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

Good morning, everyone. In 2023, we continued to deliver on our strategic objectives of increased specialization, improved geographical presence and growing scale. We achieved record revenues, gross margins and also operating and net profits. All of this was against a much tougher market backdrop which saw reduced demand for mainstream products due to a mix of corporate uncertainty and education budget pressures. And this tough market has continued into 2024. By continuing to focus on our value-add model, we achieved further market share gains, which is something we do well at in tough markets. We completed 7 acquisitions, the most we've done in a year and we're very grateful to shareholders for their support and that the fund raise that we did in June. And finally, we made good progress in the sustainability plans and engagements. So looking at the numbers in a little bit more detail. Our global revenue of GBP 1.3 billion represented a total growth of 7%, of which organic growth was just under 1%. The overall growth was a combination of a reduction in mainstream product sales at displays and projectors of 7%, but an increase in technical product sales of 18%. Our gross margin of 16.8% was up 1.5% on 2022 and is a new record for the group. We achieved strong profit growth and cash generation. Our operating profit increased by 17% and the adjusted operating margin increased from 4.2% to 4.6%. Our adjusted EPS was up 4% and cash conversion was high at 114%, and we were proposing to increase our dividend by 10% for the year. So the next slide gives a high-level view of the group as of today. We have strong global coverage with 43 locations spread across 22 countries. Our 1,800 staff traded with over 24,000 customers last year. We have 27 showrooms and demo facilities, which are an important part of our value-add offering to customers and vendors alike. I've made a bold statement at the bottom of the page, but it's one I believe passionately that we have the best team in the industry, we live and breathe AV. So in terms of our long-term strategy, the benefits of this strategy that they drive growth, defensibility, efficiency and profitability in the business. And ultimately, from a financial perspective, this strategy delivers long-term, strong, predictable and defensible EPS growth. So for investors, not so familiar with our industry, this sort of next slide looks at what we think makes our industry special. At the basic level, AV technology turns digital content into experiences. In broad terms, our technology either drives improved performance or supports creativity and fun. And I've given several examples of applications of AV technology in different market sectors. So where does our business fit into this exciting industry? But we see our purpose as being -- to help our customers win and then deliver successful projects and our manufacturers to reach a broad market. I then honed in on what I think are the 4 key differentiators of our business. These are what give us a competitive advantage in the market. Firstly, our vendor relationships are broad, the long-standing close symbiotic in that they are -- we have mutually reliant on each other and unique and that no one else has this strength of relationship with manufacturers. One of the results of our vendor relationships is that we're exclusive our #1 distributor in 80% of the relationships with our top 40 vendors. This accounts -- these vendors -- these 40 vendors account for 80% of group sales. So you can see the vast majority of our revenue is where we have an exclusive or #1 distribution relationship. Secondly, we're experts in portfolio management, managing different products, technologies, geographies. This has resulted in a seamless revenue growth every year since 2005, doubling of our GP percentage and PBT 50x higher than it was in 2005. We also have an unrivaled depth of specialist knowledge across our 1,800 strong team. This expertise helps support customers to win and deliver great projects. Our specialist knowledge has meant that technical product sales have grown from 21% of revenue in 2016 to 59% revenue in 2023. That's a compound growth rate of 41%. And finally, consistently high customer service is an important differentiator. Our teams are responsive, knowledgeable understanding, effective operators. One result of this consistency of service is that we have had relationships with all of our top 50 customers for over 10 years and many of them for over 20 years. So looking at the current landscape, there's been little change since the interim presentation. Many markets remain tough, with currently no consistent indicators of short-term improvements. The U.K., reland and Australian markets have been particularly impacted with some lesser impact in the U.S. and Mainland Europe. We've seen continued strength in the Middle East. The corporate market is demonstrating weakness with impact on demand, particularly for our unified communications solutions. And usually, we're seeing some weakness in the discretionary application spend with some funding diversity to pay for higher salaries and energy costs. However, the live events and entertainment sectors continue to be strong. Our business remains strong and stable. The 7 acquisitions that we made last year are bedding in well. We've completed one acquisition in the U.S. so far this year with a number of others in the pipeline. This slide looks at the scale of our market opportunity. This table is the same as the one we delivered at the Capital Markets Day in late 2022. This shows that we think we have a 3% to 4% share of what we believe is our addressable market. A particularly interesting market for us is the U.S., which is the biggest market in the world. We've seen strong organic growth in this market but still have only a 1% to 2% share. The bottom right shows the size of the business on the different market share assumptions in 2027 that shows the scale of the opportunity that we could have. This next slide looks at our growth and particularly how we've consistently exceeded market growth rates. The table on the left shows our long-term revenue and GP percentage trend. I think this table speaks for itself. The table on the top right shows our total percentage revenue growth in yellow in each of the past 5 years and how much of this is organic in dark blue and what the growth rate of the market was. You can see that we've consistently outperformed the market. This is, however, only part of our story. This measures our total revenue against the market, whereas we focused in growing particularly in certain parts of the market namely more technical product areas. I'll look at this again in a little bit more detail on the next slide. Finally, at the bottom right, you can see what the projected market growth by end user segment is to 2028. All segments are expected to increase with key growth areas being corporate, media, entertainment and venues and events. So the next slide has -- well, I think it's a very interesting analysis of the business. The graph on the top left-hand side show -- looks at annual revenue growth since 2019. Over that 5-year period, the compound growth rate of revenue is 18%, with the organic annual rate averaging 7%. However, as this middle graph shows, we've deliberately changed the mix of our sales from mainstream to technical products. The table to the right shows we've increased mainstream product sales at an annual compound rate, 5% in 2019, but Technical Products by 38%. Table at the bottom left looks at our gross margin development and highlights the record GP percentage that we achieved in 2023. The middle graph shows that we've achieved a compound growth rate of EPS of 7% a year since 2019, and that's with 2 fundraisers and the pandemic to deal with. And finally, at the bottom right, we look at the cash conversion and shows that we've achieved an average of 87% a year over the period. We're still guiding to an expected 70% to 80% on going. Steve?

So just turning to the group P&L. As stated by Stephen, we are really pleased with our revenue growth and market share gains. It's a tough market backdrop in 2023. In context, we've roughly doubled sales over the last 5 years. Gross margins of 16.8% reflects a strategic focus on shifting our sales mix, both organically and through M&A towards higher-margin technical products. As we grow, we continue to invest in the business, but we look to do so in a measured way with the aim to improve our net margin over time. So good progress on this in 2023. The adjusted operating profit margin increasing by 40 basis points to 4.6%. Interest costs have increased in recent years. Obviously, despite strong cash management. We saw adjusted finance cost increase of GBP 9.6 million in the year and about GBP 40 million of our debt is at fixed interest rates with the rest of floating. Well, let's fix more rates -- more interest rates as the rates coming down. But with conservative approach to tax planning and the reduction in the effective rate of the year to 23.1% simply reflects a higher profits being generated in lower tax in Middle East. We expect it to go up to 26%, 27% in the year ahead as tax rates, corporation taxes introduced in the UAE, and we also have a full year impact of the 2023 M&A, which is in higher tax rate jurisdictions. We raised the net GBP 50 million of successful equity placing in June '23. This increased our overall number of shares by just over 13%, and obviously impact our EPS calculations in both '23 and '24. After this effect, EPS increased by 44% in 2023. While we have a strong pipeline of acquisition opportunities, we also recognize the importance of dividends. Final dividend of 11p, which is payable in June, takes a full year dividend of 16.5p, which means we've now fully recovered beyond our pre-pandemic dividend level of 15.9p. Going forward, we will look to pursue a progressive dividend policy, albeit as dividend per share growth expected to be a little bit slower than EPS base on average being post. Our balance sheet over the page was impacted by the acquisition of 7 businesses [indiscernible] record for us. Including cash and debt acquired, we paid out about GBP 47 million in the year, for these companies with a further GBP 9 million paid for deferred consideration on prior year deals. Therefore, we fully deployed the GBP 50 million fundraise proceeds as expected. As at some previous updates, when our growth rates are a bit calmer, we expect to generate good operating cash flows. In 2023, we combined that with strong working capital discipline and achieved an operating cash conversion of 114% of adjusted EBITDA. I've seen over the last 5 years, the average is an 87%. I typically expect 70% to 80% cash conversion, while it will be impacted by the levels of break in any given year. This year, we chosen to report our adjusted return on capital employed for first time. This reflects our operating -- adjusted operating profits divided by total debt and equity adjusted for acquisition related liabilities and also adding back accumulated amortization of acquired intangibles. We set a relatively conservative definition and the overall return in 2023 was a very healthy 17.5% despite the big impact of acquisitions in the year. As a reminder, we now on '27 acquisitions since our IPO in 2016. Our strong cash flow reduced our year-end debt levels below our expectations and results in a leverage ratio of just over 1.1x adjusted EBITDA. As guidance, we remain comfortable with a 1.5 to 2x leverage. We have cash generation on long term bank facilities can specify our further M&A. And as noted on the slide, we've got about GBP 30 million of the deferred M&A payments due in 2024, which also includes acquiring the remaining [indiscernible] for our Middle East business. We have added some modeling assumptions in the more detailed cash flow in the [indiscernible]. Over the page, just looking at the regional performances to start with the U.K. and Ireland. U.K. and Ireland entered the exceptional year in 2022, with 18% organic growth and 72% total growth despite it being our most mature market with the highest overall market share of any region in the group. In 2023, market conditions are more challenging. Data from future source shows that flat panel sales are down about 26% in 2023 and high-end projection down about 22%. Mainstream product represents about 1/3 of our U.K. and Ireland activity with our sales dropping by 15%, still indicating overall market share gains. Our strong technical brand lineup compensation base continue to grow by about 5% in the year. So overall, U.K. and Ireland revenue reduced by about 4% in 2023, but gross margins increased by 200 basis points to a record 18.1%. This also resulted in a record adjusted operating [indiscernible] of GBP 27.1 million with net margins increased by 30 basis points to 5.7%. The acquisitions of HHB and Pulse cinemas were completed in the year. In the U.K. & Ireland, we have broadcast and high-end residential solutions to the portfolio integration with those congression really well. And just to add if you can, you count up the dots, you only 11, but there are 3 offices in London [indiscernible]. Turning to EMEA, our biggest region. We're delighted with the growth in EMEA in 2023, despite experiencing similar headwinds to the U.K. market on mainstream products, we saw organic revenue growth of 8% with total growth of 9% in constant currency. This reflects further market share gains and a particularly strong performance in our Southern European and Middle East [indiscernible] businesses. We believe this continues to demonstrate the strength of diversity, both our product in products and geography within the group. Over the last 2 years, we've also obtained a license to operate in Saudi Arabia, we believe we're the only pro-AV business with one of those, and we are building a leading brand lineup to that market. It's early days, but the business attributed well in 2023 is perfectly positioned for future great in exciting and developing country. Strong technical product growth helped to increase overall gross margins in EMEA to 15.7%, up from 14.6% the year before, resulted in record regional EBIT of GBP 28.1 million, this represents over 28% growth and net margin increase of 60 basis points, 4.7%. Turning to Asia. So APAC is our smallest region, we grew 24% of revenue. It's also the region of the highest mix of mainstream products, about 55% of overall sales. Obviously, this region is faced headwinds over the last few years, both in slower post-pandemic recovery in large, high-margin projects, which is something our business down there does really well and by the market challenges, particularly towards the end of 2023. So low gross margins remained strong at 16.8%. The lack of revenue growth, which was down 7% organically, resulted a small EBIT loss of GBP 0.3 million. We've taken action. We strengthened both our local leadership team and our global support for the region. We've made some targeted cost structure to streamline operations are also making great progress on adding some new brand relationships, expanding the loans we've got. We're confident the quality of our regional offering in APAC. So for example, in Australia, the mainstream market over 20% over in 2023, whilst our comparable sales [indiscernible] 11%. It is not expected to be a big contributor as a region to the overall group revenue in the medium term, but we do believe that we will return to profitability in time. Final region, North America. So North America is our single biggest strategic market for the Group's future growth plans, and we made excellent progress in the year. So our U.S. business continued to expand both its vendor relationships and increase its share of all our with its customers resulting in organic growth of 8% in 2023. In June, we added SFM to the Group. SFM is a high value-add pro-audio focused business, the market-leading brand portfolio and nearly 150 team members. Integration exceeded all of our expectations with deep collaboration taking place on day 1, some really exciting brand opportunities going both in the group at time we also [indiscernible] back to the Group. Combined revenue in North America is GBP 177 million in 2023, representing 14% of overall sales, or about 16% of annualize the impact of SFM. As a reminder, it was zero in this region in 2019. SFM helped to improve the gross margin to 17.2% for North America and adjusted operating profit increased by 49% in dollars to GBP 9.5 million. Finally, just to touch on sustainability. We've made great progress in sustainability in the year, as Stephen said. We established a clear sustainability strategy in 2022 and been executing on it in 2023. Things we've achieved in the year include record levels of community to support by our teams and amounts raised from our charities. We've completed a group-wide climate risk and scenario assessment and developed our response. We've also captured all of our direct emissions data for the group for the first time and targeting controllable emissions to be net zero by 2035. We've also set up engagement with a wide range on our long-term climate action planning, and we're developing some interesting pilots around circular economy for the year ahead. Our teams are passionate about sustainability. They're committed to doing the right things, and we've chosen to invest more in our team in year ahead.

So now just a quick look at our M&A overview and the investment case for the business. So -- we acquired businesses in order to either access new geographical markets or to add new technical product areas into existing businesses. After having acquired nearly 40 businesses over the years. We now have a very experienced team involved throughout the M&A program from deal origination to integration. We completed a record number of deals in 2023, and they're bedding in well. Also on the -- sorry, in January this year, we acquired a business called The Farm, a small business on the West Coast of the U.S., very technical sales representative business and very excited that they've joined the group. We have a healthy pipeline of future transactions coming through as well. When we're looking at M&A targets, we look for businesses with a strong reputation, where the team has strong technical skills, a great vendor and customer portfolio and the culture and ethos those that are similar to ours. Our typical valuations of 5x and 6x EBIT. We spent over GBP 200 million on acquisitions since our IPO in 2016. And we calculated that our average return measured as EBIT over enterprise value has been 20% on those deals. Next slide gives the list of our 2023 transactions. We completed all but one of these by the time of the interim. So I will go over them again. The final one the list, prodyTel was completed in December. ProdyTel is a very well-respected audio distributor specializing in particular brands and based in Nuremberg in Germany. So I thought we'd give an example of a recent acquisition and how it helps the business subsequently. NMK is our business in the Middle East. We acquired it in the first of January 2021. As part of our acquisition planning, we look at the development program for the business, and this included a few elements where we were going to really help the business to grow. So we delivered on these, and these included investment in a new experience center at a cost of over GBP 1 million. We financed the establishment of a business in Saudi Arabia with initial investments in excess of GBP 4 million. We seconded one of our senior finance people out to NMK until they've identified a suitable full-time Finance Director of their own. We supported them with a recruitment of 63 people for their team. We've helped them to win and launch 15 brands, which delivered GBP 4.5 million of gross profit in 2023, in return and in to delivering very strong profit and cash flow, the business helped us to cement relationships with a number of vendors and introduced an exciting new brands into the group. So now I'd like to talk about what I think makes Midwich Group's investment proposition. Firstly, we have a market-leading position in a large global market with a significant growth opportunity. Our strategy is clear and has been consistent since the IPO. We have a strong team and our customer and vendor relationships to provide effective barriers to entry. We have a proven track record of delivering strong revenue and profit growth, driven by our portfolio management skills, strong cash generation and successful M&A track record and finally, we have an experienced management team, high team management and long-standing support for sustainability. So although, as I've mentioned earlier, current strategy has its challenges. We believe there are key drivers for long-term growth in the business. This growth will be delivered organically through our expected market growth, a trend of the increased use of distributors and mostly through market share gains, particularly in the U.S. market, with supplement organic growth with M&A in a fragmented market using our proven acquisition integration model and demonstrable ability to add value to acquired businesses. We look to continue growing our gross margin through a further increase in technical product sales supported by our value-added approach with the potential to further develop our business in software services and rental activities. And finally, we will continue to manage our cost base, gaining operating leverage as the business grows, seeing enhanced productivity through the implementation of new systems and hopefully seeing the benefits of lower interest rates in due course. So if we cast our mines forward to 2030, if we combine revenue growth of mid- to high single digits plus M&A with enhanced margins and the small productivity improvements then we think we could achieve double-digit adjusted EPS growth. And that's the end of our presentation. If anyone has any questions.

U.S. Stephen, if you remember about star deal, but I think theme was that they would like to structure in the gross margin in that [indiscernible] and you're reporting 17.2% second-highest and in the group. Clearly SFM [indiscernible]. So I think my question, is the structure lower margins but you sort of higher margin business if you strip SFM out. Has there been progress in increasing the underlying [indiscernible] margin that you can point to and if so what's driven that is more tactical?

I think it's pretty stable, actually. So in most of the mix effect of one. So they've got the right product set, but it's not moving much at this point in time. Right.

So that high margin we can look at SFM. It's much higher. And that margin what we assumed would say that this high level...

And you an annualizing effect in 2024 as well.

Double-digit EPS growth medium term [indiscernible].

In more than 9.9%.

[indiscernible].

Well, I think -- in here, we have quoted 2030 wherever that is [indiscernible] particular years away. So this is that sort of 5-year time round, 6-year time horizon. Feels like the reasonable assumption based on you put all the building blocks together, which individually feel reasonable. And you end up with a quite strong EPS growth of that period.

And then on cash conversion, you're seeing 78% this year [indiscernible].

[indiscernible]

Still snatching on the working capital management [indiscernible].

Well, we kind of -- we had [indiscernible] to the whole product shortage is both getting stuck into Suez canal [indiscernible] period and things are pretty much back to normal now. So there's not really much supply chain disruptions. So the working capital in terms of sales, you can fall back in the 12.5% to 12% [indiscernible], feels like a reasonable level. So we should track more growth for the next year as well. But we'll keep focusing on it more.

And the -- the Microsoft installation indiscernible].

Bit slower than planned, but I think it's -- we're still in testing [indiscernible] go live soon [indiscernible].

And what about CapEx in the...

We take a little bit more less. I think it's 15% rather than more guidance to 12%. I think it will probably be March 12 this year, and then [indiscernible]. So that's probably 2/3 [indiscernible].

And the last question a follow question on [indiscernible].

Yes.

Can you talk a bit of background to that what's the idea? How much you're going to contribute to [indiscernible].

Obviously, we've just launched it. The idea is that it's -- so the corporate venture capital arm. So looking at investing in very early-stage businesses within the AV sector and as relevant to us when we can find them. The team of 2, 1 is Alex Kemanes, who runs our NMK business. So this is something that's personal interest to him, and he's been very involved in [indiscernible] stage investments. So we've committed internally to a fairly modest amount of money initially. We'll see how it goes. It's a new thing for us. We've had a lot of interest in it, actually. The reason for doing it is partly to get ourselves into new technologies, new products and services earlier. So that we're in the right place when these come through into free fruition. Obviously, to look to achieve a return on our investments and also to indicate to the market that we are very much embedded in the AV market. We're committed to it. We want to invest and support the development of business is in our sector. In returns, it's very difficult to say in early-stage businesses, some of them will succeed, some of them hopefully will do very well. So we will have certainly not hoping that we'll achieve a return that's less than the group does. So but it's going to be up for a quite a long period of time. So really interesting activity. You've got a lot in raised eyebrows and interest you mentioned it. You've been surprised by the [indiscernible] in coming.

Yes. I'm pretty pleased. Yes. I wasn't sure -- you never know that these sort of things to you get going, but so we have a lot of interest from people.

We've got -- we're absolutely immersed in the AV world. And we think for a business that's trying to launch new products, launch new service. We've got so much to offer them in terms of -- not just access to the market, but in terms of market intelligence, we did this for our vendors. Nowadays, if we're looking at a go-to-market strategy, we can help them to develop it. It is the same principle for new businesses. We should really be able to help them to identify what they should be doing and how they should be getting to market.

[indiscernible] How are you seeing the growth rates of the mainstream and technical in there because technical has had a drive down from a lower pace presumably will now be a little bit slower. That's still the driver of that momentum.

It has been the driver of our momentum for a long time, and I think that will continue, that will be more and more of our focus, high-margin products, more technical products that require more skill, more selling activity, and that makes us more defensible and more valuable business that's adding value to the market. So I think that won't be. I don't see mainstream products going. Almost every AV installation has got a display or 2 or a projector in it. And it's an important part of getting into projects is having access to those sorts of products and be able to supply themselves. So the trend has been for reducing mainstream product sales as a percentage of the overall business. And I would think that will probably continue. But I don't think it will just certainly won't disappear.

In terms of the pricing expectations of vendors, you've been able to see [indiscernible]. Hey, you've just done a deal [indiscernible]. It sounds like you're so well placed as a group of people want to join. It's not just the exit multiple...

I think that's -- for us, that's the most important thing. If you look at the reasons why businesses are attractive to us, they're really about people in the business that we're buying those skills and relationships. So it's really important that they bought into us. And they need to get a fair price for that business. But we also -- we want them to continue and see the benefits joining the group. And I think Midwich is the place you'd want your business to go in our industry, if you're wanting to -- if you're thinking about how you want to develop it in the future or [indiscernible] people are looking to retire themselves having put in place a management team. I think we're a good home. I think we look after people certainly try to do that.

[indiscernible] another market number on Page 11. It's just still pending. We don't know where it is yet [indiscernible].

The [ AVIXA ] numbers?

Yes.

They published numbers in sort of middle of the year, so they published their '23 estimates in the middle of '23 and we think that they will -- they revise once already. We think there'll be a little revision coming through for how '23 actually looked. It's -- we'll have a good look. I'd be very surprised if our growth was less than the market or already [indiscernible] whatever it was the market grow more than us. And particularly, if we look at those post-market where we operate. I think there's been probably been some stronger growth in the Chinese, Indian markets, particularly China is probably seeing some stronger growth in the rest of the world. But we'll wait and see, there are a number of different research organizations [indiscernible] to cover the whole market, but other ones like future sales and context data tend to focus on specific product sets, which are easier to measure displays and projection is the sort of mainstream product service. And in the appendices, you'll see the results for those for '23 and they show significant drops in those product areas, much higher than we've seen in our. But AVs cover so many different segments, and it's really hard to get much information in the overall market.

And that's second [indiscernible], do you think today measure in the same [indiscernible] technical or would they measure analogous product sales, do you think...

They have probably about a dozen different product areas, which you can pretty well map to bundle up, different product sets to make what I call very loosely technical products and mainstream and I mean, we've tended to have bigger share of our business has been in the display and projection in the overall market historically. I think that's slowly changing as you've seen in here. Though there are many different aspects of our market and no different niches and very difficult to collect on the data together. Any more questions?

[Operator Instructions] We have no questions online [indiscernible] So over to you for any closing comments.

Yes. Thank you. So a great year last year for the group in the face of a very challenging market. The market continues in many areas to be challenging this year, but I'm very confident that we will outperform what's happening. We have a fantastic team and the business is getting stronger and stronger over the years. So I'm looking forward to the rest of the year. Thank you.