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.