Midwich Group plc (MIDW.L) Earnings Call Transcript & Summary

Okay. Welcome, everyone, to the Midwich Group 2022 results presentation. This was a fantastic year for our group, matching the revenue and profit records that we set in 2021. Our revenue was up 40% to GBP 1.2 billion, first time we've gone past GBP 1 billion. Half of our growth was organic and half through the acquisition of 2 businesses in the early part of last year. Our organic growth of about 20% was roughly double the rate of the market growth. With a few moving parts, which I'll talk about later. Our gross margin was flat at 15.3%, which is a good improvement in the second half of the year. Our operating profit margin increased to 4.2% and our adjusted PBT of GBP 45.2 million was over 41% up on last year. Our earnings per share was also up 41% over last year. We're proposing a final dividend of 10.5p, bringing the total for the year to 15p. With such a strong organic growth rate, we were pleased with our cash conversion rate of 54%. Our adjusted net debt of GBP 96 million reflected acquisitions made in the year, and our operating leverage of 1.6 times was very comfortable within our acceptable range. So a really great year. Before I go into the detail of our results, I thought it would be worthwhile I'd just give you a brief reminder of the strength and defensibility of our business. I think many people have seen this slide before, so I won't go through all of the details. But in summary, our absolute focus on the AV market gives us a uniquely strong genuine value-add offering to our customers and our vendors. Our market has experienced long-term growth, which is expected to continue into the future. We have demonstrated an ability to consistently grow our business profitably even in tough market conditions. And we've been successful in our model of acquiring, integrating and then growing businesses using our experienced relationships and expertise. Next slide. So we've achieved a compound annual growth rate of 15% a year over the last 16 years and 21% a year growth since 2019. Since coming to the market in 2016, our revenue and operating profit have increased by 22% and 19% a year, respectively, which all looks very easy, particularly on this graph, but it does take a huge amounts of planning and expertise by the team. So after the balance of the revenue slide, the rather more important reality of our profit trend. The graph on the top left shows our adjusted profit before tax, which has grown over 19% a year since 2013. The only year I can remember our profit falling was in the COVID year but we managed to bounce back fully in 2021, and then we overachieved our long-term profit trend significantly in 2022. Our EBIT margin increased to 4.2%. And as I mentioned, our earnings per share also of 36.1p, was also up over 41% on 2021. And as a point of reference, it's up nearly 27% on the earnings per share in 2019. On the right-hand side of this slide, we look at gross margin trends. You may recall that in the first half of '22, our gross margin was 14.9%. So a figure that has been impacted quite a lot by a stock provision increases. We might reverse quite a chunk of that provision increase, but not completely. So that acted as a small drag on the margin for the year as a whole. However, this was compensated for by a return of the live events and other in person activities, which helped sales of some of our higher-margin products. If we strip the age stock provision movement out of the numbers completely in '21 and '22, the graph in the middle of the right-hand side shows the underlying gross margin trend is actually quite positive in '22. Our long-term ambition remains to increase growth in net margins. The main factor in achieving this is will be the mix of sales, which we're working to continue improving. In terms of the current landscape, many of the distortions of the last 3 years have improved in particularly, product supply has improved, although still it's not perfect in some areas. Most markets are back to where they were, although high street retail is still expected to take quite some time to recover. Although general economic conditions are maybe a little bit slower, particularly in the U.K. and the U.S., we remain comfortable in our expectations for the full year. Our customer order backlog has reduced over the last 6 months, reflecting an improvement in product supply, but our order backs still remain healthy and strong. The next slide, you'll see before is a summary of our long-term strategy. So we have 3 elements to our strategy: firstly, to become more specialized over time, which makes us more relevant to our customers, improves our profitability and makes the business more defensible. Secondly, we want to improve our geographical expansion, again, which allows us to support our customers in their international rollouts and obtain an improved share of their wallets. And finally, gen scale, we want to become a bigger and bigger business, which makes us more efficient, improves our profitability and helps us to cross-sell into different markets. So in terms of the development of the business, our focus on specialization continued. The technical product there is now accounting for more than 50% of revenue. Mainstream product areas of displays and projection grew but at a lower rate than the overall business with 2 larger acquisitions in the first half of last year resulted in the U.K. and Ireland representing a larger share of group revenue than in 2021. We still expect this region to represent a smaller part of the overall business in the longer term as other regions grow. Our U.S. business grew strongly last year and represented 10% of our overall turnover for the year as a whole. So I thought it might be interesting to refresh some of the customer and vendor analysis that we did at the time of the IPO in 2016. In terms of our vendors, as we've moved into more specialist areas over the years, our vendor base has grown, and our reliance on individual vendors has reduced as a consequence. By the time of the IPO, our largest vendor accounted for 20% of group revenue. We've continued to grow that vendor, but now that represents just 11% of group revenue. Our analysis of vendors showed our basis dynamic and changes with the direction of our business. We rarely lose brands but bring on and develop substantial new relationships. For example, in 2022, a 1/3 of our top 20 vendors were in unified communications, but none of these were in the top 20 3 years ago. We have a long tail of small suppliers. These are important to us because they support our niche businesses while they allow us to provide complete solutions. We also tend to make stronger margins from these smaller suppliers. I know we can also be an important partner to these brands. So it's important that we look after them as well. In terms of customers, we continue to have a lower concentration of customers with our largest customer accounting for 1.7% of sales, and our top 10 customers account for just 11% of group turnover. We work with many of our top 20 customers on an international basis, often supporting them with the major rollouts across the world. These relationships can be invaluable when we add new companies into our group when we can roll those relationships into the new business. We have many small customers. They're an important part of our value add to our vendors as they're difficult to reach, and they need our economies of scale in order to service them efficiently. The next 2 slides are a repeat of the findings from the AVIXA market survey taken in '22. So I shared these at the interim stage. Just in summary, the key findings are that the market is expected to grow at about 5.9% a year for the next 5 years and that most markets are already back to their 2019 levels. On Slide 12, you can see the market growth rates in 2022 and compare those with how we've done against these and our overachievements in each of these markets. Slide 13 shows the significant potential for our business. That builds on some analysis we gave at the Capital Markets Day last year. The large left-hand circle on the top shows a market size in '22 and the expected market size budget in 2027. What was then done is estimated our addressable share of that market. So I think our addressable share of the global market is probably about 15%. And then underneath that, I've estimated how much of that addressable market we actually had last year, which is 3% to 4%. These circles on the right-hand side, the 3 circles just do the same analysis by different regions of the world. So you can see that our market is huge. Our target market is no more than 25% of each of the different geographies. And we have under a 5% share of each of the target markets currently with a global share of under 4%. The box at the bottom right shows some scenarios of what our revenue could be in 2027 under different shares of the addressable market. So for example, you will see that if we had a 10% share of the global market in 2027, we'd have a revenue of about GBP 4.4 billion. Steve?

Thank you. So next slide is our revenue bridge. As Steve said, our organic growth was 20.7% in the year, we got it nicely balanced in all the regions by the exception of growth in North America. And first that just about double e-market growth rates. Organic growth in the second half was approximately 15%, which reflect more normal second half in the prior year as under restrictions unwound. The acquisitions in the U.K. of DVS and Nimans is complete in the first few weeks of '23, we came in the start of the current year. And growth in constant currency level of 38.6%, whilst weakening of sterling in the year gave an FX gain on the translation of our overseas revenue of about 2%, leading to overall growth of just over 40%. Looking at the regional performance over the next few slides. So revenue in the U.K. and Ireland increased by 72% in the year, including those acquisitions, and Stephen will talk about those a bit more shortly. Organic revenue in the region was 18%. This is outstanding in such a well-established market. The business particularly benefiting in the first half and the return to normal working practices, following cessation of lockdown restrictions the year before. And organic growth in the second half, 9% reflected further market share gains in our biggest single market, and these can be attributed both to the contribution from the new vendors we've launched over the last few years and also our long-term partnerships, our customers increasing our overall share of their wallet. Technical product categories were particularly strong due to both the return of end-user demand and also supply chain issues easing, and that helped our gross margin increase from 15.8% to 16.1% in the U.K. & Ireland. And as noted at the half year, we've not seen significant inflation in the U.K. to date. The long-term trend for AV products tend to be slightly downwards. We estimate inflation to be in the some 2% to 3% range for the products that we sell. We've also seen shipping costs fall significantly in the last 12 months, it really helps. On overheads, we've supported our teams with higher and earlier pay increases and other cost of living benefits. And we've also conducted similar actions in other regions, too. And just a reminder, that energy costs are less than 1% of our overall cost base. So adjusted operating profit in the U.K. & Ireland increased by 108% to GBP 26.5 million, really reflecting that sales, both on the operating leverage. Turning to EMEA, which is our biggest region. That's an excellent performance in the year with sales growth of 16.8% to GBP 535 million. And the growth is really strong across all the individual countries, notable performances in the Middle East and in Southern Europe. There, we saw a rebound in demand from corporates and live events. And it's worth pausing to how pleased we've been with the performance of NMK in the Middle East. Since I joined the group in 2021, that performance has exceeded our expectations, both the result of higher project demand than we expected. Also the benefit of the new vendors we've been able to add to that business. And we've also opened a world-class experience center that I saw a few weeks ago. As the unprecedented demand the broadcast during the pandemic, this return to normal levels as we expected in 2022. And gross margins, as Stephen mentioned, were broadly in line with the prior year, which is improvement in the first half, but we saw a margin of 14.1% rising to 15% in the second half. And that's really the progress we made on our aged stock in the second half of the year, we also took a small hit in the year. Excluding those margins would have been roughly 0.3% higher than 2021. And adjusted operating profit in EMEA at GBP 22.7 million was up 6% on the prior year. If you just turn to APAC over the page. Growth in APAC was 14% at constant currency to just under GBP 54 million. And this really reflected the removal of the pandemic restrictions being a little bit later in the year, which resulted in much from growth in the second half of the year than the first half of the year. We still believe some of the higher-margin technical projects in that part of the world haven't quite come back to normal, and we see good prospects of those over the years ahead. And also, APAC margins were slightly higher than the group just due to this mix of products and the nature of the projects they do down there at 17.3%. So adjusted operating profit as the business regained some scale was GBP 1.4 million, up 42% at constant currency. And finally, on North America. Trading North America is absolutely outstanding in the year with growth of 60% in U.S. dollars, up to GBP 123 million. It really reflects the strategic focus on specialist AV activity since they joined the group and the benefits of the investments and sales capabilities they've done. Since they joined Midwich, they've added numerous brands over the last few years, really increased their customer base and share of all of the existing customers in what is the world's biggest AV market. As expected, gross margins at 14% were a little lower than the rest of the group. But although we believe this reflects the wide American market, we're probably a little bit ahead of the wider American market for average gross margins. And the prior year margin is a bit higher, but that was really to do with the release of an age stock provision. So adjusted operating profit in North America increased by 27% to GBP 6.4 million. There, our market share remains very small, but we are focused on higher-margin specialist opportunities. And the opportunity remains significant for us by that so we don't think the growth will be quite as high as 60% in the year ahead. Just a few slides on the financials. So turning to the group P&L. As noted earlier, we're delighted with the revenue growth and market share gains in the year. Whilst age stock had some impacts, and we saw a net gain in the second half, full year margins were in line with the prior 15.3%, up from 14.9% in the first half and good overhead management led to an increase in operating profit of 50%. The net operating profit margin is increasing from 4% to 4.2%. Adjusted finance expenses increased from GBP 2.1 million to GBP 5.9 million, which really reflected the impact on borrowings of the M&A investments we did together with some higher interest rates during the year. And the group has approximately GBP 40 million of fixed interest debt with the rest floating. We expect adjusted finance expenses to reach about GBP 9 million this year before whether M&A issues those increases in interest costs. Adjusted PBT, which record levels and exceeded our expectations for the year at GBP 45.2 million, up by 41% and in line with the revenue growth. And tax rates are broadly stable at about 25%. Wage will increase slightly going forward as rates in the U.K. increase and corporation taxes introduced in the United Arab Emirates. And as Steven said, adjusted EPS increased by 41% to 36.1p, and we've posed upon dividend of 10.5p, giving a full year dividend for the year of 15, which is within our 2 to 2.5 times covered by adjusted EPS. I've also included some further analysis and some modeling considerations in the appendix if anyone is interested. Look at the balance sheet, no significant or unexpected changes here really. So we added about GBP 40 million to goodwill and noncurrent assets and the acquisitions of DVS and Nimans our working capital increased by 41%, which makes the same as the increase in revenue, GBP 150 million. Net debt excluded leases was GBP 96 million, up GBP 58 million at the end of last year, but down from GBP 112 million at the half year. As we've seen before, the business generates really good cash flows in the second half of the year, we're able to deleverage following the M&A investments in January, February last year. And as previously guided, adjusted net debt-to-EBITDA at 1.6x, is down from 2.1x at the half year, well within our normal range of 1.5 to 2x. But as noted previously, we may be above the short period, and we do acquisitions. It's worth mentioning that we increased our RCF bank facility at the start of January from GBP 80 million to GBP 275 million for the 4.5-year term. And that's supported by signature of 6 banks who are here today. And these are a mix of long-established U.K., U.S. and European banks supporting the group, this facility helps support our M&A strategy and carries a leverage of 3x adjusted EBITDA with a bit of flexibility for acquisitions. And then finally, on balance sheet, other short-term liabilities include defer consideration of GBP 9.3 million, which we paid out in Q1 this year. And the longer term, balance includes about GBP 24 million, GBP 25 million of plus options for NMK and DVS, which will typically be paid 3 years after the equities. And then finally, over the page, looking at cash flow. We continue to expect seasonality in the business with cash generation very strong in the second half of the year. And whilst our guidance remains approximately 70% to 80% of adjusted EBITDA, the exceptionally high growth in 2022, resulted in some working capital investment, and we're very pleased with 54% given the scale of growth. And just on CapEx, we spent GBP 10.9 million in the year and a little below our guidance of $12 million, and we continue to progress the deployment of our new ERP solution, which is about half of that CapEx and the balance is the investments you make in rental assets and our facilities and experience centers. Well, back to Steve.

Thank you. So the next slide which looks at the acquisitions we made last year, which happened in the first half of the year, I did run through these at the interim stage. But in brief, DVS is a business based in Cardiff deals with video security. So it's a fairly new area for us and interesting to see that market and get some experience on it. And then Nimans joined the group in February last year, very long established, quite sizable business actually gives us further in relative the unified comms market on exposure to telecoms and particular networking and some other AV technologies. And both of those businesses have settled in really well, really pleased with how they've settled in and the management team and the employees working very well together with us. In terms of the current pipeline, we have a significant number of deals in due diligence, probably more than I can every member. So I would expect that we will be making a number of announcements in the first half of this year, hopefully, if things go to plan. As Steven mentioned, we have an increase in our revolving credit facility to accommodate these new acquisitions. So we're very excited about those. So on the final slide in summary, Midwich is a group that's achieved strong continuous growth in revenue and profit over many years. After building the foundations of our business, 2022 as an outstanding year with revenue and net profit both growing in excess of 40%. Our expectations for '23 have been recently upgraded and so far, our trading in line with those expectations. Although we're a relatively large player in our market, we still have a very small overall share of the market, and that market continues to grow. We have big plans for the future, and I'd like to thank our staff, our customers, our vendors and of course, our shareholders for their ongoing support and enthusiasm for the business. Thank you. Any questions? Yes.

[indiscernible]

I think to some extent, the M&A pipeline sort of happens when it happens, and we have continuous dialogue with lots of different businesses. I think we've seen an increased willingness of companies to talk to shareholders, a company who talk to us. I think they see the benefits of being part of a bigger group. So it just happens to have a lot of businesses bunching together at the moment. In the terms of the areas they're in, I think we have one new territory. Most of them are sort of specialist businesses that we will add into territories that we're already operating in. So that's been a big part of our business historically. So they're all good fit from that side.

[indiscernible]

Yes. So that's a model that we started in the U.K. a long time ago. And we haven't done any sort of second acquisitions in other markets. So we've got quite a number of these and go along just good.

Just a couple of questions for me. On organic growth, do you measure how much of that comes from sort of your existing customer base versus expanding on. So addressable in probably your existing customer base by far your customers. Do you have one?

We don't. We probably could. My feeling is that most of our growth comes from our existing customer base and gaining share with them, either just getting more of the business and technologies that we're all selling them more. I see quite often while adding a new technology to our portfolio, we're just getting another share of the business that they had. So certainly some of it through new customers. I think the majority would be through existing customers.

And maybe just one on the slide on the [indiscernible] And as you do more M&A, you can feel out, we'll see technical specialism product as well as in new geographies. Does your expectation that, for example, in the U.S., you see 10 c tax addressable? Is that now or is that with sort of expected M&A?

I think that's with expected M&A. If you look at the entire market, then how much of that market with the portfolio of products that we have across the whole group, if we had that offering in the U.S., how much of that market could we get access to. So in the U.S. market, that's a little bit lower than other markets because there are very big chunks of that market are very commoditized, low-margin, high-volume business that isn't really as much interest to us as the more specialist areas of the market.

[indiscernible]. Is it too early to ask if they're coming back to scene and a bit of gross margin that you were used to sell 3 or 4 years ago?

I still think when I look at margins like-for-like, that's pretty similar to what they were. I don't think there's been a significant drop or increase.

And back end of this year, any sense that [indiscernible] We should look forward to some bigger stuff.

In terms of the live events market, difficult to say. I think it's fairly well normalized late last year. In fact I can kind of size to some parts of our business, they got back to where they had been. So I think it's fairly normalized now, actually. Most of our live events are sort of corporate conferences and things like that and reduce some outdoor events as well. And they are pretty much getting back to where they were. So I don't expect to see a great big bonk in those this year.

I think the current margin is more a reflection of the mix than anything else. There's obviously more unified comms in there, which is it sits really in the sort of midpoint of the margins. So it's slightly diluting those higher-margin live event overall.

Any more questions?

Let's think about operating leverage. So in the U.K., for example, you saw that company very strong when we look at sort of EMEA North America operating margins went down and in North America, but that's primarily driven by the gross margin. In EMEA was looking against our additional investment [indiscernible].

I think the prior year was slightly flatted by a bit of a stock gains in a couple of those territories, too. So that's obviously a very high-margin activity. I think we're trying to keep a fairly sensible balance. The aim is to try and grow net profit but without damaging the business and doing so. So every time we can grow, we can invest in more things. We've opened the experience centers in the Middle East. We've increased our investments in our German business. So there's quite a lot of investment in those specialist skills that makes our business defensible and scalable as we go. So it's trying to keep the people all of the lines. Well, actually, it's probably very going pretty well balanced across the business so that everybody is happy, and we're able to grow going forward.

How do you think about, [indiscernible]

Sort of had a destocking a bit of an extra provision because things slowed down in COVID, then some shortages and a bit of probably overstocking a bit of provision in the first half tidied up in the second half. It feels like we're more or less back to normal now, doesn't it? Obviously, it's formula driven, so it sort of just does what it does. But yes, we spent a lot of time in the second half of the year getting the portfolio of inventory back to the rights of mix in quite good shape.

[indiscernible] just expectations for last year, big increase in receivables, a smaller increase in stock than you've seen in the prior year, but it sort of still significant. Trying to get a sense of with the supply chain security and what you expect.

I think we should say a similar sort of percentage of revenue. There might be a little bit of an opportunity for that to come down when everything is sort of -- if everything stays to settle down. But it's probably a little bit higher than it was we got few more brands now. So we're managing more different products in stock, but we managed to keep it pretty consistent with the sales growth. So again, is that natural tension that we're rebalancing between making sure we can meet everybody's needs and not having too much stuff. So we see 7 of our conversations we port full years of doing that. So they've gotten quite good at it, but we don't always get it exactly right, every month. Multiple years of stress. Unfortunately, I haven't been here for all of them.

[indiscernible]

I think a lot of the anomalies for the last few years have largely gone away. So the business feels a bit more normal again. Remember, the world doesn't, but the business feels a bit more normal. And so maybe it's a little bit more predictable, I suppose, maybe next week, there'll be another shot, but it feels more normal. So is there a big, expected upturn. Now I think we'll carry on, let's say, normal growth rate field. The business is in good spirits. I would say everyone is buzzing. We have a very good year. We started well this year, happy with progress and still plenty of opportunities for us, lots of things going on. So more of the same. Okay. Anything else? Good. Thank you.