3I Infrastructure Ltd

Good day ladies and gentlemen and welcome to 3i Group's half year results for the six months to the 30th of September 2021. At this time all participants are in listen only mode and later we will conduct a question and answer session through the phone lines and instructions will follow at that time. Participants can also submit questions through the webcast page using the Ask a Question button. I will now hand over to Simon Burrows, Chief Executive, to open the presentation. Please go ahead, Simon.

Thank you. Good morning, everyone, and welcome to 3i's interim results presentation. This was a very good half for 3i, as you can see from this morning's results. Our current portfolio is generating strong earnings momentum, and we are confident that that this group of companies will compound significant growth in value over the coming years. We delivered a total return of 24%, giving us an NAV per share of £11.53p. So far, the PE team have had a very busy year, and they've generated a gross return of 27% in the first half. The infrastructure team have also had a very solid first half, and contributed some £39 million of cash income to the group. In private equity, we've seen strong momentum in the portfolio since the spring lockdowns were eased. In fact, 96% of the top 20 assets grew earnings in the last 12 months to 30 June 2021. It's also been a busy time for transactions. We completed two new investments in the first half and a further two since the period end. We've also been busy with bolt-on activity. We completed add-on deals for 1023 Health, Garson House, Lokom, Avea, Evonex and Certec Medical. The portfolio has very good momentum going into the second half, and that's mainly due to our positioning in sectors benefiting from strong structural growth drivers. We've also been busy on the realisations and refinancing front. and we expect that activity to continue through the second half. Here are our top 20 fee investments divided by earnings growth. As you can see, the strong picture we presented last May has continued with about 85% of the top 20 growing earnings above 10%. And Action and seven other companies accounting for over 70% have been growing earnings at over 30%. These companies across discount, digital retail, and healthcare sectors are all benefiting from strong growth tailwinds. The approach we've taken to new investments since our restructuring in 2012 has set very solid foundations for the group's current private equity performance. We start with a long-term focus. That long-term investment horizon reflects our permanent capital base. When it comes to both deploying and harvesting our capital, we regard ourselves as being in a marathon rather than a sprint. We focus on the identification of long-term growth trends, and we use that analysis to prioritize our sector and sub-sector focus. We're very disciplined about our mid-market and geographic boundaries. We believe our experience and brand combine to give us a real competitive advantage within these tightly drawn parameters. We do a lot of work in mapping our sectors of interest across our geographic office network. And we look for potential investment opportunities well in advance of any sale process. At our investment committee meetings, we challenge every important element of the investment case. And we are always challenging around price, risk, and returns. Our playbook around internationalization and bolt-ons is highly effective. And when you combine that approach with our ability to run our winners as long-term compounders, it gives us real competitive advantage. It is this well-defined and structured process that allows us to deliver sector-leading returns year after year. These are the structural growth trends that drive growth across our current portfolio. While there are clearly some serious challenges today in the broader economic environment, particularly related to supply chain disruption and import price inflation, our portfolio companies are being creative in coming up with a range of strategies to mitigate those headwinds. So they virtually all continue to prosper due to the strength of their market positions in strong verticals. Here are six of our companies which clearly demonstrate the benefit of our bolt-on approach. I'm not going to be specific about the entry multiples for each, but we have given you 12.1 times as the average across these six. In each case, you can see how bolt-ons and the synergies that come with them reduce our blended in price. These six companies span high growth consumer and healthcare verticals. They were bought at very attractive prices compared to what other people are prepared today for these sorts of companies. And our Bolton activity creates even more strategic and financial upside over time, which will become obvious when we finally move to realization of these investments. We saw very good value growth across the portfolio in the first half, with the majority of that coming from earnings and cash flow growth. As we said in September, action delivered a very strong performance up to the end of P9, with LTM EBITDA of €765 million and like-to-like sales growth for the year to date at 12.9%. And that 12.9% compares against the negative 2.5% for that period last year that good performance has continued through october which was a very strong month last year sales for the year today is now euro 5.4 billion and the ltm ebitda is now 777 million euros as we head into november the business continues to trade well at the moment we face none of the constraints we faced last year We've got all the stores open and trading with no restrictions. We've opened over 181 new stores in the year to date, and we're planning to open approximately 270 in total this year. The 270 openings are below our original target for the year, but it's still a new record for action. Planning delays during the pandemic in certain places, particularly in Germany, and supply interruptions around our construction projects have been the main reasons for the reduction from the original plan. The benefit of this reduced level of opening activity is that it puts less pressure on the business and especially on the supply chain in the busy last quarter of the year. The rollouts into Italy and the Czech Republic have gone well, and we are now moving past the pilot phase in both countries. with more material opening targets next year, particularly in Italy. Action's strong trading has led to cash on the balance sheet growing to over €1 billion, and the Board of Action will be giving consideration to the payment of a dividend in the coming months to reflect that strong performance. The team at Action have coped well with the supply chain disruptions this year, and they've been proactively managing these issues since Q1. Action has enormous flexibility around which products it chooses to sell across its 14 categories. If products turn out to be unavailable or scarce, then Action can simply list another product which is more readily available. Action has been purchasing stock throughout the pandemic, and as we move into the key Christmas period, The stores have a good selection of articles, and as of today, the supply chain is coping well with the high level of sales. We're now moving into a period which faced severe disruption across Action's store base, with closures and restrictions affecting November, December, January, and February last winter. As a result, we expect to see a material step-up in relative performance, as we move through these months this year. I would just like to close the section on action by saluting Sander, the CEO, who is stepping down from his role at the end of December. Sander has achieved an enormous amount in his six years of action, and the Board is very grateful to him for his energetic leadership, particularly through the difficult and more challenging periods of the pandemic. His successor, Ajia, is well known to many of you, and we are very fortunate to have such a strong internal candidate. Ajia started work in actions 13 stores some 24 years ago, and has mastered pretty much every major role in the company in preparing to become the CEO on the 1st of January next year. So... Thank you to Sander for his very strong contribution to action and for setting up such a smooth transition. And good luck to Hajia. I look forward to working with her as the new CEO of Action. As I said a minute ago, the private equity team have been very busy this year. They've made some very interesting new investments spanning a number of our growth trends, as well as continuing a good level of bolt-on activity. We acquired Mate in Germany over the summer. It's a provider of digital solutions to over 5,300 customers across the DASH region. Mate operates in a sector with good growth prospects and a high degree of fragmentation. And our plan is to help the management grow through bolt-on activity as well as through organic growth. We also established 1023 Health over the summer, our first build-and-buy platform. to serve the growing biotech market. I'm delighted that the team has come together so quickly and has made such a fast start in not only establishing its main lab facility in Basel, but also acquiring Swiss Philon with its specialist fill and finish capabilities. We also acquired Dutch Bakery, a specialized industrial bakery group based out of the Netherlands, and we see significant opportunity for a roll-up strategy across continental Europe in this sector. And finally, we were delighted to add further to Gartenhaus with the acquisition of outdoor toys based in Wales. Gartenhaus has materially increased both its product catalog and its geographic reach in a relatively short period of time. And you will have read about the successful sale of Magnitude at a significant uplift to our March valuation. as well as our recent sale of part of our stake in Basic Fit, at some three times the original IPO price. Market conditions allowing, we do expect to see the pace of realizations continue to pick up as we move through the next 12 months. We also saw another solid performance from the infrastructure team. It's been another good half of the 3IN portfolio, with a very good sale of the oyster-catcher European terminals, driving a significant uplift to its valuation. Likewise, scanlines had a good half, with continued levels of freight traffic above budget and with leisure travel building to 2019 levels during recent weeks following the lifting of restrictions in July. I'd like to close my section by saying that our portfolio has continued the strong performance into the second half. And while you can't take anything for granted with COVID this winter, as things stand, we do anticipate good levels of activity and strong performance continuing through the second half. And some of this is down to a bounce back or recovery from the difficult period of the pandemic last year. But It is more fundamentally about the momentum in our investment portfolio, which has been carefully selected and purchased over the last 10 years. Our focus on ESG, which is firmly embedded in all of 3i's investment processes, is consistent with our sharp focus on quality. At our full year results next May, you will hear more detail from us on how we plan to take the environmental, agenda forward. Finally, you will not be seeing us make any dramatic changes to our approach. We won't be raising trillions and investing billions and buying vintages. Frankly, in many sectors we find current valuations extremely challenging. But you are going to see us continue to demonstrate the value we have built in our portfolio, as well as executing on selective new investments and Bolton acquisitions. Thank you, and I'll now hand over to Julia.

Thanks, Simon. As you've seen in our announcement this morning, this is a very strong set of results for a six-month period, delivering a total return on equity of 24%, and a net asset value per share of £11.53. Almost all of the 22% NAV per share growth came from unrealized value growth, which accounts for 235 pence of the increase, as you can see here. Action underpins that value growth, but as you've heard from Simon, earnings growth in the rest of the portfolio, together with the excellent sale of magnitude, also made an important contribution. And I'll come on to action in a minute. The private equity performance increases of £402 million are driven by earnings growth and by cash generation from companies such as Voconcept, Hans Anders and Lucom. In a small number of cases, we increased the multiple as we move through our investment case and towards exit. And that also reflects the quality of our platform investments. The net effect was a relatively modest increase of £162 million. You've heard about the sale of magnitude that Simon mentioned. We completed the transaction last week and received £345 million of proceeds. That gives us an uplift of 109% compared to the 31st of March valuation. That's an excellent outcome. The investment was valued on an imminent sale basis at the 30th of September, so we will see the unwind of the 2.5% discount in Q3. Turning then to action, which goes from strength to strength. We valued the business using its P9 LTM EBITDA of €765 million. Period 9, or P9, is actions reporting period to the 3rd of October, which is closest to our 30th of September. That P9 LTM EBITDA translates to a run rate earnings number of 845 million euros. That's a 24% increase in the six-month period, as you can see here. Over the last six months, as the COVID noise has reduced, the peer set that we use to test the multiple has seen some pressure. But with the relative and absolute strength of actions performance throughout the pandemic and its aftermath, we have made no change to the multiple that we use. That's 18.5 times after the usual liquidity discount. So when you combine that 18.5 times multiple with the significant de-gearing of the business, that gives us a 3i balance sheet valuation of 6.1 billion pounds. The strong overall unrealized value growth meant that the private equity portfolio delivered a 27% gross investment return. The team have also been active on the investment front. In fact, they've deployed £120 million in new and further investments, including MATE and 1023 Health. And more capital has been put to work since the period end. As Simon said, infrastructure also had a good first half, underpinned by our investments in 3i Infrastructure PLC. A number of you will have seen their results, which were published on Tuesday. Our infrastructure business provides a good flow of cash income through 3IN's dividend and fees. We received £39 million from the infrastructure portfolio in this period. We reinvested in Scandlines because it is another important contributor to cash income. That investment has fared well through the travel restrictions. Last year, we didn't get any income from Scandlines given the pandemic situation. Today, the prospects for distributions resuming are now looking better. A key feature of our business has always been generating and operating cash profit. to cover our cash operating costs with income. That approach remains a key feature of our business model and proved its importance during 2020 and 2021. We are reporting a loss of 19 million pounds in the first half. That is purely as a result of timing rather than anything structural. So I'm confident that we will be reporting a profit again by the end of the year. Our conservative balance sheet strategy is another key feature of our business model and has allowed us to continue to invest throughout the pandemic period. We have liquidity of 544 million pounds at the 30th of September. Since the period end, we have completed investment of 215 million pounds and received proceeds of 491 million pounds from the sales of Magnitude and Basic Fit. As Simon's talked about, we have a good pipeline of realizations underpinning the board's confidence. in confirming our first dividend for FY 2022 in line with our policy. That policy is to pay 50% of the prior year total. That means we'll pay a dividend of 19.25 pence per share. So, this is a very strong set of results for a six month period. And it's even more impressive as we come out of the pandemic period. And the returns we're reporting reflect the strength of a carefully constructed portfolio, a thoughtful investment strategy, and very diligent asset management. Thank you.

Thanks, Julia. Apart from updating on our progress this year, we've also made an announcement this morning about Group Finance Director succession. Julia has decided to retire from 3i at the end of the year. after 15 years with the group. She's put in a long stint as a FTSE 100 CFO, and I'm particularly grateful to her for the hard work she's put in since my appointment as CEO in 2012. She's been a key part of the team and accomplished a great deal, and is an outstanding role model for any aspiring young executive. She'll be missed by the team at 3i, but she won't be pushing off until June next year, and so you will all have plenty of opportunity to say goodbye and to meet her successor, James Hatchley, in due course. Okay, operator, we're now ready to take questions.

Great, thank you. everyone if you'd like to ask a question please signal by pressing star one on your telephone keypad we will pause for a moment to assemble the queue and we'll take our first question from Bruce Hamilton from Morgan Stanley please go ahead you're live in the call hi morning and thanks for the the results good numbers again um I guess just uh focusing on action first question from me was

How to think about the timeframe for a return to the more normal sort of re-leveraging process, which I think in the past has seen you go from sort of, you know, three times or less EBITDA up to sort of five, five and a half times. And I guess, you know, would that, how would you link that to your distribution policy more formally going forward, given that we're going to be talking big numbers? And then secondly, on the sort of action model, I think your targets for 23 indicate around sort of 11% EBITDA margins, but you're running quite a bit better than that at the moment. So is there a change in the way you're now finding new countries are coming up towards sort of, you know, the Netherlands margins? And can you give us any colour around the sort of EBITDA margins across different countries? That'd be very helpful. Thank you.

Yeah. OK, thanks, Bruce. I think our position on further re-leveragings is, as it has been stated before, which is we want to get properly through the pandemic and then really take stock of things. But what we are looking at in the shorter term is a more classic dividend reflecting the performance this year. So that will be something that is considered by the board in due course, but we're not going to be rushing to a re-leveraging exercise too quickly, given that we still have growing rates of the virus now in continental Europe as the vaccine program from earlier in the year begins to wane in terms of immunity. So we do have a little hurdle to get through there. They're running a bit behind the UK in that effect. And we need to see everyone moving on to their booster shots and getting the thing back under control, I think, first. I mean, in terms of the EBITDA margin, yes, you're right. We are seeing some very good profitability down to the very significant sales that we're seeing in particular. So these sorts of numbers are running well ahead of our plan. And I think we will be re-looking at the plan in due course. In terms of countries, we're just seeing very solid broad-based performance. We did an analysis recently looking at like-for-likes if we ignore the periods of store restrictions or store closures over the last two years. And we looked at that up to about week 42. And what we saw was the lowest two-year stack for like-for-likes was in the Netherlands, and that was about 16%, 17% over the two years. The highest was in Poland, which was not far shy of 50%. And most of the countries were between 20% and 30% in terms of two-year stack like-for-like. So very strong trading performances, very good sales densities coming through the stores, a reflection of the quality of the categories now and the way they present. So they are driving very strong EBITDA, store EBITDAs in different countries, with Poland jumping up to be one of the best store EBITDAs on a country basis across the group. So yeah, we've seen very good progress and we'll be revisiting the plan in due course. Great, thank you.

Okay, you do have some more questions, but just to remind everyone to ask a question, please signal by pressing star one on your telephone keypad. And also to remind you that you can also submit a question through the webcast page using the ask a question button. But yes, your next question comes from Philip Middleton from Bank of America. Please go ahead, you're live in the call.

Okay, thank you. And first of all, thanks to Julia for all she's done. And as I said in my note this morning, she'll be missed. Secondly, back on action and the margins, is there any, what do you think will happen to your margins in the near term, assuming you get price pressures coming through, which I imagine is likely given what's happening to inflation more globally? And thirdly, how are you thinking about holding periods given that it seems increasingly hard to invest particularly large amounts of money have been increasingly creative to do that and you've got a great role model within your portfolio of action as a very very long hold asset are you thinking about any of your other companies as being potentially very very long hold assets like action thanks philip um

deal with the first question first. So in terms of short-term import price pressures, inflation, and also other cost increases like carriage, etc. I mean, we think they'll be an important consideration in the budget for next year. We formally consider the budget in a few weeks' time. So we are looking very carefully, skew by skew, across what we sell. to determine volumes, pricing, and all the rest of it. We think we're well placed in a comparative sense to deal with those issues, but those are going to be big issues for FY 2022 in the case of action. So we'll be able to say more about that maybe early next year, but I would expect there to be some margin challenge around some of the products, but not around all of the products. And I would think that our pricing advantage will perhaps be a bit clearer in many cases next year, given the pressures on the rest of the industry. In terms of holding periods, yeah, I think action is a great example. I mean, we've been very clear on the compounding benefit that we would see coming through from action. And boy, is it coming through. We do note that other private equity organizations are copying this approach now. And we do think we have a number of potential graduates within the broader PE portfolio that could also become longer-term compounders, but we haven't made any definitive decisions on that yet.

Okay. Thank you.

Thank you. And your next question comes from Luke Mason from Exane. Please go ahead. You're live in the call.

yeah thanks good morning just on um thinking about the portfolio as a whole in aggregate earnings growth there's some strong growers greater than 30 percent earnings in the last 12 months um just wondering how you think we should think about the rate of earnings growth for the portfolio as a whole how that's progressing and uh is there outlook for that to kind of step down slightly with some of the companies benefiting from uh kind of covid And then just secondly, just on that inflation piece that Philip asked about, just in terms of action and the competitive environment, and you mentioned in the comments there, but just anything you can give on how action would fare in that environment versus more specialised retailers. Thanks.

Thanks, Luke. I think as I alluded to in my presentation, I do think there's been a degree of bounce back recovery in some of the performances after the lockdowns. But fundamentally, the companies that are producing the 30% growth are in very, very interesting verticals. And I would expect them to continue to grow at good rates, whether it's 30% or not. Only time will tell. So there is a bit of it in there. But these are fundamentally very strong, very strong businesses with very good top line and earnings performance. In terms of action, I think. I think the issue that we have really is how much we're going to stick with our old prices, how much we're going to inflate, and as I said, we're going through that skew by skew at the moment, and so it will have an impact, but our determination to remain by far the cheapest on the high street across categories is going to remain very important.

Great, thank you.

Okay, there are no other audio questions.

Okay, we have a couple of questions from webcasts. First from Greg Knox at Numis. Buy and build does seem to create value when you build out. Is there always a key business you have already earmarked that may not have bought up front? What is the scope to build and buy?

Well, I think we're demonstrating that with 1023 Health, which really came from the healthcare team's focus on the strongest growing verticals in the healthcare space, but the appreciation that companies who trade in this space are trading at anything between 30 and 70 times EBITDA or something. doing the standard buy and build was not really going to be an option for us. Therefore, this is why we adopted the approach of the build and buy, and we assembled the team first under Hans Christian Mahler, and then identified this approach. And we think there are other potential verticals where you could adopt this approach. It obviously is going to take a little more time to scale up and to make a meaningful impact on the portfolio and the group performance. But we have every confidence that the start this business has made, it's going to become a significant feature of the portfolio in due course. And we will, of course, look for other examples, other opportunities to do this. We think it's particularly appropriate in the sort of healthcare spaces that we're looking at.

Operator, I think there is one more through the phone line. Do you want to put that through now?

There is. Yes, and it comes from Christopher Brown from JP Morgan. Please go ahead. You're live in the call.

Oh, hi there. Morning, everyone. Great study results. Just one quick question from me. I just wondered if you disclosed anywhere the valuation multiple for the portfolio X action?

No, we haven't, Chris. I mean, to give you a little bit of colour around it in terms of the multiple increases, they've been driven, as you'll be able to see, I think it's Simon's slide nine, around the healthcare sector companies where we've had to push those multiples on a little so that the difference between the market position and our position is not too great. And then, as I said in my script, as we think about moving multiples forward, as we move through the investment case and towards exit. So in a couple of cases, we've made a small bit of progression in acknowledgement of what I would call businesses moving into maybe phase three of the investment case, because whilst we're delighted with 109% uplift on magnitude, we shouldn't normally be achieving that if we're getting the valuation approach right. I mean, the fact we sold it after two and a half years is an indication of why we ended up in that sort of position. But I'm sure you know you shouldn't be factoring that in on all of the disposals that we do. So we do have to think a little bit around that. But the overall increase in the average is still less than a turn. It's a little over a half.

Can I just come back on a couple of the action questions? I think it's important to think about next year in the following way. We have a number of things going for us, which is we comp a very weak first quarter for action in the first quarter of next year. And we will have opened 270 new stores this year. So pretty high momentum going into the year. And against that, we have to manage through this import price inflation that we're seeing. We're not seeing dramatic impacts around labor or anything like that. So it's strictly around products we're buying in and transport.

Thank you. You do have another audio question and it comes from Romain Combs from Kepler. Please go ahead. You're live in the call.

Hi, good morning. So maybe on action and more broadly on TRI as well. So if you look at your investment over the years and a potential very large dividend coming from action and other potential realizations as well in the portfolio, So you will have potentially a large cash pile coming. So how should we really look at that? Maybe reducing a bit the gearing or more investments? I don't know.

Yeah, I think the medium-term issue in the group plan is what we do with the cash. But it's not tomorrow's issue. It's a little bit further out than that. We are seeing a decent pickup in the identification of issues. interesting companies to invest in. And I think we're going to continue to be active in the rest of the year in the verticals that we like. So I would see a reasonable investment flow, nothing too different to what we've done in the past, I have to say. We will be paying down a bit of cash. We do have a maturing bond in a few years. So there are going to be various uses for it. But it is the medium-term exam question for us is what we're going to do with the cash.

All right. And maybe just on action again for the stores. So you want to open 270 stores in four years, 2021. Do you think that going forward, you will still be able to do 300, 250 stores once supply chain issues are a bit eased?

Yeah, we're pretty confident that in a more normal environment with bureaucratic processes working more normally, we should be able to, and I'm talking about the planning process, not our process, we should be able to attain the 300 store level. But obviously certain things don't work to our timelines and that's affected us this year.

All right, many thanks.

Okay, there are no further audio questions.

We have one more from the webcast from Ian Schooler at Stifel. What proportion of the portfolio is being affected by supply chain issues? Any severe problems? When do companies expect these issues to be resolved?

We haven't kept a very close register of that, but I would say a reasonable proportion of the portfolio have come across these issues, but I would have to say it's not proving to be material for any of them in reality.

Looks like we have no more questions.

Okay, great. All right. Well, thank you, everyone. Thanks for your attention. And we'll be catching up with some of you in the coming weeks.

Thank you.

Bye-bye.