Interim Results
7 September 2021
TRIAN INVESTORS 1 LIMITED
(the "Company")
Interim Results
Interim Report and Unaudited Condensed Financial Statements for the period from 1 January 2021 to 30 June 2021
The Company announces its results for the six month period ended 30 June 2021
For further information, please contact:
Ocorian Administration (Guernsey) Limited
(Administrator and Company Secretary)
+44 (0)1481 742 742
Ian Smith
Overview of the Company
Trian Investors 1 Limited (the "Company") is a Guernsey-domiciled limited company incorporated on 24 August 2018. The Ordinary Shares of the Company (the "Shares") were admitted to trading on the Specialist Fund Segment of the London Stock Exchange ("SFS") on 27 September 2018 ("Admission"). The Company registered with the Guernsey Financial Services Commission as a registered collective investment scheme on 16 June 2021.
The investment objective of the Company, through its investment in Trian Investors 1, L.P. (Incorporated) (the "Investment Partnership"), is to generate significant capital appreciation through the investment activity of Trian Investors Management, LLC (the "Investment Manager") and its parent, Trian Fund Management, L.P. (collectively, "Trian").
The Company expects to make substantial investments, through its investment in the Investment Partnership, in one or more high quality, but undervalued and/or underperforming, United Kingdom or United States companies where the Investment Manager believes it has developed a compelling set of operational and strategic initiatives that will help generate shareholder value. Investments in companies may be made on-market or off-market, in publicly listed or private companies.
Chairman's Statement
For the period from 1 January 2021 to 30 June 2021
Dear Shareholder,
On behalf of the Board of Directors (the "Board"), I am pleased to present to you the Interim Report of the Company covering the period from 1 January 2021 to 30 June 2021 ("Period").
The Company's underlying investment in Ferguson plc ("Ferguson") continued to generate attractive returns during the Period, driven by strong operational execution at Ferguson's main US businesses, as well as further improvement in the market's valuation of its shares. In addition, Ferguson made continued progress on its strategic initiatives-the company sold its UK heating and plumbing and distribution business and distributed the proceeds to shareholders, completed an additional U.S. listing of its shares, and stated its intention to transition to a U.S. primary listing in due course.
As at 30 June 2021, Ferguson's share price was trading at £100.50 (compared to £88.84 as at 31 December 2020), which resulted in a corresponding increase in the Company's net asset value ("NAV"), to 170.42 pence per Share (compared to 150.57 pence per Share as at 31 December 2020). Between 8 May 2019, when the Company initially made its investment in Ferguson, and 30 June 2021, Ferguson generated a total shareholder return of 95.22% (as compared to 4.74 % for the FTSE 100 over the same time period) 1 .
On 14 June 2021, the Company announced that shareholders had approved amendments to the Company's existing investment policy to allow the Company to invest in one or more U.K. or U.S. target companies at the same time and to acquire minority, majority or controlling interests in any listed or unlisted target company. In tandem, the Company also revised its existing policies and guidelines on recycling sale proceeds and return of capital so that all net proceeds, including net profits, generated from dividends as well as the sale of any investment in a target company may be reinvested following disposal.
Between 17 May 2021 and 8 June 2021, the Company used approximately £14.2 million (US$20.0 million) to repurchase Shares in the open market to provide immediate liquidity to the Company's shareholders. When combined with the repurchases that took place in 2020, the Company has used approximately £21.1 million (US$29.2 million) to repurchase 17,166,913 Shares in aggregate (representing over 6% of the Shares in issue at the time of the Company's initial public offering).
Separately, the Investment Manager informed the Company that Trian Investors 1 Subscriber, LLC ("Trian Subscriber"), a company owned by Trian's partners and affiliates, purchased 8,245,000 of the Company's Shares in the open market between 17 June 2021 and 12 July 2021 following the completion of the Company repurchases. In addition, in order to promote further alignment with shareholders, Trian Investors 1 SLP, L.P., a limited partnership owned by Trian's partners, agreed to receive future incentive allocations (net of amounts required to cover certain tax liabilities) in the form of Shares, to be valued at NAV at the time of issuance.
The Board and Investment Manager believe that these revisions to the Company's investment policy and to the Company's related policies and guidelines will better position Trian to execute its highly engaged investment strategy and to compound shareholders' capital over time by reinvesting investment profits.
Regarding the feedback received from certain of the Company's shareholders relating to the amended investment policy, the Board established an engagement programme immediately following the 2021 annual general meeting ("AGM") to understand their specific circumstances and voting position. An update on the views received from shareholders and actions taken is reported separately below.
The Board is grateful for the support it has received and will continue to keep Shareholders informed of developments at the Company as appropriate.
Yours sincerely,
Chris Sherwell
Chairman
6 September 2021
1 Total shareholder return figures from FactSet.
Investment Manager's Report
For the period from 1 January 2021 to 30 June 2021
Dear Shareholder,
Background
In June 2019, the Board announced that funds managed by Trian, including the Investment Partnership through which the Company invests, had acquired a 5.98% interest in shares of Ferguson.1 The Investment Manager recommended that the Company invest in Ferguson because we believed that it possessed an underappreciated U.S. business, benefiting from an attractive long-term organic growth profile underpinned by exposure to repair, maintenance, and improvement (RMI) activity, a strong balance sheet and attractive financial profile (including stable gross margins and high returns on invested capital), and significant scale advantages compared with its competitors. Since announcing its Ferguson investment, Trian has constructively engaged with Ferguson's board of directors and management team regarding various operational and strategic initiatives that Trian believed could generate value, and Trian has developed productive relationships with Ferguson's Chief Executive Officer and its Chairman.
Since 8 May 2019, when the Company initially made its investment in Ferguson, through 30 June 2021, Ferguson has generated a total shareholder return of 95.22% (as compared to 4.74% for the FTSE 100 over the same time period).
Ferguson's Recent Trading Results
On 16 March 2021, Ferguson released its financial results for the half year ending on 31 January 2021 ("H1 2021"). Ferguson reported solid results, highlighted by organic sales growth of 3.3% at its U.S. business (which contributed approximately 95% of the company's consolidated ongoing underlying trading profit) versus the prior year period. During H1 2021, Ferguson's end markets were broadly flat compared to the prior year period, implying that Ferguson gained market share. Despite a difficult operating environment, the company was also able to grow ongoing underlying trading profit by 12.2% (representing approximately 60 basis points of operating margin expansion) versus the prior year period, driven by stable gross margin trends and operating expense discipline.
In addition, Ferguson announced several initiatives relating to capital allocation. First, it
announced that on 11 May 2021 shareholders would receive an interim dividend of 72.9 cents per share representing implied year-over-year dividend growth of 5%, as well as a special dividend of 180 cents per share, representing proceeds from the disposition of Wolseley UK (discussed further below). Second, Ferguson announced further M&A activity in connection with the recommencement of the company's M&A program in September 2020-during H1 2021, Ferguson completed four bolt-on acquisitions of companies with total annualised revenues of approximately $215 million. Finally, Ferguson announced a resumption of share
1 All data contained in this Investment Manager's Report is based on FactSet and publicly available information from Ferguson's periodic reports, investor presentations and regulatory filings. Please see "Investment Manager's Report Disclosure Statements and Disclaimers" for important information regarding this Investment Manager's Report.
repurchases, with the company stating that it intended to repurchase $400 million of its shares over the next 12 months.
On 19 May 2021, Ferguson announced its earnings results for the three months ended 30 April 2021 ("Q3 2021"). Ferguson brought forward its Q3 earnings announcement because the company delivered strong revenue and profit growth ahead of expectations. During Q3 2021, Ferguson reported 20.1% year-over-year US organic revenue growth, as compared to 1% year-over-year organic revenue growth during the prior-year quarter. We believe that Ferguson's organic sales growth exceeded market growth during Q3 2021, resulting in increased market share. In addition, Ferguson reported gross margins of 30.9%, which were 110 basis points ahead of gross margins during the prior-year quarter, and which reflected Ferguson's ability to successfully pass through price during a period of acute inflation. Overall, Ferguson generated underlying trading profit of $560 million during Q3 2021, which significantly exceeded Wall Street analyst consensus expectations ($431 million) coming into the quarter. We were impressed with Ferguson's operational execution, including its ability to expand gross margins, manage expenses in an inflationary environment, and build inventory in order to maintain customer service levels. Ferguson also announced that it had completed $140 million of the $400 million share repurchase announced on 16 March 2021, while continuing to maintain a strong liquidity position - Ferguson's net debt to adjusted earnings before interest, taxes, depreciation and amortisation stood at only 0.8x as at quarter-end (pro forma for the special dividend and share repurchases described above).
In the Ferguson earnings release, Ferguson's Chief Executive Officer, Kevin Murphy, noted that revenue picked up strongly through the quarter continuing into early May. As a result of the momentum in the business and better than expected Q3 2021 results, Ferguson revised its outlook for fiscal year 2021 trading profit to be in the range of $2.0 - $2.1 billion (as compared with the Wall Street analyst consensus expectation of $1.86 billion coming into the quarter).
Update on Ferguson's Strategic Initiatives
After first announcing its intention to separate Wolseley UK, Ferguson's UK-based distribution business, in September 2019, the company announced on 4 January 2021 that it would sell Wolseley UK to a private equity firm for approximately £308 million. The sale was completed on 1 February 2021 and Ferguson returned substantially all of the net cash proceeds of the sale by way of a special dividend of 180 cents per share, which was paid on 11 May 2021.
In addition, the additional U.S. listing of Ferguson's shares was approved by Ferguson
shareholders at a general meeting held on 29 July 2020 with overwhelming support (99.5% of votes cast at the meeting were in favor of the proposal), and Ferguson's shares began trading on the New York Stock Exchange on 8 March 2021. Ferguson has retained its primary listing on the London Stock Exchange and inclusion in the FTSE 100 index, and the company's shares continue to trade on both exchanges under the ticker symbol: FERG. Ferguson's board of directors believes that over time the additional U.S. listing will facilitate increased share ownership by domestic U.S. funds, and in connection with the additional listing, Ferguson's management team has undertaken extensive additional investor marketing in the U.S. to enhance understanding and awareness of Ferguson's business amongst these investors.
On 8 March 2021, the date on which Ferguson's additional listing became effective, Ferguson's board reiterated its belief that the natural long term listing location for Ferguson is in the U.S. and that, after a period of transition, the company intends to hold a shareholder vote on a proposal to change its primary listing to the U.S. On 16 March 2021, Ferguson also announced that the company will change to U.S GAAP reporting from 1 August 2021 in connection with a potential relisting and to aid comparability with other U.S. peers.
Finally, on 16 April 2021, Ferguson announced the appointment of Kelly Baker to the Ferguson Board of Directors. Ms. Baker is a US citizen who is currently Executive Vice President, Chief Human Resources Officer of Pentair plc. In the announcement of her appointment, Geoff Drabble, Chairman of Ferguson, commented on Ms. Baker's significant experience at numerous US publicly listed businesses.
Trian's Perspective on Ferguson's Investment Prospects
The Investment Manager was pleased to see Ferguson report Q3 2021 operating results that were significantly ahead of analyst expectations and was impressed with Ferguson's operational execution during the quarter. We believe that Ferguson gained market share during Q3 2021 and that Ferguson will continue to grow faster than its underlying markets, given its omni-channel sales capabilities, product breadth and scale advantages, and focus on pursuing bolt-on acquisitions.
Recent macroeconomic conditions have also been favourable to Ferguson. Ferguson's management noted in its most recent earnings release that US market demand accelerated through the quarter, which we believe reflects the continued strength of the U.S. residential market as well as acceleration in the commercial and industrial end-markets which Ferguson serves.
Ferguson reaffirmed its intention to pursue a full US relisting in March 2021, and as previously noted, we believe that a relisting would result in numerous benefits to Ferguson ( including higher ownership among U.S. institutions, increased U.S. research coverage, comparison to a more appropriate set of peers, and increased employee engagement (as most of Ferguson's employees are based in the U.S.)).
Trian continues to believe that Ferguson represents an attractive investment opportunity, given the quality of its business and management team, the current strength of its underlying markets, and the relative valuation discount to its US-listed peers. However, Ferguson's valuation has significantly improved since the Company initially made its investment. When the Company announced its investment in Ferguson in June 2019, Ferguson's shares were trading at approximately 14x on a price to next-twelve-month earnings per share ("NTM P/E ratio") metric, representing a 43% discount to the average valuation of its U.S. listed peers.2 As at 31 August 2021, Ferguson's shares were trading at a NTM P/E ratio between 20-21x, representing a 32% discount to the average valuation of its U.S. listed peers.
2 The Investment Manager consider Ferguson's US listed peers to include Watsco, Inc., SiteOne Landscape Supply, Inc., Pool Corporation, The Home Depot, Inc., Lowe's Companies, Inc. and Core & Main, Inc.
As always, there are risks to our investment outlook, including management's ability to execute on its operational plans, the possibility that Ferguson shareholders may not approve a U.S. primary listing, the impact of changing interest rates on macroeconomic conditions, the possibility that Ferguson could encounter operational challenges on account of higher inflation, and the possibility that an increase in COVID-19 cases in the U.S., including COVID-19 cases arising from the spread of the "Delta variant" or other variants, could impact Ferguson's operations and end markets.
Concluding Thoughts
The Investment Manager believes that Ferguson remains an attractive investment. However, the Investment Manager intends to continue to evaluate the Company's Ferguson investment, taking into consideration the significant improvement to its valuation described above, compared to other investment opportunities available to the Company.
As Trian continues to evaluate other potential investment opportunities for the Company to pursue, the Investment Manager believes that the recent revisions to the Company's investment policy and the Company's related policies and guidelines will better position Trian to execute its highly engaged investment strategy with respect to new opportunities and to compound shareholders' capital over time by reinvesting profits. In addition, Trian's Founding Partners have a long history of using publicly traded companies to enter into strategic transactions with operating businesses, and in light of the increased flexibility provided by the Company's revised investment policy, Trian intends to continue to explore M&A opportunities which could help position the Company to become a larger, more widely-held and higher-profile public company over time.
The Investment Manager has a high degree of conviction in the Company's trajectory, especially in light of the recent revisions to the Company's policies and guidelines, which is why Trian's partners and their affiliates recently invested significantly more of their capital into Shares of the Company through Trian Subscriber.
We appreciate your ongoing support and will continue to work diligently towards generating long-term value for shareholders.
Yours sincerely,
Trian Investors Management, LLC
6 September 2021
Update on Engagement with Shareholders
At the Company's AGM held on 14 June 2021, shareholders voted by a majority of 52% to 48% in favour of amendments to the Company's investment policy which are designed to enhance the Company's ability to generate long-term shareholder value.
Though pleased that the ordinary resolution passed in accordance with the Board's recommendation, the Directors took note of the narrow vote margin. Prior to the AGM, the Directors met with several shareholders to understand their view on the proposed changes to the investment policy. Recognising their responsibility to follow up after the AGM, they promptly contacted shareholders representing over 50% of outstanding Shares, including all large shareholders who indicated that they had voted against approval of the amended investment policy. Through one of the Company's corporate brokers, meetings were set up with the Board and the Investment Manager at which a variety of topics were discussed with those shareholders who accepted the invitation to meet, including those shareholders' reasoning for their voting decisions and any policies they believed that the Company should adopt in the future, including with respect to the use of Target Company dividends.
In sum, most shareholders who voted against the proposed investment policy amendments expressed concerns about liquidity and the fact that the Company's Shares were trading at a significant discount to NAV. They also focused on the revisions to the Company's policies under which all or part of the profits from the single investment in Ferguson may no longer be returned but could instead be recycled and retained for the purpose of making new investments. As previously noted, the Board and the Investment Manager believe that the revised investment policy will enhance the Company's ability to become a larger, more widely-held and higher-profile public company, and they emphasised their viewpoint in discussions with shareholders.
The Directors and the Investment Manager have since discussed the feedback received from shareholders in detail and have considered further how best to implement the new investment policy. The Board understands the expectations of those shareholders who had anticipated some return of their capital and voted against the revised investment policy, but it must also recognise the interests of the majority of shareholders who voted in favour of the revisions and who supported the proposition that the revisions can help generate more attractive returns over time than would be the case under the Company's original investment policy.
In this context the Board also notes that, when it approved the amendments to the investment policy, it considered Trian SLP's commitment to receive future incentive allocations in the form of Shares to be valued at NAV. The Board believes that these proposed issuances of Shares will provide a greater pool of capital for use by the Company and further alignment between the Investment Manager and the Company's shareholders.
While the Investment Manager continues to evaluate potential investment opportunities, the Board remains highly committed to monitoring the Company's trading activity and seeking to improve the liquidity and the trading price of the Company's Shares in relation to NAV. Furthermore, in light of the feedback received from shareholders, the Company currently expects to use ordinary dividends received from Ferguson that are not needed for working capital or other corporate purposes to fund Share repurchases. The Investment Manager meanwhile believes that the Company will have capacity to complete additional Share repurchases opportunistically, although the potential benefits of such capital returns will need to be balanced against the potential negative impact on the Company's ability to implement its highly engaged investment strategy.
Longer term, the Board intends to work with the Investment Manager to pursue the Company's overriding objective which - to reiterate - is to compound shareholder capital and use the Company's enhanced investment flexibility to build the Company into a larger, more widely-held and higher-profile public company over time. The Board believes that Trian's Founding Partners' long history of completing strategic transactions in operating businesses, and the Investment Manager's commitment to exploring M&A opportunities that can benefit the Company, should give shareholders additional comfort that the goals set out ahead of the AGM can be accomplished. Accordingly, the Board and the Investment Manager both look forward to continuing an open dialogue with shareholders.
On behalf of the Board
Chris Sherwell
Chairman
6 September 2021
Directors' Responsibility Statement
Responsibility Statement
The Directors are responsible for preparing the Interim Report and Unaudited Condensed Interim Financial Statements in accordance with applicable law and regulations. The Board confirms that to the best of their knowledge:
• The condensed set of financial statements has been prepared in accordance with IAS 34 'Interim Financial Reporting' as adopted by the European Union;
The interim management report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and their impact on the condensed financial statements and description of principal risks and uncertainties for the remaining six months of the year);
The interim management report includes a fair review of the information required by DTR 4.2.8R (disclosure of related parties transactions and changes therein); and
The condensed set of financial statements, which has been prepared in accordance with the applicable set of accounting standards, gives a true and fair view of the assets, liabilities, financial position and profit or loss of the issuer as required by DTR 4.2.4R.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy, at any time, the financial position of the Company and which enable them to ensure that the financial statements comply with the Companies (Guernsey) Law, 2008. They are also responsible for the maintenance and integrity of the corporate and financial information included on the Company's website ( www.trianinvestors1.com ). Legislation in Guernsey governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Going Concern
Under the UK Corporate Governance Code and applicable regulations, the Directors are required to satisfy themselves that it is reasonable to assume that the Company is a going concern.
The Directors monitor the capital and liquidity requirements of the Company on a regular basis. They have undertaken a rigorous review of the Company's ability to continue as a going concern, including by reviewing the Company's ongoing cash flows and level of liquid investments and cash balances as at the reporting date, as well as forecasting future cash flows, and they are of the opinion that the Company has adequate resources to continue its operational activities for at least twelve months. The Directors are of the opinion that the COVID-19 outbreak should not impact the Company's ability to continue as a going concern despite the resulting uncertainty it has created.
Based on these sources of information and their own judgement, the Directors believe it is appropriate to prepare the financial statements of the Company on a going concern basis.
Principal Risks and Uncertainties
The principal risks and uncertainties of the Company are described in the Report of the Directors within the Annual Report and Audited Financial Statements of the Company for the period ended 31 December 2020. In addition, the principal risks associated with the implementation of the Company's amended investment policy are described in the Notice of the 2021 AGM published on 17 May 2021. The Directors will continue to assess the principal risks and uncertainties relating to the Company for the remaining six months of the current fiscal year in light of the Company's investments and the COVID-19 pandemic, but currently expects them to remain substantially the same.
On behalf of the Board
Chris Sherwell
Chairman
6 September 2021
Independent Auditor's Review Report
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INDEPENDENT REVIEW REPORT TO TRIAN INVESTORS 1 LIMITED
We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2021 which comprises the Unaudited Condensed Statement of Financial Position, Unaudited Condensed Statement of Comprehensive Income, Unaudited Condensed Statement of Changes in Equity, Unaudited Condensed Statement of Cash Flows and related notes 1 to 17. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.
As disclosed in note 2, the annual financial statements of the Company will be prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting".
Our responsibility
Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.
Scope of review
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council for use in the United Kingdom. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2021 is not prepared, in all material respects, in accordance with United Kingdom adopted International Accounting Standard 34 and the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.
Use of our report
This report is made solely to the Company in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council. Our work has been undertaken so that we might state to the Company those matters we are required to state to it in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our review work, for this report, or for the conclusions we have formed.
Deloitte LLP Statutory Auditor St Peter Port, Guernsey 6 September 2021
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|
|
Unaudited Condensed Statement of Financial Position
As at 30 June 2021
|
|
|
|
30 June 2021 (unaudited) |
30 June 2020 (unaudited) |
31 December 2020 (audited) |
|
|
Notes |
|
£'000 |
£'000 |
£'000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current assets |
|
|
|
|
|
|
Investment in Midco |
5, 6 |
|
430,799 |
308,014 |
396,523 |
|
Total non-current assets |
|
|
430,799 |
308,014 |
396,523 |
|
Current assets |
|
|
|
|
|
|
Cash and cash equivalents |
|
|
1,163 |
1,742 |
1,691 |
|
Receivables and prepayments |
7 |
|
51 |
56 |
50 |
|
Total current assets |
|
|
1,214 |
1,798 |
1,741 |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
Trade and other payables |
8 |
|
129 |
44 |
59 |
|
Total liabilities |
|
|
129 |
44 |
59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets |
|
|
431,884 |
309,768 |
398,205 |
|
|
|
|
|
|
|
|
Equity |
|
|
|
|
|
|
Share capital |
9 |
|
244,745 |
262,876 |
259,095 |
|
Retained earnings |
|
|
187,139 |
46,892 |
139,110 |
|
Total equity |
|
|
431,884 |
309,768 |
398,205 |
|
Number of Ordinary Shares in issue
|
9 |
|
253,419,064 |
267,825,147 |
264,467,091 |
|
NAV per share (pence) |
10 |
|
170.42 |
115.66 |
150.57 |
The Unaudited Condensed Interim Financial Statements were approved by the Board and authorised for issue on 6 September 2021.
The notes form an integral part of these financial statements.
Chris Sherwell Mark Thompson
Director Director
Unaudited Condensed Statement of Comprehensive Income
For the period from 1 January 2021 to 30 June 2021
|
|
Notes |
1 January 2021 to 30 June 2021 (unaudited) £'000 |
1 January 2020 to 30 June 2020 (unaudited) £'000 |
1 January 2020 to 31 December 2020 (audited) £'000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income |
|
|
|
|
|
Unrealised gain/(loss) on investment in Midco |
5 |
48,451 |
(15,214) |
77,295 |
|
Dividends received from Midco |
5 |
- |
1,407 |
1,407 |
|
|
|
48,451 |
(13,807) |
78,702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
Administration fees |
15 |
76 |
86 |
147 |
|
Directors' fees |
14 |
70 |
70 |
140 |
|
Audit and non-audit fees |
16 |
30 |
20 |
34 |
|
Trademark licence fees |
15 |
23 |
23 |
47 |
|
Other operating expenses |
|
223 |
143 |
265 |
|
Total expenses |
|
422 |
342 |
633 |
|
|
|
|
|
|
|
Operating profit/(loss) |
|
48,029 |
(14,149) |
78,069 |
|
|
|
|
|
|
|
Finance income and expense |
|
|
|
|
|
Interest income |
|
- |
3 |
3 |
|
Net profit/(loss) |
|
48,029 |
(14,146) |
78,072 |
|
|
|
|
|
|
|
Total comprehensive income/(loss) |
|
|
|
|
|
|
|
|
|
|
|
|
48,029 |
(14,146) |
78,072 |
|
|
|
|
|
|
|
|
Basic earnings/(loss) per share (pence) |
11 |
18.31 |
(5.26) |
29.12 |
All activities derive from continuing operations.
The notes form an integral part of these financial statements.
Unaudited Condensed Statement of Changes in Equity
For the period from 1 January 2021 to 30 June 2021
|
|
Notes |
Share capital |
Retained earnings |
Total |
|
|
|
|
£'000 |
£'000 |
£'000 |
|
|
|
|
|
|
|
|
|
As at 1 January 2021 |
|
259,095 |
139,110 |
398,205 |
|
|
|
|
|
|
|
|
|
Profit for the period |
|
- |
48,029 |
48,029 |
|
|
Total comprehensive income |
|
- |
48,029 |
48,029 |
|
|
|
|
|
|
|
|
|
Share buyback |
9 |
(14,350) |
- |
(14,350) |
|
|
|
|
(14,350) |
- |
(14,350) |
|
|
|
|
|
|
|
|
|
As at 30 June 2021 |
|
244,745 |
187,139 |
431,884 |
|
|
|
Notes |
Share capital |
Retained earnings |
Total |
|
|
|
£'000 |
£'000 |
£'000 |
|
|
|
|
|
|
|
As at 1 January 2020 |
|
265,876 |
62,445 |
328,321 |
|
|
|
|
|
|
|
Loss for the period |
|
- |
(14,146) |
(14,146) |
|
Total comprehensive loss |
|
- |
(14,146) |
(14,146) |
|
|
|
|
|
|
|
Share buyback |
9 |
(3,000) |
- |
(3,000) |
|
Dividend paid |
17 |
- |
(1,407) |
(1,407) |
|
|
|
(3,000) |
(1,407) |
(4,407) |
|
|
|
|
|
|
|
As at 30 June 2020 |
|
262,876 |
46,892 |
309,768 |
|
|
Notes |
Share capital |
Retained earnings |
Total |
|
|
|
£'000 |
£'000 |
£'000 |
|
|
|
|
|
|
|
As at 1 January 2020 |
|
265,876 |
62,445 |
328,321 |
|
|
|
|
|
|
|
Profit for the year |
|
- |
78,072 |
78,072 |
|
Total comprehensive income |
|
- |
78,072 |
78,072 |
|
|
|
|
|
|
|
Share buyback |
9 |
(6,781) |
- |
(6,781) |
|
Dividend paid |
17 |
- |
(1,407) |
(1,407) |
|
|
|
(6,781) |
(1,407) |
(8,188) |
|
|
|
|
|
|
|
As at 31 December 2020 |
|
259,095 |
139,110 |
398,205 |
The notes form an integral part of these financial statements.
Unaudited Condensed Statement of Cash Flows
For the period from 1 January 2021 to 30 June 2021
|
|
|
|
|
|
|
|
|
1 January 2021 to 30 June 2021 (unaudited) |
1 January 2020 to 30 June 2020 (unaudited) |
1 January 2020 to 31 December 2020 (audited) |
|
|
Notes |
£'000 |
£'000 |
£'000 |
|
|
|
|
|
|
|
Operating activities |
|
|
|
|
|
Net profit/(loss) before tax |
|
48,029 |
(14,146) |
78,072 |
|
Adjustments to reconcile profit/(loss) before tax to net cash flows: |
|
|
|
|
|
|
|
|
|
|
|
Unrealised (gain)/loss on investment Dividends received Interest income Movement in receivables and prepayments |
|
(48,451) - -
(1) |
15,214 (1,407) (3)
40 |
(77,295) (1,407) (3)
46 |
|
Movement in trade and other payables |
|
70 |
(16) |
(1) |
|
Net cash flows from operating activities |
|
(353) |
(318) |
(588) |
|
|
|
|
||
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
Dividends received |
5 |
- |
1,407 |
1,407 |
|
Capital distribution from Midco |
5 |
- |
3,000 |
3,000 |
|
Share redemption from Midco |
5 |
14,175 |
- |
4,000 |
|
Finance income |
|
- |
3 |
3 |
|
Net cash flows from investing activities |
|
14,175 |
4,410 |
8,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
Shares repurchase |
9 |
(14,350) |
(3,000) |
(6,781) |
|
Dividend paid |
17 |
- |
(1,407) |
(1,407) |
|
Net cash flows from financing activities |
|
(14,350) |
(4,407) |
(8,188) |
|
|
|
|
||
|
|
|
|
|
|
|
Net movement in cash and cash equivalents |
|
(528) |
(315) |
(366) |
|
|
|
|
||
|
|
|
|
|
|
|
Opening cash and cash equivalents |
|
1,691 |
2,057 |
2,057 |
|
Closing cash and cash equivalents |
|
|
|
|
|
|
1,163 |
1,742 |
1,691 |
The notes form an integral part of these financial statements
Notes to the Unaudited Condensed Interim Financial Statements
For the period from 1 January 2021 to 30 June 2021
1. Corporate information
Trian Investors 1 Limited (the "Company") is incorporated in and controlled from Guernsey as a company limited by shares with registered number 65419. The Ordinary Shares of the Company (the "Shares") are admitted to the Specialist Fund Segment of the London Stock Exchange (the "SFS").
On 14 June 2021, shareholders approved amendments to the Company's existing investment policy to allow the Company to invest in one or more U.K. or U.S. target companies at the same time and to acquire minority, majority or controlling interests in any listed or unlisted target company ("Target Company"). In tandem, the Company also revised its existing policies and guidelines on recycling sale proceeds and return of capital so that all net proceeds, including net profits, generated from dividends as well as the sale of any investment in a Target Company, may be reinvested following disposal.
In light of the Company's ability to invest in more than one Target Company at a time following the approval of the Company's revised investment policy, the Company registered with the Guernsey Financial Services Commission on 16 June 2021 as a registered collective investment scheme.
2. Accounting policies
The principal accounting policies applied in the preparation of these Unaudited Condensed Interim Financial Statements are set out below.
Basis of preparation
The annual financial statements will be prepared in accordance with International Financial Reporting Standards ("IFRS"), as adopted by the European Union, which comprise standards and interpretations approved by the International Accounting Standards Board and International Financial Reporting Interpretations Committee and in accordance with the Companies (Guernsey) Law, 2008. The financial statements will be prepared on a historical cost basis as amended from time to time by the fair valuing of certain financial assets and liabilities.
These condensed interim financial statements included in this half-yearly report have been prepared in accordance with European Union adopted International Accounting Standard 34, "Interim Financial Reporting". The same accounting policies and methods of computation are followed in the interim financial statements as compared with the annual financial statements. These condensed interim financial statements do not include all information and disclosures required in the annual financial statements and should be read in conjunction with the Company's annual financial statements as of 31 December 2020.
Going concern
The Directors monitor the capital and liquidity requirements of the Company on a regular basis. They have undertaken a rigorous review of the Company's ability to continue as a going concern, including by reviewing the Company's ongoing cash flows and level of liquid investments and cash balances as at the reporting date, as well as forecasting future cash flows, and they are of the opinion that the Company has adequate resources to continue its operational activities for at least twelve months. The Directors are of the opinion that the COVID-19 outbreak should not impact the Company's ability to continue as a going concern despite the resulting uncertainty it has created.
Based on these sources of information and their own judgement, the Directors believe it is appropriate to prepare the interim financial statements of the Company on a going concern basis.
New and amended standards and interpretations applied
The following accounting standards and updates were applicable in the reporting period but did not have a material impact on the Company:
- Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 Interest Rate Benchmark Reform - Phase 2
New and amended standards and interpretations not applied
The following new and amended standards and interpretations in issue are applicable to the Company but are not yet effective or have not been adopted by the European Union and therefore, have not been adopted by the Company:
- IFRS 17: Insurance Contracts (effective 1 January 2023)
The Company has considered the impact of IFRS 17 and concluded it is not likely to have a material effect on the Company, as the Company does not expect to carry out any transactions that fall within its scope.
Segment reporting
The Directors are of the opinion that the Company is currently engaged in a single segment of business, being the investment through Trian Investors 1 Midco Limited ("Midco") into Trian Investors 1, L.P. (Incorporated) (the "Investment Partnership") .
3. Significant accounting judgements, estimates and assumptions
The preparation of the financial statements requires the Directors to make estimates and assumptions that affect the amounts reported for assets and liabilities as at the Statement of Financial Position date and the amounts reported for revenue and expenses during the period. The nature of the estimation means that actual outcomes could differ from those estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected.
The Directors also need to make judgements (other than those involving estimates) that have a significant impact on the application of accounting standards. The following critical judgements apply to the Company's investments. There are no key sources of estimation uncertainty.
i) Investment entity exemption:
The Directors have considered whether the Company meets the definition of an investment entity as stipulated in the provisions of IFRS 10. Entities that meet the definition of an investment entity within IFRS 10 are required to measure their subsidiaries, other than those that provide investment services to the Company and do not themselves meet the definition of an investment entity, at fair value through profit or loss rather than consolidate them.
When entities are formed in connection with each other, the criteria for qualification as an investment entity is applied to the structure as a whole rather than for the entity in isolation.
The criteria which define an investment entity are as follows:
• An entity that obtains funds from one or more investors for the purpose of providing those investors with investment services;
• An entity that commits to its investors that its business purpose is to invest funds solely for returns from capital appreciation, investment income or both; and
• An entity that measures and evaluates the performance of substantially all of its investments on a fair value basis.
The Company's purpose is to invest through the Investment Partnership in one or more Target Companies for capital appreciation and it will measure performance (of the Target Companies) on a fair value basis. To date, the Company has only made a single investment in a Target Company, Ferguson plc ("Ferguson"), through its wholly owned subsidiary, Midco, which in turn holds 99.83 per cent of the commitment in the Investment Partnership. Midco was incorporated in Guernsey and its principal place of business is Guernsey. The Board has assessed whether the Company has all the elements of control as prescribed by IFRS 10 in relation to the Company's investment in the Investment Partnership and has concluded that the Company does have control of the Investment Partnership. Midco and the Investment Partnership are therefore both classified as subsidiaries of the Company. The Board has also assessed that the Company meets the criteria of an investment entity and therefore the subsidiaries are recorded at fair value through profit and loss rather than being consolidated. The Board's determination that the Company is classified as an investment entity involves a degree of judgement due to the complexity of the wider structure encompassing the Company, Midco and the Investment Partnership.
ii) Use of last sales price published by the exchange:
The Directors believe that a key judgement relates to the valuation of the investment in Ferguson held through the Investment Partnership. The Ordinary Shares of Ferguson are listed on the Main Market of the London Stock Exchange and the Directors must determine whether the market is sufficiently liquid for the last sales price published by the exchange to be a fair value in accordance with IFRS principles. The Directors have assessed that there is a sufficiently liquid market in Ferguson Ordinary Shares and accordingly they consider the quoted share price to be the appropriate basis for the valuation of this investment.
4. Income tax
The Company is exempt from taxation in Guernsey under the provisions of the Income Tax (Exempt Bodies) (Guernsey) Ordinance, 2008 and is charged an annual exemption fee of £1,200.
5. Investment at fair value through profit or loss
|
|
1 Jan to 30 Jun 2021 |
1 Jan to 30 Jun 2020 |
1 Jan to 31 Dec 2020 |
|
|
(unaudited) |
(unaudited) |
(audited) |
|
|
£'000 |
£'000 |
£'000 |
|
Cost |
|
|
|
|
Brought forward |
257,000 |
264,000 |
264,000 |
|
Capital distribution |
- |
(3,000) |
(3,000) |
|
Share redemption |
(14,175) |
- |
(4,000) |
|
Carried forward |
242,825 |
261,000 |
257,000 |
|
|
|
|
|
|
Fair value adjustment through profit or loss |
|
|
|
|
Brought forward |
139,523 |
62,228 |
62,228 |
|
Fair value movement |
48,451 |
(15,214) |
77,295 |
|
Carried forward |
187,974 |
47,014 |
139,523 |
|
Fair value |
430,799 |
308,014 |
396,523 |
|
|
|
|
|
As at 30 June 2021, the Company held 245,825,000 Ordinary Shares in Midco, representing 100 per cent of the share capital, which were subscribed for at 100 pence per share (30 June 2020: 264,000,000 ; 31 December 2020: 260,000,000 ), and Midco has contributed £264,000,000 to the Investment Partnership (30 June 2020: £ 264,000,000 ; 31 December 2020: £ 264,000,000 ). As at 30 June 2021, Midco held 99.83 per cent of the commitment in the Investment Partnership (30 June 2020: 99.83 per cent; 31 December 2020: 99.83 per cent). During the period from 1 January 2021 to 30 June 2021 the Company received cash from Midco of £14,175,000, all of which comprised a share redemption, which it used, with cash received from Midco in the prior year, to conduct £14,350,000 of share repurchases (period to 30 June 2020: Company received cash from Midco of £4,407,000, comprising of a £1,407,000 dividend and a £3,000,000 capital distribution, which it used to declare a £1,407,000 dividend to shareholders and to conduct a £3,000,000 share repurchase; year to 31 December 2020: Company received cash from Midco of £8,407,000, comprising a £1,407,000 dividend, a capital distribution of £3,000,000 and a £4,000,000 share redemption, which it used to declare a £1,407,000 dividend to shareholders and to conduct £6,781,000 of share repurchases).
Investments at fair value through profit or loss comprise Midco's pro rata portion of the fair value of the Investment Partnership's investment in Ferguson, currency option, cash and working capital balance, less accrued incentive allocation ("Incentive Allocation") payable from the Investment Partnership to Trian Investors 1 SLP, L.P., the special limited partner of the Investment Partnership ("Trian SLP").
The Investment Partnership's investment in Ferguson is currently treated as a "Stake Building Investment". If the investment continues to be a "Stake Building Investment" until realisation, the Incentive Allocation will be equal to 20 per cent of net returns on the investment, payable after the Investment Partnership has distributed to its partners an amount equal to the aggregate capital contributions made in respect of the investment (excluding any capital contributions attributable to management fees).
The Investment Partnership's investment in Ferguson, unless otherwise agreed with the Company, will cease to be considered a "Stake Building Investment", and will instead be considered an "Engaged Investment", if and when Trian Investors Management, LLC (the "Investment Manager") obtains representation on Ferguson's board of directors, through one or more partners of Trian Fund Management, L.P. ("Trian Management"). If the investment becomes an "Engaged Investment", the Incentive Allocation will be equal to 10 per cent to 25 per cent of the Investment Partnership's net returns on the investment (excluding any capital contributions attributable to management fees), as set forth in greater detail in the Investment Partnership's Amended and Restated Limited Partnership Agreement made effective as of 14 June 2021 (the "LPA"). As at 30 June 2021, there was an incentive allocation accrual of £49,085,000 (as at 30 June 2020: £12,875,000; as at 31 December 2020: £36,445,000).
In addition, the Investment Partnership invested in a £125,000,000 currency call option to offset a portion of the Investment Partnership's U.S. Dollar exposure arising from its investment in Ferguson, which receives the vast majority of its revenues in U.S. Dollars. The option offered protection against a weakening in the U.S. Dollar against Pound Sterling and expired on 16 June 2020. In March 2020, the Investment Partnership entered into an additional currency call option (the "March 2020 Option"), expiring in March 2021, to purchase £125,000,000 for US$165,875,000, in order to hedge the Company's currency exposure for a further nine months as well as a three month overlap on the original currency call option.
In February 2021, following a strengthening of Pounds Sterling against the U.S. Dollar, the Company through the Investment Partnership took advantage of attractive pricing conditions and sold the March 2020 Option for £5,200,000. Simultaneously, the Company through the Investment Partnership entered into a new option (the "February 2021 Option") , which expires in February 2022, to purchase £125,000,000 for US$181,250,000, for a premium of £1,743,750. Taken together, these two transactions were designed to allow the Company to recognise cash proceeds of £3,456,250 on a net basis, while still providing it with protection against significant further appreciation of Pounds Sterling against the U.S. Dollar until February 2022.
The accounting for the Investment Partnership is prepared under IFRS.
Summary financial information for Midco's pro rata share of the Investment Partnership
|
|
30 Jun 2021 |
30 Jun 2020 |
31 Dec 2020 |
|
|
(unaudited) |
(unaudited) |
(audited) |
|
Net asset value |
£'000 |
£'000 |
£'000 |
|
Investment in Ferguson at cost |
249,566 |
249,566 |
249,566 |
|
Unrealised gain on investment in Ferguson |
225,044 |
62,685 |
169,979 |
|
Total value of investment in Ferguson |
474,610 |
312,251 |
419,545 |
|
|
|
|
|
|
Foreign exchange option |
777 |
1,326 |
4,616 |
|
Cash and cash equivalents |
4,521 |
7,334 |
8,816 |
|
Other net liabilities |
(24) |
(22) |
(9) |
|
Incentive Allocation payable |
(49,085) |
(12,875) |
(36,445) |
|
Total net asset value |
430,799 |
308,014 |
396,523 |
|
|
|
|
|
|
|
1 Jan - 30 Jun 2019
|
1 Jan - 30 Jun Jun 2019
|
1 Jan - 31 Dec 2019
|
|
|
2021 |
2020 |
2020 |
|
|
(unaudited) |
(unaudited) |
(audited) |
|
Summary income statement
|
£'000 |
£'000
2019 2019 |
£'000
2019 2019 |
|
Unrealised gain/(loss) on investment in Ferguson |
55,064 |
(11,240) |
96,055 |
|
Unrealised (loss)/gain on foreign exchange option |
(3,517) |
(859) |
2,430 |
|
Realised gain/(loss) on foreign exchange option |
3,129 |
(2,860) |
(2,860) |
|
Ferguson dividend income |
8,600 |
- |
7,312 |
|
Interest income |
- |
12 |
12 |
|
Management fee expense |
(2,107) |
(1,488) |
(3,261) |
|
Other operating expense |
(78) |
(54) |
(98) |
|
Incentive Allocation (payable)/receivable |
(12,640) |
2,682 |
(20,888) |
|
Profit/(loss) |
48,451 |
(13,807) |
78,702 |
6. Fair value
IFRS 13 'Fair Value Measurement' requires disclosure of fair value measurement by level.
The level in the fair value hierarchy within which the financial assets or financial liabilities are categorised is determined on the basis of the lowest level input that is significant to the fair value measurement.
Financial assets and financial liabilities are classified in their entirety into only one of the three levels.
The only financial instruments carried at fair value are the investments which are fair valued at each reporting date.
The Company holds 99.83 per cent of the commitment in the Investment Partnership through Midco, a wholly owned subsidiary. Midco's investment in the Investment Partnership has been classified within Level 2 as the Investment Partnership primarily invests in quoted securities which are classified within Level 1. The amount of Midco's investment in the Investment Partnership classified under Level 2 as at 30 June 2021 is £430,799,000 (30 June 2020: £308,014,000; 31 December 2020: £396,523,000). The amount of Midco's pro rata portion of the Investment Partnership's investments that is classified within Level 1, consisting of the Investment Partnership's investment in Ferguson Ordinary Shares, as at 30 June 2021 is £474,610,000 (30 June 2020: £312,251,000; 31 December 2020: £419,545,000). The amount that is classified within Level 2, consisting of the Investment Partnership's investment in a currency option, as at 30 June 2021 is £777,000 (30 June 2020: £1,326,000; 31 December 2020: £4,616,000).
Transfers during the period
A reconciliation of fair value measurements in Level 2 is set out in the following table. Due to the nature of the investments, they are always expected to be classified under Level 2.
|
|
1 Jan 2021 - 30 Jun 2021 |
1 Jan 2020 - 30 Jun 2020 |
1 Jan 2020 - 31 Dec 2020 |
|
|
(unaudited) |
(unaudited) |
(audited) |
|
|
£'000 |
£'000 |
£'000 |
|
Opening fair value at beginning of the period/year |
396,523 |
326,228 |
326,228 |
|
Capital distribution |
- |
(3,000) |
(3,000) |
|
Share redemption |
(14,175) |
- |
(4,000) |
|
Movement in fair value |
48,451 |
(15,214) |
77,295 |
|
Closing fair value at the end of the period/year |
430,799 |
308,014 |
396,523 |
Valuation techniques
The value of Midco's investment in the Investment Partnership is based on the value of Midco's limited partner capital account within the Investment Partnership. This is based on the components within the Investment Partnership, principally the value of the underlying investee company, the currency option, cash and the Incentive Allocation. Any fluctuation in the value of the underlying investee company will directly impact the value of Midco's investment in the Investment Partnership and will also impact the value of the Incentive Allocation.
Valuations are determined in accordance with a pricing policy agreed between the Directors and the Investment Manager from time to time. Calculations will be made in accordance with IFRS principles or as otherwise determined by the Board.
In accordance with the LPA, for the purposes of calculating the NAV of the Investment Partnership, its assets will be valued on the following basis:
· The shares in Ferguson were listed on the Main Market of the London Stock Exchange throughout the year and are valued at the last sales price published by the exchange.
· The valuation of the February 2021 Option is performed by utilising an external data source which uses proprietary software and a valuation model to perform the fair value calculation. The valuation model used to value the February 2021 Option is the Black-Scholes model.
The Board approves the valuations performed by the Investment Manager and monitors the range of reasonably possible changes in significant observable inputs at each reporting date.
7. Receivables and prepayments
|
|
30 Jun 2021 (unaudited) £'000 |
30 Jun 2020 (unaudited) £'000 |
31 Dec 2020 (audited) £'000 |
|
|
|
|
|
|
Other prepaid expenses |
51 |
46 |
50 |
|
Receivable from Investment Partnership |
- |
10 |
- |
|
|
51 |
56 |
50 |
|
The carrying value of receivables and prepayments approximates their fair value.
|
|||
8. Trade and other payables
|
|
30 Jun 2021 (unaudited) £'000 |
30 Jun 2020 (unaudited) £'000 |
31 Dec 2020 (audited) £'000 |
|
|
|
|
|
|
Administration fees |
31 |
10 |
10 |
|
Audit fees |
13 |
12 |
26 |
|
Non-audit fees |
17 |
17 |
- |
|
Director fees |
8 |
- |
- |
|
Other professional fees |
60 |
5 |
23 |
|
|
129 |
44 |
59 |
|
|
|
|
|
The carrying value of trade payables and other payables approximates their fair value.
9. Share capital and capital management
Capital risk management
The Company's objective for capital risk management is to safeguard the Company's ability to continue as a going concern and to provide returns for shareholders. The Company considers its capital to consist of the shares issued and retained earnings.
The Board reviews the Company's NAV monthly, as calculated in accordance with IFRS, and the Company's Share price (as well as its discount or premium to NAV per Share) in the context of market conditions, with input from the Investment Manager and its Corporate Brokers. As explained in note 5 and shown in the tables below, the Company has repurchased a total of 17,166,913 shares at a discount to NAV in the period from February 2020. In addition, the Company currently expects to continue to use ordinary dividends received from Ferguson that are not needed for working capital or other corporate purposes to fund share repurchases. Share repurchases are subject to the Company's discretion based on market and economic conditions, the price and trading volume of the Company's shares and other factors.
The Company has the ability to hold its own Shares in treasury. All Shares repurchased by the Company are currently being held in treasury, and the Company may use this ability again from time to time in the future. The Company's Articles of Incorporation and the Companies Law do not limit the number of Shares held in treasury provided that at least one share of any class is held by a person other than the Company. The Company is not subject to any externally imposed capital restrictions.
Ordinary shares of no par value
|
Net shares outstanding |
|
|
30 Jun 2021 |
30 Jun 2020 |
31 Dec 2020 |
||
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
Shares issued |
|
|
270 ,585,977 |
270 ,585,977 |
270 ,585,977 |
||
|
Shares held in Treasury |
|
|
(17,166,913) |
(2,760,830) |
(6,118,886) |
||
|
Net number of shares outstanding |
|
|
253,419,064 |
267,825,147 |
264,467,091 |
||
|
The Company's authorised share capital as at 30 June 2021, 30 June 2020 and 31 December 2020 is 300,000,000 Ordinary Shares. As at 30 June 2021, 17,166,913 shares were held in Treasury (30 June 2020: 2,760,830; 31 December 2020: 6,118,886). |
|||||||
|
|
|
|
|
||||
|
|
|
|
£'000 |
||||
|
Issued and fully paid: |
|
|
|
||||
|
As at 1 January 2021 |
|
|
259,095 |
||||
|
Repurchased during the period |
|
|
(14,350) |
||||
|
As at 30 June 2021 |
|
|
244,745 |
||||
|
Issued and fully paid: |
|
|
|
||||
|
As at 1 January 2020 |
|
|
265,876 |
||||
|
Repurchased during the period |
|
|
(3,000) |
||||
|
As at 30 June 2020 |
|
|
262,876 |
||||
|
Issued and fully paid: |
|
|
|
||||
|
As at 1 January 2020 |
|
|
265,876 |
||||
|
Repurchased during the year |
|
|
(6,781) |
||||
|
As at 31 December 2020 |
|
|
259,095 |
||||
10. Net Asset Value per Share
|
|
30 Jun 2021 |
30 Jun 2020 |
31 Dec 2020 |
|
|
|
(unaudited) |
(unaudited) |
(audited) |
|
|
|
|
|
|
|
|
IFRS Net Assets (£'000) |
431,884 |
309,768 |
398,205 |
|
|
|
|
|
|
|
|
Number of Ordinary Shares in issue |
253,419,064 |
267,825,147 |
264,467,091 |
|
|
|
|
|
|
|
|
IFRS NAV per Share (pence) |
170.42 |
115.66 |
150.57 |
|
|
|
|
|
|
|
The IFRS net asset value ("NAV") per Share is arrived at by dividing the IFRS Net Assets by the number of Ordinary Shares in issue.
11. Earnings/(loss) per share
|
|
|
|
||
|
|
|
1 Jan 2021 to 30 Jun 2021 |
1 Jan 2020 to 30 Jun 2020 |
1 Jan 2020 to 31 Dec 2020 |
|
|
|
(unaudited) |
(unaudited) |
(audited) |
|
|
|
|
|
|
|
Profit/(loss) for the period/year (£'000) |
|
48,029 |
(14,146) |
78,072 |
|
|
|
|
|
|
|
Weighted average number of Ordinary Shares in issue |
|
262,361,275 |
268,693,049 |
268,093,698 |
|
|
|
|
|
|
|
Earnings/(loss) per share (pence) |
|
18.31 |
(5.26) |
29.12 |
|
|
|
|
|
|
There were no dilutive potential Ordinary Shares in issue as at 30 June 2021, 30 June 2020 or 31 December 2020.
12. Financial risk management
Financial risk management objectives
The Company's activities expose it to various types of financial risk, principally market risk and credit risk. The Company has minimal exposure to liquidity risk. The Board has overall responsibility for the Company's risk management and sets policies to manage those risks at an acceptable level.
Financial risk factors
The Company's investment objective is to realise capital growth from its investment in one or more Target Companies with the aim of generating significant capital return for shareholders. At present the Company's only significant financial assets are those held through the Investment Partnership, via Midco, consisting of Ordinary Share of Ferguson, a currency call option and cash and cash equivalents held at both levels.
Credit risk
Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. The Company manages its credit risk by scrutinising the financial standing of counterparties with which it enters into transactions, using external credit ratings where available. Credit risk is reviewed periodically to identify balances that may have become impaired or uncollectable.
An event of default is a pre-specified condition or threshold that, if met, allows the lender or creditor to demand immediate and full repayment of a debt or obligation. The Company is exposed to credit risk through its balances with banks. The table below shows the Company's material cash balances and foreign currency option held and the short-term issuer credit rating as at the year end date:
|
|
Location |
Rating |
30 Jun 2021 |
30 Jun 2020 |
31 Dec 2020 |
|
|
|
|
(unaudited) |
(unaudited) |
(audited) |
|
|
|
|
£'000 |
£'000 |
£'000 |
|
|
|
|
|
|
|
|
Bank of New York Mellon |
|
|
|
|
|
|
UK |
AA- |
1,163 |
1,742
|
1,691 |
|
|
|
|
|
1,163 |
1,742 |
1,691 |
The table below shows the Investment Partnership's material cash balances and the short-term issuer credit rating or money-market fund credit rating as at the period end date:
|
|
Location |
Rating |
30 Jun 2021 |
30 Jun 2020 |
31 Dec 2020 |
|
|
|
|
(unaudited) |
(unaudited) |
(audited) |
|
|
|
|
£'000 |
£'000 |
£'000 |
|
Bank of New York Mellon UBS AG - Stamford |
|
|
|
|
|
|
UK
USA |
AA-
AA- |
4,529
778 |
7,347
1,329 |
8,832
4,623 |
|
|
|
|
|
5,307 |
8,676
|
13,455
|
Market risk
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate as a result of market price changes. The Company is exposed to market price risk and currency risk. The Company has no significant exposure to interest rate risk.
Market price risk
Market price risk arises as a result of the Company's exposure to the future values of shareholdings in Target Companies; currently solely Ferguson. It represents the potential loss the Company may suffer through investing in a Target Company. By way of example, if the price of Ferguson moved by 30% as at 30 June 2021, the effect on the NAV of the Company would be an increase or decrease of £113,906,000 (30 June 2020: £24,980,000 based on [10 per cent movement]; 31 December 2020: £100,691,000 based on 30 per cent movement). A change of 30 per cent reflected a reasonable change in the share price of Ferguson based upon the period ended 30 June 2021. Please see note 18 for post year end information.
Currency Risk
As at 30 June 2021, the Company had exposure to currency risk as a result of its investment in Ferguson through the Investment Partnership, which receives the vast majority of its revenue in U.S. Dollars. At 30 June 2021 the Company through the Investment Partnership held an option, which expires in February 2022, to purchase £125,000,000 for US$181,250,000 (at 30 June 2020 and 31 December 2020 it held a currency option, expiring in March 2021, to purchase £125,000,000 for US$165,875,000.). The option is designed to provide the Company with protection against significant appreciation of Pounds Sterling against the U.S. Dollar. However, there is no assurance that the currency call option will be effective at managing the Company's currency exposure.
13. Financial Instruments
|
|
|
30 June 2021 (unaudited) |
30 June 2020 (unaudited) |
31 December 2020 (audited) |
|
|
|
£'000 |
£'000 |
£'000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets at fair value through profit or loss |
|
|
|
|
|
|
|
|
|
|
|
Investment in Midco |
|
430,799 |
308,014 |
396,523 |
|
|
|
430,799 |
308,014 |
396,523 |
|
Financial assets measured at amortised cost |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
1,163 |
1,742 |
1,691 |
|
Receivables |
|
- |
10 |
- |
|
|
|
1,163 |
1,752 |
1,691 |
|
|
|
|
|
|
|
Financial liabilities measured at amortised cost |
|
|
|
|
|
|
|
|
|
|
|
Trade and other payables |
|
129 |
44 |
59 |
|
|
|
129 |
44 |
59 |
14. Related parties
Key management personnel
The Directors are considered to be the Key Management Personnel of the Company. They are all non-executive and receive an annual fee denominated in Pounds Sterling.
The Chairman receives an annual fee of £55,000, the Chairman of the Audit Committee receives £45,000, and the other non-executive Director receives £40,000.
Directors' fees and expenses for the period to 30 June 2021 amounted to £70,000 (six month period to 30 June 2020: £70,000; year to 31 December 2020: £140,000), of which £8,000 was outstanding at the period end (six month period to 30 June 2020: £nil; year to 31 December 2020: £nil).
The Directors did not receive dividends on their shares during the period to 30 June 2021 (six month period to 30 June 2020: total dividends paid to Directors of £1,000; year to 31 December 2020: total dividends paid to Directors of £1,000).
Incentive Allocation
Under the terms of the LPA, Trian SLP, the special limited partner of the Investment Partnership, is entitled to receive an incentive allocation based on the investment performance of the Investment Partnership. This is detailed in notes 5 and 15.
Intergroup balances
As at 30 June 2021 the Investment Partnership owed £nil to the Company (30 June 2020: £10,000; 31 December 2020: £nil) in relation to custodian fee expenses paid on its behalf.
15. Significant Agreements
Trademark fees
Trian Management has granted to the Company, Midco and the Investment Partnership a non-exclusive licence to use the name, logo and graphic identity "Trian" in the UK and the Channel Islands in the corporate name of these entities and in connection with the conduct of their business affairs, and the Company is using the name, logo and graphic identity "Trian" within the Annual Report and these Interim Financial Statements pursuant to such licence. Trian Management receives a fee of £70,000 per annum split between the Company, Midco and the Investment Partnership for the use of the licensed name, logo and graphic identity. For the six month period ended 30 June 2021, fees of £23,000 were paid by the Company in relation to the licence (six month period ending 30 June 2020: £23,000; year ending 31 December 2020: £47,000).
Administration Agreement
On 19 September 2018, the Company and Ocorian Administration (Guernsey) Limited ("Ocorian") entered into an administration agreement. Under the terms of the agreement the Company (alongside the Investment Partnership) is charged a fixed administration fee of £97,000 per annum from 27 September 2018 payable monthly in arrears, administration fees for Midco of £5,000 per annum, NAV preparation fees of £10,000 per annum, compliance officer services of £6,000 per annum, MLRO services of £3,000 per annum and data protection officer services of £2,000 per annum. Fees are adjusted annually to rise in line with the Guernsey Retail Price Index. For the six month period ended 30 June 2021, aggregate fees of £76,000 were paid to Ocorian (six month period ended 30 June 2020: £86,000; year to 31 December 2020: £147,000).
Management Agreement
The management agreement between the Investment Partnership and the Investment Manager was amended and restated on 19 July 2021 and made effective as of 14 June 2021, in order to reflect the revised investment policy and revised policies and guidelines on recycling sale proceeds and return of capital described, which are each described in note 1 above. No revisions were made to the manner in which management fees are calculated.
The Investment Manager is entitled to management fees in consideration of its work equal to one twelfth of 1 per cent of the adjusted NAV of the Investment Partnership, calculated as of the last business day of the preceding month. The management fee is payable in advance to the Investment Manager on the first business day of each calendar month. For the six month period ended 30 June 2021, management fees of £2,107,000 were paid to the Investment Manager (six month period ended 30 June 2020: £1,488,000; year ended 31 December 2020: £3,261,000).
LPA and Calculation of Incentive Allocation
The LPA was amended and restated on 19 July 2021 and made effective as of 14 June 2021, to reflect the revised investment policy and revised policies and guidelines on recycling sale proceeds and return of capital, which are each described in note 1 above, as well as to provide that Trian SLP will receive future incentive allocations (net of amounts required to cover certain tax liabilities) in the form of Shares, to be valued at NAV at the time of issuance. In addition, the LPA was amended and restated to provide that should the Company realise losses on any future investment, Trian SLP will not receive any incentive allocation on investment returns until the Company recovers such realised losses. The Company is considering the accounting treatment of share-based payments to be adopted post-approval of the new LPA on 19 July 2021.
Under the terms of the LPA, Trian SLP is entitled to receive an incentive allocation based on the investment performance of the Investment Partnership. The incentive allocation may be between 0 to 25 per cent of the net returns of the Investment Partnership. The calculation of the incentive allocation is described in more detail in note 5 above and the LPA. As at 30 June 2021, there was an incentive allocation accrual of £49,085,000 (as at 30 June 2020: £12,875,000; as at 31 December 2020: £36,445,000).
UBS Credit Facility
In March 2021, the Investment Partnership entered into a revolving credit facility (the "Credit Facility") with UBS Bank USA ("UBS"), which permits the Investment Partnership to borrow an aggregate amount of up to $70 million at an interest rate equal to one month LIBOR plus 1.75%. There are no commitment or closing fees associated with the facility. In connection with establishing the facility, the Investment Partnership transferred its shares of Ferguson to a securities account operated by UBS Financial Services Inc. and a portion of the shares are pledged as collateral under the facility, with the remaining shares subject to a negative covenant restricting their sales or disposal while the Credit Facility remains outstanding. UBS may elect to demand repayment of any outstanding borrowing under the Credit Facility, or terminate the Credit Facility, upon 60 days' notice. The Investment Partnership may elect to terminate the Credit Facility at any time so long as no borrowing is outstanding.
No borrowings under the Credit Facility were made during the period from 1 January 2021 to 30 June 2021.
16. Auditor remuneration
The auditor's remuneration relating to services to the Company for the period was:
|
|
1 Jan 2021 to 30 Jun 2021 (unaudited) £'000 |
1 Jan 2020 to 30 Jun 2020 (unaudited) £'000 |
1 Jan 2020 to 31 Dec 2020 (audited) £'000 |
|
|
|
|
|
|
Audit fees |
13 |
12 |
26 |
|
Non-audit fees |
17 |
16 |
17 |
|
|
30 |
28 |
43 |
Differences between the figures in the above table and the Statement of Comprehensive Income are due to accruals. During the six month period to 30 June 2020 non-audit fees of £8,000 were recorded in the Statement of Comprehensive Income and during the year to 31 December 2021 non-audit fees of £9,000 were recorded in the Statement of Comprehensive Income.
In addition, the fee for the audit of the Investment Partnership of £7,000 (period to 30 June 2020: £6,000; year to 31 December 2020: £13,000) and the fee for investor tax reporting of £nil (period to 30 June 2020: £7,000; year to 31 December 2020: £4,100) is payable by the Investment Partnership.
17. Dividends
The Company did not pay out a dividend to shareholders during the six month period to 30 June 2021 (period to 30 June 2020: total dividends of £1,407,000 paid; year to 31 December 2020: total dividends of £1,407,000 paid).
18. Subsequent events
The Company's NAV as at 31 August 2021 is £447,884,000, or 176.74 pence per Ordinary Share, which is a 3.7% increase compared to 30 June 2021.
In the opinion of the Directors there have been no events after the reporting date that require disclosure in these interim financial statements.
Investment Manager's Report Disclosure Statements and Disclaimers
General Considerations
The Investment Manager's Report is for general informational purposes only and does not constitute any advice or recommendation to invest in Trian Investors 1 Limited (the "Company") or Ferguson plc ("Ferguson") or enter into or conclude any other transaction. The Investment Manager's Report should not be construed as legal, tax, investment, financial or other advice. It does not have regard to the specific investment objective, financial situation, suitability, or the particular need of any specific person who may receive the Investment Manager's Report and should not be taken as advice on the merits of any investment decision. The views expressed in the Investment Manager's Report represent the opinions of Trian Investors Management, LLC (the "Investment Manager") and its parent, Trian Fund Management, L.P. (collectively, "Trian") and are based on publicly available information with respect to Ferguson and the other companies referred to therein. Trian recognises that there may be confidential information in the possession of Ferguson and the other companies discussed in the Investment Manager's Report that could lead such companies to disagree with Trian's conclusions. Trian does not endorse third-party estimates or research which are used in the Investment Manager's Report solely for illustrative purposes.
Select figures presented in the Investment Manager's Report, including investment values, have not been calculated using generally accepted accounting principles ("GAAP") or International Financing Reporting Standards ("IFRS") and have not been audited by independent accountants. Such figures may vary from GAAP or IFRS accounting in material respects and there can be no assurance that the unrealised values reflected in the Investment Manager's Report will be realised. Nothing in the Investment Manager's Report is intended to be a prediction of the future trading price or market value of securities of Ferguson or the Company. There is no assurance or guarantee with respect to the prices at which any securities of Ferguson or the Company will trade, and such securities may not trade at prices that may be implied in the Investment Manager's Report. The estimates, projections, pro forma information and potential impact of Trian's analyses set forth in the Investment Manager's Report are based on assumptions that Trian believes to be reasonable as of the date of the Investment Manager's Report, but there can be no assurance or guarantee that actual results or performance of Ferguson or the Company will not differ, and such differences may be material. The Investment Manager's Report does not recommend the purchase or sale of any security.
The Investment Manager's Report is based upon information reasonably available to Trian as of the date of the Report. Furthermore, the information, which includes information and data used and derived or obtained from filings made with regulatory authorities and from other public filings and third party reports, has been obtained from sources that Trian believes to be reliable; however, these sources cannot be guaranteed as to their accuracy or completeness. No representation, warranty or undertaking, express or implied, is given as to the accuracy or completeness of the information contained in the Investment Manager's Report, by Trian or any of its affiliates or its or their respective partners, members, or employees, and no liability is accepted by such persons for the accuracy or completeness of any such information. Trian reserves the right to change any of its opinions expressed in the Investment Manager's Report at any time as it deems appropriate. Trian disclaims any obligation to update the data, information or opinions contained in the Investment Manager's Report.
Forward Looking Statements
The Investment Manager's Report contains forward-looking statements. All statements contained in the Investment Manager's Report that are not clearly historical in nature or that necessarily depend on future events are forward-looking, and the words "anticipate," "believe," "expect," "estimate," "plan" and similar expressions are generally intended to identify forward-looking statements. The statements contained in the Investment Manager's Report that are not historical facts are based on current expectations, speak only as of the date of the Investment Manager's Report and involve risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such statements. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of Trian. Although Trian believes that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in the Investment Manager's Report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included in the Investment Manager's Report, the inclusion of such information should not be regarded as a representation as to future results or that the objectives and plans expressed or implied by such forward-looking statements will be achieved. Trian will not undertake and specifically declines any obligation to disclose the results of any revisions that may be made to any forward-looking statements in the Investment Manager's Report to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
Not an Offer to Sell or a Solicitation of an Offer to Buy
Under no circumstances is the Investment Manager's Report intended to be, nor should it be construed as, an offer to sell or a solicitation of an offer to buy any security. The funds managed by Trian are in the business of trading -- buying and selling -- securities. It is possible that there will be developments in the future that cause one or more of such funds from time to time to either purchase or sell shares of Ferguson in open market transactions or otherwise or trade in options, puts, calls, contracts for difference or other derivative instruments relating to such shares. Consequently, Trian's beneficial ownership of Ferguson's shares may vary over time depending on various factors, with or without regard to Trian's views of Ferguson's business, prospects or valuation (including the market price of Ferguson's ordinary shares), including without limitation, other investment opportunities available to Trian, concentration of positions in the portfolios managed by Trian, conditions in the securities markets and general economic and industry conditions. Trian also reserves the right to take any actions with respect to any investments in Ferguson as it may deem appropriate, including, but not limited to, communicating with the management of Ferguson, the board of directors of Ferguson, other investors and shareholders, members, stakeholders, industry participants, and/or interested or relevant parties about Ferguson or seeking representation on the board of directors of Ferguson, and to change its intentions with respect to any investments made in Ferguson at any time.
|
Directors Chris Sherwell (Chairman) Mark Thompson (Chairman of the Audit Committee) Simon Holden
Website: www.trianinvestors1.com
Managing General Partner Trian Investors 1 General Partner, LLC 280 Park Avenue, 41st Floor New York, NY 10017 United States
Corporate Brokers Numis Securities Limited The London Stock Exchange Building 10 Paternoster Square London EC4M 7LT United Kingdom
Administrator and Company Secretary Ocorian Administration (Guernsey) Limited PO Box 286, Floor 2 Trafalgar Court Les Banques St Peter Port Guernsey, GY1 4LY
Advocates to the Company As to Guernsey law Ogier (Guernsey) LLP Redwood House St Julian's Avenue St Peter Port Guernsey GY1 1WA
Registrar Link Market Services (Guernsey) Limited Mont Crevelt House Bulwer Avenue St Sampson Guernsey, GY2 4LH |
Registered Office PO Box 286, Floor 2, Trafalgar Court Les Banques St Peter Port Guernsey, GY1 4LY
Investment Partnership Trian Investors 1, L.P. (Incorporated) PO Box 286, Floor 2, Trafalgar Court Les Banques St Peter Port Guernsey, GY1 4LY
Investment Manager Trian Investors Management, LLC 280 Park Avenue, 41st Floor New York, NY 10017 United States
Corporate Brokers Jefferies International Limited Vintners Place 68 Upper Thames Street London EC4V 3BJ United Kingdom
Solicitors to the Company As to English law and US Securities law Norton Rose Fulbright LLP 3 More London Riverside London SE1 2AQ United Kingdom
Independent Auditor Deloitte LLP Regency Court Glategny Esplanade St Peter Port Guernsey, GY1 3HW
Custodian to the Investment Partnership The Bank of New York Mellon - London Branch One Canada Square London E14 5AL United Kingdom
Identifiers ISIN: GG00BF52MW15 SEDOL: BF52MW1 Ticker: TI1 LEI: 213800UQPHIQI5SPNG39 |
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