Smiths News plc (SNWS) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Welcome to the Smiths News plc Full Year 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 questions submitted today and will publish their responses where it's appropriate to do so. Before we begin, we would like to submit the following poll. And if you could give that your kind attention, I'm sure the company would be most grateful. I would now like to hand you over to the executive management team from Smiths News plc, Jon, good afternoon, sir.

Good afternoon, and good afternoon, everyone. Welcome to Smiths News full year results for the period ended the 31st of August 2024. I'm Jon Bunting, CEO of Smiths News. And with me today to talk through our full year results presentation is Paul Baker, our CFO. Before I get into the detail of the results, I'd like to take a minute to briefly highlight the main headlines and give a flavor of what we will cover later in the presentation. First and foremost, I'm delighted to confirm that our full year results reported today are ahead of market expectations driven principally by improved revenue in news and magazines and the contribution of our growth activities. This excellent outcome has been built on another resilient performance from our news and magazine business, which continues to both underpin and sit at the heart of our developing strategy for growth. Pleasingly, we've now secured over 90% of publisher revenues until at least 2029, providing stability for the business and surety of revenues across the medium term. The remaining revenues typically operate on shorter-term contracts or arrangements. Meanwhile, our focus on growth continues to gather momentum. Our established expertise fits squarely within the needs of the growing early morning market, and we're seeking to leverage our existing network and proven capabilities in this space to build out and expand our services. And though it's early days, we are seeing good progress with GBP 2 million of company profit generated in the period from these efforts. I will revisit this again later in the presentation as we seek to implement our vision to become the U.K.'s leading provider of early morning end-to-end supply chain solutions. We also announced our new refinancing agreement in May this year, which removes restrictions on shareholder distributions and allows the company to implement its capital allocation policy. To that end, we are delighted to announce a proposed final dividend of 3.4p and a special dividend payment of 2p, taking total dividends for the year to 7.15p, up 72% year-on-year. And now I'll hand over to Paul, who will talk you through the financials.

Thank you, Jon, and good afternoon, everyone. I'm pleased to report a good set of financial results and, following the refinancing in May, the implementation of our capital allocation policy, which has increased distribution to shareholders. For the financial headlines, revenue was up 1.1% to GBP 1.1 billion, benefiting from the men's European football championships, increased contribution from our growth activities and the 53rd week of trading. As a result, adjusted operating profit was GBP 0.3 million higher than last year at GBP 39.1 million. Adjusted EPS was 0.5p, less than last year despite lower interest costs due to the higher U.K. headline tax rate. Free cash flow of GBP 7.3 million was GBP 14.5 million lower than last year but impacted by an expected net cash outflow of GBP 15.7 million during the 53rd trading week, which was part of our normal working capital cycle. Average bank net debt, which is a better measure of our net debt trend, continued to reduce and was GBP 11.7 million, 53% lower than last year. As Jon mentioned, dividends are proposed at 7.15p, a 3p increase on last year. The full year ordinary dividend is proposed at 5.15p, which represents 2x cover, in line with our capital allocation policy, and is augmented by a special dividend proposed of 2p per share, both to be paid on the 6th of February 2025. Moving on to revenue. Revenue of GBP 1.1 billion was up 1.1% on the prior year and included a 1.9% benefit from the 53rd week and a 2.3% benefit from the new contracts we announced in December. Newspaper revenues were again supported by cover price increases, although these continue to impact volumes. Growth activities, while showing significant increases year-on-year, represent a relatively small part of our overall sales. Underlying revenue from collectibles decreased by 13% this year partly driven by a weaker performance from the current Pokémon series. Sales are now back in line with their pre-2022 levels after a very strong period last year. While the overall revenue decrease was just below the historic trend of minus 3% to minus 5%, our medium-term view of a minus 3% to minus 5% decline on newspapers and magazines still holds. Adjusted operating profit was GBP 39.1 million and includes a GBP 0.9 million benefit from the 53rd week of trading. We had a good contribution from the men's European football championships. This contributed about the same as the Royal Succession and the men's football World Cup in total last year. Cost out plans delivered GBP 5.6 million of savings, partially offsetting the combined impact of margin decline and inflation, which remains high compared to historic levels. Encouragingly, though, our growth initiatives delivered a contribution of GBP 2 million, an increase of GBP 1.3 million on last year. Net finance charges have reduced by GBP 0.6 million due to lower average debt. Profit after-tax of GBP 24.7 million is GBP 0.9 million lower than last year and includes the impact of the higher U.K. corporation tax rates. This also had an impact on the headline EPS, which reduced to 10.3p. Continuing free cash flow for the year was GBP 7.3 million, although this includes the net GBP 15.7 million cash outflow in the 53rd week, which was part of our normal working capital cycle. We shall outline the impact of our working capital cycle on reported results in more detail in a moment. Capital expenditure at GBP 4.4 million was higher than last year due to our depot refurbishment program and the start of our technology upgrade programs. As we mentioned at the half year, we anticipate investment spend increasing by around GBP 6 million over the next 3 years before dropping back to a run rate of about GBP 4 million per annum. Lease payments were GBP 0.2 million lower than last year due to the exit of one lease and another lease which was downsized. We have signed several renewals in the final quarter and expect lease payments to increase above GBP 6 million again next year. Net interest and fees are lower than in 2023 due to the lower average net debt partially offset by the impact of refinancing fees. The cash impact of adjusting items were GBP 0.4 million. The outflow was higher in the prior year due to the cost of the aborted M&A. The impact of the 53rd week on our reported net debt and cash flows was a net outflow of GBP 15.7 million driven by payments made to our publishers at the end of the calendar month. This is part of our normal working capital cycle and consistent with the GBP 15 million to GBP 20 million net outflow in the last week of August. As we have previously disclosed, our working capital cycle can swing by more than GBP 40 million within a single month, depending on the timing of receipts from large supermarkets and the calendar month-end payments to major publishers. While average net debt is closer to GBP 10 million, we have also designed our banking facility, which has a limit of GBP 40 million to cope with our normal working capital swings. On to Slide 10, which shows the movement in average net debt and dividends paid and proposed over the last 4 years. We have seen average net debt reduce by 87% to GBP 11.7 million since fiscal year 2021. We continue to generate a consistent level of cash flow of between GBP 20 million and GBP 25 million. This enables the business to plan with confidence and implement the key tenets of our capital allocation policy, which include maintaining a 2x dividend cover, investment in news and magazines and growth, and then considering further returns to shareholders when appropriate. The bars on the chart show the development since 2021 of the dividend we have declared. Dividends in 2021 to '23 were restricted by our banking covenants. The GBP 17.2 million we proposed to pay in relation to fiscal year 2024 is enabled by the renegotiation of those facilities in May earlier this year. This is made up of a GBP 12 million ordinary dividend, a 24% increase on the prior year. In addition, the Board are proposing a GBP 5 million special dividend. Finally, I thought it was worth sharing our capital allocation policy again, which is detailed on this slide. Policy seeks to maintain a strong balance sheet whilst allowing investment for the future and returns to shareholders. As highlighted on the previous slide, the RCF facility enables the business to manage its normal borrowing peaks throughout the year. It outlines our commitment to the newspaper and magazines business and our measured approach to organic growth and M&A. The immediate impact of the policy can be seen in the dividend proposal that we have made this year with a 2p special dividend alongside the 2x ordinary dividend. I'll now hand back to Jon.

Thank you, Paul. Before I delve into a little more detail about our operational and strategic progress, I wanted to first outline our vision for the business, along with our purpose and capabilities enable us to achieve our aims. First and foremost, we believe that we can consolidate Smith News' position as one of the U.K.'s leading providers of early morning end-to-end supply chain solutions. Our long-established news and magazine business forms the foundation of this vision and all of our research, and indeed, recent trials, demonstrate that there is a real opportunity to expand our services further using our proven experience, expertise and network. Secondly, our aim is to make the lives of our customers easier and just as importantly, more profitable. We want to ensure that our unique operational footprint, skill set and position as a trusted service provider enables them to focus on what they do best. And lastly, it's our existing capabilities that will ultimately provide the backbone to our success, delivering end-to-end supply chain services that draw on our significant experience in warehousing and reverse logistics and our early morning final-mile presence, which leverages our extensive high-density U.K. delivery footprint. Our strategy is clear: to consolidate our position as one of the U.K.'s leading providers of early morning end-to-end supply chain solutions. There are three main strategic levers that will allow us to successfully deliver on our ambitions. Firstly, to continue to support our well-established news and magazine operations. This is the foundation of the business, and I'll come on to talk about our 3-year investment plans in due course, which underline our long-term commitment to news and magazines. Secondly, we plan to build out and expand into the early morning final-mile vertical. This is an area that covers both final mile and reverse logistics where we have proven capabilities. We believe there are significant opportunities for Smiths News in this area. Lastly, our plans for both the existing news and magazine business and additional growth areas are enhanced by our flexible and asset-light business model. This underlying flexible structure provides the group with an agile platform to maximize future opportunities. In summary, we believe there is a significant opportunity to deliver on our growth ambitions, which are a natural extension of our established reputation as a trusted partner across the early morning news and magazine supply chain. With this strategy in mind, I'd like to take a closer look at the performance of our news and magazine activities and why this long-established business remains at the heart of our strategic vision. Our news and magazine operations produced another resilient result in the period, with revenues demonstrating a stable performance versus comparative years against the backdrop of slowly declining market. Furthermore, we have now secured 91% of the news and magazine revenues to at least 2029. This not only provides predictable revenue visibility for the business but also allows us to manage our cost base. A reminder that our asset-light flexible business model is made up of leased warehouses and largely third-party contracted delivery partners. This asset-light model enables us to flex our cost base to match the reduction in news and magazine volumes and the increase in growth activities and provides a significant opportunity to further grow revenues and expand our footprint. Running alongside this strategic intent is a firm commitment to continue to deliver on our service excellence. Historically, Smiths News has maintained a relatively low CapEx model, typically deploying circa GBP 4 million per annum. Over the next 3 years, we plan to increase our spending, allocating a further GBP 2 million per annum to both future-proof the business and further support our growth ambitions. During this period, our investment will reinforce our established capabilities with the implementation of a new warehouse management system and a new transport management system alongside continued investment in facilities. Crucially, this investment will not only serve our existing customers and markets but will support the company's ambitions for organic growth initiatives, which are reliant upon our maintaining our market-leading reputation in the delivery of news and magazines and early morning services. So looking more closely to our strategic intent. We first began articulating a building out from our news and magazines operational base around 2 years ago, and we are delighted to report that the business generated GBP 2 million of operating profits from these activities. Over that period, we've sought to explore opportunities that capitalize on our expertise, in particular, the window from 2 a.m. to 10 a.m., when our final mile and reverse logistics operations are at the most active and importantly, our economics are at their strongest. It is by expanding our activities within this time-sensitive window for which we already have decades of proven competency that we believe we can create the best opportunities to deliver above-average margin returns. Smiths News recycling is one example that has been put into practice, and I believe there is significant scope to both increase our recycling operations whilst also replicating its success across other verticals. As mentioned in the previous slide, the early morning window is where we believe we can fully leverage our established capabilities and unique operating model. We have commissioned research, which suggests that this market is worth circa GBP 5 billion, of which GBP 1.3 billion can be serviced by ambient vans. Following further work, we believe this market offers a total profit opportunity for Smiths News of GBP 160 million. We have identified three target verticals within this addressable market: final mile, recycling, and new categories, all of which represent material opportunities for us to expand our revenue and profit base with a greater degree of scale. We are currently most advanced in the recycle vertical, and I'll touch on that in more detail shortly. As you will be aware, we're already delivering books and home entertainment products to two of our scale supermarket customers, and we believe we can expand both the number of categories and the number of retailers we apply this to. Finally, we have a building pipeline for potential final-mile customers who value our early morning capability and reach. A prime example of our progress in broadening out our revenue base is our growing recycling profit stream. We have decades of experience in collecting and processing newspaper and magazine unsold, or returns, as they are known in our industry. And our team have been successful in harnessing this expertise to develop an integrated recycling service, which processes paper, soft plastics and bulky cardboard. We currently service over 5,000 customers for our existing network. From a standing start, we now provide recycling services across more than 900 routes. We're collecting over 28,000 bags each week, and we're processing over 2,000 tonnes of cardboard and 220 tonnes of plastic a year. Fundamentally, we believe we can do more with this service. Demand for recycling services is extremely high early in the morning, and we are well placed to increase our customer base and range of services. As such, we plan to start marketing our services beyond our established existing retail footprint. And it's clear there is more we can offer in terms of both collecting and sorting high street recycling. In the short term, we expect to see above-average margins by overlaying these services across our existing network and leveraging our existing assets. We spent time evaluating the economics of this market and believe it could be worth circa GBP 230 million in revenue, is growing at circa 3% to 5% per annum and offers an EBITDA profile of 10% to 15%. We look forward to updating you all on the progress over the next 12 months and believe our recycling activities have created an ideal blueprint for how we plan to grow the broader business. So turning to the outlook for the year. Importantly, we've made a good start to the current financial year with trading in line with market expectations. The refinancing agreement announced in May enabled us to implement our capital allocation policy, which can already be seen in the form of our special dividend proposed today. Our ongoing cost-out program continues to deliver savings to plan, and we've commenced a 3-year investment program designed to support our news and magazine activities in addition to our growth ambitions. With 91% of existing publisher revenues now secured until 2029, we have both the confidence and revenue visibility to proactively invest in our future. This confidence is already evident through the increasing contribution from our growth initiatives, some of which we've been able to talk through in greater detail today. I'd now like to thank you all for listening, and Paul and I are happy to take any questions you may have.

Perfect. Jon, Paul, if I may just jump back in there. And thank you very much indeed for your presentation this afternoon. And if I may, what I'll do is just bring back up your cameras there. [Operator Instructions] Just while the team takes a few moments just to review those questions that were submitted already, I'd just like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A can all be accessed via your investor dashboard. Guys, as you can see, we have received a number of questions throughout your presentation this afternoon, and thank you to all of those on the call for taking the time to submit their questions. But Paul, Jon, if I may, at this point, hand back to you just to read out those questions and give your responses where it's appropriate to do so. And then I'll pick up from you at the end. Thank you.

Yes. Thanks very much. All right. So first question, Jon, from [ C. Hill ]. This is about collectibles. And can I ask any view of the trend of the collectible revenue? Is the 13% decline reported mainly due to Pokémon card sales?

Yes. Okay. Good question. I mean I think the first thing to say is we still see the collectible market as a very attractive market for both ourselves and our retail customers. Sales were a little softer this year than in previous years, and Pokémon underperformed from a year-on-year perspective. But in reality, not all of that 13% was directly attributed to Pokémon, that's for sure. And actually, we're still really confident that both Pokémon and football will continue to have material revenues coming in from those areas for many years to come. So yes, a slight decline year-on-year, but it's not something that we are concerned about at this point.

Yes. I mean it's worth mentioning, I think we had a really, really strong year last year. So we're just back at 2022 levels, right? So this isn't a decline in the sector. We just had a really strong year last year. A question from Simon. Well done again on a good set of results. So thank you, Simon, for that. The broker note talks about a potential market for ancillary growth opportunities that seems substantial. What do the Board see as the biggest challenges to gain further traction with these opportunities, Jon?

Yes. Good question, Simon. Thank you. I mean, hopefully, you found the presentation interesting in terms of laying out the size of the potential opportunity for us in the early morning space. It's certainly something we're excited about. I think our core competencies of early morning, final mile, reverse logistics and warehousing is what we've been doing for decades, frankly. So building out is a natural thing to do. What's the biggest challenge? That's a really good question. I would say, ironically, if you think about where we've gotten over the last 2 years, what we've been able to do is sell broader services and products to our existing retail customers. And what we need to do going forward is be able to apply that logic to customers we don't currently trade with, to retailers we don't currently trade with. So we need to test ourselves and our selling skills with retailers that we don't currently have a relationship with. And that's probably the single biggest challenge we've got in the short term.

Thanks, Jon. And then a question around our delivery structure. So given the fact that we've got our structure in place, why focus on early morning delivery? Why not on a broader range of products? I think we've been quite clear in the strategy that, that early morning space, 2 till 10, is where we, I guess, see the best opportunity.

Yes. I mean I think, in reality, that is the reason we are choosing a 2 till 10 space is because that's when we are currently most active, and that's when our economics are the strongest, and therefore, that's where we believe we'll be the most competitive. And if we go beyond that 10 a.m. delivery time, then actually we start to move into the mass market and lots of other parcel carriers who, frankly, will have better economics than us as the day progresses because we would not naturally be going out delivering any products at that point. So for us, it's all about the early morning, leveraging our competitive space, leveraging our unparalleled economics, we think, in that early morning time of 2 a.m. to 10 a.m. and that's why we're very focused on news and magazines, recycle, new categories and early morning final mile.

Thanks, Jon. Another question here back to news and magazines, actually. Do you see a trend line change in the volume decline in news and magazines? At what percentage of group volumes might it stabilize and, in parallel, with book sales? Well, I think the good news for 2024 is we have seen the volume reduction in magazine soften. So we haven't seen quite the level of decline we've had in previous years. That improved in 2024. I think it's fair to say newspaper volumes were just the same as it's been historically, around an 8% to 10% decline, so they haven't really changed. But magazines did seem to have a stronger year. Whether or not it has any [ read ] across the books and whether or not it plateaus, that's a crystal ball I don't have. Let's hope so. On to the next question from Andrew around, what services can we describe that we provide on the final mile? And can you be specific about what the new categories consist of?

Sure. So if we do those in reverse order, so we're currently delivering books and home entertainment products to 2 of our scale supermarket customers, and we're about to commence a trial in the independent, with our independent customers for greetings cards. So that's 3 new categories there that I can instantly talk to you about. And in terms of what are we doing from an early morning final mile, well, our focus is very much B2B, not B2C. So we're not looking to do parcel deliveries to domestic addresses. Rather, we're delivering products to retail businesses principally early in the morning. And that varies. But typically, it's ambient products that are suited to the types of vehicles that we have.

And then I think it's a question for you, Jon. Gavin asks, inventory management, room for improvement? I mean it's fair to say, our stock levels have increased, and that's largely driven by the new categories that we've put into and we're having to hold numerous different sites. So we've got 3 locations where we hold the stockholding of our books to enable us to distribute them to the locations we're delivering to. It's fair to say we will look to optimize that as best we can going forward. And certainly, the investment in our warehouse management system will help us manage our stock profile and ordering profile to the best we can. So yes, but probably not immediate, Gavin, on that one. And then a question from James around our delivery fleet. What percentage of your delivery fleet is electric? And do you have any targets for when to transition completely. I mean I'll pick up on that briefly. We set ourselves a target for our owned cars and vehicles, and they're largely hybrid now. We have some electric. They're all converted away from diesel. The actual delivery fleet, however, they're largely contracted vehicles, so they're not ours. So clearly, we would look to work with our contractor partners to make sure it's the right sort of vehicle. But they're not ours. So we don't have an investment program in place to replace those. A question from Simon, can you just elaborate briefly on how the GBP 230 million of potential revenue from recycling was derived? Well, we've done a piece of research. A consultancy we've been working with for the last couple of months derived that by looking into the market, speaking to key providers in that space, and built up that picture. So yes, we've got some backup document for that. We think it's fairly robust about how that splits out across the different streams of recycling and even the geography across the U.K. about where that potential revenue opportunity lies. Anything to add?

No.

I think we just touched on another question from Simon on final mile opportunities. I think we've answered that one. We have a question here, another one for the crystal ball, Jon, where do you see the company being in 10 years?

Yes. Well, we set a vision for the business to be the U.K.'s leading early morning provider of end-to-end supply chain solutions. So in 10 years' time, that's where I expect us to be.

I guess linked to that, Daniel, the early morning is a bigger market but more players, as you say. What is your competitive advantage here versus all of the other players, which sort of helps us get to that vision, isn't it?

Yes. I mean I think, Daniel, this comes back to our economics. To be successful as a distribution business, you largely need to have a good reach, which clearly we have if you think about the propensity for newspapers and magazines to be sold across the U.K. You need to have good drop density, which we clearly have. And ideally, you need to have coincidence of delivery, so delivering more than one thing to the same outlet, which we do. So whether that's newspapers and magazines and now, at the same time, collect and recycle and, at the same time, delivering books or home entertainment product. So all of those things make our economics really, really attractive. And it's that economic advantage we have in the morning that I think will be compelling.

Another question from Gavin on cost pressures post the budget. And certainly, that is true, and we're highlighting that today. So clearly, the employer's contribution piece, that will impact us about GBP 0.5 million next year in 2025 and about GBP 1.2 million on a full year basis. So clearly, for everyone that has a number of people, that's the cost that you've got to look into. I mean, thankfully, I think the national living wage we've got factored into our plan, so that was broadly in line with our thinking. So yes, just a little bit extra that we've got to look at, and we'll look at our cost base accordingly, but nothing that would impact our overall free cash flow numbers, I don't think, significantly. Questions, so new ones at the end. So again, on the cost increase of the budget, which I think I've just answered that one. And then currently, the last one from Kevin, could you please describe the constraints that the bank covenants will place on future dividends? I mean there aren't any specific constraints any longer, Kevin, around dividend distribution. We have 2 covenant tests of net debt to EBITDA, which is 2.5x and an interest cover of 4x, neither of which causes any concern for distribution in the future. So I think free cash flow generation is the largest constraint about dividend distribution. I think that's it for now.

We've got one that's just popped in.

Is there scope to expand the products for delivery?

I mean I think, yes, always. But for us, we've got a criteria, which is it needs to be B2B and it needs to be early morning, and it needs to be complementary with the types of vehicles that we have. But we're always open-minded to products that we could deliver early in the morning if there's a scale market opportunity there for us.

Perfect. Jon, Paul, if I may just jump back in there. Thank you very much indeed for being so generous for your time and addressing all of those questions that came in from investors this afternoon. And of course, if there are any further questions that do come through, we'll make these available to you immediately after the presentation has ended, just for you to review and to then add any additional responses, of course, where it's appropriate to do so. And we'll publish all those responses out on the platform. But Jon, perhaps before really just looking to redirect those on the call to provide you with their feedback, which I know is particularly important to yourself and the company, if I could please just ask you for a few closing comments to wrap up with, that would be great.

Sure. Well, firstly, thank you, everyone, for dialing in and particularly for those of you that have asked the questions, which I'm sure many people will have benefited hearing the answers from, so thank you. If you're an existing investor, I hope you've been pleased with the performance over the last year and you feel that you're getting a strong return for your investment in the business. If you're a non-holder, I hope you're encouraged by what you're hearing. I hope you're as excited about the future as we are. And clearly, we've shared a bit more today about where we're taking the business and the size of the opportunity that exists in that early morning space. But thank you, everyone, once again for dialing in and for taking interest in our business, and we look forward to updating you at the half year.

Thanks very much.

That's great. Jon, Paul, thank you once again for updating investors this afternoon. Could 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 the management team can really better understand your views and expectations. This will only take a few moments to complete, but I'm sure it will be greatly valued by the company. On behalf of the management team of Smiths News plc, we would like to thank you for attending today's presentation. That now concludes today's session. So good afternoon to you all.