Smiths News plc (SNWS) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the Smiths News plc preliminary results investor presentation. [Operator Instructions] I'd also like to remind you that this presentation is being recorded. [Operator Instructions] And I'd now like to hand you over to Jonathan Bunting, CEO. Good afternoon.

Thank you very much, and good afternoon, everybody. And before I start the presentation, I'd just like to take a moment to introduce Paul Baker, our new CFO. And Paul will let -- no doubt talk a little bit later in the finance section. And I'd also like to pay tribute to Tony, the outgoing CFO, who's decided to retire. He's had this job over the last 3 years. And I personally valued not only his contributions to the business, but he's got [indiscernible] myself, and we'll be sad to see you go. So I just wanted to acknowledge that. So should we start with the presentation? So if we turn to the headlines -- so let's begin with an overview of the year. I'm pleased to report a continuation of our progress with performance ahead of market expectations and another year of delivery against all of the key priority areas we obviously set out to achieve. EBITDA of GBP 42.6 million is up 9% from revenues, which are actually down 4.7%, but are back in line with the historic norm of the 3% to 5% decline. Free cash flow was more than doubled to GBP 24 million, and bank net debt at year-end has reduced by 1/3 to GBP 53.2 million with a reduction in our average net debt of circa GBP 20 million. What's especially encouraging is this progress has been built on solid foundations, giving confidence that the business is better placed to deliver shareholder value than it has been for several years. Looking at our operations, in what have been hugely challenging circumstances, we've maintained our laser-like focus on service and efficiency, on which all of our plans and prospects depend. Throughout the year dominated by the pandemic, we have served occupancies without fail, made efficiency savings of GBP 6 million, driven one-off sales opportunities, such as the [ euros ]. I will close with our retailers [indiscernible] as the markets emerge from the most disruptive period in recent memory. Our people are rightly proud of this performance because it's [indiscernible] initiatives that has largely driven this. In July, consistent with our commitment to meet the needs of all stakeholders, we returned to the payment of regular dividends than the scope allowed by our financing arrangements. And it is our intention to maintain that momentum for the final dividend announced today. Tony will, of course, touch on this shortly. It is also our intention to reduce our net debt to 1x EBITDA. And again, we'll touch on it shortly. In [indiscernible], we've began to feel the impact of the inflationary pressures in distribution markets, and these have since increased, confirming in our minds at least, that this is not a temporary blip. I'll talk about our approach to managing these challenges later in the presentation. As we look ahead, therefore, there is a course of mix of opportunities and, indeed, challenges, both in the short and longer term, but we are addressing the from position of much greater stability and strength. As such, I'm confident we are well placed to continue to create and grow value, delivering strong profits and cash that are used to meet the needs of our shareholders, our financial partners and the future, indeed, of our business. I'd now like to hand over to Tony to take you through the numbers.

Thanks, John, and good afternoon, everyone. A great pleasure to be presenting my final set of results for Smiths News before handing over to Paul, not at least because they confirm a strong performance, which shed the light on the underlying strengths of a business that [indiscernible] many reasons to be sad to leave. Let's start with revenue, which at minus 4.7% year-on-year, has returned to within the historic range of structural decline of the market. Given the ongoing disruption of the COVID-19 pandemic, this is a great result, reflecting the market's resilience and the ongoing strength of demand for traditional newspapers and magazines. Adjusted EBITDA on a pre-IFRS 16 basis, which is the alternative performance measure used by management managing control of the business, increased by 90% to GBP 42.6 million. Operating profit of GBP 39.6 million is a 12.8% increase from the previous year as a result of improved margin continued strong [indiscernible]. Operating margin of 3.6% compared to 3% in financial year 2020. Net finance charges increased to GBP 8.7 million due to the fees and expenses associated with refinancing the business in November 2020. With an effective tax rate of 14.9%, adjusted tax charge for the year was GBP 4.6 million, which is GBP 0.4 million higher than the previous year. Finally, adjusted earnings per share of [ 10.8p ] with an increase of 11.3% year-on-year. Coming now to adjusted base. There has been a significant decrease in the value of adjusted [indiscernible] compared to the previous year. The total charge after tax in the year is nil, which compares to GBP 11.7 million in FY '20. Charges in respect of network and reorganization and asset impairment have reduced by GBP 6.9 million to GBP 4.8 million, respectively compared to FY '20. The major elements of adjusted items in the current year relate to the impairment of a joint venture investment [indiscernible] to [ GBP 4.6 million ], costs related to the [indiscernible] of the pension schemes, GBP 1 million and GBP 1.1 million of costs related to transformation and long-term planning programs. These have been offset by the GBP 3.5 million accounting [indiscernible] way on the top of deferred consideration as recoverability became cleared up but more certain. And in fact, GBP 6.5 million the first period due under the agreement, which received last Tuesday. Free cash flow, a very strong rolling licensure year the company generated GBP 24 million of free cash flow in FY '21 compared to GBP 10.9 million in FY '20, an increase of 120%. The significant improvement has been driven by increased EBITDA of GBP 4.6 million, improved working capital of GBP 6.7 million and lower capital expenditure of GBP 4.6 million. These have been partially offset by higher net interest and fees of GBP 3 million, and GBP 4.1 million of additional tax base. Looking at net debt. The closing bank net debt of GBP 53.2 million, representing 1.2x EBITDA that compares to a rate of 2x in the prior year when reported closing [indiscernible] net debt was GBP 79.7 million. The reduction in net debt is driven by 2 key factors: the GBP 13.1 million improvement in free cash flow versus FY '20 and the cash inflow from the repayment of the GBP 6.5 million working capital loan made to the buyers of [indiscernible] in May 2020, which was repaid in October 2020. This item alone represents a GBP 13.2 million improvement year-on-year. I'll now hand over to Paul to introduce himself and discuss the impact of IFRS 16 on our results.

Thank you, Tony, and good afternoon, everyone. Before I talk to this more technical slide, let me briefly introduce myself. I joined the company as Chief Financial Officer on the fourth of October, and have been actively engaged with a thorough induction program since day one. In last 4 weeks, I've managed to meet more than 90 leaders of the business and visit 3 operational sites to get a hands-on understanding of our operations and our business model as well as spending time with our advisers and auditors. It's been a busy time, but exciting. And as you've just seen from Tony during his presentation, the business -- the financials of the business are solid with strong cash generation. But what has also impressed me in my first few weeks is the passion that people in the business have for what they do, and the depth of their understanding and control in managing the operational performance. The planning and measurements within the business reflect this attention to detail, giving me confidence as I take up my new role. Now back to the chart. In our financial performance, we use an adjusted performance measure, a pre-IFRS 16 EBITDA, which Tony mentioned. This [indiscernible] GBP 7.7 million of operating lease charges for our statutory IFRS 16 EBITDA of GBP 50.3 million. I know many of you already used the IFRS 16 measure, and we will reference this more going forward. The lease charge within the business primarily relates to our 37 distribution sites, and the underlying impact is broadly consistent year-on-year. Reported net debt of GBP 81.2 million includes lease liabilities of GBP 29.2 million relating to 44 leases with an average total length of 6 years. When you also add back the unamortized fees and the 2020 refinancing of GBP 1.2 million, you get to an adjusted bank net debt of GBP 53.2 million, which Tony referenced. I look forward to speaking to you all in the future, but for now back to Jon.

Thank you, Paul. Thank you, Tony. So let's look at the year we just completed. Looking at the activity behind numbers, we can see an immensely busy and challenging year, but even importantly, where we once again delivered on all of our promises. Back in November 2020, we secured the last of our major publisher contracts and we are in deep negotiations for our banking arrangements. We were also, at that time, cautiously optimistic about the likelihood that [indiscernible] restrictions. I'm afraid that didn't prove to be the case. And by the late autumn, it was clear that we were in for a tough time from a winter perspective with the reposition of lockdown, the so called Council Christmas, and a long period with a return to normal working life being a distant prospect. And yes, our markets proved remarkably resilient. The majority of retail remained open, and we, in turn, provided a full service, helping to maintain both sales and delivery service charges. Results have been a gradual recovery from the deep [indiscernible] spring 2020, and an overall performance, which is minus 4.7%, sits within the long-term trends for our industry. Importantly, as the volumes increase in the second half of the year, we were able to contain the increased distribution costs proportionately so that the benefit flows through to the bottom line. Even more importantly, our cost savings have once again offset the decline in our core margin, driving profit and cash growth this year. Whilst nobody can be certain the pandemic is entirely behind us, we look forward with increased confidence, but we'll continue to plan on realistic and prudent assumptions of the market trends. Longer term, we must also acknowledge pressures on all distribution businesses in relation to sustainability and our impact on the environment. We have always been a responsible business and have a track record of making meaningful improvements. But this year, we started the process of looking and challenging ourselves even further. Our aim is to take an active role in shaping solutions that are compatible with our best interest and meet the needs of our wider stakeholders. More on this shortly. At the half year, our interim results confirm the progress we are making with the financial performance that was ahead of prepandemic comparative period. Cash generation and broader capital gold were on track allowing later in the year for the return to the payment of dividends after a 2-year gap. And with both the second half -- and as we close the second half, we have maintained our overall momentum despite the early signs of inflationary headwinds. As I said earlier, I can't talk about that. And then finally, into this financial year, we have further -- 2 further highlights to report. Firstly, on the second of November, we received a payment of GBP 6.5 million in relation to the deferred consideration for the sale of Tuffnells. The proceeds will be used to reduce bank debt further. Secondly, we have received confirmation from the trustee of the defined pension scheme that they will return to the company the cash surplus that arose from the buyout of the scheme by legal in general in March 2021. The surplus net of additional professional fees and tax charge is GBP 8 million and is expected to be paid to the company later in this month. Again, the proceeds will be used to reduce net debt and is firmly on track to deliver on our target of net debt times at 1x EBITDA but ahead of our initial August 23 target. If we think about our plans and priorities, again, we're on track. We have an excellent control of our operations in terms of both service and costs, and we have clear plans to maintain this performance over time. We are targeting GBP 15 million of cost savings over the next 3 years. And we are open to new thinking about how we can extend our vision for sustainability. We are a market leader in our market, and the -- and all of our behaviors represent that. Our sales and markets have stabilized from the disruption of the pandemic. And significantly, we have not seen the closure of large numbers of new retailers. This helps support both our sales revenues and our delivery service charges. Looking ahead, there are opportunities for the recovery to continue in the short term with a greater return to traveling and, indeed, commuting. But importantly, we should remember that this business has 3 multiple income streams, newspaper margin, magazine margin and carry service charges. And it means that the impact on our margin is typically 2 to 3 percentage points lower than the headline decline in sales revenues. And finally, looking at capital management. In the improved -- our underlying finances, we are strengthening the foundation of future shareholder value. Smiths News has always been cash-generative business, which is the prudent management of that asset, which has delivered reduced debt control of capital expenditure and the return of dividends, which we are committed to growing in line with our continued financial progress. So let's look at sales. As you can see, this is a 3-year view of our markets, and they were severely impacted by the first lockdown, but it did follow by a relatively swift improvement as retailers reopened albeit with a sales still showing a significantly greater decline than the typical structural trends. The recovery of the summer in Autumn of 2020 that slowed somewhat as we moved into regional restrictions and then later the second lockdown. However, it's easy to see the [ anniversary ] impacts in the chart on the right-hand side. It's interesting to note the relatively lower volatility of newspapers compared to magazines, in part due to the higher volumes sold through local independent retailers. While the last few months have been positive, the situation remains fluid and what your hardest to predict is exactly how much of the [indiscernible] sale will come back as commuting and travel passes return. As it stands, we estimate pandemic to have impacted the market by roughly an additional 5% over and above the decline we might have expected across the 2-year period. Looking ahead, we are planning on the basis of return to the previous trend of minus 5%, but we ran both alert to the potential for further disruption and indeed for the opportunity for further sales gains. Before closing my review of sales and costs, I also want to look at the inflationary pressures and put them into context. The background will no doubt be commented to everybody. There are some particular items, however, of our model, as I've explained. Firstly, it is clear there is a national shortage of drivers, not just in HGV categories but all levels, including smaller vehicles and subcontractor operators. As well publicized is the pressure on the warehouse operatives, in parts driven by Brexit and the availability of lever and in part, we believe, by lockdown the reassessment people have made about how they want to manage their working arrangements in lifestyle. Looking ahead, there is no mistaking the increase in costs, and certainly, there will be an additional element of the merger pressure this year. Of course, we will see central efficiencies and offsetting opportunities. But as a matter of policy, we will not take measures, which might flatter the numbers in the short term but endanger the business and its reputation down the line. Service KPIs are critical not only to our contractual obligations, but also to the wider efficiency of our operations, which is why maintaining them is paramount and non-negotiated our approach to managing through the issue. In this regard, our contractor model provides us with some limited protection because we renew these contracts on an annual basis. And just as importantly, we have a good relationship with our subcontracted delivery drivers. On the positive side, this gives us some breathing space to ensure the actions we take and the investments we make are carefully judged and targeted. And there's also much we can do to ensure that we have the most efficient routes within the caveat of maintaining our service KPIs. And you can rest assure that we'll leave no stone rest of the -- unturned our search for sensible mitigations. But for all that, we must recognize that the pressures are just a result of media headlines. They're real and they require robust solutions. It will be a fault coming to overcut today if it damages our capability for tomorrow. Therefore, we currently estimate the impact of -- the impact on EBITDA this year will be in the region of GBP 2 million per annum after the mitigating actions we plan to take. Now on to sustainability. I mentioned earlier this year, we've taken the opportunity to review our approach is sustainability and the ESG goals. By way of context, this [indiscernible] statement that we've always been a responsible business, leading the market in many ways. It's also clear that stakeholder expectations are changing and that we must all look further into the future than perhaps we have previously thought. I can go on, but I'm sure the direction is already clear to us all. So we have set out to create a proactive vision embraced by our people and shared by our stakeholders. We want a holistic approach, not limiting our ambition or isolated targets or narrowing our focus too much by adopting the format of the UN sustainable development goals together with the measurement standards of the global reporting initiative, we hope to bring greater transparency and direct to our sustainability strategy. We already have adopted a 5-pillar approach based on new SDG and GRI standards. And you can see them on the right-hand side of the slide. But given the limited time today, I will not go through those in detail but you'll be able to see them on our website and indeed in our annual report. If we think about the longer term, we have a number of ambitions. And these, if you like, help set the compass for our future direction of travel. These include the migration over time to nonfossil fuel vehicles in our fleet, and that of our contractors by 2035, plus net carbon neutral warehouses by 2030, a colligated [ agent ] score of 70% or higher each year, and a materially improvement to the level of diversity in our leadership population, including the Board. In addition to that, we will continue to support our home lesser passed on. Now of course, it's fine to have long-term targets, but it's important to have table short-term targets too, and we have those as well. So this year, we'll be introducing electric fleet for our location that is servicing the London airports. We've already run a carbon-neutral conference in October, and we already buy all of our electricity from renewable energy providers. In the year we've just completed, we reduced our use of pellet shrinkwrap by 79%. And by better sorting and recycling, we've diverted 100% of our waste from landfill. These are all the sorts of things that we do year in, year out and are well understood in our business, but perhaps we've not done a good enough job of explaining it externally. So let's turn to our priorities. You will not be surprised to hear that service and efficiency remains very much at the top of our list. It's intensely lead to our business model, the cash flow generation and how we plan to mitigate some of the inflationary brushes. It's also interesting to note that one of our developments over the last 12 months has been that of e-cost based returns process. This has been designed to enable our largest retail customers to improve the category profitability by reducing the labor they dedicate to the category and reducing their shrink levels. We think this is an important commercial goal for our business. We also think that the sustainability agenda that we've developed will be an important part of the tender process for contracts in the future. And therefore, it's very much aligned to not only the broader -- the global strategy around sustainability, but also our corporate one. Lean to that is a commitment of our people. You have heard me say probably before that harnessing their talents and commitment, ensuring that we drive our engagement, and improving diverse and inclusion is fundamental to what we do. We are a people business. We have a number of small ancillary businesses who found the pandemic period more challenging than actually the core business did. And to put that in perspective, we have a business DMD that put newspapers and magazines into airlines around the world. Understandably, that business is impacted by the pandemic. And whilst it was never a drain on cash, it wasn't providing the contribution it would have otherwise provided. We are hopeful that over the next 1 to 2 years, we'll start to see a better recovery of that business. Importantly, our plans are not dependent upon the recovery of that business or any balance of their businesses. So I think it's important to say that our prudent approach to capital management remains unchanged. We will retain our firm grip on cash, capital expenditure and the reduction of net debt. And with regard to dividends, within the constraints of our current financial agreements, we will seek to deliver regular and growing dividends whilst meeting the investment need business. So to finalize. We have delivered a strong performance in a challenging year, once again delivering on all of our commitments. Our progress has been founded on the focus and close control of our operations with the determination to come through the pandemic as a stronger business. In that regard, we've achieved all of our critical targets. From a shareholder value perspective, we've materially improved underlying finances, strength in the balance sheet and with a significant reduction in net debt. We've held through to our promise of approved capital management approach, ensuring that cash generation benefits all stakeholders. And in that regard, we have restored a payment of dividend and are committed to regular returns for our shareholders. In terms of the outlook, well, in some ways, the flight path is more predictable than it's been for a number of years. our markets and business model continues to demonstrate resilience, and we have opportunities as the society move back to a post-pandemic norm. We must, however, recognize that the inflationary pressures in distribution markets are really immediate and we must manage these in a sustainable way. And in terms of current trading, I'd just like to mention the fact that year-to-date trend is in line with the Board's expectations after the allowance for the inflationary pressures that I've so far mentioned. And that's it. So on that note, I'd like to hand back to Alexandre, and we'll be happy to take any questions that you may have.

[Operator Instructions] Perhaps I could read the question we received ahead of today's event, which read as follows: What is the exact nature of the conditions laid down by the banks in relation to dividend payouts?

Can I tell you to [indiscernible]?

Very simply, in the year, [indiscernible] '22 and '23, we can we can make distributions of GBP 6 million in each of those years. There are no other conditions, it doesn't fall away early if you make an advanced payments on [indiscernible]. Just simple, very simple formula.

Thank you very much, Tony. Investors have also submitted a number of questions during today's presentation, and I wanted to hand back to you to respond to those which are appropriate to do. So could I ask you just to read out the question and then who it's from?

Yes, I'll read out the first one. I think Jon will answer. So can you talk a little about the recent distribution deal with the Caribou Energy Drinks and how this plays to your -- to utilize the distribution network?

Yes, very happy to answer that. So this is a new relationship for us with one of the world's actually largest energy drink providers. And we are providing a full end-to-end service for them. So we're selling their products into our independent retailers, taking the orders, distributing it and collecting the cash. So it's -- as a question in place, it's just a further utilization of our capability in assets. It's relatively small at this stage, but they're a good partner, and we're looking forward to working with them.

Thanks, Jon. I think the next one from Tim, and for Tony. Is your net bank debt target of 1x EBITDA based on reported net debt or average net debt?

It's based on reported net debt. And the question also is that we take account into [indiscernible] capital. Obviously, that's why we started reporting average net debt to get the market better understanding of about GBP 20 million to GBP 30 million swing in the month. We saw some tailing periods of [ Page 2 ] publishers and receipts from supermarkets and other customers.

So next one from Tim. In terms of basis points, what reduction in the weighted average cost of debt would you expect in FY '22 from FY '21 is 9.6% given the switch from LIBOR to Sonia, lower amortization of arrangement fees and before taking account of an increase in base rates.

So the -- first of all, there's no difference between moving from LIBOR to Sonia. Cost about GBP 25 in the year, something like that. So it's minimal. 9.6% was clearly [indiscernible] as a consequence of -- and very [indiscernible] some additional fees. And I'm answering a question of earlier as well, which talks about later. Our core interest charge is about 4%. We expect to pay about GBP 7 million in total in terms of the interest, amortization, et cetera, where hopefully that -- I don't have the exact percentage now, but then hopefully, that answers the question. So we can give more detail if that doesn't answer the question.

One for Jon. Can you confirm there will be no repeat of the [indiscernible] fiasco and the company will focus on its core competency in the future?

Good question. So yes, I mean, we've been -- I think we've been [indiscernible] the last couple of years that we have been very focused on running the business in the way that know best. And I think we've done a good job of doing that. And if you look at what's happened to the share price over the last 12 months, when it's doubled, the reintroduction of the dividends, et cetera, et cetera, I think there's evidence to suggest that. I think it'd be wrong of us as a management team not to ever consider looking at opportunities outside of the news or magazine structure. But there's nothing that we're actively looking at right now, and we're very focused on delivering the cash that our business is [indiscernible].

I think the next 2 questions, I have a couple of questions on inflation. First one is about the -- does the -- does our net of inflationary pressures include the headwinds of published [indiscernible] and the answer is yes.

Yes.

And then we got the second question being, how confident are you the effects of inflation in the labor distribution market [indiscernible] is about GBP 2 million in FY '22? That is our current [indiscernible] our view [indiscernible].

Yes.

So the next question from do you expect the efforts needed to mitigate recent inflation pressure, reduce your ability to make savings that you've been achieved over years to mitigate structural sales decline?

It's a really good question, Tim. I mean, we're committed today to about [ GBP 15 million ] of savings going forward. And if you look at our track record of doing that, it holds up to very close inspection. We've got good visibility of where those savings are going to come from this year and indeed into next year. And then in the third year, as it is in every 3-year cycle, there's less detail around that. So it's a fair question, but it doesn't dilute our -- either our focus or our confidence that we can continue to reduce our cost base.

And final one for Tony. What do you expect maintenance CapEx to be in FY '22 on a cash basis?

Yes. I mean, a couple of allocation policy, which we used earlier this year. We see CapEx will be on average 10% of EBITDA, so broadly $4 million. There will be pluses and minuses. There was a GBP 2.6 million this year. We are on GBP 4 million, [indiscernible] GBP 0.5 million over the budget. [indiscernible]. I think there was one way up at the point of the [indiscernible].

I'm happy to take. I'll use the [indiscernible] but Jon [indiscernible], this one [indiscernible] I just wanted to add, so distribution centers are important in the digital economy, are your distribution centers able to service this part of the economy in addition to the newspaper business, Jon?

Yes. So we have 36 warehouses, and we operate from a hub and spoke with a hub-and-spoke structure. Our scale locations are absolutely equipped provide the total solutions that the film businesses might want. Our spoke locations less so. They are very -- a much smaller units and very much designed for a small cross-dock operation. or in any kind of stock holding. But yes, should there be an opportunity to do something in that space. And should we determine that was the right thing for the business, then we would have lots of the capability to do so.

I think you have addressed pretty much all the questions there from investors today. And of course, the company will review any further questions submitted and publish responses where it's appropriate to do so. Jonathan, just before redirect investors, I wondered if I could ask you for a few closing comments.

Yes. Thank you very much. We personally thank you for your time today, and dialing in and listening to the progress that we continue to make in the business. I hope you can see that the business is in a good strength. It's very cash generative. And you can see how we're using that cash to both benefit our shareholders and indeed our financial lenders. So as Tony has already mentioned, the business itself is a relatively asset-light, just require a lot of CapEx. And so the free cash that we throw off, really we can be used to create value for our key partners.

Jonathan, Paul, Tony, thanks once again for updating investors today. Can I please ask investors not to close this session as you'll now be automatically redirected for the opportunity to provide your feedback in order that the management team to better understand your views and expectations. This may take a few moments to complete, however, it's greatly valued by the company. On behalf of the management of your Smiths News plc, we would like to thank you for attending today's presentation. That now concludes today's session, and good afternoon to you all.