Restore plc (RST) Earnings Call Transcript & Summary

Good afternoon. Thank you to those of you who are joining us today to hear from Restore plc, who announced their half year results earlier this week. If you haven't seen them already or we haven't seen our notes already, you can find it on the website. But the purpose of today is to hear from the management team and take Q&A at the end. As ever, please feel free to submit questions as we go along via the Q&A button at the bottom. And otherwise, I will hand over to Charles Skinner, CEO.

Great. Thanks, Hannah. And if we can go to the first slide, that would be great. The group highlights. It was interesting. We went to -- Dan and I have been seeing our institutional shareholders, and we went to see one a couple of days ago, who I've sparred with over many, many years, and he's normally quite critical when we sat down and he said, I've been looking at what you said you'd do 2.5 years ago, I thought, oh, dear. Anyway, and he said, and you've done it. So that was very, very satisfactory. And I think probably it reflects where we've got to that we were fairly clear a couple of years, it's 2.5, maybe 3 years ago that -- 2.5 years ago really that we wanted to do 3 things. We want to focus on the operating margin. We wanted to show how cash generative this business is, and we wanted to get our businesses to be as good as they possibly could be. And I think probably with these results, we can show that we've achieved it. And really that over the last, getting on for a year or so, really, it's been about how can we drive growth. And I think with these results, which show revenues up 20%, of which half is organic and half is through the impact of acquisitions, I think we can say that we're really moving on to that track now. And again, the group highlights remain pretty similar with this business. It's about recurring revenue, strong cash generation. This is absolutely what comes from our core physical box storage business and also recurring revenues and strong cash generation comes from our Datashred, our shredding business. And with those as the sort of core, that enables us to look at further value -- further acquisitions, which tend to be value accretive and also generating decent capital returns. We've also seen good momentum in our digital activities. That's our formerly our sort of scanning businesses, which are increasingly close to our box businesses and also the newly -- with Synertec, which is now being rechristened Outbound Communications, which we acquired about 18 months ago. And also, we've seen a dramatic turnaround in our technology, IT recycling and life cycle business. And between those 3, they've generated double-digit organic revenue growth for the whole group. We've also moved forward on the information management, the property consolidation, which has been a key feature of which we advertised 2.5 years ago, how we're going to generate significant cost savings there. And we also continued this year with some more bolt-on acquisitions, 3 in Datashred, 1 in the Information Management division, part of our Synertec-Outbound Communications business. And we've moved ahead with the GBP 20 million share buyback. And I think with all of these things going on, we're very comfortable that the divisions are firing not necessarily on all cylinders, there's more to go for, but definitely in line with or above our expectations. So we're very comfortable with the PBT figures for the -- which are in the market for the full year. Also, I think as part of where we are now that I will have done over 3 years by the end of the year. My role was -- I viewed it very much as getting things back on track, setting the agenda for where we go next. And I think now is an appropriate time having worked closely with Dan over the last 2.5, 3 years for Dan to take over from my role over as CEO, which will be great. It's been very well received by our institutional shareholders. And I'm lucky enough that the Board has seen fit to appoint me as Non-Executive Chair, which will enable me to stay in touch with the business, which I care about desperately with and which -- where I really enjoy working with the people here. And Jamie, who's looked after -- who's been the Chair for the last 3 years, will step down at the end of the year, but will stay with us as a NED, which is great, and he will be the Senior Independent Director. So that's really the highlights. And then on the next slide, Hannah, where we're seeing the organic revenue growth coming from is the -- our digital services business, which is predominantly, which is really our scanning activities that we've spent over 2 years transforming that. We're winning good business. The issue there is driving margins rather than necessarily needing more revenue. We've done a great job on some very complicated contracts, which we have, particularly in the digital mailroom business. And there seems to be -- I think we see over the next few years, quite a lot of scope for working closely with our customers on what they should digitize, what they should continue to store and helping them to digitize those and also in a world where there's a demand for data. Quite a lot of that data is sitting in our cardboard boxes. And I think we'll see more areas where people want to digitize documents, which we are holding for our clients. And there's also been -- we -- the DWP mailroom contract, which kicked off last year, is now in full swing. We think it's probably the largest mailroom contract in Europe. As we've touched on the business we acquired going on for 18 months ago, Synertec, that's been -- that has grown very significantly and continues to grow. We think there's a lot of market opportunity to drive this business forward, particularly in the public sector, where there's -- and the NHS, where there's still a lot of the work is being done inefficiently and not using the modern technology, which we have in-house. And also our technology business, which was losing money 3 years ago, is now delivering double-digit margins. It's built very strong relationships with value-added resellers. There's -- we've had a bit of luck in that division but with the value of recycled secondhand IT going up in line with the shortages in the original market. So we see that as really moving forward dramatically. And we can see that these 3 growth areas, which are being sort of funded by our cash cows in terms of the box business and the shredding business that they are not shifting our center of gravity, but becoming an increasing high percentage of our group revenues. And then just on the next page, Hannah, just looking at here are some of the acquisitions -- here are the acquisitions we've made. You can see they've been across the physical. We are always in the market for buying box businesses. We bought a scanning business of NEC last year. Outbound Comms, obviously, Synertec. And then so far, we've acquired 6 businesses for our data shredding business. And I would say most excitingly, which Dan will talk a bit more about. For our Synertec business, we made our first acquisition a couple of weeks ago. So organic growth is going great, and we're still very much in the market for acquisitions. Let me hand over to Dan.

Thanks, Charles. So Hannah, if we just pop on to the next slide, thank you. So, those of you familiar with us, this regular slide, you've seen a few times before. Revenue up 21% in the period. As Charles mentioned earlier, half and half split there in the growth between organic and inorganic. And it's what's driving the organic growth is the 3 areas that Charles touched on earlier. So really pleased with that. Operating profit up 19%. And we kept the margin, the operating margin at 20% -- just over 20%. And we're pleased with that because the story previously has been around increasing the margin to 20%. The story is now to keep the margin 20% whilst growing the revenue. And the reason we're particularly pleased is that the growth areas are structurally less profitable than the boxes. So the fact we've managed to keep hold of that margin whilst growing those areas, we're really happy about. Adjusted profit before tax, PBT up 23%, EPS following shade more at 24%. So really strong P&L figures, really, really very happy with that. And then just on to the cash flow and balance sheet. This business has always been throwing off lots of cash, and that hasn't changed. So free cash flow of just over GBP 21 million and cash conversion of 95%. So a consistently good performance there. Net debt and leverage, net debt broadly unchanged. Of course, what we've been doing there is this has been throwing off cash, but we've been spending money on the bolt-on M&A that Charles touched on earlier, and we've been doing the buyback. And we said the buyback would take about a year, and we launched the buyback when we released the results mid-March this year. So we've got just over 1/4 of the buyback that we've done at the half. So it's just under -- sorry, just under GBP 5 million, and we think that will probably continue through the rest of this year and into Q1 2027. And then dividend, we're keeping the cover exactly the same. So dividend up 18% to 2.6p, that's the interim dividend. So then just on to the next slide, Hannah, just a quick counter through the 3 divisions. So Information Management, so there are 3 businesses in there, the physical storage, so that's the boxes, Digital Services, so scanning and Outbound Communications, otherwise known as Synertec, we're rebranding to Outbound Communications. So in the first one, boxes, stable number of boxes. We'll come on to that in a second, but 22 million boxes. So very happy with that. And they're inflation-linked pricing. So that comes through on the 1st of January for the commercial customers and started tax year for the public sector customers. So that's continuing to do really well. Digital Services and Outbound Communications. So 2 of the areas, 2 of the 3 areas we said would be growth. They have both done very well and are growing, and that's what's driving organic growth together with technology. Property consolidation. So we've been talking about this a little while now. There's a slide in a couple of slides' time, which goes in a bit more detail. But broadly, it's in its final phase. We said we would move 4 million boxes. We've moved just over 3 million now, so just under 1 million to go. And we think it will be finished by the time we're talking in a year from now, so by first half of next year. And then Charles touched on this. We're excited by the opportunity here in the market. So a couple of weeks ago in early July, we completed the acquisition of a company called MPS Marketing. It's part of the Outbound or fit into the Outbound Communications business. So what's exciting here is that the Synertec business, most of its work, 85% of the revenues with the NHS. It's got good coverage over the NHS, so we work with 75% of the trusts. But within the trust, we only do 25% of the volume. Now you might quite rightly ask why there's such a difference. The difference is that each department within the trust makes its own buying decision. So we might be working with a trust but only work with 2 of the 7 departments. So that's why it's a bit of a mismatch. That's good because there's lots of growth to go after organically. What makes this interesting is it's -- customers are local councils. So it's basically a Bristol. The councils are all around that area. And the principle is similar to the concept we have in Datashred where we're effectively buying a customer book. And our aim is that we use our facility, our site, our printers to produce the material on, keep the people, but we'll therefore get a margin benefit from using our own equipment where we've got spare capacity and we hope that we might also be able to sell in some additional services. At the moment, these councils are just doing printing. With Synertec, we have a really clever piece of software called Prism that can help triage between physical and electronic communications. Councils, obviously, want to save money and therefore, send more things digitally. So we think we'll be able to sell in Prism as well. And what's exciting is that this is a trial really, but we asked Tom, the MD of that business to give us a list of potential M&A targets. Very quickly, he gave us this as long as my arm. We picked this one off as an easy one to try. But if it works, then there are lots of other businesses out there that we think might be suitable. And in fact, since we've done this deal, it's been picked up by the relevant press and more people have been in touch with us. So we think that might be quite interesting space to look at. So watch this space. Then Datashred, highly recurring revenues. We know pretty much within a very high degree of accuracy how many collections we're going to do each day. So that's consistent. Acquisitions, obviously, this is an area where we've had quite a few bolt-ons. What's gone against us this period is the paper price. Now that's protected somewhat because we've got roughly 2/3 of our paper volume hedged, but the paper price has been particularly low during the first half of the year. We think that's because there are some U.K.-specific factors around some of the mills being closed and they're now reopening now. They've been closed for operational reasons. And so we think that will start to recover during the second half of the year. But the -- that's offset the benefit from the acquisition. So flat profits there and broadly flat margin. And then technology, as Charles touched on, really pleased with this business. When I started, Charles, I admit, it was loss-making. We hoped we would get to double-digit margins this year, and we hope to get double-digit revenue growth, she's done better than that. So revenue growing at 17% and just over 11% margin. A lot of that is things we've done ourselves. So we've talked previously about focusing on blue chip or blue chip like customers. And what that means is that the customers care more about the data being white. They care more about ESG, so they don't want the laptops to go into landfill, which, of course, we can do. So we're benefiting there. We're also potentially benefiting from a refresh cycle that's coming through maybe post-COVID, maybe part of AI and people wanting new laptops and the sector in general, as Charles touched on the shortage in chips, which is growing the resale value of the equipment. Just on to the next page, Hannah. This is, again, a familiar page. So it's walking from profit before tax in the first half of last year to this year. I won't talk through all of the bars, but just touching on the bigger ones. The boxes are inflation-linked pricing. So that's driving organic growth. We've also got growth in digitization, which we hoped there would be. That's helped by the Department of Work and Pensions mailroom contract where we've got a full half's worth this year. And last year, we were ramping on taking the contract up, taking the contract on. And we've got Synertec, Outbound Communications growing well. Benefit from acquisitions. And we've got a little bit of headwinds. A lot of that is people cost. People is a significant cost for us. And we've also got a net impact of the property consolidation in there as well. But net-net, information management growing. In Datashred, as I touched on earlier, roughly canceled out between the impact of the lower paper price, offset by contribution from acquisitions. Technology, all organic growth, so very pleased with that and then flat interest and other costs. So that gets us to the GBP 22.3 million profit before tax for the first half. And then just a page on each of the divisions or a couple of pages. So Information Management, 22 million boxes at the start of the period, still 22 million boxes. Scanned image volume up, partly that's the Department of Work and Pensions mailroom, Outbound Communication volume up. That is both a full year or full half contribution rather from Synertec, but it's also underlying volume growing. Staff is up. That's because of the additional staff from the Department of Work and Pensions contract. So a pleasing result there. Margin has gone down by down 190 basis points, and that's because the growth areas of Synertec and digitization are a lower margin. So it's a structural mix changing there. And then 2 pages, a deep dive on the property consolidation. Thanks, kind for flipping on. So after people, property is our largest cost. We talked about this, I think, early 2024 is when we first started talking about this. We're now fully filled up the Markham Vale warehouse. Some of you would have been to that. We did a site visit there. So that's just over 100,000 square foot, takes about 1 million boxes. We've also largely filled up the new facility near Durham, that's 84,000 square foot, just under 1 million boxes there. Towards the end of last year or perhaps very early this year, we took on new warehouses, new leases in Stroud and Rainham. So that completes our new warehouses we need, and we'll have exited 20 warehouses and moved to 4 million boxes or just over 4 million boxes once we finished. Key metric for us is how much it costs to store each box. And I'm really pleased that despite the increases in business rates, some of which has been quite significant and some of the rent increases, the net movement is down, and that's because of the property consolidation program. Now that doesn't mean we're entirely finished. Obviously, when leases come up for renewal, we'll continue to look, but that's the end of the -- or will be the end of the big program. And then on the next page, there's quite a number of boxes on here. I won't talk through all of them, you'd be glad to know. But the idea of this page is to just give you a bit more color about the logistics of moving those number of boxes, how much boxes we bought, how many boxes we've moved each time and the cost and savings. What I would say is we'd initially hoped the payback would be 18 months. It's actually more like 2 years. It cost us a little bit more. So it costs just under -- or will have cost just under GBP 12 million, saving around GBP 6 million. And the biggest difference for that is that the landlords are quite aggressive on some of the dilapidation. So that's cost us a little bit more than we initially hoped. And then just moving on to Datashred. This largely tells the story that I've already gone through the 30,000 tonnes of paper, the paper price that we are achieving is about GBP 40 less, so GBP 40 less on the 30,000 tonnes, that's the GBP 1.2 million headwind. As I said, that will start to recover during the second half, we think, and we're already starting to see that coming through. And then on to the next page on technology. So doing really well here. Growth 17%, which is better than we hoped, a margin of 11.6%, which is also a little bit better than we hoped. So very pleased with that business as it's -- and Iain, the MD is doing a fantastic job on that team. And then 2 more -- sorry, 3 more slides from me. Next one is on adjusting items. A couple of things just to highlight for you here. The biggest item is the amortization. So that's driven by the acquisition. So that's coming through on the M&A activity. The next biggest item is the acquisition-related cost. Within that, the largest item GBP 3 million of the GBP 3.8 million relates to the Synertec earn-out. That's accounted for remuneration and will start to be paid out from the 1st of April next year is the third year of their earn-out period, and it will go on to the year after that as well. So a significant portion of that is the earn-out. When I was learning accounting, that would have been classified on the balance sheet, but the accounting means you need to classify that as remuneration. Next page, just on cash. So continues to be really positive in this space, GBP 21.3 million cash flow, strong cash conversion, 95%. On the page, you can see the impact of the acquisitions and the share buyback, so GBP 4.6 million purchased in the period, and we expect that to be broadly GBP 5 million a quarter going forward and leverage dropped a smidgen to 1.7x. We've got significant headroom. So the main facility we have is the revolving credit facility, RCF. We've got headroom within the GBP 150 million. We've got an additional accordion of GBP 50 million there, so GBP 200 million in total, including the accordion. And we've also got the U.S. private placement, the USPP that matures in spring 2028. This is the final slide for me. So capital allocation priorities. This hasn't changed now for some time. But the reason I wanted to highlight it was because I wanted to make it clear, this is how we make all of the capital allocation decisions. So the underpin is maintaining a strong balance sheet and keeping the net debt-to-adjusted EBITDA between the range of 1.5x to 2x. We were at 1.9x at the end of last year. We're now at 1.7x. So we're well within the range. And then within that, invest for growth, first and foremost, either in our business or in M&A, and we'll always target accretive M&A and continue to do that. And then secondly, deliver shareholder returns. So what does that mean? It means keeping the policy cover the same at 3.3x. And this year, we've tried the share buyback, which we're probably 1/4 of the way through. Thank you, and I'll hand back to Charles.

Thanks, Dan. And if we go to the business outlook. Thanks. So we're always very keen on operating margin here. It very much drives the performance of our operating companies. So that will continue to be a focus. We've clearly got in the physical storage business, that's the box business. That's always a fantastic bedrock for the rest of the group underpinning profits and cash flow. Increasingly, Datashred is trading well. And again, a bit like the box business, it hasn't got huge growth prospects, but has traded well, as Dan referred to, the paper price has been low, but we've managed to hold up the operating margins into double digits. And that, again, is a really powerful business even if it's not -- hasn't got the growth prospects. And where we look at the growth prospects, this is talking about organic growth. We're excited about increasingly as the boxes feed the digital and our scanning activities, we really think this is quite an interesting area. We're improving our product. We're improving our -- in terms of what we can do for our customers. We're definitely improving our operating margins in that space. We're a very important business, this is scanning. If you write to HMRC, if you write to the DWP, if you're writing the land registry, you're actually writing to us. And we're becoming an integral part of a lot of quite important stuff for both the public and the private sector. We're very excited with the Synertec business, Outbound Communications. We think that has historically shown great growth patterns, and we think we can continue with those. And the performance of technology gives us great heart that I think in that business. We are ahead of the competition in what is an exciting market indeed. So we're very -- the outlook is very bright. And just moving on to the last slide. I'm very comfortable that when I push on from the CEO role at the end of -- towards the end of this year, I really think the businesses are in great shape. And I think that both in terms of organic growth, we can see where that comes from. And there's a lot of scope for acquisitions, whether that's bolt-ons in the box business, it's bolt-ons in the shredding business. There may be further bolt-ons, which we can see in the Synertec, Outbound Comms area. There are probably 1 or 2 larger deals, which may drop in the next 2 or 3 years, which could really drive earnings as well and keep Dan and the teams busy. So we think we've got a really good platform now. The key metrics have all improved and these are good numbers. I think we're really proud of these. And we think that what we've achieved in the first 6 months of this year shows what the business is capable of and the momentum that we've got going into it. And again, as the operating margins, yes, we can see the mix will mean we'll get growth from the lower-margin businesses. But I think we're hopeful that we can keep the margins at 20%, probably not significantly above that. And if we can obviously push more volume through that operating margin, things begin to work really well. I always love this business in terms of being a CEO, having recurring revenues, good margins, predictable strong cash generation makes our life as a CEO much easier. I've been in businesses before the Restore days, which was a long time going back, but it wasn't always -- it's not always as easy as that. And those features make an excellent platform. And I think we can create a lot of additional shareholder value here. I just reiterate that we're very comfortable with the numbers which are currently in the market. So that's come in at about half an hour, Hannah. And yes, all good stuff and look forward to some questions.

Excellent. Very punchy. Right. Full year '26 full year forecast, you've got EPS up 12% and they look extremely conservative given the first half EPS rose 24%, especially with further M&A probable. This investor likes conservative, but these forecasts look too cautious. Can you explain why H2 growth will be so modest?

Should I pick that? That's your numbers.

What's helping in the first half is we're comparing, if you look at last year, we didn't have the Department of Work and Pensions contract. So that is benefiting this year. We only had Synertec for a quarter. Those deals, one of the earlier slides, you can see the 11 deals we did. This time last year, we'd only done 2, I think. So you have got half-on-half benefit, which is why the growth is split 50-50 between M&A and organic and the DWP is helping the organic growth. So if you then look at the second half, those things kind of balance out, which is why the second half growth won't be as strong as the first half growth. As we've said, we're comfortable with the numbers and that will be at least in line with market expectations.

Okay. And perhaps a different way of asking a similar question. How much do you see the technology division contributing to the overall revenue, EBT and operating margins in the next 3 years?

There's a habit going...

You are going to have to take over eventually there.

So the truth is we don't know the destination point. We don't know how long it can keep growing. We've got sight over the next 6, 12 months or so. The business is certainly benefiting from some sector tailwinds, but we think the majority of it is what we've done for the business. So will it keep growing at this rate into the second half? It should do, probably into early next year as well. I think 17% revenue growth, probably a bit much to expect that, that will continue in perpetuity, but it should certainly be mid- to high single-digit growth. And if we can get it to throw off GBP 10 million a year profit, then I'd be very happy with that.

Yes. I think it's been a story which we're all really impressed with what the team have achieved there. It's taking something which was a bit of a basket case, to be honest. And now we seem to be very -- a long way ahead of our competitors in this particular space. We're hitting all our SLAs, which we used to do. We've seen costs come down dramatically at the same time as revenues have gone up. But we've -- I'm really -- some of the systems we've got in place there, I am convinced our industry-leading in what has been quite a cottage industry type sector. I'm really impressed with how we now absolutely know where we make our money, what we make our money on. And once you can do that, then actually in an area where the pricing is generally quite opaque, we've been able to say to customers, it's not worth us getting out of bed to do that for you. Do you want us to do that at this price? And generally, the customers have come back and said, we are okay, that sounds fair enough. So there's so much good stuff has gone on there. And I think I think we've undoubtedly had a bit of -- had some tailwinds in so far as you just need to look at the computer center results and the fact that the hardware market is very strong at the moment. There's a shortage of kit, whether that's to do with chips or whatever. And clearly, if new hardware is getting more expensive, secondhand hardware is getting more expensive as well. It's a business which a few people have said a few years ago, you want to bother with that. Very much we do. It's absolutely in our sweet spot, the customer base, blue chips, government, that's exactly what our customer base is. We -- all of our businesses trade on trust, and this is one which is where that on people trusting us with valuable stuff, and this is exactly where that sits. So as Dan said, how far will this go? It's a pretty big market. It's pretty immature. I think we're doing a really good job. I think we're really excited about it. So should it make GBP 10 million profit? Yes, I think it should. Can it make more than that? Don't know at this stage.

Okay. Sticking with technology, would you look at complementing the technology business with areas such as information security and business continuity consulting?

Good question. Thank you. We are looking at a few adjacencies. So we're not actually looking at those, but we could. The area we are looking at is there's increasing ability to change the way that the refresh model works at the moment. So currently, a typical customer will have -- will replace all the laptops every 4 years, and they'll phase them so they don't replace every single laptop, but they'll have waves of refresh. There is better technology out there where you can monitor the health of the equipment and only replace what needs replacing. So we're looking at that space. In truth, as Charles alluded to, the business wasn't being run that well when I joined. So we weren't able to meet our SLAs and therefore, we weren't able to broaden things out. We are in a better place now. But there is a lot to go after just doing what we're doing. And the VAR, the value-added resellers are continuing to gain market share as people outsource to them, and that is triggering a subcontracting out of the work that we do. So we think there's quite a lot to go after then. But of course, we will look at adjacencies.

Yes. I think the nice thing about the nature of our portfolio of businesses is we know it's all B2B. It's all B2B services, it's all focused on the U.K. And quite often in my experience, if you're acting in one area, something else almost turns up. I don't think that Dan needs to set out how we're going to build a new leg. But I think one finds that if one is always alert and has got the funds and has got the appetite, things do sort of turn up. And I think those are interesting adjacencies. They're not in our headlights at the moment. But clearly, we're always casting around from this sort of platform to try and add on new things. And we know the sort of things which work for us. And there seems to be a few, but quite often that something turns up and you think that's quite a good idea.

Okay. One more on technology in regard to the value-added resellers. What do you think your market share is at the moment? And the question goes on to say, I would have thought that they'd rather deal with larger players. I'm guessing you do you fit into that category?

I mean I think we'd say that we're probably the biggest in this space in the U.K. It's a difficult market to identify the scale of it. Most of our competitors are pretty small in what we do in terms of the -- in some areas, we begin to overlap with some very big players. But generally, in the life cycle and end of life. It's quite a sort of fragmented market. I think we -- it's difficult to really unpick the market here. And if we look at how many laptops we process every year and we look at how many work laptops there are in existence, the fact package suggests we're somewhere between 5% and 10%. And certainly, we can still come across operators we've never heard of who may have 1 or 2 particularly big interesting clients. So I think it's -- we've tasked the team there who've been incredibly busy over the last couple of years to now start looking externally more. And I think that hopefully, Dan will have a better answer for everybody in 9 months' time once we've looked at the market more carefully. We don't -- we are highly trusted by very blue chip names, whether it's the Department of Work and Pensions, whether it's the leading banks, the leading accountancy firms. We're very much trusted by the top names you can think of.

Okay. Let's move on to paper. With the -- we've got a couple of questions here on the paper price. One of them is asking, with it so low, will you bother hedging for next year or you try to get more out of the recovery?