3i Group plc

Good morning. Welcome to 3i's interim results presentation. As you can see from this morning's press release, this has been another good half for 3i. Our portfolio overall continues to generate healthy earnings growth in today's difficult macroeconomic environment. We delivered a total return of 10%, giving us a net asset value per share of £18.86p. We've ended the half with a gross investment return of 11% from private equity and 2% from the infrastructure team. We also produced a good level of cash income at 62 million pounds. Next, we have our Maramico chart showing the makeup of the 3i portfolio on a page. This is what you're investing in, in buying a 3i share. The underlying theme you can see here is resilience. And you can also see that the proportion of our portfolio in the resilient sectors of value for money, private label, infrastructure, and healthcare represent 85% of total portfolio value. We expect that proportion to keep growing over time. And this trend gives us real confidence in the continued compounding power of the 3i portfolio. Private equity has delivered another solid performance with 89% of our portfolio companies by value, growing their earnings in the 12 months to the 30th of June, 2023. We've seen another consistently strong performance from action, as well as good growth from our private label and healthcare portfolios. It's also been a good year of recovery for our travel related businesses, even if we have seen some softer booking weeks in October. But our companies with discretionary consumer, construction, or recruitment exposure have again seen some very challenging conditions. Sanashore is our only healthcare asset to have seen sales orders weaken this year, and management are taking decisive action to reduce costs during this period of inventory destocking across the wider bioprocessing industry. So far this year, we've been very focused on hands-on active asset management of the existing portfolio. And we have closed some important bolt-on or transformational acquisitions for the portfolio, but we have made no new PE investments in the half. We've come close on several things, but we've been unable to close a deal on terms we find acceptable. In two cases, the companies were not sold. And that really illustrates the challenge of finding a middle ground between buyers and sellers, especially in this higher for longer interest rate environment. We are prepared to remain patient and keep our price discipline because we expect refinancing pressures to grow in this climate. In turn, that should throw up more opportunities later next year. This year, our investment teams have devoted a lot of their time to making sure that our portfolio companies remain well positioned strategically, and that they are tightly controlling costs and focusing acutely on cashflow. As we reported at our capital markets day in September, we like to be ahead of the curve on debt facility management, and we can report the portfolio is in good shape in that regard. We've not completed any realizations from the PE portfolio so far and remain cautious about the current environment for selling companies. We do expect to receive significant refinancing and distribution flows throughout this year. Earnings growth across our top 20 companies continues to present a strong picture with 84% by value, growing earnings above 10%. But while Action and six other companies are growing earnings at over 20%, we now have eight companies where earnings are declining over the 12 months to June this year. This change is down to the deteriorating macro environment across Tata and Wilson's end markets in particular, as well as continuing weak trading across a number of our discretionary consumer assets, such as Lookum and Boconcept. We still have a healthy balance on the winners and losers slide, but it has been very frustrating to see some continuing large write downs as a result of weakening consumer or business demand. As we said at our Capital Markets Day in September, action has once again delivered a very impressive first nine months of the year. Net sales were up 31% on the prior year and, Year-to-date P9 operating EBITDA was 1 billion euros and 65 million, as you can see here. That's 44% of head of 2022 with like-for-like sales at 19.2%. That's on top of 15.8% last year. These like-for-like sales are down to very competitive pricing, which has driven very good footfall growth. and more and more people shop at action for their essential items before they visit their local supermarkets. Like for like comparisons are tougher in the last four months as we've already indicated, but trading through September and October has continued to be materially above budget and ahead of our earlier expectations. In fact, year to date net sales to the end of October or P10 are now 8.85 billion, And that delivered another operating EBITDA of some 1.21 billion, 43% up on the same 10 months last year. A high performing supply chain and good availability of products in store has led to better than planned sales. When you combine those better sales with tight cost control, you get an EBITDA margin well ahead of budget and you get very strong cash flow. Like for like sales in the first half and over the summer have been exceptionally strong compared to last year. And we're delighted to be reporting double digit like for likes for P9 and P10, both well ahead of budget. And clearly that performance bodes very well for our key periods running up to Christmas. Trading over the last three weeks in particular has seen a strong pickup in traffic So far this year, we've added 195 new stores and we remain on track to open about 300 by the end of the year. Trading across our new countries like Italy, Spain and Slovakia has been very good. And we've crossed a number of store expansion milestones. 50 stores now open in Italy, 100 stores in Austria and 300 in Poland. We also have over 500 in Germany and more than 750 stores in France. As you may recall, we used four tables to demonstrate the power and consistency of Action's performance under 3i's stewardship. These are exceptional results, and Action's organic growth engine, powered by its ability to seamlessly open stores in new countries, is a very rare attribute in the retail sector. The consumer's response in all of our new countries underlines the appeal of our format, It also demonstrates that we have very considerable runway for growth. As you have seen, the year-to-date numbers suggest we are looking at another very good step-up year of growth. This year, capital structure and debt financing have been a key agenda item at action. In the spring, we achieved an amend and extend of the existing European debt facilities and We laid the groundwork for a debut seven-year US dollar term loan financing in the US private debt markets. We completed this US dollar financing last month. And to say it went well as a debut issue for a European company is something of an understatement. Demand for the action debt was so strong that we raised $1.5 billion against an original target of $1 billion. as well as securing rating upgrades from both S&P and Moody's during the process. The new $1.5 billion term loan has been fully hedged back to Euro, with 70% of the debts fixed at an all-in cost of 6.3%. In fact, that interest cost of 6.3% compares better with where 40 companies have been issuing bonds rather than the private equity sector. As the two rating upgrades from Moody's and S&Ps would suggest, Action remains conservatively financed. Today, debt currently is at 2.1 times run rate EBITDA after netting off Action's current cash balance of 1 billion and 30 million euros. The company's cash flow, like everything else at Action, is growing very strongly. The proceeds from this debt issue together with 207 million euros of existing cash in action have been used as part of a capital restructuring. That money was used to fund a 1.6 billion euro pro rata redemption of shares with 3i receiving 877 million euros of that cash. We use 524 million euros of cash to buy some further shares in action which takes our 3i equity interest up to 54.8%. The infrastructure team has had another good half. Their portfolios are performing well, even if this is not reflected in the 3in share price. 3in generated a total return of 6.3% for the first half and agreed to sell its interest in Atero at a circa 31% uplift to the 31st March valuation. Cash from fee and portfolio income has been strong at 62 million pounds. Both the European and US infrastructure assets have delivered good performance. And the US team have made a further new investment, AM Waste, which is a waste collection and processing business in the Southeast region of the US. So all in all, another decent half for 3i. Our teams put in a lot of good portfolio work to make absolutely sure we can manage our companies through these challenging times with as little drama as possible. And on that note, I'll hand over to James who will fill you in with some more detail.

Thank you, Simon. And good morning, everyone. Our total return on equity was 10% in the first half of the financial year. The NAV increase was driven by value growth of 197 pence per share with negative carry and net foreign exchange movements of 16 and 11 pence per share respectively. Our dividend payment reduced now by 30 pence per share. That meant we closed the half with an NAV per share of 18 pounds and 86 pence. You can see the components of the 197 pence per share or 1.9 billion pounds of value growth here. Simon has highlighted the continued strength of action, which again provided the largest contribution to the value growth at 1.8 billion pounds. We also had a good number of strong performers in the rest of the PE portfolio. making a material contribution to the result in the half. We covered the growth of European Bakery Group in our recent Capital Markets Day. And it was joined by Royal Sanders and AES, as well as Certec and Kew Holdings. Collectively, these portfolio companies generated the majority of our performance-driven value growth of £353 million. Softer trading from Lucom, Idian, Taito and Wilson accounted for most of the performance decreases of 219 million. The net impact of the multiple movement was negative 23 million pounds. And we will cover these movements later in the valuation section. We also had a reduction in the value of our two quoted assets of 54 million pounds. resulting from lower share prices at both 3IN and Basic Fit. Taking the pluses and minuses together, the portfolio grew to 20.3 billion pounds. So, let's have a look at the action valuation. Action continues to outperform its peers in terms of the most relevant key performance indicators. And we've been disciplined in applying a consistent valuation methodology for action. In practice, that means we've again applied a post discount multiple of 18.5 times actions run rate earnings. That gives action an enterprise value at the end of September of 30.2 billion euros. The valuation on the 3i balance sheet after deducting debt and taking account of our percentage ownership is £12.9 billion. We've shown the current peer group valuation chance on this next slide. This covers the period from September 2022 to September 2023. Taking these multiples, action sits well within the better rated peers on the last 12-month basis, which is more than justified when you look at its KPI performance. As you also know, we have referenced a proxy for a next 12-month multiple for action by looking back a year. The enterprise value in September 2022 translates to 12.8 times the run rate EBITDA actually achieved one year later. That isn't demanding compared to the peer group. We also thought it made sense to show a longer term perspective on actions valuation multiple versus its peers. This slide shows the valuation levels of the same peer group over the last five years. It splits out the more consistent and better rated peers, which includes Costco, Dollarama, Five Below and Ollie's, as shown by the light blue line at the top of the graph. None of the peers which make up this group is a perfect comparable, but we think of them collectively as more relevant valuation benchmarks for action. This longer term timeframe includes periods of significant volatility in the stock market, particularly around the COVID years, Russia's invasion of Ukraine, and the impact of higher interest rates. The graph shows the five-year average multiple of the better-rated peers of 21.2 times. This longer-term perspective is also supportive of our mark. Okay, let's look at the whole portfolio and its valuation multiples compared to the peer set. This slide is a favorite, and we've decided to keep the arrows which we introduced at the year end. They show, albeit anonymously, the multiples that have gone up and down in the period. Just to remind you, this chart shows our portfolio valuation multiples in dark blue compared to the average of the multiples for the relevant peer sets in light blue. The picture hasn't changed materially from the position at the year end. We've applied our valuation process asset by asset, and as always, our independent board valuation committee and KPMG have both scrutinized this process. Overall, only three assets are marked above the average of the peer group out of 28 valued on an earnings basis. These are shown on the far right-hand side of the chart. All of the assets are within the respective peer group ranges. This quarter, we've taken two multiples up. To put that into context, the average multiple of these two assets before the upward revisions was just 7.5 times EBITDA, which reflected the discipline we applied in buying these assets. We are moving these assets up because each business is outperforming its respective investment case. As you can see by the green arrows, these assets remain valued below the average of the peer group, and in one case, significantly below. Where we have marked multiples down, as we have in four cases shown on the slide with the red arrows, We've done that largely as a result of either softer performance and or a material move downwards in the peer group or both. Overall, we continue to retain a good buffer between our marks and the average of the peer group, which will no doubt be helpful if we continue to see further market volatility. The portfolio weighted average multiple excluding action is now 12.9 times just below the 13.1 times we disclosed in March. So, turning to the business line performance for the half year. As Simon said, our private equity portfolio generated a gross investment return of 11%. And just to be clear, that investment return included a £127 million loss on foreign exchange. As you can see, it was a relatively quiet half for both realizations and investments in the private equity business. We did invest 50 million in European Bakery Group to support its transaction activity and in 1023, our CDMO business. The overall PE portfolio value ended the period at 18.3 billion pounds. We covered the leverage position of our portfolio at our recent Capital Markets Day. I thought I'd give you a quick update, particularly in the light of the recent US debt issuance at Action. As you can see here on the left-hand side of the page, our private equity portfolio, excluding Action, had a net debt to earnings ratio at the end of September of 3.8 times, down from four times at the end of March, That reduction in leverage is a result of generally solid cash generation across the portfolio. Actions debt ratio was 1.3 times at the end of September. The portfolio has a long-dated debt maturity profile, as you can see in the two charts on the right-hand side, which show the position before and after the action debt issue. After the debt issue, approximately 74% of the total portfolio debt is repayable in 2027 or later. The portfolio as a whole is well protected against interest rate risk. After the recent action debt issue, two-thirds of the portfolio is subject of interest rate hedges. The all-in-debt cost of this part of the portfolio is 6%. Our infrastructure team delivered a gross investment return of 2%. That outcome largely reflects the continued pressure on the 3IN share price, as well as the dividend and interest income of 24 million and a small foreign exchange gain. It's worth reiterating that the underlying performance of the 3IN portfolio is strong. Scanlines continues to benefit from good strength in leisure travel in the period, but we've remained cautious on Scanlines' short-term freight outlook, and we reflected that view in our September valuation mark. Both 3i infrastructure and Scanlines remain important contributors to our operating cash profit. The infrastructure business and scan lines combined generated 72 million of cash income in the period. That meant we recognized a small cash operating profit in the half, as you can see on this slide. We expect to end the year with a cash operating profit in line with our objective to at least break even on this measure. So, now let's take a look at the balance sheet. At the end of September, we had 55 million pounds in cash. The change from the year end position reflected the payment of the full year dividend and further carry purchases, which I will come to in a minute. We closed the period with liquidity of just under 1 billion pounds. At the end of September, net debt was 1.15 billion pounds with gearing of 6%. In October, we received proceeds of £762 million from action, of which we retained around £300 million. As a result, the pro forma net debt position is within our tramline guidance of between £500 million cash and £1 billion of net debt. We have made no material changes to the Group's FX hedging programme, That means we have continued to roll the 2.6 billion of Euro and 1.2 billion of dollar hedging we put in place this time last year. The continued strong performance of action and performance increases in other vintages led to a 147 million pound increase in the carry payable in the period. On the balance sheet, carried interest payable of 962 million reflects the above increase. Set against the cumulative impact of the purchase of 200 million of carry we announced at the full year results and the additional purchase of 258 million of carry we executed in this half year. Given there are a number of moving parts, we thought it'd be helpful to summarize where we are in terms of gross and net ownership of action and the associated carry dilution. Actions US debt issuance and the resulting capital reorganization and reinvestment all happened after the end of the period we're reporting and was covered by Simon earlier. As he set out, 3i now has a pro forma ownership of action of 54.8%. In fact, you can see the ownership progression over the last three sets of results, including the position at the end of September 2023 on the top line of this slide. You can also see the cumulative impact of the carry purchases we've made over the last 12 months. All these purchases have been of the 1012 vintage that owns our investment in action. That has meant a reduction in the carry dilution on our interest in action from about 10% this time last year to roughly 5% today. Given the subsequent growth in action, these purchases have been very beneficial to 3i's NAV growth. The cumulative effect of the increase in our gross holding and the reduction in carry dilution results in a 3i group pro forma equity holding in action net of carry of 52%. That's up over 4 percentage points from September last year. This slide and table is specific to action, but it's worth reminding everyone that in terms of all other PE vintages, a sensible guide for the net carry accrual as a percentage of GIR is around 12%. Finally, let's turn to the interim dividend. Here you can see our dividend policy. In line with that policy, we will pay our first FY24 dividend of 26.5 pence per share in early January, which is half of the prior year's total dividend. Before we get into Q&A, I'll hand it back to Simon.

Thank you, James. This has been another good half for us, and despite the current macro and geopolitical concerns, we're anticipating a strong second half to round out another year of solid progress at 3i. We're benefiting from our long-term approach, which is supported by a growing base of permanent capital. We have a resilient and prudently funded portfolio, and we've already addressed shorter-term refinancing requirements. In fact, the majority of our company's debt facilities don't mature before 2027. That means we avoid those busy refinancing years of 25 and 26. Over the last 10 years, we have been rigorous and disciplined investors, and we were not big investors at the peak of the market. And our careful approach to leverage has been matched by our grounded and consistent approach to portfolio valuation marks. Over the coming years, we intend to establish another group of investments that will sit between the core private equity portfolio, which acts as our origination engine, and action. This new bucket of investments will eventually contain some five or six longer term compounders. And we expect it to become over time a significant part of our balance sheet. We've already identified four or five assets that we believe are capable of meeting our 15% annual return hurdle over the long term. And we will consider them as part of the longer term bucket when they're reaching about 100 million of EBITDA. Action is a core long-term holding, where over the last five years, we have increased our direct equity holding from some 44% to 55%. At the same time, we have also reduced the cost of carry dilution from 15% to about 5% of Action's annual return to 3i. Action is delivering another exceptionally strong year. Footfall has been growing throughout the year, and as you have seen, P10 or October has even eclipsed one of the very strong months last year. As actions volumes and store base grows, so does its buying power. So these scale benefits are being returned to its consumers through lower prices. Since the summer, we have been reducing prices across the essentials catalog on a rolling basis. These reductions reflect actions reduced COGS on these items and we are now seeing that volume growth is more than making up for these price reductions. Actions prices have always been very competitive, but now the gap between action and the rest of the high street is increasing. In return, that gap is driving further footfall growth in action stores and Incidentally, a store in France hit Euro 500,000 in sales in the last week of October. That's pretty astonishing given this was a non-Christmas week and it wasn't a big city store. It was great to see actions valuation this summer hit 100 times our original purchase investment in 2011. it took just under 12 years to get to that 100 times milestone. And that's really fast compared to most companies which have become 100 baggers. But the really exciting thing with the power of compounding is that as action continues to grow, the next step to reach 200 times will come about very much quicker. 3i's private stewardship of action has been a key part of this success. And we're delighted to be working with Hijia and her team on this exciting next stage of the action journey. Okay, thank you. We'll now open it up for questions.