Dennis Publishing Limited (FUTR) Earnings Call Transcript & Summary

Good morning. Thank you for attending Future Plc's investor call. [Operator Instructions] Please note that this event is being recorded. I will now hand over to Zillah Byng-Thorne, CEO.

Good morning, and thanks very much for joining us today. As you have seen from our announcement earlier today, we have signed a contract to acquire a portfolio of brands from Dennis Publishing. We're really delighted with the opportunity to own this business as it's directly in line with our stated acquisition strategy strengthening our capabilities in subscription revenues, while materially increasing our position in a number of special interest verticals, most notably wealth, knowledge and B2B. In addition to the acceleration of our strategy, the deal is highly attractive from a shareholder return perspective. We expect it to be materially earnings enhancing in the first full year with ROIC expected to exceed WACC in Year 1 also. The deal is expected to complete [ around the 1st of ] October 2021 and will be fully debt-funded. As I mentioned, this acquisition is in line with our stated strategy, deepening our capability in both subscriptions and lead generation, increasing our market share across a number of specialist content verticals and geographically aligned with our desire to be a global operator with a North American focus. The business we're acquiring is both a growth player increasing revenues 12% last year, with a strong drop through to EBITDA and also a robust and predictable business, with around 75% of revenues being generated from subscriptions, while over 50% of revenues are in the [ U.S. ]. We're acquiring a number of iconic brands, for example, The Week, Kiplinger, IT Pro and MoneyWeek. In addition, over 1.2 million subscribers are being added to our existing customer platform. As we've shared before, we think about our acquisitions through 3 lenses: tactical, strategic and transformational. This acquisition is strategic in nature for Future bolstering our growth while increasing our capabilities and content verticals. One critical consideration for us is that we believe we as owners can create unique value through the combination of the two. And when we're looking at our acquisition pipeline, we identified Dennis as a business that we felt presented us with an opportunity to accelerate our strategy while adding unique value, hence, why we approach the owners around the sale. We see 5 core strategic opportunities through this acquisition, in addition to strong financial drivers that Rachel will walk you through in a moment. Firstly, the addition of MoneyWeek and crucially Kiplinger in the U.S. materially strengthens our wealth vertical, given that access to expert advice in this area with the addition of the Future tech platform and the GoCo services, we believe there's a real opportunity to increase the digital reach and monetization in both the U.K. and the U.S. Secondly, our strategy is to operate and diversify business and you have heard me talk before about the holy trinity of media revenues: Advertising, affiliate e-commerce and premium content. As acquisition increases our recurring revenues and subscription capability, adding materially to the mix of premium content in the business with over 75% of the revenue derived from subscription. This drives stable long-term customer retention and brings expertise in relation to all things subscription to future. While also enriching our first-party data, which will bring further opportunity to our audience data platform, Aperture in the U.S. and in the U.K. Today, over half of the revenues are in the U.S. And the kiplinger.com site has historically been used as a marketing tool largely for subscribers. We, therefore, see a material opportunity to accelerate our market position in financial advice in the U.S. through the acquisition of this dotcom and associated brands. The fourth strategic driver is the opportunity to grow our lead generation business through the acquisition of IT Pro, an established brand in the IT professional area, which complements our brands, TechRadar Pro and IT Pro portal. Crucially, the IT Pro team have created and built an established a lead generation process and sales operation, while with Future, we built our lead generation technology in Vulkan. The combination of Future's tech and brands with Dennis' operating model and brand position significantly accelerates our strategy in lead generation. Finally, the acquisition of The Week franchise materially strengthened our knowledge vertical. These are leading brands is over 700,000 subscribers across the U.K. and U.S. This team will complement our existing knowledge brands, including life science and space.com and present an interesting opportunity to create new subscription models from our existing knowledge business, while also representing an opportunity to leverage our technology platforms and centers of excellence for The Week. Now before I hand over to Rachel, I wanted to take a closer look at the 3 specialist content verticals that benefit from this acquisition. Earlier this year, we launched a Future savings in wealth vertical with the acquisition of GoCompare, Mozo and Look After My Bills. We then earlier this month, launched a new organic brand called [ the Money Adder ] aimed at a more millennial audience. And while dotcom, this is initially focused in the U.K. The acquisition of Kiplinger and MoneyWeek materially accelerate our strategy, including giving us a jump start in our U.S. ambitions. Kiplinger and MoneyWeek represent 27% of the current revenue and 67% of the revenues coming from subscribers and a combined online user base of 6 million, coupled with an extraordinary heritage in the market. We see a real opportunity to harness that expertise and heritage coupled with the Future platform and monetization models to build out further digital audience, advertising and e-commerce [Technical Difficulty] using tech platform and a centers of excellence approach. As I've also mentioned before, we have organically been building our own generation capability. And it has been focused mostly [Technical Difficulty] across our B2B Pro vertical via our brands TechRadar Pro in the SME tech enthusiasts and IT Pro portal in the SME IT professionals. The acquisition of IT Pro is very complementary to our existing strategies with 80% of our revenue being generated by lead generation. The opportunity to combine the Future technology in Vulkan and our brands with the Dennis operating model and their business is a real accelerant on our strategy. Future has an existing successful knowledge vertical with the market-winning brands online with space.com and lifescience.com and the comprehensive magazine portfolio in science and history genres. The acquisition of the knowledge brands and Dennis, including The Week, further strengthens this vertical. The acquired brands represent 63% of the acquired revenue and with more than 85% of these revenues coming from subscribers with 85% retention rate. This business has been highly impressive with new launches in The Week Junior and new geographies with a material push of both The Week and The Week Junior into the U.S. We believe there's a real opportunity to harness the Future expertise and science combined with Dennis' expertise and innovative new launches to launch into new areas. With the acquisition, we are acquiring more and leading brands with expert content. As I've mentioned, we're also enhancing our existing capabilities in subscriptions, lead generation and rich first-party data. The Dennis team have a proven model in subscriptions, particularly in relation to the U.S. retention and pricing capabilities. The combination of the existing Dennis operating model and Future Vulkan tech and regeneration also enables us to scale this revenue stream faster. While almost every element of this acquisition brings first-party data allowing us to target efficiently while enriching our Aperture platform. I'm going to now hand over to Rachel, who will take you through the financials and the transaction details.

Thank you, Zillah, and good morning, everyone. In addition to the strength of the strategic rationale of the transaction, it is equally important that it delivers value creation for our shareholders. The acquisition creates increased scale in both online users and subscriber base. The business has had double-digit revenue growth, proving resilient during the pandemic. And the high-quality earnings growth has delivered double-digit EBITDA growth, too. As Zillah mentioned, the composition of earnings is particularly attractive given the high proportion of revenues that are occurring, representing 75%. In addition, the proportion of revenues in North America further strengthens our position in this market. The deal is double digit earnings accretive in the first full year of ownership and the return on investment is higher than our cost of capital in the same period. GBP 5 million of cost synergies are factored into the numbers and calculated from an assessment of back-office operations and property lease requirements. 50% of these are expected to be realized in the first full year of ownership. And finally, the business is highly cash generative with strong cash conversion, complementing Future's trading characteristics. In respect of this and our capital allocation policy, our priorities remain unchanged. Alongside investment in our organic growth, our M&A strategy is focused on acquiring assets which adds value to the group and to our business model capabilities. This acquisition will be 100% debt funded. We have recently amended and extended our debt facility with an increase to GBP 600 million, comprising a revolving credit facility of GBP 400 million and a GBP 200 million term loan repayable in mid-2023. We've had fantastic support from our syndicated banking partners and have secured this new facility at competitive market rates. In addition, the remaining headroom on our facilities post the transaction will be material. The high cash generation of our business alongside our track record means that we will rapidly delever post acquisition to below 1.5x. From a timetable perspective, we are expecting completion to be at the start of our new financial year on the first of October. Our approach to the integration will be the same as we have used on our previous transactions. Using the time precompletion to validate our approach and detail out our integration strategy. This will include critically the identification of Day 1 teams. During the first 90 days, our focus will be on ensuring we retain control of the key functions and manage the back office integrations, for example, payroll, finance and IT. We would expect them to be on our way to securing the strategic benefits outlined earlier in this presentation. We have a proven track record of integrating acquisitions and delivering value. Now let me hand back to Zillah.

Thank you, Rachel. We're really excited about today's acquisition, which is in line with our strategy and has a compelling strategic rationale. It further diversifies our revenue stream from a content, capabilities and geographic basis. It bolsters our wealth, knowledge and B2B tech verticals in both the U.K. and the U.S. and enhances our existing capabilities around subscriptions, lead generation and first-party data. Importantly, as Rachel just outlined, the transaction is financially attractive with a strong growth profile. This transaction is expected to be materially earnings enhancing in the first full year of ownership as well as ROIC being ahead of WACC in the first year. We believe the combination of these brands, coupled with the Future operating model presents an opportunity to create unique value. And with that, let me open the floor to questions.

[Operator Instructions] [ Marion ], who is the question from first?

The first question is from the line of Gareth.

The first one, really, can you expand a little bit on the knowledge side around the kind of monetization levers you think you can drive? I mean my take was the historic NS model around those titles was very much pricing-driven and subscriber growth and quite sort of linked in that regard and not really looking to monetize beyond that. So I wonder if you can expand a little on where you see the real opportunity there. And then the second one would just be, is a very strong management, incumbent management team at Dennis. Can you just give us a little color on who you expect to come across and who will stay with the assets that are remaining with Exponent?

Yes, sure, no problem at all. And we would concur your view, which is the management team at Dennis are exceptionally strong, and we're delighted that the day-to-day Dennis management team are coming across with James Tye, the current CFO; and -- Richard Kerr, the current CFO; and all of the executive team are coming across. I think that the Autovia assets have been put in place with a separate management team. James is going to work is for at least 1 year, we hope very much he'll work for longer than that, but we have secured him for the first 12 months. And his key focus is going to be on continuing to drive the momentum that we see in the -- particularly in The Week vertical where as Richard is going to lead with us on the integration initially. So really pleased with the strength of the management team coming across. And as you said, I think it will be really bolstering the Future portfolio. In terms of the opportunities, I think, Gareth, we see opportunities across the whole of this acquisition, which is why, to be honest, we went out and approached Exponent about whether or not they would consider selling it. We're particularly excited the change in the Dennis portfolio over the last 3 years under Exponent's ownership where it's become more than half of the revenues are in the U.S. and the significant growth in their wealth vertical with Kiplinger and MoneyWeek, both acquired subsequent to the ownership of Exponent. Particularly in the wealth vertical, you know already the Future has space.com, lifescience.com, both the market-leading knowledge brands in the U.S. in those specific areas and also our portfolio of titles, magazine titles and history and science. And when we look at what the team have done at Dennis with regards to The Week and The Week Junior, we think there's an opportunity to potentially take that capability across our portfolio. So if you think about the New Scientist, which recently traded for a 10x multiple on its historic earnings, we think there's a possibility to take that capability into the wider Future knowledge portfolio and maybe do something interesting there. Likewise, there's been really good engagement with The Week U.S. website over the last 18 months. However, historically, for the Dennis team that has very much just been a marketing channel to drive subscriptions. Obviously, in the Future capability, we see a wider opportunity there to drive further monetization. Having said all of that, we continue to think that managing price, particularly from a yield perspective as opposed to just price rise is really important. And so looking to determine how we can ensure we can drive value add to the ongoing customer base to drive yield improvement will need to be a focus area for us in that vertical. I think the other big opportunity we see, however, it is with the wealth vertical, where again, the assets have been largely drive -- the online businesses have largely been used to drive subscriptions to the newsletters for Kiplinger and the magazine MoneyWeek, whereas, again, we think that there's a significant opportunity to monetize those online audiences, particularly with our newly developed wealth vertical.

And the next question will come from the line of Simon Davies.

Three quick ones from me, please. Firstly, can you just talk about the balance between online and print revenues within Dennis. And I know it's a slightly simplistic approach, but I presume you can give some sense of the revenue stream currently coming through from online. And secondly, how do you see the balance between revenue synergies and cost synergies. Obviously, you've given us a target of GBP 5 million on the cost side, but it seems to me that the revenue synergy opportunity should be rather larger than that. And lastly, in the statement, you talked about GBP 8 million to GBP 10 million payment cash payment to Future over the next year. Is that working capital adjustment or anything else I should be aware of?

Rachel, do you want to take the first question up. I'll take up the last 2.