesting and they've been doing well. And if you look at the next slide, you can see the fund of fund investments look enormous, but in fact, for Aberdeen, we're invested in four different PE fund of funds into which we probably put 20 or $30 million. And those have drawn down over a period of time, invested in other funds. So, you know, whilst 98 million looks a lot to one manager, it's through to a lot of individual businesses via the funds that they have backed. interesting spread of of sectors across the piece particularly strong in health care that's where we we spend a lot of our time looking at health care businesses and funds in in China and wider Asia area which is a you know it's a very high growth huge demand for that in in Asia Currently it's about half and half split to Asia and America. As this matures, you'll see the amount going into Asia will be reduced and you'll end up with about a third, two thirds weighted towards America. So really good returns and that strategy is working really well. So I'll hand over to Tim who will talk you through some of the detail on the financing.

Thanks, Will. Afternoon, everybody. I'll just talk very briefly about a couple of slides on the financial performance. So this first slide pulls out a summary from our comprehensive income statement within our financial statements. So total comprehensive income for the year of just under 470 million. And that compares to a loss at that level of 173 million last year. So a very significant turnaround of performance. You'll see on the second line down the gains on investments and property is the key determinant, 440 million in the year compared to the 206 loss in the previous period. So extremely strong capital gains being achieved across the portfolio. And I think it's worth noting that that was achieved across all three of our portfolios. So that performance was well spread. In terms of the sort of key lines here, investment income, Will's already spoken to a degree and I'll cover on the following slide. You'll see our expense lines have moved up a little bit. ongoing management is principally performance related bonus costs coming through this year which were not in the previous year and then as described in the name the performance awards are share based payments directly linked to long-term performance of the business and obviously last year with the dip we saw a credit and this year we see a normalized charge come through so that's why there's the significant change in direction In the prior year, we had transaction costs associated with the Stonehague Fleming acquisition. This year, there are very little costs coming through. And then on the tax line, there's a large credit this year as we've been able to utilize tax losses recorded principally in the management company against some of our subsidiaries where they've got taxable profits. And so through Group Relief, we've created a significant credit within the income statement. Probably just a couple of points on the notes towards the bottom of the page. With the management expenses increasing, that flows through to our ongoing charges ratio. So there's quite a step up year on year. Whilst there's growth in the cost, The average asset base, which is used in that calculation, was actually significantly higher last year than this year due to the timing valuation changes going through the books. So it slightly inflates, I guess, the year-over-year growth in those terms. So talking about income in a little bit more detail, as Will's alluded to, our income is principally sourced from our quoted equity stocks and from our private capital portfolio. So private capital generated just under 23 million this year. The fall from last year was principally to do with Cook, where obviously operations were quite severely curtailed in the first half of the year, and equally to SIS, which was closed for large periods of time during the year, and so therefore didn't generate dividend income. um and then in the quoted side um the big fall is in the quoted income portfolio income generation as noted we've moved um the components within that portfolio towards slightly lower yielding higher quality stocks and that's part of the story and As we have gone through that transitionary process, the amount of capital actually deployed in that portfolio during the year is somewhat lower than the prior year. And that's why you see that drop of about 5 million on a year on year basis. We've had quite a strong income growth over the last two or three years and obviously that's been somewhat impacted this year. We expect that income growth to start to pick up again through the current year and next year as we start to return to the levels that we were achieving in 2019 and 2020 over time. In terms of our net asset value position, so we obviously started the year at 1787 and we actually grew before we paid out dividends by about 470 million up to 2259. And as noted previously, the key driver there is the investment gains achieved during the year. And we paid out dividends of about 34, which gives the closing NAV figure that you've seen of 2225. So it's a fairly straightforward picture. In terms of NAV per share, so on this graph, the NAV per share is shown in the blue line. NAV per share has grown strongly over the year. So I'll just move that up slightly. So we started at 3236 and we ended up at about 4000 pence. So growth of nearly 24% over the year. You can see the shape of that growth with a significant uplift around the end of September, which is when we put through all of the fund valuation changes for the first half of the year and removed the overlay that we'd put in place at the end of the previous financial year, and where we also saw a little bit of growth from private capital. And then as you go towards the end of the year, a big pickup at the end of March, principally the private capital valuations coming through. There was a sort of underlying backdrop of strong quoted equity performance throughout the period, but that was somewhat offset as we saw foreign exchange move against us as sterling strengthened by about 11%, particularly over the second half of the year compared to the US dollar, and that somewhat diluted our return performance. But interestingly, our share price performance hasn't performed quite as well as our NAV per share. And the blue lines, the green line here is showing you how the discount has moved during the year. So we've tended to be in a band of sort of 20 to 25 percent discount and gone out of that level, particularly around the two key valuation change points at half year and full year. And interestingly, if you look at where we are today, we've come back down just below that 25% level. So we have a relatively continuous level of discount, somewhat higher than we would ideally like. I think we have to recognize we do hold private assets and that drives some of that discount. Equally structurally, we don't have the ability to buy back shares and manage the discount through that mechanism. And we're working on our sort of thoughts around both communication and marketing sort of drives an extra demand to try and deal with some of that excess liquidity in the market and hopefully bring that discount down a little bit over time. So sort of as a summary, obviously quite a strong year. We think the portfolio remains invested in a good, broad mix of high quality businesses. And all of those have those very long term performance attributes that we're looking for. um we're very cognizant that asset evaluations are quite high at the moment um driven i think by the the amount of money that is around to purchase and so i think as we look for new investment opportunities we will be cautious and careful about those um the balance sheet is still strong there's a lot of liquid assets there and we've still got our 250 million pounds of banking facilities so if there are good opportunities we're well placed to be able to take advantage of them And we think we're in a position where the portfolio as it stands today remains very well placed to drive that long term growth in assets and dividends for our shareholders. So with that, I'll just hand back to Will to sum up.

Yeah, thanks, Tim. So, you know, a good year for the business. As Tim said, I think we're quite well set. You know, there are some interesting macro factors floating around in the world at the moment. We're not great economists as a house. We tend to do everything bottom up, but I'm a little bit wary about asset prices. But I think well set for another year with a good solid portfolio that's now, I think, ridden the difficulties of COVID and We look forward to 2022 with a certain amount of confidence. So thanks very much for joining us on the call. I think these Zoom calls aren't so good at getting proper feedback and Q&A. So listen, we're around. You know where to get hold of us on the phone or emails. Please, by all means, bombard us with thoughts or call us and we'd be delighted to help you. But thanks very much for joining us and