RM plc (RM) Earnings Call Transcript & Summary

Hello, and welcome to RM's half year results for 2023. My name is Mark Cook, Chief Executive; and I'm joined on this webcast by Emmanuel Walter, our Interim CFO. I am pleased to get the opportunity to share with you our transformation program as part of our half year results. It's only been 80 days since I updated you on the 2022 results, but we've made good progress, which I will update you on. The agenda for today is split into 4 segments. I will give you an overview of half 1 2023, the stabilization phase and an overview of the transformation program. Emmanuel will then give a financial overview of the half 1 in more detail. I will follow with an update on strategy and operations. I will then conclude with the summary before we open up the conference call and webcast for any questions. We embarked on our ambitious transformation program, which commenced in the first half. and we expect to start positively impacting financial performance in FY '24. This is not a big disruption transformation with large exceptional capital costs but rather a multiyear continuous improvement program with 6 monthly phases containing clear decisive cost savings and improvement targets. My priority has been initially being focused on Phase I which was to stabilize operations and financials following a very challenging 2022. Whilst we accomplished a lot, these challenges will continue to influence the full year results and certainly have done so in the first half. The first half results are not unexpected and with the support of our lenders. In this stabilization phase, we have identified opportunities for growth and operational efficiencies, some of which have actioned already, albeit they do not yet positively impact our financial performance. I would talk you through all completed transformation actions completed in Phase I a little later. We have a 50-year track record in education and believe as we progress through the transformation stabilization phase, with a focused and deliverable strategy. We can deliver significant enterprise value creation despite the lag effects of the prior year challenges. All of this creates an interesting growth opportunity and positive inflation point for RM. And it goes without saying, given recent history that RM isn't a business that needs to change.

Now turning to the performance in the first half. Whilst this was not unexpected. The self-made issues in the consulting business in 2022 continue to impact the financial and operational performance in the current year. It still occupies a lot of management time as we seek to recover trading, and fully restored customer confidence. Revenue was GBP 87.6 million, down 11%. The return of Consortium trading has been slower in a more challenging market, and this is reflected in the results. Our assessment continued to deliver strong revenue growth of 8% from new and existing contracts. We operated well within our covenants during the first half and had a net debt of GBP 52 million at half year. We completed the sale of RM Integris and finance businesses with net proceeds of GBP 8.7 million received at half 1 and $4 million expected in half 2. We also disposed of GBP 8.5 million of IP addresses. We extended our GBP 70 million banking facility to July 2025. And with revised covenants and reached agreements on a funding plan with the pension trustees and the pension regulator. In our Resources division, we went live with a Consortium's new e-commerce platform in the final 6 weeks of the half. Consortium remained challenging going forward with trading volumes below where we expect to be, but we are determined to improve performance and restore customer confidence in the business. I'm pleased to say that the Resources TTS, own design products and TTS International continue with double-digit growth. I'm very pleased with the management's turnaround of the Technology division. Which is nearing completion of its commercial turnaround and heading towards the expected profitability by the end of this fiscal year. Elsewhere in the business, we had success in retaining and winning new customer contracts and assignments. Which has translated into new wins and retention in both technology assessment and growth in our TTS international business. In summary, the clear actions we have taken as part of our transformation program, Phase I to identify, execute and deliver cost savings has identified initial annualized savings in excess of GBP 10 million in FY '24. And we will continue to look for further savings opportunities as we work through the transformation program.

I mentioned at the start, there's only been 80 working days since I last updated you on progress. Despite this, we've worked hard to make every day count. Since we reported in March, we have completed the following actions: launched a new e-commerce platform for the consulting business, incorporating our own new automated distribution center. We are reducing dependency on third parties and bringing key skills in-house. Commenced restructuring and rationalizing in the U.K. and India business. We built a finance function with key appointments and are mapping our key business processes. We are reducing working capital through inventory management and accounts receivable overdues and we are clearing the backlog of customer tickets from prior challenges, specifically in resources. And finally, I've introduced an internal culture focused on reducing unnecessary spend. I will now hand you over to Emmanuel to talk through the financials.

Thanks, Mark. So moving on then to look at our financial overview. Revenue fell 11% to EUR 88 million. Our assessment division showed further solid growth, up 8% versus H1 '22. Also, this was offset by lower revenues across resources and technology, which will discuss in more details on the next slide. The lower revenues and increased costs associated with delivering FY '22 year-end and the dual running of distribution side and technology tax resources impacted profitability in the period with adjusted operating profit decreasing to a loss of EUR 4.5 million. Adjusted diluted EPS decreased from 3.4p million to a loss of 6.7p per share. Net debt at the end of May was EUR 52 million, EUR 11 million higher than the same time last year and EUR 5 million higher than November '22. The increase driven by H1 losses and working capital outflows following the cash protection activities ahead of FY '22 year-end. As a reminder, we have a EUR 70 million revolving credit facility in place. On this slide, we bridge our $10.3 million revenue decrease versus H1 '22. In resources, revenue decreased by EUR 9.5 million to EUR 42.2 million. But as you can see from the breakdown, the international business saw strong levels of growth, up 18%, with improvement across most geographies and most notably Europe, where revenues have doubled against pre-pandemic levels of 2019. Revenue in the U.K. decreased by 26% to EUR 31.8 million mainly driven by lower trading volumes in the consortium business where revenues were impacted by lower customer volumes and decreased spend following the disruption of last year's IT implementation. There were further year-on-year growth within our assessment business of EUR 1.5 million, plus 8% to EUR 19.7 million, with growth in volumes seen from both existing contracts and the benefits of new contract wins. In our Technology business, revenue reduced by 8% to EUR 25.7 million. H1 '22 revenue included EUR 1.3 million of IP asset sales more recent sales have been reported as other income. Excluding IP sales, revenue reduced by 4% driven by the loss of customer in FY '22. On this slide, we bridge our continuing adjusted operating profit movement. Profit reduced in Resources business by EUR 5.7 million, impacted by the lower trading volumes in consortium and EUR 2.5 million increased costs relating to the dual running of distribution sites and technology stacks across the division. In our assessment business, profit increased by EUR 0.4 million. Thanks to increased revenue and improve operational gearing. A reduction in technology divisional profit of EUR 1.2 million, excluding the impact of IP sales reflects the lower revenues. Corporate cost increase of EUR 1.3 million reflect the costs associated with then end activity, rebidding the group finance function and losses from adverse FX movement. Including the H1 '22 was EUR 1.3 million of IP sales, both revenue and AOP equivalent sales in 2023 have been classified as adjusted other income therefore, not included in revenue or adjusted earnings. On this slide, we set out the key components of our income statement, focusing specifically on the items below adjusted operating profit. Interest was GBP 2.2 million, up GBP 1.4 million on last year, comprised of the cost of servicing of debt facility. Total adjusted loss before tax was GBP 4.8 million, including discontinuing down GBP 8.2 million from GBP 3.4 million profit in the prior year. If you look at the accounting element, we made a loss of GBP 5.6 million, which is down GBP 8.5 million while discounting increased GBP 0.3 million to GBP 0.8 million. Post-tax adjusted items total of GBP 11.7 million profit driven by the gain of sales of RM Integris and Finance, GBP 9.5 million and the sales of excess IP addressing, GBP 8.5 million. Offsetting those gains were GBP 3.5 million of costs incurred in respect of a new consortium IT platform implementation, GBP 1.8 million cost associated with our RM extended bank facility and GBP 0.9 million of amortization of acquired intangible assets. After adding back adjusted items, we reported profit after tax of GBP 6.8 million, including discontinued operation, which is up from a loss of GBP 5.9 million in H1 '22. On this slide, we take a deeper look at the key drivers of our cash during the period, focusing on items below adjusted operating profit. In H1, we had an inflow of GBP 17.4 million on the sales of assets, GBP 8.5 million relating to IP sales and GBP 8.9 million relating to the sales of RM Integris and finance. Working capital outflow of GBP 10.4 million mostly related to return in supplier payments back to time following the cash protection activity approaching FY '22 year-end. Which was partially offset by collection activity in casting overdue receivables and reducing inventory in our Resources division. CapEx spend of GBP 0.7 million related largely to BAU resource in Tule while pension contribution were GBP 2.3 million, which is in line with last year. Bank interest and commitment fees paid were GBP 2.8 million versus GBP 1 million in H1 '22. With lease liabilities down slightly from GBP 1.5 million to GBP 1.2 million in H1 '22. Let's move on to the financial outlook and guidance. We've taken cost action in FY '23, which are expected to deliver in excess of GBP 10 million of annualized benefit full year in FY '24. In H1, we already taken action for GBP 2.3 million, especially related to the technology head count reduction, GBP 1.5 million. We have other activity related to procurement on properties for GBP 0.8 million. In H2, we already actioned GBP 6.3 million of savings, mostly related to restructuring in resources and technology for [ GBP 4.5 ] and the remaining related to procurement and properties GBP 0.8 million. We are also working on further identified action, which could further benefit between GBP 1.4 million to GBP 2.9 million. The restructuring cost is expected to reach GBP 1.6 million in FY '23, evenly split between technology and resources. In terms of outlook, we expect year-on-year growth for assessment and technology, but resources will be slower to recover. Our expectation for the adjusted operating profit for FY '23 is around breakeven. In terms of net debt at the end of the year, we expect it to land between GBP 44 million to GBP 53 million. In terms of activity to reduce working capital is also to reduce inventory and resources over GBP 5 million by the end of the year. I will now hand over to Mark to go through strategy and operation.

Thanks, Emmanuel. We have a clear structured transformation program in place with 5 identified work streams: stabilization, people and teams, finance and corporate, divisions and strategy. The identification, execution and benefit realization within these work streams are broken down into 6 monthly phases. With the program being managed by an experienced transformation director reporting directly to me. On the next few slides, I will summarize the actions we've already taken and executed across the 3 work streams. The transformation program needs to include strengthening the cultural and commercial mindset across the business. The response to our customers' needs, need to be faster and more agile so we can take advantage of market opportunities. The further potential within the business and continuing growth in the Ed tech market. I have previously outlined some senior hires that have now been completed. With our Chief Digital Officer in place, and our new permanent CFO and Company Secretary, starting in the second half. Through our FTE committee, a weekly cadence is now in place that addresses each incremental or replacement hire to ensure management have control and an agile response to market conditions. Our total business has 325 less people than the prior year, approximately 15% of the workforce. And then the first half, we commenced consultation for further reductions in technology and resources. Our overall premise and restructuring is to ensure that we invest in permanent RM colleagues and not third-party advisers, interims and consultants. The finance team was most impacted by the stresses calls in FY '22. And I'm pleased to say that in addition to our new CFO, Simon Goodwin, who joined at the end of this month, we have in place new directors of Finance, Planning and Analysis, Group Controller and internal audit and controls Manager. Within our finance and corporate work stream, we commenced mapping our key business processes to better identify our internal control framework. This work will be used as the basis to build an IT enterprise architecture that better fits the strategy of the business and operating model. Our Chief Digital Officer, Dr. Grane Watson, is responsible for the current IT estate and its development in the future. Despite the evolution go-live consulting in March, we've been focused on remediating the issues caused by the previous attempt to go-live in FY '22. This has involved the accounts receivable and payables, customer services teams in India and the U.K. and addressing outstanding customer queries, supplier on hold and invoicing versus delivery queries. The net effect of the prior year query backlog has had a detrimental impact on customer confidence and the speed at which customers have returned to the consulting website. In preparation of the consulting go-live, inventory was built in FY '22 to handle the expected volumes. Running down inventory to the now appropriate levels of trading volumes is a priority. We have an inventory reduction plan in place to materially improve the customer's company's working capital which I'll report on it, full year. We are not looking to roll out the evolution ERP system to the rest of the business. And we are working collaboratively with existing IT vendors and our in-house teams to build an appropriately priced and fit-for-purpose enterprise architecture. As part of strengthening the senior team and delivering on the transformation program, I am pleased to report that we have made the appointment of heads of procurement, and real estate and workplace in order to maximize the potential of the post-pandemic change in workplace. Initial progress across procurement has been promising, with tighter controls on international travel, and other spending lines and more materially FY '24 cost saving and other benefit realization. We have executed a number of new initiatives across our real estate and workplace to reduce costs. An important step in our operational real estate footprint is the dual running costs in resources for the TTS and consulting brands in both warehousing and distribution, IT and staffing, and this is a priority in the second half. Some cost statements have already been actions, of course, in year, but we'll have the full material impact in FY '24. Whilst we make material improvements across people, finance and services, the work we're doing with the divisions and strategy work streams will be the key to unlocking the growth opportunities within RM. We have traditionally structured into 3 divisions, and this represents our current operating model with the revenue-generating units. However, in the marketplace, we have also been known for our brands. For example, TTS and the Essex the platform. Internally, we have pockets of rich Ed tech knowledge as we design, develop and bring to market hundreds of new products per annum alongside deep testing and assessment business process knowledge and capability to advise on digital transformations. These pockets sized IP are important for us to recognize in order to monetize and use as a competitive differentiator. The strategy evolution will be based on the premise of increasing value creation with high value-adding SaaS-based and other managed platform services delivered to a global customer base. We will focus on the areas we are excellent at and with the attributes of producing high margin and repeatable revenue streams. Coupling the physical resource development with digital learning content will give RM ed tech an even greater differentiator. More on this will be revealed in future updates. The strategy evolution across our divisions has already begun and with key highlights over the next 3 slides. Increasing demand is coming from our TTS owned IP and unique in-house developed resources. For example, the Robotics Bee-Bot programming range and the resources range to international markets headed by ICT and early years categories. This is a key differentiator for RM. As mentioned before, we went live for the consult e-commerce platform and the Harrier Park automated distribution center in Nottingham. Operational activities are now focused on rebuilding customer relationships with marketing productions and resolution of previous system and account queries. Inventory is being reset to align with trading volumes and releasing valuable working capital. We will continue to focus on market and category growth areas in the future and optimizing the new IT system in the second half. Assessments strong growth in revenue and profit continues. This has been fueled by 2 new customer wins, 100% customer renewal and 6 new major implementations for existing customers. Our strategy work continues to explore the potential from digital Software-as-a-Service based and AI learning solution offerings to attach to our global customer platform. Specifically, our global customers need a trusted expert assessment partner to hold their hand on a journey towards a fully digital testing and assessment experience and ultimately transform the learning experience for candidates. Our own assessment is well positioned to become the go-to partner for the world's leading awarding and education organizations such as Cambridge, Oxford, International Baccalaureate and professional qualifications, such as ACCA and the Institute of Faculty of actuaries. The Technology Division has been undergoing a root-and-branch transformation over the past 12 months, and this will complete in the second half. The division has better commercialized with improved account and contract management and rebuild margin into a managed and standard operating practice. With a new hardware approach, global Tier 1 partners coupled with a 50-year RM brand across education. This has led to 95% customer retention and opportunities for our new PR-led marketing and customer campaigns. A clean example of growing private pipeline is with the Department of Education's connect the classroom program. The managed services, connectivity and hardwood strategy is still to target larger multi-academy trusts as the driver academization continues. The further developments for the RM ICT platform, will enable the provision of managed services to all areas of education and to a global customer base. These operational and strategic improvements will take time and profit recovery will lag revenue growth. But RM technology continues to benefit from a strong market position and channel reach. So how will we capitalize on the education technology opportunities and other strong market positions. RM differentiates itself through 5 key areas: extensive domain experience and a deep understanding of the education sector with 50 years of expertise and IP, strong partnerships with educational institutions and industry leaders, continuous investment in research and development to stay at the forefront of innovation. Proven track record of successful implementations and customer satisfaction; and global reach and scalable solutions adaptable to different educational systems and cultures. Decisive actions already taken in the first half helped stabilize the business, reduce costs and strengthen operations. These actions will largely flow into benefits in FY '24. For the consulting business within resources continues to present us with challenges and its underperformance clouds the value of the rest of the group, impacting our profit expectation for the full year. We have a transformation program in place with clear work streams and outlets being tracked, and we will continue to identify and execute cost savings and efficiencies over the coming years. My focus is also turning to our new strategy, unlocking the value and enhancing margin within our divisions and brands. Some of the attributes of the value drivers in our strategic thinking our RM designed physical resource products, combined with our own developed digital curriculum focused learning content. A global SaaS-based assessment platform with AI-enhanced solutions supported by a global managed service platform for IT and connectivity. I have spent the best part of my career working in technology businesses and leading technology transformations. My priorities at RM are clear: to work with the Board and the leadership teams to bring that experience to bear with the objective of rebuilding value for all of our stakeholders. We look forward to giving progress updates. We will now take any questions from the conference call and webcast.

[Operator Instructions] There are no questions on the line. I will hand over for any webcast questions.

Thank you very much. We do have one question on the webcast. What is your expectation for profitability in FY '24? Will it be another year of recovery?

Yes. Thank you, Chloe. So we've already mentioned this year is very much a transformation and restructuring year, which we've given indications on. We have a transformation plan that we've embarked on, and this will be in 6 monthly segments. So we will either identify, execute and then enjoy the benefits realization of those programs. So that will be an ongoing process over the coming years, and it's really focused on continuous improvement, efficiencies, automation, et cetera. The benefits we've already identified and executed on in the first half of this fiscal year, will flow in terms of benefits realization in FY '24. So that's when we will see circa GBP 10 million of savings -- cost savings flowing into FY '24. We shouldn't think of the transformation plan is a big cumbersome restructuring CapEx type program. It's continuous improvement, which every business quite often faces into.

In terms of expectations for FY '24, we expect credit the profit we were expecting '23 delayed to '24 due to conditions. .

I believe we have a question from Julian Yates from Investec on the conference line now. So I will pass back to Susie.

Julian, yes, you may go ahead now.

Just got a couple of questions from me. One quick housekeeping and the other a bit more strategic -- housekeeping? And just looking at EBITDA, can you just remind me of your sort of depreciation going forward to the EBITDA number I guess, more slightly positive territory than your profit number. Just to remind me of that, the depreciation we can have back to the operating profit. The more strategic question is to do with Consortium you've helpfully split out the consortium revenues. Is there any way to split out or give us an indication of the losses the business is making or estimated to make for the year, so we can kind of pitch and hold that in one area. And enable us to sort of see what the profitability of the TTS business is sort of going forward? And I guess a follow-on from that. confirmation that TTS has been run in a separate warehouse plans to migrate that to your -- to the big warehouse that you're putting in? And are there any ways to monetize that, the large warehouse that you have with the consortium revenues running through, which are clearly at a lower base now than expected. So you've got a big sort of warehouse facility that sort of -- ways to monetize it, I guess, is the question.

Julian, thanks for the question. So I think to give some expectation in terms of depreciation for FY '23 would be around the GBP 6 million mark. As we guided just earlier, we are expecting a breakeven on the AOP basis for the year, which will complete to above GBP 6 million mark. . On your second question on further profitability between consortium and TTS, is your where we are on profitability at the cash generating unit at the resource level I'm going to hand over to Mark for this topic.

Yes. Thank you, Julian, for those questions. In terms of our real estate footprint, we've hired a Head of Real Estate and Workplace Karen. And Karen has looked at all of the detail that we have in our real estate footprint. Operationally, you're quite right. We have 2 distribution center warehouses in the Nottingham area, operating both TTS and consortium. And indeed, there is an opportunity for further benefit realization from rationalization activities, and we'll be very pleased to talk about that in the second half. when we talk at full year. But yes, very good, very good call here. Thank you.

Just on that as a follow-up, would there be sort of risk migrating TTS over to the new facility, if that was the plan? Or would it be to remain distinct, TTS seems to be rolling pretty profitably at the moment?

Yes. I mean there's a number of issues. I mean one is physical inventory in locations. So the 2 sites are actually quite close to each other, 15 minutes from transport point of view. The Harrier Park facility, it has significant capacity to enable us to move additional inventory into that facility. Whether we co-mingle the inventory physically and/or on the same operating system within the distribution center is a further decision point in question, quite frankly. But just the rationalization of the physical footprint would be one that would be fairly straightforward, I would say. My operations team have got great detailed plans for us to assess the decision on this in the second half.

Okay. And just one follow-up, if that's okay. I've got a line covenants just very quickly, look forward, it looks like regain, some so if you just give us an indication of your initial feelings from the banks, i.e. supportive sort of dialogue you've had to date on that basis.

Yes, I'll hand over to Emmanuel at the moment, but it's just really supported from our lenders both through the year-end process and ongoing. So we're in regular communication developments on a monthly basis, both operational and financial, and also our strategic plans going forward. So I'd like to support on the attainment to their support. And then Emmanuel, you can comment on the supportive sort of half year.

Yes. Thank you, Mark. So well, ongoing the negotiation with our lender payment or covenants for the rest of the year, the financial year [indiscernible]. We currently expect to be stable by the region being one of the highest lenders [indiscernible]. Also in offset to that 2 and 2 things we -- .

There are no further questions on the call. I'll hand back to you for the webcast questions.

Thanks very much. We have a couple of more questions now. First is around what is the attitude of the site of the lending banks have anything out to sell to reduce debt.

So we are achieving is on credit to be positive. We went through a very rigorous year-end event to go to remain and extend facilities that we agreed with our lenders that take gives us 2 years' worth of extension to their support. And we continue to work with them on a monthly basis in terms of our financial and operational performance. We've said that we will be doing a strategic review of our business and where that will take us over the next 3 years. And we will be actively engaging with all of our stakeholders, including our lenders through that process. But I have to say, on an attitude basis, incredibly positive. They see a very good underlying business. We've gone through some challenges. We're fixing them. We've got the cost savings in place. and we have their support going forward. In terms of further things that we have to sell, Emmanuel?

Yes. So as we guided 3 months ago, well been proactively looking at selling at assessment platforms and IT sales. We see in terms of my priority as CFO is to reduce net debt, and we continue to look at to noncore assets when required support our net debt and level.

Thank you very much Emmanuel and Mark. Our next question is around cost savings. And whether you can provide any further comment on staff cost savings in addition to the GBP 325 million reduction you've already backed?

Yes, sure. So what we've referenced in terms of FTE and head count is the number of FTEs that we have at half year-end, end of May compared to the prior year-end. And that's a reduction of about 15% of our FTEs in the overall business. Since that first half period, we have engaged in further consultations in both our technology and our resources business. And we will report on the progress of that in the second half. As I said before, continuous improvement is something we're going to have in place for coming years. And it's about efficiencies. It's about automation. It's about maximizing the potential that we've got from the workforce we've got. And I think more importantly, is bringing interim contractors, consultants work in-house. We want to invest in our people and our permanent staff, and we want to build their capabilities to actually serve us better in the future.

So in terms of cost, as I highlighted earlier, having about GBP 7 million of savings around technology and resources are all related to head count position. In total, an excess of GBP 10 million for the full year for FY '24.

Thank you very much the questions on the webcast. So I'll pass back to Mark for some closing remarks.

Yes. Thank you, Chloe, and thank you for everyone that's attended this call today. The messages that we've given today is this is a great sound business in terms of underlying profitability. Clearly, we had challenges in FY '22, which have carried on into the first half of '23. And we've called those out and been clear about those. But we know where the issues are. We know how to resolve them. We've taken actions in terms of restructuring transformation actions, which will bring GBP 10 million of annualized cost savings flowing into our benefit stream in FY '24. And in terms of prior consensus that was given from this business, we've been honest and clear and transparent around resetting that with a 1-year delay. The profitability in FY '24, in terms of operating profit and EBITDA has been stated and clear. And we're really focused on making sure we can continue to grow the business focus on our strategy and continue to generate expectations for -- and value creation for all of our stakeholders. Thank you.