Midwich Group plc (MIDW) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to the Midwich Group 2025 Full Year Results Presentation. For people who are watching online, if you have any questions, please click on the Q&A button and then we can look at entering those at the end of the presentation In May this year, we'll have been on AIM for 10 years. The group has achieved some great things over the years. I believe we've delivered on what we promised we would do at the time of the IPO. We've grown our revenue, gross profit, net profit, all significantly. We've moved into new technical product areas. We've expanded globally and become a leading player in the market. One man who's not helped with any of that, but will be key to our future growth is sitting beside me, he's Adam Councell, who's our new CFO. Would you like to introduce yourself?

Yes. No, those haven't met me, my name is Adam Councell. I've got around 15 years' experience as a quota company CFO, initially with Restore, where I was there for 7 years, and we grew that business from sort of GBP 50 million market cap to GBP 600 million. And then I had a stint at Fullers and then more laterally at Marlowe plc. One of the things that drew me to Midwich was I really like businesses where for the customer there's a real premium on getting things right and conversely, of cost of getting things wrong, which obviously, if you're doing a live broadcast or an event, is a real cost of your customer of getting it wrong. And Midwich really helps with that because that's what we do. And through my 2 weeks in the business already, I've met a lot of people and what I found is a really great culture and also a real deep industry knowledge, which is fantastic. So really pleased to be here and really looking forward to taking the business through its next phase with Stephen. But obviously, because I've only been here 2 weeks, I'm going to give Stephen a delightful job of doing the entire presentation. So for the first time only, Stephen will be doing the financial slides. So I'll hand back to...

Unless I ask you to do them when we get anyway.

No.

Okay. Let's move on to the sort of summary at the beginning. So -- against the backdrop of a continued challenging market, we were very busy in 2025, getting the business ready for the future. We've made significant progress with this, and we have much more to come. One of the things we did was to close our Swiss business and a small business in the U.S. These were in markets where we felt we couldn't see a way to get the return we needed. So the numbers in this pack are presented on a continuing business basis, so excluding the discontinued activities. Our revenue of GBP 1.27 billion was down slightly on 2024. We saw growth in the U.K. and Ireland and in our live events businesses, but these were overshadowed by poor trading in Germany. Our gross margin percentage was flat on the prior year. Our adjusted operating profit of GBP 43.6 million was down 10% on last year, although the numbers in the second half of the year -- sorry, the numbers were in line with expectations and were relatively strong in the second half. Our cash generation was very strong at 123% and our leverage of 2.17x was down significantly from the 2.5x at the end of the first half. We expect leverage to be below 2x at the end of this year. In line with our revised dividend policy, we are proposing a final dividend of 3.5p, giving a full year dividend of 5.25p. We continue to execute on our established strategy of focusing on technical sales and gaining market share. We are very busy laying the foundations for the future. Our focus was on improving commercial excellence by broadening our vendor and customer share, expanding our product ranges, offering new services and cost efficiency. We expanded our vendor portfolio, including launching 36 new vendor relationships across the group. We made significant progress with our digital capabilities, including AI automation and digital solutions, including a new software billing platform. Our team -- we've built a new team looking at projects and system enhancements, and we've recruited a new Chief Technical Officer. Also, we've continued to ensure that our cost base is suitable for the business in the market that it is. We've reduced our headcount during the year despite making further investments in key strategic areas. We've seen benefits from many of the business improvement activities we've undertaken. And as I said, there's more to come in 2026 and beyond. I would highlight particularly our commercial training academies where we educate teams on best practice within the group. In 2026, we hope to build on the small organic growth that we achieved in H2 2025. After 2 years of price deflation in parts of our market, we started to see some price rises, which should help our revenue during the course of this year. Our team is energized and look forward to delivering a stronger year in 2026. So in terms of the current landscape, as I said, 2025 was a challenging year in our markets, and we've seen no signs of improvement in this yet. We have, however, as I mentioned, started to see price rises across a range of vendors and technologies. These are driven by chip shortages and pricing increases on chips as well. We expect to see price rises across product ranges continue for some time. Government spend continues to be suppressed. This is particularly pertinent in Germany, where we've not yet seen the benefits of proposed major investment programs. We're seeing increased adoption of AI in vendor solutions, which we believe will lead to higher specification products driving new demand in our industry. In terms of our business, we are seeing stable order books and improving market shares. The benefits of our cost base realignment in 2025 are flowing through into the business as well as benefits from our technology investments. Finally, the Middle East situation is a concern as this region was a major contributor to our EMEA profit in 2025. Our business is still open and trading, but obviously, the security of our people is key. We're monitoring the situation closely, but it is difficult to assess the likely impact of this crisis on the business at this stage. Our market remains vibrant and dynamic. An example of this is that there were record numbers of attendees in our recent global trade show at ISE in February. The next slide provides a reminder of our purpose and key differentiators. We exist to help our customers win and then deliver successful projects and our manufacturers to reach a broad market. Our main differentiators are the strength of our vendor relationships. A major growth driver for the business is to expand our vendor relationships across the group and introduce new vendors to companies that we've acquired. Our expertise in managing portfolio of products, technologies and geographies is also another key differentiator as well as the unparalleled depth of specialist knowledge in the business. And finally, and most importantly, consistency of a high level of customer service is key. In terms of market share, I'm often asked about the size of the market, the addressable element and our share. This has always been very difficult to answer because of the lack of reliable data and changes in the different segments of the market, what's suitable for distribution and what is attractive to us. However, research by AVIXA in 2025 showed that the global market was expected to be $332 billion, growing at 3.9% a year to $4.02 (sic) [ $402 ] billion by 2030. On the left-hand side of this page, the growth model tries to show how we grow our business in each category. So for example, where we're in competition with other distributors, we might, for example, represent 50% of our supplier sales. So one growth approach, of course, is to win a larger share of our vendors' business from the competition. Our other focus, of course, is to grow our vendors business by taking share from vendors we don't supply. If we have an exclusive vendor relationship, of course, that's our only role. And of course, the top arrow shows that the total market for a particular set of products might also be growing. On the right-hand table, we're looking at our relative position in each of our global markets by the main product sets. The darker rectangles represent a market where we have a comprehensive portfolio of leading brands. The lighter rectangles show where we have an established capability but with room to improve. And where we have white space, of course, we have no presence, which represents a strong growth opportunity for us. Overall, we believe that we have 3% to 4% of our target addressable market globally. So in summary, we're not short of business to go after. The next 2 slides give examples of how we're able to source and drive new business. Firstly, our relationship with a major drone manufacturer, DJI. We are all aware of drones now, of course. They have numerous commercial applications such as emergency response, search and rescue, infrastructure inspection and land management. We started to sell DJI drones in the U.K. in late 2024 and then Benelux in 2025. Having had no prior involvement in this sector, it's become a major success story in 2025 with revenues in the tens of millions of pounds. This shows me that we have an approach which applies equally well to noncore AV markets. You can see from the quote on the right-hand side that the vendor also very much appreciates our approach, our success and the future partnership. On the next slide, we look at the Unified Communications, a part of the AV market that we had little involvement in prior to acquiring our first U.S. business, Starin in 2020. Through applying our focused distribution approach, investing strategically and acquiring and rolling out vendor relationships, we've become a global market leader in this category, which now represents around 15% of our group turnover. We estimate that we have grown this business organically well over GBP 100 million in 6 years. You can see on the right-hand side a quote from one of our relatively new vendors, Neat, showing how we've substantially increased their global reach. So now looking at the financial review. Just to pick out a few key points that I haven't already covered. Firstly, the revenue decline in the year of 1.5% was just 0.8% on a constant currency basis. This in turn was a combination of a first half decline of 2.4% and a second half increase of 0.8%. Our overheads were largely flat despite a full year effect of acquisitions and strategic investments. Our adjusted operating profit reduced by 10% on a constant currency basis, but was broadly in line in the second half of the year. We have significant exceptional items this year, which we've listed and described in the appendix. Turning to the balance sheet. Strong working capital management led to a ratio of working capital to sales being much lower than in the prior year. Our positive net cash flow resulted in net debt being GBP 4.6 million lower. Our leverage of 2.17x was better than our previous guidance with an expectation of it being below 2x at the end of this year. Our outstanding liabilities for M&A are now GBP 6.7 million, significantly lower than they have been in the past, and there's been no change to our debt facilities. So now looking at the performance of our 4 regions. What we tried to do on these slides is look at the key drivers to 2025 performance, then our assumptions on the market and our business in 2026 and finally, our view on our position in the market. So to EMEA first. This is our largest region by revenue. Overall, revenues declined 5.5% on a constant currency basis. Note these exclude the discontinued business. We saw growth in the Southern European and Middle Eastern businesses, but this was significantly overshadowed by a drop in German revenues. We also undertook some significant restructuring activities in the German business later in the year. Finally, you may recall that we had a fire in our Dubai warehouse at the end of 2024, and that did impact on the results from that part of the region in the first few months of 2025. In terms of this year, we're expecting flat markets and an expansion out of the -- an expansion -- sorry, into Central and Eastern Europe out of the German business. Finally, I should add, of course, that the Middle East does pose some uncertainty in terms of the results. In terms of our market position, we have a regional strength in the live events and entertainment markets and strong positions in the German, French and Benelux markets with leading business specialist businesses in Southern Europe and the Middle East. In the U.K. and Ireland, the business performed very well in a tough market. We did reduce the cost base earlier in the year, but we took business from competition. We launched new brands and we grew our drone business significantly. We expect to continue much of this business improvement work in 2026, seeing particular gains in market share and the full year benefits of restructuring. The results in the U.K. and Ireland show that the turnover increased by 6.6% on a constant currency basis, of which 4.9% was organic. We improved our gross profit percentage from 18% to 18.6%, and our EBIT increased by 30% across the year. In terms of our market position, we are a clear market leader in the U.K. and Ireland, and our future growth should be achieved through new technologies, vendors and expanding share from competition. North America accounts for 16% of our business. We saw a decline of 5.3% on a constant currency basis and a fall in the gross margin from 19.3% to 17.5%. Our EBIT on a constant currency basis was down around 44%. This region, as you may recall, was impacted significantly by the loss of a high revenue GP vendor in Canada. We believe that we've also lost some share within the mid-tier U.S. business. We undertook a significant headcount reduction in Canada earlier in the year. The CEOs of the Canadian and U.S. businesses left late in the year, and we've created a single regional management team of 4, including a senior sales resource recruited from outside. Our assumptions for 2026 center around the new regional management team driving improved performance and a push to acquire new vendors, particularly in the Canadian market. APAC is our smallest region. We saw some small improvements in revenue, margins and overhead costs, leading to a reduction in losses in the region. The key to 2025 was an improved project pipeline and new management in that region. Our focus for 2026 is an investment in Southeast Asia, which we see as a good long-term growth prospect and a further focus on projects in Australia and New Zealand. Our market position in ANZ, we have a meaningful share of the market but currently a narrow portfolio gives us opportunities to expand our business by broadening that. In Southeast Asia, we have a small share in a very fragmented market. We're looking at new brands, which we've had some success with, and we hope to achieve some good growth in that in the medium term. I spoke earlier about our recalibrated dividend policy. This next slide, looking at capital allocation priorities. Our first priority is investment in organic growth and strategic areas, then in new areas of development in M&A and finally, in shareholder returns. We will continue to have a focused and tight approach to capital allocation with a particular emphasis on the growth of the business. Now to growth drivers and outlook. I think it's important to reemphasize what our areas of future focus are. Firstly, it's absolutely critical that customer service is as consistently high as it can be. We want to continue to develop the business in core technical areas, and we expect to see benefits from our system investments. We will look to take advantage of market disruption, for example, struggling competitors. We will accelerate the growth of our new market segments, such as in software, services and other technical categories. We'll focus on higher-growth markets such as North America, Southeast Asia and the Middle East and undertake selective M&A to infill new technologies and geographical expansion. In financial terms, our focus is on PBT growth, EBIT margin enhancement, quality of earnings and, of course, shareholder returns. On the next slide, we look at growth drivers. We've recently undertaken a detailed 3-year plan, which sets out our ambitions for the future organic development of the group. And I thought I would pull out some of the key focus areas. Firstly, the expansion of our existing technical sales reach includes particularly looking at developing the live and entertainment businesses. Secondly, we have significant plans for businesses that are still in quite early stage of development, such as our software business. Thirdly, we look to continue market share gains. We're significantly underweight in a number of key markets, but even in established markets, I believe there's lots of business for us to go after. Fourthly, we'll use technology solutions to drive additional sales and efficiencies. These include improved e-commerce offerings and AI solutions. And finally, we've identified areas for achieving future economies of scale. These growth areas, of course, are all organic and exclude the potentially significantly positive impact from our future M&A activities. So finally, in terms of our outlook, we've made a basic assumption of a challenging market continuing into 2026. However, we've done a lot of work in 2025, and we expect to see the benefits of that coming through this year, and we'll continue with much of that work through 2026 and beyond. We have a focus on driving gross profit whilst ensuring our operations as efficient as they can be. Our outlook for the full year remains unchanged. Thank you.

Thank you very much. That brings us to the Q&A section. So first of all, we'll take questions from the room.

3 for me. If we start off with Germany, you described as [ startling ]. I think the last time we spoke about this, there was the expectation that we got towards the end of calendar '25, there might have been the potential for a federal government to unlock spending of that. What's your experience been with that? And is it rolling on to hope for this quarter and next quarter? And then if you can develop that into the 3.9% that you spoke about from AVIXA, which I guess is -- begins this year, doesn't it? And then goes on to 2030. How much of the 3.9% do you expect to be the price rises that you spoke about on Page 2 or 3 in the presentation? And then I assume the rest is volume. And then finally, on drones, really like your slide on drones there. Wasn't single mention of military in that entire note. Everybody believed [indiscernible] these days and there's a massive market in miliary drones -- and any interest in being there, if not, why not?

Okay. Let's start with the German market. The German government, as everyone will know, has a big program of investment in infrastructure in that market, part of it military, but also part of it investment in infrastructure for the country. There was a special education scheme called Digital Pact, which finished, I think, halfway through 2024. They then promised or suggested there'll be another version of that, and that was called Digital Pact 2, which is the form part of this big investment spending program. We haven't seen that really happen yet. So it's there -- it's a program that I expect sitting on the shelf somewhere ready to be dusted off and launched. Obviously, it's a regular question I'm asking my colleagues whether they see any signs of orders coming through from that. But not, yes, it's in primarily in schools, I think universities as well. So it's an education-based program. Education is a particularly big part of our German business. And of course, coming between 2 special programs, the market dropped very significantly waiting for the new investment of money to come through. So that's probably impacted on the education market in Germany. The simple answer to your question is, I don't know, and we haven't seen any signs of it happening yet. We know it's there. We know there's an intention. I believe it's gone through all the different government sign-offs that are needed, but nothing has really come through. In our planning, we've decided that we really need to plan for that business, assuming there is no great big uptick in this sort of spending. So we need to have a business that's right for the market that's there. And if we get some big programs coming through big investments, then we should be able to see a significant benefit from those. Price rises and the 3.9% growth, I'm not sure how much of the AVIXA growth was driven by expected price rises. I suspect it probably wasn't. I mean there are differential rates of growth across the world with countries like India being particularly high growth. I think China is quite good. The European market, I think, it was much lower growth. So I don't know how much is affected by price rises. I would think it's, obviously, very interesting to try and gauge it for our business for this year. We're keeping a track of price rises by vendors and when they're proposing to do them. My gut feeling would tell me we might see 3% to 4% average price rise across the group, driven by chip pricing, which I don't imagine is going to reduce any time very soon. So that's a little bit of help maybe during the course of the year. And then drones, we have avoided, of course, getting involved in military drones, not entirely sure that's the right thing for our business. Maybe it's something we should look at it, at some stage, but we've not really been on, I would say, on the front line of drone supplying. There is a -- I think there is a very big market for drones outside direct military conflicts. We do -- and that business has gone very well. It's a big and growing market outside the military. We have -- I believe we supply drones for sort of training and for police and the uses of them are fantastic really in terms of their performance and what they achieve. But no current plans to get involved in military drone supplying.

Yes, just I think 3 for me. Just to understand the kind of nature of the pricing deflation a little bit more. Is that more driven by competitive dynamics in the vendor market? Are you seeing competitors try and take share through price decreases that's affecting your vendors? Or is it more on the demand side where people are just reluctant to buy and on to lower price?

I'll answer that one. I'll start on the 2, otherwise, I'll forget them. I think the price deflation that we've seen is primarily driven by a flat or, in some cases, declining market, but with manufacturers not adjusting their manufacturing output sufficiently to balance out the pricing. I think it may well be that the increase in chip prices will force some of the -- particularly in displays, some of the display manufacturers to start increasing prices because some of the increase in chip prices are quite significant. So I think it's a bit of demand actually, and it's a bit of supply. So it's a bit of both. And probably in some parts of that market, there's been a little bit less innovation in displays recently than maybe there was a few years ago. And that also then -- instead of products being refreshed as quickly, they then become -- the prices start to drop on current prices rather than the price levels being kept maintained.