Smiths News plc (SNWS) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Smiths News plc interim results investor presentation. [Operator Instructions] The company may not be in a position to answer every question it receives in the meeting itself. However, the company will review all questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. And I'd now like to hand you over to Jonathan Bunting, CEO. Good afternoon, sir.

Thank you, Alessandro. Good afternoon, everyone. Welcome to Smiths News plc's Interim Results for the Financial Year '23. I'm delighted we've got a strong set of results to talk to you about today, stronger than my voice, which appears to be a bit to be losing it already at this point of the day. So please do forgive me if I speak with a little less clarity or if it's more softer than I normally would. So let's make a start. So in terms of format, as usual, I'll introduce the session with a summary of the highlights. Paul will then review our financial performance. And finally, I'll give you a little bit more detail on the progress we've made on our priorities for the year. Our overriding message of our results presentation will hopefully be clear, and that is that Smiths News continues to drive shareholder value, delivering positive and predictable results even in an uncertain economic environment. As always, we'll welcome any questions you may have, and we'll take them at the end of the presentation. So starting with the headlines. We've delivered a good performance in a challenging macro environment. All our key metrics are ahead or in line with plan, and we are well positioned to maintain progress over the full year. Adjusted operating profit of GBP 20.4 million is up 6.8%, and profit before tax of GBP 17.1 million is up 11.8%. Earnings per share of 5.6p is up by 9.8%, and average net debt of GBP 26.3 million is down by 55.3%. Central to these results are 3 factors: firstly, an acceleration of price rises that have seen our sales revenues grow year-on-year, providing a temporary reversal of the gradual decline that remains a long-term trend; secondly, the further benefit of margin mix from the continued strong sales of one shots, including collectibles and one-off special additions; and thirdly, the close management of cost to ensure that the impact of inflation is in line with our plan and our long-term efficiencies are also delivering as expected. I should say that all of this has been achieved in tandem with strong service metrics that ensure delivery rectification costs are minimized. And as a result, we're on track to meet full year expectations. We've also made progress with our strategic goals. Last autumn, we talked in detail about our contract strategy and the exploration of new business opportunities. I'm delighted that in the period we've continued to make progress with our publisher contracts and now have 65% of our current sales revenue secured on new agreements on improved terms through to at least 2029. This is critical not just to revenue and cash flow planning but the operational certainty it brings, supporting our ability to plan the sustainable efficiencies that are key to our value model. New profit stream opportunities also made progress, most notably with our waste recycling offer that has moved from a regional trial to network-wide rollout and the expansion of our supply of adjacent categories to leading retailers. It's early days, but we are encouraged by the progress, and I'll cover this later in today's presentation. So in summary, across the key areas of sales, costs and securing our future, we've had a pleasing first period. And on that note, I'll now like to hand over to Paul, who will talk in more detail about our financial performance.

Thank you, Jon, and good afternoon, everyone. Starting with the financial headlines. Revenues increased in the period by 1%, which is ahead of historic trends driven by pricing from publishers as they recover inflationary input costs and additional sales from one-off events, including the World Cup in the autumn of 2022. I will cover revenue in a little more detail on the next slide. Management of input costs and the consistent delivery from our operations team in driving efficiencies have helped mitigate inflationary pressures. The benefit from additional sales and positive margins have therefore resulted in adjusted operating profit of GBP 20.4 million, an increase of GBP 1.3 million from 2022. Earnings per share increased by 9.8% to 5.6p. Continuing free cash flow for the period was an outflow of GBP 0.2 million, including a GBP 13.6 million working capital movement, which is part of our normal working capital cycle. Full year free cash flow is on target to be in line with expectations. It is also worth noting the prior period included one-off receipts from deferred consideration and a pension surplus totaling GBP 14.6 million. The dividend proposed is in line with last year, and the business anticipates distributing up to the maximum committed under our financing agreement of GBP 10 million, subject to half 2 trading. Now to give a little more color to revenues. Newspaper revenue increased by 0.5% in the half. These revenues were supported by news events of 0.9% as well as benefiting from 27 price increases across the previous 6 months compared to 16% the year before. These increases are expected to slow in the second half. And the impact of lower volumes means we expect to see newspaper revenue to start to decline in half 2, exiting the year more in line with historic trends of minus 3% to 5%. Magazine revenues declined 6.1%, which is in line with historic norms. One shots continued to perform well and benefited in the period from the World Cup, strong Premier League collection performance and one-off titles. Whilst positive from a margin perspective, this growth has a relatively small impact on total revenues. Adjusted operating profit increased by GBP 1.3 million with the margin benefits from one shots and additional pricing dropping through. The cost reduction program is in line with plan. And while there is more to do in half 2, this is a similar share to prior years with clear tracking and visibility. Inflationary costs have been managed in line with planning assumptions. And while the macro picture continues to be uncertain, we are not seeing significant changes to our assumptions. Net finance charges have reduced by GBP 0.5 million as the extension of our debt facilities last year resulted in lower bank arrangement fee charges in the year. The impact from higher interest rates were offset by the lower average net debt. The effective tax rate has increased in the period in line with U.K. corporate tax rises. And as mentioned in the key headlines, EPS increased by 9.8%, 8.1% driven by the increase in operating profit and 1.7% due to a slightly higher holding of shares from the EBT. Turning to free cash flow. The prior period cash flow of GBP 17.5 million benefited from GBP 14.6 million of one-off receipts. The underlying inflow of GBP 2.9 million compares with a small outflow of GBP 0.2 million in half 1 2023, with GBP 5 million of receivables received on the first working day of the second half. Capital expenditure of GBP 2.1 million is ahead of last year but aligned to our target of circa GBP 4 million per annum. Following reduced expenditures during COVID, we are now back on track with our depot refurbishment program and expect this level of expenditure going forward. Lease payments are broadly flat year-on-year with some increases in the 6 renewals in the period mitigated by leases exited as part of our network efficiency program. The cash impact of adjusting items was GBP 0.7 million, which largely related to the cost of due diligence and legal fees of a bolt-on acquisition that was aborted. Jon will explain the context of this later when discussing our strategy and progress in pursuing adjacent revenue streams. The business bank net debt continues to reduce. And here, you see the last 12 months reduction from half 1 2022. Importantly, the rolling 12-months operating cash flow of GBP 23.2 million remained consistent and predictable, which enables the business to plan with certainty and provide clear guidance. Average net debt has reduced by GBP 33 million compared to half 1 2022 or 55%. This is largely due to the impact of GBP 22.1 million of one-off receipts received, the last of which was GBP 7.5 million received in May '22, which you can see in the chart. And finally, looking forward, we have given some modeling guidance on the final finance chart, which remains unchanged from the preliminaries. Now back to Jon.

Thank you, Paul. To summarize our results this period, we've had a good performance, delivering our numbers and meeting the key targets and priorities we set for the year. I won't repeat each point on the slide, but the overall momentum will hopefully be clear. It follows that we have strong foundation on which to deliver further value. Therefore, in the second half of today's presentation, I'd like to look at the progress we are making to this goal and how our plans are shaped by the ambition to deliver success for all of our stakeholders. At the heart of those plans is, of course, Smiths News wholesale business, hence, understanding what it does and how it delivers such a unique service is critical to also understanding the logic of our growth strategy. As I indicated a moment ago, the Smiths News business is founded on a unique, highly specialized network and service proposition. Our 36 depots have a hub-and-spoke configuration making around 24,000 daily deliveries to retailers across England and Wales, amounting to 55% of the U.K. newspaper and magazine market. We cover the majority of the major urban conurbations South of Scotland, meaning our territories have a high density to match their fixed footprint. In effect, we go to the same customers every day, making deliveries and collecting returns in a predictable pattern that supports high levels of service and efficiency. In addition, we have exclusive contracts with all of the key publishers, meaning we're the only supplier of news and magazines in our territories. This exclusivity provides a synergy of both delivery volumes and distribution timings supporting a cost-efficient supply chain for both publishers and retailers and with it our predictability of volumes and costs that shapes our distribution model. Ultimately, this is a unique supply chain which has evolved in ways that means we are an essential partner to both our publisher clients and our retail customers with long-established trading relationships that underpin the business model and the strategy for future value creation. With this in mind, there are 3 elements to our plans to continue delivering success for all of our stakeholders. Firstly, accelerating our contract renewals to provide clarity of our operations and visibility of likely cash flows over time. Secondly, delivering great service efficiently every day, not only does this justify the exclusivity arrangements for our contracts, it's also essential to efficiency. But there is no greater wasted costs than that driven by the need to rectify delivery or packing errors. And last but not least, the creation of new profit opportunities by leveraging our assets and our customer base, securing additional profits in a way that complements our core business rather than distracts. In all 3 of these areas, we've made good progress over the last 6 months. So let's look at each in turn. Firstly, our contracts. The vast majority of our exclusive publisher contracts run for 5 years, and we renew these periodically as part of our normal course of business. Over the 12 months, however, we've worked to accelerate the renewal calendar, so we now have 65% of our business secured on improved terms to at least 2029. The graphic to the right shows proportion of total business that we've resecured through to at least '29. In fact, it would almost look exactly the same if we have shown the newspaper and magazine separately. I should emphasize the remaining contracts are also operating well, and we are making good progress in our discussions. There is no reason to believe that we will not have more positive news in this regard in H2. That said, each contract renewal has a pace of its own and a rhythm of its own, and we have plenty of time to renegotiate the remaining contracts. If we turn to service. We are passionate about exceeding our contractual requirements and proud to be the market leader not only in size and financially but in the service we provide, too. We have market-leading KPIs across all of the critical measures for our publisher clients and our retail customers. Every month, we deliver 44 million newspapers, 12 million magazines and collect GBP 22 million of returns. This is a scaled distribution by any measure. I could add that these are delivered in the tightest of time windows, requiring a coordination of multiple inbound deliveries to reach the vast majority of our customers before 6:30 a.m. every morning. And in terms of efficiency, we have a capital-light model using contractors' final-mile deliveries and returns collection. And the fixed nature of our deliveries means we can plan routing in a way that is predictable and minimizes wasted miles. Longer term, we are constantly reviewing our physical network, our routing and our technology to find efficiencies that help offset the gradual structural decline in our volumes. Finally, we have recognized that these levels of service and efficiency across our network and as a daily partner to our customers offer a range of opportunities that can complement and enhance our core profit streams. You will recall in November, we spoke about our growth strategy and our approach being to enhance the core, add more and move up the value chain. We talked in detail about the steps we've taken to identify carefully selected range of our growth opportunities that were both complementary to our core business and achievable. We presented these as a spectrum of potential that leveraged our physical capabilities and our existing supply chain relationships using the combination of our core capabilities and our spare capacity either directly or in partnership with others. Our focus was on expanding our service to existing customers and/or partnering with suppliers who would benefit from access to our asset skills and customer base. All of the avenues we presented then remain open and active, and indeed, we have made progress across them all. In one case, we pursued a small bolt-on acquisition that we believe would give us scale and boost our entry into a highly complementary market. Unfortunately, the economics of the proposed transaction and the changing macro climate at that point would have made imprudent to proceed. And hence, despite our best endeavors and a great deal of effort, we took the decision to withdraw. Of course, we would have preferred a different outcome, but the decision serves to underline that whilst we are committed to pursuing new opportunities for growth, we are not dependent upon progress at the expense of prudence. We'll give a more comprehensive update at the full year, but for now, I'd like to highlight just 2 areas of encouraging progress. Firstly, Smiths News Recycle. Last year, starting with a small trial from our Birmingham depot, we launched a service for cardboard and plastic waste collection. It's a simple and convenient solution for our retailers that backs on to our daily deliveries and returns processing capability. Over the last 6 months, we've expanded the availability offer and in February launched across our entire network targeted principally to our independent customers. We now have almost 1,900 registered retailers with around 100 new sign-ups every week. More than 700 of our delivery rounds are making collections. And in terms of physical recycling, we are processing an additional 50 tonnes of cardboard and plastic each month. I should stress that while we are pleased with the initial take-up, we remain in trial mode, refining the offer, measuring the economics and assessing its ability to operate at scale. This is an important part of our approach to profitable growth across all the opportunities we've identified. I'd like also to give a quick update on supplying new categories. You may recall in the summer of '22, we trialed the pick, pack, distribution and returns collection of DVDs to a leading supermarket, again, leveraging our existing capabilities, piggybacking onto our existing news and magazine deliveries. This year, we've expanded the service to 2 of the supermarkets and broadened solution to include books with one of these customers. We're undertaking this activity in partnership with Frontline, one of our magazine distributors. Between us, we're able to offer our supermarket customers an end-to-end supply chain solution for a range of adjacent categories. Ultimately, we believe there is a wider opportunity across our full customer base. But for now, we are focused on building the scale offer that adds value through category management as well as an efficient and easy delivery for retail stores. So from a growth perspective, we're pleased with progress and excited about finding further profit opportunities in a way that delivers tangible value for our stakeholders. And that pursuit of tangible value is central to our commitment to shareholders, too. Over the past 3 years, since rebranding to Smiths News plc, we have delivered on our plans and being diligent in our commitment to focus on our transparent objectives and, in doing so, creating long-term value even through the uniquely challenging times of the pandemic. As a consequence, the strength of our balance sheet has been transformed with average net debt halving from GBP 98.8 million to GBP 49.9 million and now further reduced again to GBP 26.3 million at the end of H1 '23. And in tandem, as debt has fallen, we've increased the dividend, renegotiating the terms of our banking facilities twice so that shareholders have a greater share of the cash rewards. And this brings me neatly back to this year and the outlook for the current period. After a strong 12 months for pricing, we anticipate revenue and volume to return to historic trends in the second half. With a clear flight path for cost control and longer-term efficiencies, we are confident of managing the impacts of inflation to within plan, and hence, we are on track to meet full year expectations and to continue to deliver success for all of our stakeholders. And on that note, Paul and I are very happy to start taking questions.

Jonathan, Paul, thank you very much for the presentation. [Operator Instructions] But just for the company to take a few moments to review those questions submitted today, I'd like to remind you the recording of this presentation along with a copy of the slides and the published Q&A can be accessed via your investor dashboard. Jonathan, Paul, as you can see, we've received a number of questions throughout today's presentation and if I could just ask you to read out those questions and give responses where it's appropriate to do so. I'll pick up from you both at the end.

Thanks very much. I'll start with the first one. So what are the criteria for raising the dividend payout from GBP 10 million a year? When can you see that happening? So just to be clear, our current financing agreement, which runs until August 2025, has a cap of distributions of GBP 10 million. So we're currently now planning -- we paid last year up to that cap, and we plan to do that this year to get to half 2 trading. That cap wouldn't be lifted until the end of the financing agreement in August '25 unless we were to renegotiate earlier.

Okay. Question 2, could you comment on the shortage of drivers? Yes. So I think it was well documented across all distribution businesses 12 months ago that there was a real shortage of drivers and subcontract drivers. Actually, we've made really good progress in that area over the last 12 months, and we are now down to a level of vacancies which would be similar to pre-COVID levels. So from our perspective, we've seen an improvement in the number of subcontractors available for us to engage.

Thanks, Jon. So the next question refers to the year-end net debt figure in -- I think it's in an Edison paper that's available on our website, and are we comfortable with that. I refer people to the net debt that we reported at the end of last year was 0.3x net debt to EBITDA. I would expect that to reduce at the end of this year. It will be a low point for us at the end of this fiscal year. The following year, we would have 53 weeks in our trading year in '24, so that will bring in the publisher payments. So I wouldn't -- I don't think that number is far off the mark at all.

Okay. I have a question here asking if we expect to see acquisitions be a part of the strategy for accelerating growth. I think, yes, I mean, the simple answer is we're looking to do a combination of organic and acquisitions as part of our growth strategy, the idea being that we test the markets that we're -- that we believe we can be successful in organically. And if it makes sense and there is the right acquisition available, we'll reinforce our presence in that market through a small bolt-on acquisition. I think the key thing to remember is we've worked really hard over the last 3 years to improve the balance sheet. We've worked really hard to restore the dividend. And therefore, we do not plan to do anything from an acquisition perspective that puts the dividend at risk or undermines the good work we've done on the balance sheet. So you can't expect to see game-changing acquisitions from us. It's likely to be small bolt-on acquisitions specifically targeted at the areas where we're looking to grow the business.

Got a question here on free cash flow. So please, could you say more about your expectations for free cash flow? Will you be able to continue paying and growing your dividend if free cash flow stays negative as in the half? Well, the good news is our free cash flow is a positive second half story. So the first half, because of the cycle of the business, is always a bit of a low point in our February reporting. So I think as I said in the presentation, we -- last year, we had an inflow of underlying GBP 2.9 million; this year, a small outflow of GBP 0.2 million, and that was largely driven by the fact we had a receipt of GBP 5 million that's. This would be in the first day of the second half. So we're normally in line with that, and we expect to be in line with our cash flow for the full year of GBP 20 million to GBP 25 million, which would enable us to continue, as we've already said, paying the dividend up to the maximum available in the facility.

Okay. Then [ Simon ] asked a question about whether we've seen an increase in take-up for pallet storage in any of our warehouses and obviously referencing the update we gave in November last year. The simple answer is yes, we have. It's very much been a linear progression. But I would just point out that this is very much at the tactical end of our growth strategy, so what we're doing there is sweating our assets. But you're absolutely right, [ Simon ], We have seen an increase, but it's not material to our overall trading performance. We have a question here about...

DVD.

Yes, DVDs, books, et cetera. What other products are we targeting? Again, good question. The way I would think about this is to think about we're looking at the categories that are naturally adjacent to or complementary with news and media, so we're not looking at food, for example, as a category. But all those products that you see typically in the same aisle or the next aisle to newspapers and magazines are potentially of interest to us if they do not fit naturally into a multiple retailers' own supply chain and we're able to deliver them in a consolidated way through our vehicles. So yes, it's all those typical categories that you would see and observe yourself when you're shopping.

There's a question about the improvements in the contract terms.

Yes, I mean, I can't give specifics. That would be unfair on our clients. What I can say is we're really pleased that we've renegotiated them. We've reached agreements which work for ourselves and work for our publisher clients. There's an improvement in terms. And typically, they improve with each year that passes from 2025 through to 2029. But that's all I'd like to say on something that's confidential to ourselves and our clients.

I think that's all we've got.

Yes.

Yes. Jonathan, Paul, thank you very much. I think you've addressed all those questions you can from investors. And of course, the company will review questions submitted today, and we'll publish the responses on the Investor Meet Company platform. But just before we direct to investors to provide you with their feedback, which I know is particularly important to you both, Jonathan, could I just ask you for a few closing comments?

Yes, of course. I mean, I think headlines are really that we're pleased with H1. We think it's a good set of numbers and actually reinforces the progress we've made over the last 3 years. I think it shows that the fundamentals of the business are in good shape. And actually, there's no bigger evidence of that, I guess, than the fact that our publisher clients are signing up new contracts to 2029. You can see that we're making incremental progress with new profit streams, but we're doing it in the way that we said we would. We're being sensible about it. We're testing. We're expanding organically. But if there's an opportunity to give us more strength in that space without putting at risk the balance sheet for our dividend, then we'll look at that. And you've seen that already in the fact that we looked at an acquisition and didn't take it. But you should also take, I would say, some confidence from that because what it means is, if we're prepared to walk away from an acquisition that we don't think quite works for us, it shows you the strength we feel we have in the core business and the fact that we won't be rushed into making acquisitions that don't quite work for us at this point. So beyond all of that, I thank you for your time and your interest in the business and look forward to updating you in the future.

Jonathan, Paul, thanks once again for updating investors today. I'd like to ask investors not to close this session as you'll now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. This will only take a few minutes to complete but I'm sure be greatly valued by the company. On behalf of the management team of Smiths News plc, I would like to thank you for attending today's presentation, and good afternoon to you all.