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

Thank you, and welcome to the Midwich H1 2023 results. In the first half of 2023, we had particular success with our long-term strategy of focusing on specialist product areas. We saw strong growth in areas such as audio, lighting, technical video, at least helped push gross margins up to the highest level we've seen since 2019. As we flagged earlier in the year, we've also seen softness in a number of markets, including Australia, Germany and particularly, U.K., which we'll cover later. So the overall impacts of these were that revenue was up 7.4%, 2.3% on an organic basis. Gross margin increased to 16.3% from 14.9% last year. Our adjusted operating profit was up over 30% to GBP 26.4 million, and our operating margin was up plus 4.3% from 3.6%. After the expected higher interest charges, our PBT increased by 13.4%. Positive cash conversion of 27% for the half year was good for the first half of our year. Our full year expectations are unchanged. So this slide, you may recognize we put it in last time, so I won't run through it all in detail. But fine to say that in the first part of this year, I think that our strength and our strategy has helped us to compensate for softness in some market areas and still deliver an outstanding set of results. The next slide is my favorite. Shows our long-term revenue growth. Again, we'll go through this in detail. Just a reminder of where we come from over the last 2 decades. The only comment we make is although the business is now a very substantial group, we believe we still have only about a small share of the global addressable market, maybe 3% to 4%. So there's plenty of market for us to go after. So looking at profitability on the left-hand side of this page, we look at gross margins. So I've got put in the full year of 2022 and then the first half '22 and '23 You remember that in first half '22, our margin was impacted quite significantly by a large age stock provision increase. This year, the movement has had a minimal effect on the margin. So you can see that we achieved a very strong gross margin impact, excluding the effects of [ page stock ] divisions. The full year margin will be influenced by a number of factors, including the continued strength in some of our higher-margin product areas and the recovery of particularly corporate and education business, which I'll talk about in a minute. And then finally, actually, the impact of the acquisitions we've made recently, which I'll also talk about later. On the right-hand side of the page, just a reminder of our EBIT margin increases from 3.6% to 4.3%. Improving our EBIT margin remains an important focus of the business going forward. So certainly, the current landscape. We're seeing an impact on the business from general economic conditions, particularly as I mentioned in U.K. and Ireland and Australia. Two areas of the market being affected particularly our corporate spend, particularly in respect of Unified Communications, where we think some projects are being paused. And unusually, education, particularly discretionary local spend, where schools are using more of their budgets for energy and staff salaries. These 2 areas of softness particularly impact our displays business. And to give you an indication of the display market generally, there is market research to show that the global display markets globally in the first half of this year was down 15%. Our display business is down 8%. And in the U.K., the display market is down 27% and we were down 70%. Our order books are largely back to normal, maybe a little bit of where they were in 2019. Our market shares around stable or more often increasing. And finally, we've completed 6 transactions this year with a building pipeline of what's to come. Again, this slide will look very familiar to people. So just explaining our long-term strategy of becoming more specialized, increasing our geographical coverage and growing scale. So think out a few areas of the developments of our strategy this year. So far, we've continued to roll out brand relationships across the group. We've added in new product areas in broadcast software and specialist services, particularly. We've built on specializations through acquisition, audio broadcast and technical video. And we've expanded into one major new territory of Canada. In terms of the revenue development of the business, you can see at top that our display business has reduced from 32% in due revenue down to 28% in the first half of this year, not surprising given the market conditions I just discussed. And our technical product areas are now 58% of revenue, up from 53%. In terms of geographical splits, the U.K. dropped from 42% to 38% of overall group revenues, and demand has increased from 44% to 46%. North America has gone from 10% to 12%. I would have been 16% had we acquired SFM at the beginning of the year, so on a pro forma basis. This slide, looking at concentration of customers and vendors again is that bid from last year. We'll update this the year-end, shows the broad spread we have of our vendors and customers. I think we'll see with the continued development of the business and the acquisitions that we made during the course of the year, when we come to the year-end updates, then you'll find that we have more customers, more vendors and a broader strength of the business. So looking at market data, AVIXA, the trade body, has published its 2023 reports, which downgraded its global ProAV expectations for 2023 to 7.6%. However, our evidence, and I think the actual results of the year-to-date suggests this is still very overoptimistic, and we do expect further downward revision in their numbers by the end of the year. As I mentioned, there have been significant reductions in market or flat panels, interactive displays and projection, that's from future stores and other research body. And we've seen indications from manufacturers that UC&C demand could be up to 20% down in H1 2023 compared to 2022, but they still expect long-term growth in our GDP. And I'll put a few more of the long-term growth trends identified buybacks at the bottom of this page. I'll just pick on 1 real, which is bottom right, which is that they see increased use of distribution rather than direct selling to end users or resellers. And I think that's a development that will play to us. The market opportunity slightly again preventive from last year. We looked at this again at the year-end. This just looks at the size of our business, what the global and regional market size is or what share we believe we have of the global market. So as I mentioned earlier, on the left-hand side, we think we have about 3% to 4% of the target addressable markets. So just to be on the personal tradings. So this is our revenue bridge showing overall growth of 7.4% in the period. It's an exceptional period of organic growth in the prior year. Organic growth in H1 this year with 2.3%. And our market data has seen 70 cases of the head of the wider market growth and chose further share gains. . Key drivers of H1 growth with double-digit increases in technical product categories, offsetting a mid-single-digit slowdown in mainstream products. Our most mature markets is the U.K. and Ireland. Here, we have the biggest market share. So we're more impacted by the wider market trends and has a slight reduction in revenue. In other territories, we saw good growth, largely driven by the additional product sales. M&A, which is the full year effects of the acquisitions during Q1 2022 and the first month of SFM added 2.80% to the period, which is a growth in constant currency to 5.1%. As we saw last year, weaker sterling means our overseas earnings are worth more in GDP with currency changes adding at 2.3% in the first half. Although current exchange rates will lap and the pound is very weak in H2 last year, this currency effect will reverse fully in the second half of the year. As a reminder, the majority of our trading is in local currencies. So while FX impacts of members has much more impacts on transactional activity. Just looking at the regional performances and start with U.K. and Ireland. It's up to an 86% growth in H1 last year. The U.K. and Ireland region saw some calm return in the first half. Over the last year, there's a significant number of new unified communications and the technical brands to this region, which has allowed us to increase market share and build a very robust business with full service offerings to all end user markets. We saw a downturn in mainstream demand in the first half, as Steve mentioned, driven by strong comparatives, tighter economy and some budget uncertainty, such as delaying spending in the education sector. However, by focusing on our key goal of growing profitability, we successfully increased our technical sales mix and significantly increased gross margins from 15.7% to 17.7%. And this year, it was driven by a combination of the recovery of live events, rents and entertainment sectors, together with contribution from the new brands post-COVID. As noted at full year, inflation has not have any significant impact in AV by the pricing. We've been able to offset labor inflation with focus on higher-margin sales, productivity improvements and operating leverage in our technical businesses. As a result, operating profit in U.K. and Island reached record levels in the first half or 29% growth to GBP 13.9 million from margins increasing from 4.5% to 5.9%. So turning to EMEA, which is our biggest region in terms of revenue, we continue to deliver strong growth in revenue at constant currency at about 10%, all of which is organic. And growth in the first half is especially strong in our pro audio businesses in Southern Europe and the Middle East, and this reflects the combination of market recovery and further share gains with both existing vendors business and also through adding some new vendor relationships. In Germany, which is our biggest EMEA market, we saw some softening in the mainstream and broadcast amount, but less so than in the U.K. Resources have been broadly in line with prior year. Just 3 context. Our German business is about half the size of the U.K. business, and the ProAV market is the biggest in Europe. And we continue to invest in our team to receive further opportunities. Gross margins in EMEA increased strongly from 14.1% to 15.5%, once gain driven by product mix. And the combination of revenue gross margin improvements and operating leverage was also a strong growth in operating profit, which is up by 39% to GBP 12.6 million, with operating margins increasing from 3.5% to 4.5%. Looking at APAC, which is our smallest region, I mean, Australia and New Zealand. This region is like others in its recovery from COVID and the growth of the first half, 2.3%, reflected increased cost activity with some softening in broadcast demand as people return to office space to work. An increase in upsell of technical products, that's the mainstream sales and also the margins improving by 1.8% to 17.5%. And we do continue to see a pipeline of large projects building that's not yet turned into a significant step of productivity. We are well positioned for future growth in the region, invested in the team, which is on a small reduction in operating profit of GBP 0.2 million to GBP 0.4 million. Part in the regions, North America markets in [indiscernible] delivering in payment solutions. This business has grown hugely since we acquired it in the joint group. And we further H1 by 5.4% in U.S. dollars despite some softness in corporate demand. We continue to increase our Australia customer rollouts and see a further significant growth opportunity in the region for the future. We also entered the Canadian market this year through the acquisition of SFM, which included the results first time in June. Including SFM, revenue in H1 was GBP 69.9 million to 18.7% in local currency with gross margins mentioned in line with last year. A small reduction operating profit in the region due to further investments in our sales and business management capabilities. Just looking at the overall group P&L. We are really pleased with the performance in products, especially significant increase in the gross margin of 14.9%. So 16.3% is almost about pre-pandemic levels despite the near doubling of the business and an increase in a slightly lower margin Unified Communications activity over the last years. Further investments of our team to support future growth, increased operating margins from 3.6% to 4.3%, which resulted in operating profit growth of 27.9% at constant currency, GBP 26.4 million. As mentioned, interest rate, interest rate increases, which have been great. And our expectations at the start of the year is also net finance cost increasing to GBP 4.6 million. But we do expect it to be a little more than our previous expectation of [indiscernible] million or so in the second half of the year due to further increased interest rate hikes during the year-to-date. Just worth noting about GBP 40 million of our debt at fixed interest rates. Expected tax rate of 26.1% really just reflects the overall mix, degree to increase a little bit due to the U.K. corporation increasing in the year. And we set to increase a little bit further in the Middle East introducing corporation tax in the near future. So all of that is also in EPS increasing by 10%, doing a small dilution effect from the success of fund raise in June and in line our progressive dividend policy and the spot raise, we've increased our interest dividend by 22% to 5.5p. Just worth noting the interim dividend the second half of the group's final dividend. Just on balance weeks, the main impact here was the interest acquisition of SFM, which added about GBP [ 16 ] million in goodwill and other noncurrent assets. And the export impact of SFM, trade debt has increased in line with improved sales growing. We've seen collections holding up well, and we're continuing to use trade credit insurance in most countries. And product supply issues are now largely being resolved. The stock level is in line with expectations for some here. And just the net debt of GBP 102 million was impacted by the fundraise, the SFM acquisition in June and the GBP 9.3 million deferred consideration paid in the first half was a little bit lower than we were expecting at the time of fundraise. Leverage, which is our adjusted net debt divided by our adjusted EBITDA, was 1.5 at the end of the period, which is again a little bit better than we had expected to fundraise and despite M&A payments of deals we've done in the second half to date. And so it's further M&A, we expect leverage to come down as operating cash inflows in the second half of the year, as well as saying other liabilities are mainly effects and performance related to further M&A payments. As of 30th of June, we had about GBP 25 million projected future M&A payments, and GBP 19 million of those due in '24 and GBP 6 million are due in '25. And since then, we've also spent GBP 18 million on the 5 M&A, as Stephen mentioned, which also had about GBP 10 million of further consideration for most of [indiscernible] '26. And finally, just looking at cash flows, as note to prior years, our cash flow is about same, which typically have much outflow in the first half of the year to get up the summer installation season. Reflects our revenue growth this time around and really good effects on working capital versus an operating cash inflow of 27% adjusted EBITDA in the first half and full year guidance around 70% to 80% operating cash conversion. Full year CapEx is actually about GBP 12 million pounds due to the rollout of our ERP solutions in Q4, similar level of CapEx next year. So moving on to our acquisition. In the first half of the year, as we mentioned, we acquired SFM, a Canadian-based audio distributor. We'll talk a bit more about in a minute. Subsequent to the half year-end, we acquired HHB, which is a London-based well-established and highly respected audio distributor into the media and entertainment sector. Then a small business called Pulse Cinemas, which is a home cinema specialist based in Stansted in East of England addressing the residential market. Then 2 acquisitions in the U.S., 1 or 2 [indiscernible] media systems. They -- the partners are particularly interesting in the sense it provides video editing software and the acquisition of the software business. So again, both targeting the sort of media entertainment broadcast markets. In terms of its media systems, specialist video storage solutions. And then finally, Video Digital is an Iberian-based distributor of pro video broadcast products with a particular [indiscernible] magic. So we've been very busy. At the time of the fundraise, I think we said we had 6 businesses in due diligence. So we're now complete viable or the more still going, which are people may be on 1 month or 2 months to complete. We've been building our pipeline of next transactions, and we have a number of those coming through now. So whether we do complete anymore, I think we'll see this year, but we have certainly more to come through. Just a few -- there's another slide in asset marketing, which you may have seen if you looked at the time of our fundraise. But it's the largest acquisition we've made this year. They found in 1978, about the same time as Midwich, growth become a leading player in the Canadian market based in Montreal. Big workforce, 146 people with 50 brands, 1,500 trade accounts, the vast majority which we weren't dealing with at all. Very strong track record, good strong gross margins and compound growth rates on an office with excellent facilities and therefore, looking after their customers and the team. The founder of the business, [indiscernible], who is no longer actively involved in the business and stepped back. And a strong and established management team, which continue with the business with making very good progress and with such a very good relationship with very strong for the pro audio market with some very good brands at the bottom that we're very pleased to get into the group. So finally, I think we had an excellent set of results in a challenging market. The business is growing stronger as we roll out our relationships into new markets to bring on new brands, and we're moving to new territories. We delivered strong operating gross margin growth and 6 more acquisitions during the period, and our full year expectations are unchanged. Thank you. Any questions?

We expect to see the most growth from a geographical perspective and [indiscernible]?

I think in our business, I mean, EMEA has grown strongly this year. We've still got plenty of organic growth from dealing around targeted acquisitions or the number of territories that we've done [indiscernible], yes, in that cost of the world. So that's done well. The U.S. market, we -- our business is growing quite significantly. And as you see, we've started balancing some little business there on to scouring also our business there. I think that probably has the most organic growth opportunity. We have the U.K. and Ireland, there's been a sort of steady growth for on time this year in a much more challenging from an economic point of view. So we've always said we expect that to be only sort of steady growth with a real focus on margins and profitability. And ultimately, we need to do a bit more in the APAC region. We're very small out there, and I think there's some better opportunity stores in our background, a little bit more difficult to identify the opportunities and find suitable acquisition targets, but we have some good drop out there. So I think mostly North America, I think, is probably the top of the list and EMEA second. More questions?

Just looking at the APAC operating margins, and we talked about the comeback [indiscernible] in a world where normalizing goes back to pre-pandemic, how structural pressure are those margins in cost to serve having fragmented markets as, say, U.K. works on a single market?

I think historically, it's been a higher stock rate demand in the region. It tends to have a really, really big projects, and that vehicle missing at the moment. So potentially competing technical projects at good gross margins and obviously, high operating leverage seen can service those projects really well so.

I think the Australian market for us anyway, yes, as Stephen said, it's been dominated by infrastructure spend, new buildings, oil and gas, raw materials that follow up the education. And that as being property related and that passes [indiscernible] really struggling of the parties. So it's been a difficult market. Some times, the state has said some time the improvements. There [indiscernible] 4% for the group basis because there is more opportunistic side. Anything else? .

No questions from the online audience, Stephen. So over to you for any more in the room or closing comments.

[indiscernible].

Yes.

I mean that would be all [indiscernible] or not yet?

Yes. So we think we've got -- we've basically got GBP 40 million of specs, most of that is probably sterling, euros and U.S. dollars. And we've got GBP 100 million net debt at the end of the first half [indiscernible]. Some respects for almost 5, 6 years in 2019. I think we got call out around about some expenses here in U.S. dollars.

Okay. Thank you. Well, frankly, it's the first half. Tough market, but I think we've made some good progress. So I look forward to giving you an update on our full year. Thank you.