RM plc (RM) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to today's RM plc 2020 Full year Results Presentation. My name is Jordan, and I'll be coordinating your call today. [Operator Instructions] I'm now going to hand over to David Brooks to begin. David, please go ahead.

Thanks, Jordan. Hello, everyone, and welcome to RM's Full Year Results for 2020. As Jordan said, it's David Brooks here, RM's Chief Executive; and I'm joined on the video call this morning by Neil Martin, our Chief Finance Officer. Neil and I will be doing a double act of the presentation, and then we'll ask Chloe from our PR company, Headland, to join us to help us with questions. Before I go through the agenda, I'd just like to start by thanking RM staff, customers and suppliers for their support and dedication through 2020. RM has proved to be a very resilient organization, and 2020 has actually brought the whole company together in a united aim of not just getting through this crisis, but also being a better organization coming out of it. So the agenda. We split the presentation into 3 sections. I'll give you a quick overview of 2020 and our focus on the year ahead. Neil will look at the financials in detail before reviewing each of the 3 divisions. I'll then talk about some market trends. And then Chloe will join us and we'll go through some questions. RM showed great resilience in 2020 despite the business being significantly impacted by the closure of schools and nurseries and the cancellations of exams due to COVID-19. Trading progressively improved through the second half, and Neil will be sharing the detail of that in his section. Across the organization, we implemented a range of cost-saving initiatives, which enabled all 3 divisions to remain profitable, and RM finished the year with an improved net debt position of around GBP 1 million. Coming into 2021, the immediate outlook remains uncertain. The U.K. government announcements on school closures and canceled exams are and will impact our trading. However, in time, schools will reopen and exams will happen again in other parts of the world as well as the U.K. On the back of this medium-term confidence in the business, we're proposing 3p per share, if I can say it, dividend. In 2020, we chose to pause our 2 major digital and automation programs for a period of time to save cash. However, having proved our resilience, we're now full steam ahead with both of these programs to upgrade our group IT systems and automate our distribution center delivery capability. Before these programs -- sorry, both of these programs are key to RM's long-term future. Several market trends are being accelerated by COVID, and RM is well positioned to benefit from these. I will go through these trends in more detail later in the presentation. Bringing things back to today, I'm just going to give you a quick view of our current thoughts around the market backdrop. The top left-hand map on this slide shows school closures around the world at the moment. Much of the world schools are partially or fully shut. The graph at the top right shows the number of learners impacted with -- through full or partial school closures over the period of the pandemic. Moving to the bottom of this slide, the current situation in the U.K., as I'm sure everyone knows, particularly people like me who are trying to homeschool at the moment, is that schools won't fully reopen before March. What is interesting for us is that people physically in school is much higher in lockdown 3 than it was last year in lockdown 1, and we're seeing this reflected in better trading than last time, particularly in our own resources. All U.K. school exams are being canceled, though many international exams are still being planned. Let me hand over to Neil now who will take you through the finances and the review of each division. Neil?

Thank you, David, and good morning, everybody. If I start by looking at our key financial metrics on Slide 6. Clearly, these have all been impacted by the material effects of the pandemic. Revenues were down 16%, which reduced profits and earnings per share by broadly half. And as David mentioned earlier, net debt has actually improved as a result of a number of cash conservation activities and improved working capital. And we ended the year with net debt of GBP 1 million versus GBP 15 million at the end of 2019. This low level of debt and the support of our GBP 70 million credit facility gives us a resilient platform on which to enter the year ahead, which remains uncertain with the ongoing COVID restrictions. That said, our financial position entering the year and experience through 2020 gives us the confidence to reinstate the dividend at a proposed final dividend of 3p per share. This shows an increase on 2019, but it is worth noting that 2019 payment was the interim dividend, and we did not pay a 2019 final or 2020 interim as a result of COVID. Moving on to Slide 7. This draws out greater detail of our year-on-year revenue performance and highlights where COVID impacts hit hardest. We started the year with positive momentum with Q1 revenues up 2%, driven by growth in the 2 technology divisions. But as you can see, revenues were impacted materially in the second quarter as RM Resources was hit heavily by school and nursery closures on March 23, which resulted in school attendance being reduced to just 2% of pupils physically being in school. This quarter also saw the impact of global exam cancellations which had an impact on our RM Results. Revenue started to recover in the third quarter as 3-year groups in primary schools returned in June, progressing to a more stable position in Q4 as all nursery schools and colleges returned in September. International markets remained subdued through this period, and the exam cancellations impacted revenues in each of the second, third and fourth quarter. I'll turn the page now to look more closely at the revenue and profit development. For RM Resources and RM Results, you can see that the revenue reduction flowed through lower profitability, notwithstanding a range of cost-saving initiatives that were quickly implemented. RM Resources also experienced an additional GBP 2 million of charges, in part driven by pandemic effects resulting from higher bad debt provision and stock write-downs. RM Education was much less impacted by COVID. And the revenue decline was predominantly driven by the absence of the Building Schools for the Future contracts, which ended 2019. Although a material impact across the board, the cost-saving initiatives enabled all 3 divisions to remain profitable. In the second quarter, at the height of uncertainty, we did utilize the government's job retention furlough scheme, but the resulting resilience that we were able to demonstrate enabled us to repay these sums in full before the end of the financial year. Moving on to the income statements and looking further down the profit and loss accounts. Interest charges were flat and represent the cost of servicing our debt facility and the finance costs related to the defined benefit pension scheme. And post-tax exceptional charges were GBP 2.4 million with the material items being the amortization of acquisition intangibles, some pre-COVID restructuring charges and an impairment charge related to our digital capital program following a review as a result of the impact of the pandemic. Looking at cash flow. As you can see, the drivers of the net debt reduction, cash generation was strong supported by positive working capital movement, particularly in inventory, and positive trading movements in payables and receivables. Wider cash conservation activities included the suspension of dividend payments, a reduction in planned capital expenditure as we paused our larger capital programs for 6 months during lockdown 1 and also utilization of the government's VAT deferral arrangements. With our 2 large digital and automation programs now fully restarted with -- alongside wider capital investment, we will see elevated capital expenditure over the next 2 years, which is likely to be in excess of GBP 20 million with a large proportion of this in 2021 as the effect of the program pause in 2020 has concentrated spending this year. Moving on to pensions. Our pension deficit increased to GBP 18.7 million from GBP 6 million. This has been driven by the material reduction in our discount rate, which more than offset a strong asset performance. Moving on. But before I move on to the divisional reviews, I'll pause on Slide 11 to highlight this picture, which is of our new warehouse in the East Midlands into which we will consolidate the remaining 4 warehouses over the next 18 months. Although, as I mentioned, we paused our capital programs in 2020, the construction of the warehouse continued and was completed just before year-end. Once fully operational, this program will enable a number of benefits. Firstly, for the customer, the robotics used will reduce fulfillment times and improve key customer service metrics and we will be able to offer next-day delivery as standard. Also, operationally, the building has half the footprint of the previous estate and includes features that will materially reduce our carbon impact. For our colleagues, it will also house all RM Resources warehouse and HQ staff in 1 building from the first. I'll now move on to look at performance in each of the divisions in 2020. Starting with the Resources on Slide 12. As we've outlined, the picture here is one dominated by our experience of COVID and school closures. Chart on the top right demonstrates that story through the quarterly revenue performance with complete school closures in Q2, partial reopening in Q3 and the full return of schools in Q4 where you can see that the U.K. education revenues were actually above their 2019 equivalent levels in this quarter. International revenues, however, were down throughout the year. The first quarter reduction was in part due to the absence of a large order that we had in South America in 2019, but the rest of that period and the rest of the year is dominated by the pandemic impacts. And to give an example, our North American revenues were down over 80% as key trading partners were closed for over half the year. Moving on to Results. The financial performance was relatively resilient, given the scale of exam cancellations that we experienced in the year. As you can see from the table, there was only 1 geographic region in the world that was not impacted from the perspective of our customer base. Our contracts gave us a reasonable degree of protection, partly due to the proximity to the exam dates in which the cancellations were made. However, our ability to convert sales pipeline has been materially disrupted, particularly driven by travel restrictions. That said, some notable contracts were won in the year, including 2 end-to-end digital assessment contracts, which, for the first time, include online testing, marking and remote invigilation, which allows the exam to be sat outside test centers. We also won the international baseline research test in mathematics and science, which is material as it could engage with the ministers of education in around 70 countries. Looking forward into '21, David has mentioned that we've seen exam cancellations in the U.K. already now and we remain cautious on how this will unfold across our wider geographical footprint. Moving finally on to RM Education on Slide 14. This division has been the most resilient through the pandemic, through the period of school lockdown with a portfolio of products and services that have a high degree of recurring revenues that supported the technology environment in schools and colleges. The 9% revenue decline was not principally COVID related, and as mentioned previously, was driven by the end of the Building Schools for the Future program in '19. Operating margins were also broadly maintained, benefiting from the impact of a pre-COVID restructuring program, some onetime benefits and lower discretionary spread through lockdown. Looking ahead, school closures have clearly put technical resilience and business continuity in the spotlight for schools alongside the subject of school funding. The schedule on the top right of the slide highlights a number of initiatives that supports schools in these areas. Although many initiatives in education are either government-funded or free to schools, RM remains well positioned to support them on their journey and ensure that they have the right technology resilience and capabilities to support technology and digitally enhanced education. I will now hand back to David, who will take you through our outlook. Thank you.

Thanks, Neil. COVID has seen a change in how our customers operate, and we're starting to see some trends in the market I'm going to share with you now. Some of these trends have been coming for a while and are just being accelerated by COVID. The market trends I've picked to highlight are education becoming more digital, the modernization of assessment, a move to flexible learning and the trend towards buyer aggregation. Let me take you through each of these 4 and explain what I mean by each, give you some examples of how we're responding. Education becoming more digital. The education sector has traditionally lagged many other sectors when it comes to being digital. Whether this is the delivery of teaching and learning or the buying of products and services online, digital adoption has been slow. However, we are seeing -- we're starting to see a change in the marketplace, which has been accelerated in 2020. Schools and nurseries are ordering more online and increasingly utilizing more digital materials in conjunction with physical resources to deliver blended teaching solutions. Our response is to invest in and implement a new web platform in 2021 to complement the social media engagement approach we already have. We've seen real progress in 2020, but see no reason why in the future all our orders in RM Resources won't be coming in online. Let me show you some additional milestones in RM as we become more of a digital organization. There's a lot on this slide and I'm not going to try and go through all of it, I'm just going to simply pick some headlines. To help underpin our digital journey, we're invested in a new automated warehouse, which will be fully functional by 2022. Our new digital systems in RM Resources will start to go live in the second half of 2021. This will allow us to further track personalized customer journeys. At the moment, we offer the option for next-day delivery, but can't always guarantee it. Combination of back-end automation and front-end digitization will lead to better service levels as well as operational efficiencies. Going into 2022, we will move our focus to the wider group systems so we can have a common platform across the entire company. The second trend we're going to look at is the global modernization of assessment. What do I mean by this? Well, many high-stakes qualifications are still completely -- completed using paper-based exams. In the last few years, we've seen these exams turned into a digitized form and then marked onscreen. The digitization of high-stakes assessment is complex and a niche area of expertise, but we've seen COVID-19 start to accelerate the adoption of technologies that are modernizing assessments. More exam awarding bodies in the U.K. and internationally are now moving towards a model of computer-based assessments in the first place rather than paper. Many customers are looking to get away from relying on exam delegates having to visit physical test centers as well. The Holy Grail of examples being able to offer assessments that someone could take onscreen, on-demand in their kitchen on their laptop is coming. In 2020, we've won 2 new contracts that provide the ability to take high-stakes onscreen exams at home in a secure manner that are properly remotely invigilated, and this is in the professional awarding body arena. The third trend I want to talk about is flexible learning. COVID-19 has forced many learners to remotely engage with education, and technology underpins this shift. This is a complete change for the learner and the teacher. We expect this shift to continue beyond the short-term remote learning demands of COVID. Many of us have spent lockdown helping our kids in homeschooling, or struggle to help, in my case. Part of the solution to effective remote learning is to provide technology to facilitate it. There's been a lot of focus on students having the right devices at home. In fact, just as important is that a school has the right materials and infrastructure in the cloud to deliver the resources. We've now launched our new cloud-based managed service proposition that helps schools on this journey to the cloud and then helps them manage it when they're there. The final trend that's emerging is aggregated buying, England's seen multi-academy trusts or MATs continue to grow. Over the next 3 years, the number of scores in MAT groupings is set to continue to grow and expand. In addition, the provision of nursery education in the U.K. is consolidating with larger chains acquiring and growing. Both of these trends are driving central bodies to buy in bulk on behalf of their education establishment. The U.K. school and nursery market still remains a fragmented one. However, as multi-academy trusts and nursery chains start to buy more centrally, we're focusing our dedicated sales team and customized products to meet this different need. Selling to a procurement director at a multi-academy trust or nursery chain is a completely different discipline to selling school by school. Hopefully, that's given you a good view of some of the market trends we're seeing at the moment and how we're responding to these trends. These trends are likely to evolve and new ones emerge in the current months. I want to finish this presentation by looking at the outlook for RM. We're in a strong financial position, debt is at very manageable levels and we continue to be strongly cash-generative even through a pandemic. Trading in 2021 is inevitably going to be impacted by COVID, but we're still investing strongly in the business, particularly in our digital and automation program. The longer-term future RM remains bright. Promising market trends are being accelerated by COVID and RM is well placed to benefit for them. Okay. That's all that Neil and I wanted to say as far as the presentation. It's time for questions. So I'm going to ask Chloe to come on the line and help facilitate this part of the call. Hi, Chloe.

Hi. Good morning, everyone. We have a couple of questions on the webcast. The first is, please could you update us on the CEO succession.

Yes, okay. I'll do that one. So the Board are running a thorough process for my successor. There's no news to be shared right now. However, in the Chairman's statement at the RNS, John said that the search for my successor is well advanced and the Board anticipates making an announcement shortly. So yes, watch this space, I think, is the simple thing there, Chloe.

We have another question, which has come in regarding trading and how you see trading through 2021.

Okay. I'll have a go on that one as well. Looks like Neil waited to put his jacket on for this presentation. First time in 6 months. Anyway, I should have said that right at the beginning. So in terms of trading for 2021, based on what we know today, we would expect to make progress in 2021 compared to 2020, but our numbers not to return to levels of 2019 yet. Clearly, much does depend on how COVID-19 plays out over the coming months, and therefore, we're not in a position to give formal guidance for 2020 right now. Thank you very much.

We also have a question from Julian Yates at Investec. Can you talk a little bit more about the longer-term margin aspirations for the Resources business? Can they move back to historic levels or will pricing and the backdrop make this more difficult? Could they move above historic levels due to the operational benefits of the new warehouse and systems?

Yes, sure. I mean that's a slightly more difficult question. So I know that Neil will be desperate to come in at this stage.

Thank you, David. Thank you, Julian. I think as we progress, if I go back to we were operating margin of 12% in '19; slightly higher than that, 13% in '18. I think as we start to get clean trading and not COVID impacted and we're clear of some additional spend that we've got associated with progress on the capital programs, then I would expect operating margin to return to those levels as we progress into 2023 and we are through our digital and automation programs. I think it's clear that as we move more online and a product business that we won't be able to maintain some of the pricing margin. I think that will continue to come under pressure as we've seen. But I think the benefits from the program of consolidating the warehouse will certainly help offset that, and therefore, I would expect in the longer-term for us to return to previous quarters.

We also have a question from [ Paul Lavin ]. To what extent are RM Education and Results' lower negative operating leverage related to more flexible Indian costs?

Say again.

To what extent are RM Education and Results' lower negative operating leverage related to more flexible Indian cost?

What do you think, Neil, is it a reflection of 2020 results?

Yes. I think if we look at some of the cost-saving initiatives we had, the flexibility in our India operation we've maintained our permanent head count in India, so it's our own organization. It's not outsourced. I think a lot of the flexibility we had or where we managed to reduce costs was to put in head count freezes to reduce some levels of temporary workers. Senior staff took adjustments to their pay for a period of 6 months. And a number of discretionary spend areas, marketing, travel, et cetera, were reduced. So I think more broadly, it's not specifically as a result of our support from the India team, where we have over 700 people. I think it was more broadly management across the board as we went through that lockdown phase.

And we did have, at the end of 2019, we did some restructuring in RM Education, cost saving in RM Education, which came through at the beginning. So that was nothing to do with COVID. That was just some work we were already doing that came through and benefited 2020 in RM Education in particular.