Restore plc (RST) Earnings Call Transcript & Summary

Good morning, and hello, everyone, and welcome to the First Half Results 2020 Call for Restore. It's Charles Bligh here, CEO of Restore. And joining me on the call in another location, I might add, is Neil Ritchie, the CFO. So on to the results and the presentation, which is on the company website, and I'll take you through the highlights and then our view of COVID-19 impact and certainly put it into perspective. And then Neil will go through the financial overview, and then I'll talk about the business units in more detail, including a view of the strategy going forward and certainly, the outlook as well. So on to the highlights for first half of 2020 on Page 2. Well, overall, it was a resilient first half, a good start to the year. And then we're impacted, obviously, in Q2 with COVID-19, but with activity levels sharply increasing at the end of the half, that we'll talk more about, I'm sure. And I'm delighted we continue to win new business, especially in Q2 during the height of the restrictions. Just to remind you, I'm sure you noticed that we had a very good 2019. So it came into the year with momentum and continued that momentum with January and February up and overall, ended Q2 -- Q1, I should say, at 2% year-on-year. But then we ended the first half with revenue down 16% to GBP 89.5 million with the impact of the lockdown. So more about this. We saw the peak impact in March and April with a gradual increase in demand in May and then a sharp increase in June, which has greatly continued into July which is good. We certainly moved decisively to ensure we maintained a safe and COVID-19-secure environment which is very important to keep all of our businesses open and continue to operate safely for staff, customers and suppliers. Now overall, profit was down GBP 10 million. And I should say this is also the new way of looking at profit, IFRS 16 and so forth. But this was a good result overall with profitability throughout the period. So on to exceptional. The operational, we'll talk about more later, but the operational-related exceptionals were broadly 0 as we promised last year. So I hope that shows the strong earnings of the company. And certainly, it lays to rest any questions in this area. I will go into the business units later, but the focus on cash generation with the resulting net debt reduction of almost GBP 15 million was a terrific result, and Neil will cover this off in more detail. So finally, we are weathering the uncertainty very well, both financially and with customers and with a strong balance sheet. I know with activity levels coming back and into 2021, we will be in a strong position to capitalize on the opportunities we'll certainly see coming towards us. So now on to the impact of COVID-19 on Page 3. So first of all, I wanted to put a structure around how to think about our response and how we are executing through the uncertainty and the impact on customers and the business. And first and foremost, it's all about safety. It's safety of staff, as I mentioned, customers and suppliers. So we moved swiftly to make sure we're COVID-19 secure. In terms of activity, as I mentioned, we saw the peak impact in April. And in May, we saw a gradual increase with a sharp increase in June. From a people perspective, we had peak -- we made use of the furlough scheme of peak impact of 47% in March and April. And then end of July, we are now below 32% furlough. And I should say, I expect more staff to return in August with increasing activity across all businesses. We moved, as I said, to manage cost very well, and the teams did a very good job with that. Cash collection was very strong. I should say we experienced very little bad debt as well. We also, as I said, we're winning during Q2, which I think was a hallmark of the quarter. So during Q2, we also didn't miss an opportunity to transform the business. We're investing in IT. We brought forward projects for driving automation and efficiency, new digital investments in the portal and also new products as well. Some of these are existing products that we really drove a lot harder like Scan On Demand, I'm sure we'll talk about, and Digital Mailroom. And we're launching a new product in our digital business called Homeshred. And then acquisitions, we have paused acquisitions in the first half, but we've seen a pipeline of acquisitions increasing strongly, and I expect this to increase markedly as we go towards the end of the furlough period into 2021. So on to Page 4. I wanted to briefly mention what we've contributed in the fight against COVID-19. I'm very proud of the service we provided at the height of the restrictions and ongoing today. We're delivering essential service to customers, as you'll see on this chart. And you know you're an essential business when we had numerous calls from customers throughout Q2 to make sure we not only stayed open but continued at the high levels of service and responsiveness we are known for. And it was just terrific to see even more than normal customer e-mails to thank our teams. The teams did also a lot for various charities, and they really set this up even more and there's a few shown here as well, and there's many, many more as well. So overall, we deliver an essential service in all of our businesses that help the government and companies function, and this crisis has really shown this. So overall, a resilient start to the year. First half, overall, to be proud of. And now I'll hand over to Neil to go into the financials.

Thanks, Charles. Nice to speak again. If you turn to Page 6 in your decks, and you'll find that we set out the highlights, and I guess the financial themes for the first half. And really, those were that firstly, we have achieved a resilient and profitable result in challenging circumstances that Charles has been describing. We did start well in Q1, and we're showing growth despite the outbreak of the coronavirus and subsequent lockdown from March. And the group was profitable throughout Q2, albeit at a lower level than achieved in 2019. Secondly, we are very pleased to show, again, the cash-generative nature of the business. And you see in the chart that we've delivered a fourth consecutive reporting period of net debt reduction, with debt down a further GBP 14.6 million in the 6 months to the end of June. And this is driven by very low exceptional cash costs and the strong operating cash flows derived from the profit that we posted for the period. And then finally, I think with more of a forward-looking hat on, we have maintained our balance sheet health through the crisis and have capacity to finance expansion or act as a buffer, should that be required. So moving on to the income statement on the next page in a bit more detail. On revenue, Charles mentioned that we were very pleased to see the business grow by 2% across quarter 1. And remembering that, that was including a couple of weeks of disruption at the end of March, so we've got a very solid start to the year. In Q2, we saw the strong core of the business come through with about 50% of revenue frankly completely unaffected, and that's really the storage fixed income aspect of the business that we have. In other areas, although revenue might be largely contracted, the restrictions on customer access meant that activity was reduced. As such, we saw a reduction in this activity-based revenue, which came through in quarter 2. So the net result of all of these effects is that overall, we saw revenue of GBP 89.5 million and down 16% on the same period in 2019. Looking further down the income statement and looking at the adjusted profit results. I think it's important just to emphasize that the speed with which management adapted their operating processes and resource levels. I mean frankly, we prepared well, but also we're a well-run business. And if you look at the chart on the right-hand side, you'll see that for each of the pound lost in revenue, we were able to adapt the business model to take out about 50p of costs. So this ability to [ select and link ] it's credit to the operational teams and their ability and focus on this through the whole period of keeping the business running as well as giving a tight, tight control on costs. So although lower, we were able to maintain good margins. And in total, the group achieved a profit of GBP 10 million against GBP 18 million for the same period last year. And I think at this point, I would also just call out our statutory results. You will see that in the detail of some of the narrative that we did perform a review of our intangible assets and investment values at the half year. This gave rise to a noncash accounting impairment of GBP 8.6 million, which you see reflected in the negative statutory result for the period. That impairment mainly relates to the valuation of intangibles and a legacy investment as a result of historic acquisitions and really the application of the various accounting standards to those values. So as I said, it's noncash. I think it's important to reflect these reporting requirements as we see these things appear. So moving on to adjusting items, which is on Page 8. We were quite keen to underline exceptional items, which I think historically for the business have been perceived as high. In the H1, they were very low, frankly. The operational exceptional items were less than GBP 100,000. The majority of the cost of exceptionals within that GBP 0.4 million in H1 related to national insurance and some legacy share option exercises, so very low underlying adjustments to the profit showing, I think, the sort of quality of earnings and cash flows in the business. However, we do have those impairments I just described as GBP 7 million against intangible assets and GBP 1.6 million against the legacy investment. Moving into the business divisions. Adding a bit more color to what we saw in Document Management and Relocation. So on Page 9, we have Document Management, and just to highlight a few of the effects we were seeing within the business units. Firstly, in Records Management, the strength of that storage income really comes through and actually, it was plus 1.5% for H1. So the box growth was flat, the revenue was increasing in Records Management on the storage side. Post COVID-19, service levels did drop in, in shred. We saw that significant activity in April, although we have seen that recovering in May and June. Digital has been very interesting for us, actually, although we did lose the summer exam scanning season due to the cancellation of exams. If you took out the exams from the revenue in 2019 and 2020, the business is actually flat year-to-year, which I think is an indication of the strength and the progress that we're making in the quality of contracts in that business unit. At the profit level, all the business units were in positive EBITDA and sustaining themselves from a cash perspective, although you do see in the revenue variance of year-to-year that Datashred obviously had proportionally the largest impact with Records Management down 8.5%, but by contrast, Datashred down 31%. Turning the page to Relocation. We enjoyed the very good start in Harrow Green and Technology. Both businesses performed very well in quarter 1. Technology was enjoying the lapping of the acquisition of it that we made in May 2019 as well as contract expansion. Harrow Green came into the owners performing well. As a result of COVID-19, there was an activity drop in both businesses in Q2 where interestingly, Harrow Green has actually had peaks of activity as it was supporting businesses relocating homeworkers. And actually, businesses realizing that their lease end dates were not moving, and their requirement to move had to be carried out. So actually, Harrow Green in June was performing at similar levels to 2019 in London. So we're very pleased to see that. And the margins in this sector are lower than in the Document Management business unit, but you do see that we've maintained profitable results across the business division. Moving to the balance sheet. I think the key point to this is that we have maintained the balance sheet health throughout the crisis and came in with a good balance sheet, and we're acting -- actually H1 with a good balance sheet. And we maintained good assets and liability ratios. Those haven't really moved. Our debt-to-equity ratio remains good, and we have capacity in the banking facility. In the chart at the bottom right-hand corner, that shows you that we have GBP 103 million drawn down at the end of H1 and GBP 57 million of capacity in the RCF and a very supportive set of banks that have been available to us should we require them. Now importantly, again, just want to emphasize as a result of the cash generation, net debt has reduced again, the fourth consecutive reporting period of debt reduction with 2 years of consistent reduction in debt, and we closed the period at GBP 73.9 million. Some of the more observant of you will notice we are running quite a high cash balance. That is through choice, just a decision to maintain a higher-than-normal cash balance really as a precautionary measure. And we can probably ease that back a bit now that things are starting to release a little bit. The other question I know some of you will have is around trade debt and the payment profile of our customers. I'm very happy to report that we have no debt issues at all. The customer base that we have is of good quality and continuing to pay on time and in full. So that's one of the key features of the balance sheet. So I'll just finish then with a commentary on the cash flow on Page 12. The key assumptions of the cash flow is that we perform well with very positive cash flow from operating activities from the trading of the group. And out of that net cash inflow from operating activities of over GBP 36 million, we of course have to pay our interest cost, our taxation and our CapEx. We have acquisitions on hold, as we've previously communicated, and we have to pay our rent, which is what principal elements of lease payments referred to there. And so the net cash flow in the period was GBP 14.6 million, so it is a very strong result. And I would just add that we did that, we have had a bit of working capital on line. And due to that good debt profile, we have about GBP 7 million, GBP 8 million of cash flow benefit as a result of working capital that may come back to us in H2 when sales recover. But I think overall, a very, very strong results on cash, and we're very pleased to deliver fourth consecutive reporting period of net debt reduction. So I think with that, I'll probably hand back to Charles and see if he wants to take questions and continue with his commentary. Thanks, Charles.

Great. Thank you, Neil. And it's good to see the cash flow coming through in the first half of a very, very good result, as you've seen. Now I do now want to go and talk more about the business units in more detail. But before I do, I do want to talk about the market a little bit more, and some of you are asking about effects of COVID, I'm sure, on our business model and strategy. So you turn to Page 14. I do think -- I don't think it's an understatement to say that our business model is showing its true strength during the uncertainties. The -- we keep talking about them, but these are important in times like these, even more so predictable, recurring revenue streams are the hallmark of the business, significantly cash-generative business model and strong balance sheet. And we showed that within the first half how cash-generative the model is. We do have a flexible cost base. It does vary by business unit, but overall, quite a flexible cost base. And what you saw in the first half was a strong execution by the whole team to reduce costs as much as we can in line with the activities, and that produced this very good profit result. And as I said earlier, office services we provide aren't discretionary. We provide an essential services to customers, and we remain open throughout the entire period, including the peak period as well, which is very well welcomed by customers. And then the second and last point is our customers. We operate in robust sectors, local government, health, central government, a lot of public sector, financial services, regulated utilities, pharmaceuticals, legal, accounting and so forth. So these are very robust sectors and very blue chip as well. So just to remind you certainly of the structure of the firm. Now just a last point here about talking about the office. I think everyone is obviously talking about COVID-19 and the impact and the fact that people were functioning with a lot of people working at home. So it's prompting the question about how will COVID-19 affect the office. And I think it's a very good question, but I do think it's also easy to get caught in the moment a little bit about this. And I think it's best to answer this question over a longer period by going back 25 years and then maybe sort of projecting the forward first -- remember, the next 10. And I think the industry trends that we think are the most important going back the last 25 years, clearly, a physical to digital transformation driven by the Internet, but a whole range of IT investments and so forth. Very important. Flexible ways of working primarily driven by the Internet in the last 20 years, rising focus on data security or, more importantly, stopping data loss. And certainly, the environmental focus and awareness of businesses. So these 4 trends have been unfolding over the last 4 years. And these are challenges that Restore solves for customers throughout our business model. And candidly, if COVID-19 accelerates these trends, which I think they are likely to, so coupled with an immediate need to reduce cost if we are in a recessionary environment, we are well placed to help customers and grow substantially. So our business model really is showing its true strength. Now turning to Page 15. Our strategy, you've seen this before, but I want to keep reminding you on the left-hand side about the market position and our strategy on the right. But the overriding message here is our long-term growth strategy is reaffirmed for our shareholders. On the left-hand side, again, to remind you, we had strong market positions with definite room to grow. The key facts are aggregate, if you add these up, the market is over GBP 1.8 billion, growing pre-COVID at circa 3%, so it's a healthy rate. And we have an 11% share across all of these business units, even with our #1 and #2 positions. So strong market positions. As I keep telling the team, with 11% share, we have ample room to grow strongly organically. And then on the right-hand side, as we talked about in November last year is our disciplined strategy to deliver profitable growth. And as we talk a lot about cash generation as well, it has 3 elements to it. The organic growth strategy on the top left-hand side, the company has grown organically in the past. And with a 3% market, I hope that we will continue to grow greater than 3% to take market share organically. There's lots of acquisition opportunity mainly in 4 of the 5 markets that we operate in, and I'm sure we'll get questions on that. And that after the uncertainty is subsided, I'm sure we'll have a lot more quality acquisitions that we can go after. And then the third element is margin expansion. So it's really to look at the overall cost of the business to make it work harder for us is property rationalization that I'll talk about as well as a whole range of other things we can do to improve the margin of the business. So it's a very disciplined strategy, and our long-term strategy is very much reaffirmed. Now I do want to now move and briskly to go through this in more points, and I'll cover in each of the 5 business units. The first one is Records Management on Page 16. I do also like to say we have added a video link of each of the business units. These are new. And we've done this for a very specific reason. I've been in the business now 15 months, and every day, it reaffirms to me that you have to see the physicality of our business to really truly appreciate how good we are. And so the easiest way to do that is to provide video so you'll go inside and outside of our facility. So I encourage shareholders to click on these short videos to see exactly the footprint we have in each of the businesses. So let's talk about Records Management. Just to remind you that there are 2 types of revenues in Records Management broadly: storage revenues that make up about 70%, and then activity revenues and other revenues, frankly that make up 25% to 30%. As Neil and I mentioned, overall revenue was down in this business unit. The storage revenues were up 1.5%. Activity levels stabilized in this business in the end of April and gradually improved in May and rising sharply in June. June over May was over double digit -- was double digit -- high double-digit growth in June. We had a Net Box of growth was flat in half 1, which frankly was a good result. The impact stopped us taking boxes in from competitors. And in addition, permits and distractions were down. So that was a good result and reaffirming that we will in the full year expectation is that we will grow Net Box for the half. Scan On Demand revenues were up, which is growing. We got 23 new customers take this to service, which is something we already delivered but this came very much back into those. As I said earlier, new customer wins, strong pipeline. The operating margin of this business was consistent with prior year with very strong cost management. And our property rationalization is on track. We closed 1 facility in January and starting to move boxes from another facility in Q2, which will go through the second half and early next year as well. And as a result of this, our capacity utilization with Rainham coming on stream in the second half, not the first half, did move up a bit from 1% to 97%. But we do have additional capacity coming on board in Rainham in the second half to bring that down. So overall, I think a very good result by the Records Management team. If we move to Restore Datashred, as Neil mentioned, this business probably is more impacted with the restrictions not being able to get into offices, but we'll see a sharp increase when we start to be able to access offices as well. So activity levels in January and February were in line with the prior year, which was a solid start to the year for the team. But as I said, Q2 levels were impacted. Interestingly, regional and London activities were impacted equally. And I know in June and July, as it's turning out that the regional business is picking up greater than the London activity, which I think is sort of only natural, but I think we'll start to see that equalize after August as more people come back into London. Importantly, all sites remained open during the peak lockdown. We're, in some ways, the waste -- regarded as waste management as well as recycled paper. And we have a number of customers in this business unit call to make sure that we continue to be open across all of our sites. Paper pricing, which makes up about 30% of the revenues, increased by 35% versus Q2. To remind you, last year, paper pricing started to soften around the April time period, but we saw a 35% increase, as I said, which helped offset some of the reduction in activities. We continue to win business in Q2 and renew contracts with customers. You see here 3 large major existing customers as well as new. It was a low switching quarter, so it's down versus prior year, but it was still very healthy levels. We are certainly maintaining capacity in this business as activity levels come back. And we haven't made any acquisitions in this business, as you know, for a few years. But I think you'll find that this is an area where we'll find good opportunities for us to accelerate our strategy in shredding. I'm really delighted with Duncan Gooding and the whole team at what they're doing to turn around this business. So I think a very solid result for the shredding business. In Digital, revenue was down 23% year-on-year, but that's a harsh view. If you take out the exam canceled some session at GSCE/A levels, so they were flat year-on-year which I think was a terrific result, some project revenues in there as well. So very good result by the Digital team. We had some major wins in Q2 with 2 large digitization contracts won. So again, continue to win in Q2. We saw an increase in activity in Digital Mailroom. This is a service that we sell. But people not being able to access their physical mail rooms, we saw a sharp increase in that, and I'm sure that will continue for the next few years. And then June sales activity and pipeline came back to near normal levels. And we took sales staff of furlough to cater for the new -- for the activity. And I think that really shows the team -- the companies are looking to see how they can reduce costs in the second half and get ready for that. We are making changes in the operating model to deliver productivity around consultation and closing of sites in Digital. These are smaller sites, and they're very, very much in keeping with the strategic growth story of the Digital business, and we completed a small acquisition in July. So I think a good result from the Restore Digital team. Moving now to Restore Harrow Green, our commercial Relocations business. They had an exceptional 2019, so strong comparison. They had a strong start to the year with a 7% increase in January and February, but they were down with the impacts with accesses to offices, reduced activity in March and April with the peak restrictions and then we saw May activity improving. And interestingly, I think this is going to bode well for this business. June activities were near normal levels as -- and London particularly strong. This is slightly different to the shredding business. We saw regional and London and dropped with activity at the same time, but London is kicking back a lot quicker. And I think what that means is that businesses are looking to reconfigure their offices in London probably with after summer increases of people coming back into London. But a good result there. We support over 25 NHS trusts in reconfiguring hospitals and various facilities to fight COVID-19 on essential service. We won 3 very substantial new clients. These are long-standing clients with our competitors in Q1. And remaining open for the entire period, I think, has boded well for us in this business unit. And we continue to bid and win new clients that we're going to consolidate with. And in the second half, I think we'll see quite a lot of opportunity because what this business does is help customers change. We help them reduce costs, and I suspect there'll be a lot of activity coming Harrow Green's way in the second half. And then finally, our business unit, Restore Technology, our youngest business unit, but it did grow very strongly in the first half, 23%. And they would have grown even more if it wasn't for the impact. Early life collection did significantly decrease in Q2 as I said, so this could have been a much better result. We do also help customers in early life installs as well. So as companies were setting up homeworking and social distancing, very important they used Restore Technology to help them with that, including used equipment. So our e-commerce sales were over 50% increase in the first half on the back of investments last year and a rebranding exercise in January, which bode that business very, very well. We had existing customer renewals in this business as well with 1 large contract, GBP 2 million per annum, so that's terrific because we deliver very good service. And as we said last year in that strategy for this business, the IT channel is a key growth area for us. And we've been working on a lot of opportunities with customers. And I'm delighted that the team signed and onboarded 2 large new customers in the IT channel: one, a top 5 global IT supplier; and another one, a large U.K.-focused IT reseller, which I'm sure we'll start to see some volume coming through in the second half. So a very good first half for the Restore Technology team, could have been even better but I know they're going to bounce back very strongly. And I would say that there's significant opportunities for acquisitions in this market, which is very fragmented. We trialed last year. And after the furlough scheme, I'm sure we'll start to see some businesses coming to the fall here as well. So they are the business units in detail. Now I'd like to turn to the outlook and looking forward if you go to Page 21. Now we're not giving guidance per se with all the uncertainty around COVID-19, but we are assuming increasing activity levels in the second half. We are expecting, with the reducing uncertainties and activity levels, that H2 profit will be more than the first half profit. Cash generation will continue to remain strong with continued reduction in net debt. And as Neil mentioned, we are maintaining funding headroom and being very prudent with that as we go forward. We've made structural changes in the cost base around people and site closures where there's also another site-run consultation with as well in 2 different business units. Again, these are all part and consistent with the strong growth plan and bounce back in the business. And on the acquisition front, we did pause as COVID-19 impacted, but we made one small acquisition in Digital we're delighted with. And going forward, we will be very disciplined, but we will expect there will be significant opportunities for acquisitions in all the markets that we operate in. Dividends are on hold for 2020, as we've said, but they certainly are under constant review in 2020 as well by the Board. But certainly, our intention is to restore the dividend in 2021, in line with recovery of activity levels that we expect to see in reducing uncertainty. So look, overall, a resilient first half for the company. I'm very delighted with this result given the uncertainty. We had strong cash generation. And finally, I'd like to thank the whole Restore team for their terrific dedication and focus in the way we responded to the restrictions, changed the way we operated, keeping safety at the forefront and also keeping the focus on customers every day. Thank you. Now I'd like to now turn this over to the operator, Mark, for questions.

[Operator Instructions] Our first question comes from the line of Chris Bamberry of Peel Hunt.

I have 3 questions, if I may. During COVID, what did you see in terms of competitive behaviors and actions by business units? Secondly, could you please elaborate on the IT investments that you mentioned? And finally, as restriction cease, what's the kind of order of recovery by business unit? And as you look into the second half, which business unit would you expect to have the strongest trajectory of recovery?

Chris, very good questions. So look, competitive behavior, the -- I don't think sales-wise, it was a competitive certainly, Q2, then a lot of furloughed staff across all the industries we're in. We kept still a number of sales staff to obviously generate the sort of wins and renewals that we saw. I think competitive behavior is probably more focused on the operational side. We saw a number of competitors close either partial or all of their sites. In Records Management, some competitors closed all but essential services, and we remain very strongly open. In Harrow Green, we had a number of competitors closed completely and furloughed staff. And certainly, in Datashred as well, the 2 national operators stayed opened, but some of the smaller ones definitely closed. So the competitive behavior was very much around the operational. I would say we've just started to see restructuring happening in a number of our competitors as they're getting ahead of the furlough scheme as well. So IT investments, now these are IT investments that are primarily related to becoming more digital, becoming more productive in the company, Chris, we laid out a series of projects for the year, and we decided that now is a great time to fast-track some of these projects. So what they were is portal changes to improve our digital access for our customers in Records Management, more access to be able to serve themselves in remote locations through our portals. We improved our Scan On Demand business. We quickly did some development there in shredding, upgraded some things we do in that business. And then some of the other investments are more behind the scenes that will help us be more productive going forward, which we'll probably talk about more in November in Capital Markets Day. So these were all within the CapEx envelope that Neil described and sort of modest CapEx. It goes quite a long way in our business because we are very well integrated with IT, so you're not fixing the path. We're putting things in which improve the customer experience and productivity. And then your last question, in terms of recovery by business unit, well, if June is -- and July is any indicator, we'll see, I think, an increasing and steady recovery in Records Management with activity as over the NHS hospitals, over 60 that we deal with, a number of them closed for elective surgery and various other things. They're now obviously opening, so they're taking more records back. So I think we'll see an increasing activity in Records Management. In our Digital business, I think the things that we won in Q2 in first half, so they're looking to unfurlough a number of staff. Our shredding business, as I said, is probably more regionally kicking back more than our London business, but I suspect that will change in September. So maybe a little bit more challenged, but I feel very positive about that business. In Harrow Green, I think we're going to see a lot of work in Harrow Green as people reconfigure their businesses, if they've got a lease break getting out early. Potentially, change is always good in the Harrow Green business. And then I think in the technology business, probably a little bit more in July and August with collections down, but I think this business could kick back very quickly. And the reason for that is very straightforward is that the IT that everyone uses every day still ages. And as we come out of COVID-19, the fact in IT, and I've been in that industry 30 years, is that software gets bigger and bigger and people need faster and faster systems. And so all that technology that was aging during COVID is going to come out at some point. So the demand has just shifted, not perished. Now I don't know whether it's going to come back in Q3 or Q4, but it will certainly come back in over the next 12 to 18 months. So overall, you've got a mixture, I think, in the second half of sort of 75% to 90% recovery of the businesses to pre sort of to 2019 levels.

And our next question comes from the line of James Tetley at Nplus1 Singer.

So I've got 3 questions as well. First one on shredding -- was on acquisitions really, but it sounds as though, obviously, you're going to return to the acquisition trail in the reasonably near term and shredding potentially is one area for that. But having said that, you've got plenty of capacity presumably at the moment given where activity levels are. So I just wondered, is that because within shredding, there's an opportunity to fill in regional gaps in your offering? Or is it more about maybe customer taking on customers from the acquisition targets and then sort of synergy gains from the acquisition, is that the strategy? That's the first question. And the second one is just around digital. With the exam revenue last year all in the first half, it's a question there. So you don't get sort of a tough comp still in the second half from some of the exams. And the third one is a fairly basic question as well, just on technology, the 2 contract wins that you've talked about. Just what is the service you're providing for those 2 customers, please?

Right. Great, James. [ This rhymes down ]. Okay. So very good questions. So shredding, yes, we do have plenty of capacity in over 8 facilities that we do have. So from an acquisition perspective, the rationale is very clear. It's unlikely that we will have found a strategic operational site. There might be, but it's not what we think. Really, we're buying them for customers and the reach and the drivers and trucks and so forth. So it's -- that's what we're looking for to bring into our existing capacity because a number of our facilities, even at last year's level, still had spare capacity as we've invested in that business in the last few years ready for a consolidation, okay? Neil, do you want to take the digital question on exams?

Yes, certainly. So again, that's a good question. I think the answer is the majority of the income comes in H1, so the effect in H2 will be less so that's going into the details around the commercial of that contract. You're right. The majority of that year-to-year effect is clearly in H1, so we don't have such a hard comparative in H2.