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 during the meeting itself. However, the company can review all the questions submitted today and publish responses where it is appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Jonathan Bunting, CEO. Good afternoon to you, sir.

Good afternoon, everyone. Welcome to Smiths News plc's interim results for the first half of 2024. I'm delighted to report another robust performance from the business over the last 6 months. Furthermore, we have this morning announced our new finance facility and revised capital allocation policy, and I look forward to discussing this in more detail alongside our progress to date with you this morning. Today's presentation will follow our usual format. I will cover some of the highlights; Paul Baker, our Chief Financial Officer, will then review our financial results, before I return to discuss progress of our wider strategy. As always, we will welcome any questions you may have, and we'll take these at the end of the presentation. Finally, a copy of the presentation will be available to view on the Investors section of our website later this afternoon. Turning to the headlines. Let me start by saying how pleased we are to have announced today that we have successfully concluded our debt refinancing agreement, which not only reinforces the group's strong financial position, but also creates a more flexible financial template to invest in the business and reward our key stakeholders. Furthermore, the removal of the GBP 10 million distribution cap allows us to better align shareholder distributions with our revised capital allocation policy, and we will go through this in more detail later in the presentation. Overall, we are pleased by the group's continued solid trading performance throughout the period. We delivered an adjusted operating profit of GBP 18.8 million, down GBP 1.6 million versus H1 2023, which was a very strong comparator that was boosted by events, including the state funeral of Her Majesty The Queen and the winter timing of the Men's Football World Cup, which generated an additional GBP 1.2 million of operating profit. In terms of funding, average net debt was reduced by 53% in the period to just GBP 12.5 million, with the business maintaining strong levels of cash generation. We're also pleased to report an interim dividend of 1.75p per share, an increase of 25% versus last year's interim. The business traded in line with our internal expectations and were supported by ongoing operational efficiencies alongside further optimization of our network infrastructure. We successfully commenced distribution of regional titles for Midlands News Association, alongside additional news U.K. distributions in London. And we expect to receive an additional boost in the second half driven by collectibles from the Men's UEFA European championships. Elsewhere, our teams have now secured 74% of contracted revenues through to 2029, providing visibility of contract renewals and certainty of revenues, which is critical for future planning. Most importantly, we now have good momentum in our organic growth strategy, and we expect to see the contribution tripling to GBP 2 million in the current financial year. So in summary, a very pleasing 6 months for the business, which is focused on optimizing our business operations while securing additional revenue opportunities, which complement the core business. I'll now hand over to Paul, who will discuss the first half financial results in more detail.

Thank you, Jon, and good afternoon, everyone. Starting with the financial headlines. Revenues decreased 1.9% in the half, ahead of the historic norm of a 3% to 5% decline, which we have previously guided to. Price increases have continued to support revenue and partially offset volume decline, although these increases are expected to slow in the second half. The second half will see the benefit from the Men's Euro Football Collectibles and the start of the new wholesale contracts announced last year. Adjusted operating profit decreased by GBP 1.6 million to GBP 18.8 million, of which the royal succession and the 2022 Football World Cup contributed GBP 1.2 million. In addition, softer waste prices impacted the sale of magazine waste by GBP 0.9 million, which was offset by the continued expansion of our growth initiatives, which increased by GBP 0.7 million versus half 1 2023. The operations team continues to focus on our cost-out initiatives and have delivered GBP 2.4 million of savings in the half, which along with GBP 0.7 million of overhead savings have helped offset inflation. With the benefit of the 2024 Euro Football Collectibles in the second half, the results are in line with plan, and we are confident of delivering full year expectations. Adjusted earnings per share is down 0.7p, of which 0.4p is due to an average lower shareholding in our employee benefit to us. Free cash flow is in line with expectations and ahead of last year due to the timing of our customer payment, which last year came in just after the reporting period. The interim dividend, as mentioned, is proposed at 1.75p, an increase of 25%. On to the adjusted income statement. Below operating profit, net finance charges in the period are down GBP 0.4 million, driven by the continued reduction in the bank debt. Profit before tax was down GBP 1.2 million at GBP 15.9 million as a result. The tax charge of GBP 4.1 million reflects an effective tax rate, which has increased to 25.8% due to the rise in the main rate of U.K. corporation tax to 25% in April 2023. Profit after tax of GBP 11.8 million is, therefore, GBP 1.5 million lower than last year, and this has reduced adjusted earnings per share by 0.3p. The remainder as mentioned, was due to lower owned shares held by the company. Free cash flow for the half was an inflow of GBP 4.2 million and compared to a small outflow last year of GBP 0.2 million. In the first half of the year, we have a working capital outflow, which is part of our normal working capital cycle and the GBP 6.3 million better than last year due to timing of the large customer payments. As a result, our free cash flow for the full year will include the impact of the 53rd week and we'll, therefore, include the publisher payment, we can make at the end of the calendar month leading to a full year working capital outflow. Capital expenditure of GBP 1.9 million is slightly lower than last year. As Jon will outline later, having now completed our refinancing and as part of our overall strategy, we aim to increase our investment in the business by up to GBP 2 million per annum for a 3-year period before returning to GBP 4 million per annum thereafter. The majority of this expenditure has positive returns to our growth and cost out programs, with the remaining amounts representing investment in our facilities. Lease payments have reduced GBP 0.5 million year-on-year due to the exit of 1 lease and the timing of renewals. With inflationary pressure, I would expect full year lease payments to be circa GBP 7 million when all of the leases have been renewed. Net interest and fees are slightly down than 2023 by GBP 0.3 million, driven by lower net debt and the impact of cash from the existing items was a small of GBP 0.2 million. Ag net debt continues to reduce, and the business generated GBP 21.5 million of cash flow before working capital and dividends in the last 12 months. Over the last 2 years, we have focused on average net debt as a headline measure as reported net debt is impacted by the timing of our working capital cycle. Average net debt has reduced from GBP 26.3 million for the first half 2023 to GBP 12.5 million in 2024, a consistent level of cash flow between GBP 20 million and GBP 25 million for the last 3 years allows the business to reduce debt with certainty. Turning to the refinancing announced this morning. We have in place now a facility which matches the key requirements of our business model, reduces costs and enables management of our intra-month working capital cycle. The facility also provides flexibility in the uncommitted accordion to support any bolt-on acquisitions identified in implementing our strategic ambitions. Before briefly taking you through the details of the facility, I would, on behalf of the Board, Jon and the business, like to thank all 4 banks in the old syndicate for their support of the business over the last few years. The principal facility is a GBP 40 million revolving credit facility designed to meet our working capital cycle and enable us to support investment, both in the news and magazine business and in our strategic growth objectives. The tenor of the facility is based on a 3 plus 1 plus 1, whereby subject to lender's agreement in each of the first 2 anniversaries the facility could be extended. The margin of 2.45% is 155 basis points below that of our previous facility. As Jon stated, the previous distribution restrictions have been removed. And this is to enable the best to revise its capital allocation policy. Turning to that policy, which is detailed on this chart and was included in both press releases issued this morning. The business has worked hard over the past few years to rebuild a strong balance sheet, and this will remain the cornerstone of the business model. We will continue to invest in the news and magazine business and organic growth activities. And as I mentioned earlier, we will see an increase in CapEx over the next 3 years as we ensure we have the capabilities to meet our customer needs. As part of our strategic plan to build on our organic growth platforms, we will look at potential bolt-on acquisitions. But as in 2023, when we walked away from a potential deal, we will be disciplined and seek clear accretive returns. Importantly, the new financing facility enables the Board to implement the previously stated 2x cover policy for dividends. The removal of the distribution capital also allows the Board to consider further capital returns to shareholders. I'll now hand back to Jon.

Thanks, Paul. Turning back to the wider business. I want to spend the next few slides giving a recap of both our strategic priorities and the group's ongoing progress. Let's start by reminding ourselves of the headlines. Smiths News is a long-established track record of delivery. It is very pleasing to deliver another set of solid financial results, built on ongoing efficiency gains, strong cash generation and a growing contribution from organic growth in adjacent markets. Our standout headline however has to be the successful conclusion of the group's debt refinancing, which Paul has already covered off in detail. Ultimately, this new agreement provides flexibility across our capital allocation policy, which is directly into generating ongoing value for our shareholders and broader stakeholders. The business has continued to mitigate the impact of inflation in line with plan, and our teams have maintained a clear focus on optimizing our network and processes. Sales have continued to outperform the historic trends of minus 3 to minus 5. And importantly, we continue to build momentum with our growth strategy and are on plan to triple its contribution year-on-year. In all, a very pleasing outcome across a high number of strategic fronts. Many of you will be familiar with this slide. It clearly captures the 3 core elements of our strategy. Firstly, we remain focused on our core business to ensure we continue to serve our customers with a highly efficient service proposition whilst generating reliable profits and cash. Secondly, we will seek to further leverage our capabilities across new and complementary markets in a measured and highly methodical way as we are building out from a very solid newspaper and magazine business. And finally, we are committed to delivering for all stakeholders by both meeting the needs of the business, our clients and customers and providing attractive returns for our investors, which is underpinned by a strong balance sheet. To remind everyone, we have resecured 74% of our newspaper magazine revenues until 2029 with the remaining material contract discussions making good progress. This degree of revenue visibility provides both stability and assurance of revenue and future cash flows from our core base and allows us the certainty of the backdrop against which to introduce operational efficiencies. It also enables us to plan our growth services with 4 foresight of the distribution network for the foreseeable future. It is this base that underpins our confidence as we seek to further broaden our revenues going forward. Importantly, we also plan to invest in enhanced technology capabilities, predominantly in our warehouse and final mile services. These investments will enable the business to continue to meet the needs of our existing clients and customers drive efficiencies and give enhanced capabilities to apply growth opportunities. Whilst our news and magazine markets continue to be robust, it is a fact that we are handling volume each year. This creates excess capacity, some of which we utilize as part of our efficiency program and some of which we utilize to provide complementary news services to our existing customer base. In short, we are able to provide highly cost-effective pick, pack, distribution and reverse logistics services with a higher level of margin contribution than would be the norm. Over the last months, we have laid further customers to the new services we have previously outlined. To give a little more color on this, we are now providing our recycled collection service to circa 5,000 customers, up 25% over the last 6 months. We now have 2 supermarkets that we service with a supply chain solution for books and home entertainment products. In addition, we continue to grow a number of final mile delivery clients we work with, and most recently added a national retailer to that list. Pleasingly, our service levels are landing well in these markets. And as each offers more scale, we are using our methodology of trialing and reviewing to further refine the offers we present and the way we execute to both improve quality and efficiency. I look forward to providing a fuller update at the full year. A critical pillar of our strategy is to continue to deliver for all stakeholders. You will have heard me talk in the recent past about the great progress we have made on reducing our debt, renegotiating extended contracts with our clients, our pleasing colleague engagement scores and our sustainability commitments and the progress in that area. To date, we have announced a new refinancing agreement, which will enable us to continue to deliver on that stakeholder promise. Our new agreement, when aligned to our revised capital allocation policy will enable us to invest in our business, improve our service for clients, customers and colleagues and further reward our investors. We believe, therefore, that our new finance agreement and revised capital allocation policy is good news for all stakeholders. So to summarize, we have made a very solid start to the current financial year with clear progress made across all key business imperatives. Our core markets remain resilient, and we have good momentum in our areas of growth. Debt continues to reduce and our revised capital allocation policy will be good news for all stakeholders. All of this is only possible because of the dedication and great skill of our Smiths News colleagues and indeed, our broader business partners. We remain on track to deliver results in line with full year expectations, and I look forward to updating you again later in the year. Now on that basis, Paul and I are now happy to take any questions you might have.

Perfect. Jonathan, Paul, thank you very much for your presentation. [Operator Instructions] 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 our investor dashboard. As you can see, we have received questions throughout today's presentation. And Jonathan, Paul, 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, Alexandra. All right, I'll start with the first question that came in, which is from Simon H. As ever, some very good results, well done. Thank you for that. And then do you see debt reduction as a priority in capital allocation of increased dividend? And how does the Board view the balance here? I think we've just concluded the refinancing this morning. So first of all, we're really pleased to be able to implement the 2x dividend policy that we've now announced and then increase the interim dividend. Ideally, we'd like to continue with our strategy to diversify the business and grow the business organically and, if possible, inorganic growth opportunities, and we'll continue to review those options. And clearly, the Board will continue to look at where we are going forward. But early days yet, having just refinanced this morning. Gavin L., again, a great set of results. Well done. So thank you. His question really is what could go wrong? Jon?

So what are the risks, I guess, is the question in H2. Good question. We still have some further cost to take out of the business. And whilst we have clear plans for that, it's never given and we never take it for granted that it will be done. So clearly, we still have that to do. Although I would always remind you of our strong track record in that area, but until it's done it's not done. We have some sales are baked in for the performance from the euro. And again until that format takes place, we won't know whether all of the help have been achieved or not. And of course, we've got some further growth to come from our adjacent categories. And again, until it's delivered, you never know. But as I sit here today with Paul, I think we look at the full year number with a degree of confidence, but recognize that until those 3 things are delivered, we don't have certainty.

Thank you, Jon. The next question is from Simon C., who said, you mentioned the European championships. Could you expand on how you plan to use the tournament to enhance performance in the second half of 2024.

Yes. This is certainly a budgeting piece. I mean we saw it take place in the second half and the sales of that, which we assume will be similar to the Winter World Cup of 2022 will fall into that period. So naturally, that will give us a benefit in H2 that we didn't have in H1.

Yes. And that was part of the swing factor that you saw in half 1, given the World Cup last year was in the winter as opposed to the normal summer. So that was one of the things we tried to explain to the impact on profit half-on-half, but that's the one that gives us confidence that our full year expectations are in line with plan. Simon H., are there any particular service offerings that customers often asked for that you don't currently provide?

I wouldn't say they were necessary service offerings. What I would say is the progress we're making both in the adjacent categories for books and home entertainment product. And indeed, with recycled has enabled to have different conversations with our retail customers that whether there are per additional categories that we can provide, for example. So I think it's less likely to be a completely different service offering for our existing customers and more likely to be things that are adjacent to what we do now.

Thanks, Jon. And then Gavin L. come back with it. Our institutional investors wanting Smith to be a growth or income stock. It's a great question. Institutional investors don't have to all align on their view. It's fair to say given the fact we are in a declining sector currently, the income is important for our investors, and we will continue to ensure we are clear about our dividend distribution and maintain that. I think when we said that we look at diversification, and inorganic growth, we always said that we wouldn't put the balance sheet or the dividend at risk. So maintaining that income for people is important to us, and we know it's important to them. But we do have some shareholders who would like us to invest in growth and provide longevity of profit. And we're looking to do that and to reward them as well over time.

Yes.

So [indiscernible] C. Could you comment on the issue of shortage of drivers and staff.

I think it's really probably a broader question around what's the market like for recruiting right now. From a driver perspective, you know that we have a subcontractor model. So we don't deploy all our own drivers, we have subcontracted drivers. And that picture is much, much better than it was, say, 2 or 3 years ago. And what we really see now is geographic differences. So it's suffering certain geographies to recruit drivers, but it is in others. But generally, that market is better than it was 2 or 3 years ago. From a colleague perspective in terms of people working either in the offices or in the warehouse, yes, that market has come back quite a lot over the last couple of years, and we don't see the shortages that many businesses are experiencing not that long ago.

Thanks, Jon. The next one is about the deposit return scheme. And are we investigating potential opportunities around that, which is currently delayed to October '24, we have had our discussions about it, didn't we?

Yes. I mean I think it's something that we've looked at. I'm sure lots of businesses have but it's very much moved into the medium term is something we're considering, again, in due course. But it's not something we're currently expanding too much energy around.

Thanks. And then Peter asks, does your capital allocation potentially include a buyback program. I mean, we haven't -- I think we say we haven't ruled anything out. One of the tweaks the capital allocation policy that was published in May '21 was to be more broad about the further distribution opportunities for the Board. I think previously, we've said any set of cash will be distributed as specials, and we're being more on that basically because our shareholders have a mixed view of what would be a sensible distribution piece the Board would consider all including in potential buybacks in the future. And then [indiscernible] C., could you also comment on the progress of distributing third-party goods to retailers? I understand you are now distributing some energy drinks, chocolate, et cetera. What's the response so far? It's a good question.

Yes. Good question. So yes, we've been doing that for a little while now. We've got circa 3,000 customers that we send additional products to and as you say, energy drinks and the like are good examples of that. For us, logistically, and this is relatively straightforward in as much as it plays to our core strengths of warehousing, the pick, pack, final model reverse logistics piece. The challenge for us is to make sure we find the right products for our customers. And by that I mean, it's obvious for many of our independent customers that they can see product cash and carry. And therefore, we have to offer them alternative products then they may not identify for themselves or indeed may not want to go and get from a cash and carry. So we're working with 2 or 3 different partners there to identify the right products because our sweet spot is logistics piece, it's not the procurement piece. So yes, more to come from this, I'm sure, but at the moment, 3,000 customers had maintained a contribution to our growth number, although it's not the largest part.

Thanks, Jon. And that was the last question, one more coming in from John B., have you identified possible acquisitions from?

Good question. We're constantly looking at the honest answer to that. There is nothing imminent. It's fair to say, but we are constantly looking. But we're being very choosy, very thirsty about the sort of thing that we think will genuinely add value to our business and enable us to expand out from the areas of growth which we expand out into. So if we think we can have scale and capability to the operation that we've got, then we're definitely interested. But as I think you've had been said many times before, we've worked very hard over the last 4 years to improve balance sheet, and we're not going to do anything in the short term that puts out at risk. So as far as we're concerned, protecting the balance sheet, rewarding our investors are really, really important parts of our strategy. We will look for acquisitions, but they will be small and relatively volatile.

Perfect. Jonathan, Paul, I think you've actually managed to answer all the questions for investors. And of course, the company can review all the questions that have been submitted today, and we'll publish those responses on the Investor Meet company platform. But just before redirecting investors to provide you with their feedback, which I know is particularly important to you both, Jonathan, could I please ask you for a few closing comments?

Yes. I mean once again, thank you, everyone, for taking the time to dial in and listen to our story and the progress we're making. We're really pleased that this is the fourth year on the through now we're able to stand in front of you and talk about the fact that we delivered numbers, at least in line with expectations, if not enough in that balance. I think the refi is actually really good news for all stakeholders. And I hope you feel that too. And hope you're encouraged also by the 300% growth we're seeing from growth. It's an important part of our business strategy going forward and it's important we have got that momentum. Underlying all of these guys is we've got a very solid news and magazine business with relatively low amount of debt and lots of free cash. And the new capital allocation policy gives us great flexibility to how we deploy that. So thanks once again for listening in, and I look forward to updating you at the full year.

Perfect. Jonathan, Paul, thank you once again for updating investors today. Could I please ask investors not to close the 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 moments to complete, and I'm sure will be greatly valued by the company. On behalf of the management team of Smiths News plc, we'd like to thank you for attending today's presentation, and good afternoon to you all.