Smiths News (LSE:SNWS) — Interims Results

0:01 Good morning, and welcome to the SMITHS NEWS PLC Interim Results Investor Presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and can be submitted at any time by the Q and A tab situated on the right hand corner of your screen. Just simply type in your questions and press send. 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 is appropriate to do so. Before we begin, I'd like to submit the following poll.

0:30 And I'd now like to hand you over to Jonathan Bunting, CEO and Paul Baker, CFO. Good morning to you both. Yes, good morning, and good morning, everyone. Welcome to the presentation of SMITHS NEWS PLC's interim results. This presentation is being recorded, and we may well put it on our new website later this afternoon. Today's formatting content is hopefully straightforward, reflecting a good performance driven by the focused application of our strategy. And in that sense, there should be no surprises. We are, however, here to give you a bit more context around our performance and answer any questions you may have at the end of the presentation. So let's let's start with the headlines. So we've returned a good performance, delivering profit growth and a strong net debt reduction.

1:18 Adjusted EBITDA of 20,700,000 is in line with expectations with growth of 1%. Underpinning this are two key factors. Firstly, sales in the period are ahead of historic trends as the pandemic unwinds with further benefit from margin mix. And secondly, the absolute focus on delivering our business priorities, including the successful execution of our productivity plans and the mitigation for inflationary pressures. This clarity of mission combined with our market expertise is a signature asset of our business and one that has paid dividends in what could have been otherwise volatile times. Net debt at one time net debt below one times EBITDA has been achieved ahead of our target, and the interim dividend of 1.4 p reflects our ongoing confidence in the performance of this business.

2:08 The newly increased 10,000,000 annual cap on distributions in our in our revised financial agreements also gives us the flexibility for further strong cash returns for the full year.

2:22 So let's look at the underlying performance drivers. Well, firstly, core sales have clearly under underpinned our performance in the period. As the pandemic unwinds, the returns to high street and greater levels of travel and commute and commuting have helped with magazine sales and one shots and have actually helped with our margin mix too. On the other side of the coin, all distribution businesses have faced increased inflationary pressures. However, the early actions we took and our deeply embedded culture of continual efficiency improvement has meant that the net impact is in line with the forecast we made. Importantly, this has been achieved without compromise to our customer service standards, which are fundamental to avoiding waste and replication costs. Finally, an agile and proactive approach to making incremental revenue gains has helped to further mitigate some of the recent cost pressures.

3:12 So in short, it is these factors underpinned by the focus and expertise of our experienced management teams that is driving our performance in the period. I'd now like to hand over to Paul, who'll talk you through the numbers in more detail. Thank you, John, and good morning, everyone. Starting with the financial headlines. Whilst revenue was down 1.2%, this represents a resilient performance in the context of markets which have historically shown greater declines. All of the key financial metrics are favorable, including an 11% increase in earnings per share and a 45% reduction in bank net debt. In terms of the 1.2% decline in revenue, this is lower than historic levels due to the market recovering against the prior year that was impacted by lockdowns.

4:00 From a margin perspective, we have benefited from a favorable mix as monthly magazines and one shots have performed especially well. Overall, EBITDA of 20,700,000 and adjusted operating profit of 19,100,000 were both 0.2 or 1% ahead of last year. Regarding inflation, last November, we guided the market to a 2,000,000 net impact on our full year EBITDA, and we remain in line with this guidance. Looking to next year, the recent increases in national minimum wage and the ongoing high cost of fuel mean there will be inflationary headwinds facing all logistics businesses. In response, we will continue to drive our cost out program and have increased our efforts on the pursuit of additional revenues to mitigate any further impact.

4:51 Continuing adjusted EPS increased by 11% to 5.1p, driven by the improved trading and $700,000 of lower interest charge, which was the result of lower average net debt. Our free cash flow of 17,500,000 benefited from the receipt of deferred consideration from Tuffnells of $6,500,000 and the pension surplus of $8,100,000 Both receipts were used to pay down debt in line with the terms of our financing agreement. This has helped reduce bank net debt to $38,800,000 meeting our accelerated target of bank net debt below 1x EBITDA. The solid base of cash generation and the increased distribution enabled by the financing in December supports an interim dividend of 1.4p, up by 180 when compared to the reintroduced dividend of 0.5p announced in June 2021.

5:51 Turning to revenue. The 2.9% decline in newspapers and 2.6% in weekly magazines were at the lower end of historic levels of decline. Monthly magazines, however, grew year on year by 1.1%. Magazine sales are impacted by underlying consumer spending and travel, both of which have increased compared to the prior year, which was affected by the winter lockdowns. One shots have seen a much improved performance year on year supported by the return to school. In particular, continuing Pokemon sales and improved football collections have driven higher volumes. As I mentioned, not only has the increase in magazines and one shots given our revenue some resilience in the first half, they also provided a favorable margin mix, which has supported our overall trading performance.

6:43 In terms of outlook, we expect our core sales revenue to return to a decline of circa 5%, in line with historic trends. Moving on to the continuing adjusted income statement. Adjusted operating profit of $19,100,000 was up 200,000 Margin mix contributed $1,100,000 while additional revenue streams, including the utilization of warehouse space and the sale of waste paper, added a further $1,500,000 These were offset by $1,100,000 of various incremental costs in the half, including phasing and one offs, as well as the net inflationary impact of 1,400,000. Net finance charges were 700,000 lower at 3,800,000, which is the result of lower average net debt.

7:34 The effective tax rate of 20.3% was 50 basis points lower than in half one twenty twenty one due to the benefit of the government's capital super deductions initiative. Overall, profit after tax increased by 800,000 to 12,200,000, and as a result, earnings per share increased by 11% to 5.1 p.

7:59 This next chart shows the reduction in bank net debt over the last twelve months from $70,000,000 in February 2021 to $38,800,000 in February this year, which supports a reduction in leverage from 1.8 times a year ago to naught point nine times at the half. While we have benefited from $14,600,000 of one off receipts, we have a strong underlying cash flow, which was $20,600,000 over the last twelve months. It is worth noting the impact of timing on our net debt position. While cash flows are predictable, reported bank net debt in the current year and the prior period benefited from the timing of circa $20,000,000 of publisher payments, which fell due in fell due in the following period.

8:49 Average net debt decreased by 34% year on year to 59,000,000, having only included three months benefit of the pensions credit. As you can see, cash dividends in the last year were only 4,000,000 compared to the opportunity to distribute up to 10,000,000 going forward. Since the half year, the company has received a payment of 7,500,000 in final settlement of the deferred consideration from Tuff North. The board, mindful of the current macroeconomic climate, agreed to receive a discounted amount ahead of the two scheduled installments, which would have concluded in May 2023.

9:28 This receipt will be used to further pay down bank debt as per the finance agreement. Moving on to the detailed cash flow. Free cash flow increased by $12,900,000 to 17,500,000 benefiting from $13,600,000 of adjusting items. Working capital outflow was $3,000,000 higher than last year due to the timing of receipts from the major supermarkets, which fell into the first week of March. Underlying working capital movements are consistent with the prior previous years. Lease and tax payments were both impacted by the timing of quarterly payments and increased by $400,000 and $600,000 respectively. Capital expenditure of $1,200,000 remains lower than our anticipated run rate of 10% of EBITDA.

10:19 This is largely the result of our operational focus on mitigating inflation in the first half, and we expect some catch up on our depot refurbishment plan in the second half. Net interest and fees are $1,100,000 lower than last year, driven by the lower average net debt. Other adjusted items of $1,000,000 was $1,600,000 lower than last year as the first half of twenty twenty one included the payment of restructuring and redundancy costs from the sale of Tuff Mills. And finally from me, as we have mentioned before, a brief update on the change to the headline performance measure the business will use from the full year 2023. We will move from the current measure of adjusted EBITDA pre IFRS 16 to adjusted operating profit.

11:11 As a reminder, this is the number you will see on our income statement and will be familiar with from the slides just shown. We feel it is important to move away from the historic measure based on old GAAP, and the change will continue to enable the business to focus on operational performance with the impact of leases through depreciation. The key reconciling items are listed, and we will continue to provide reconciliations as we go into the full year results expectations for 2023. Before I pass back to John, I should conclude by saying I'm very pleased to present such a strong set of results with performance measures across all KPIs in the in in positive in my first set of results. While there will no doubt be challenges ahead, this is a good foundation on which to build future performance.

11:58 So now over to John, who will cover our operational progress and outlook. Thank you, Paul. So I'd now like to spend a little bit of time looking at our progress we've made to broaden the the to the broad priorities that we published in November last year. At that time, we said we'd be very focused on service and efficiency in our core operations. We'll be focused on the recovery from the pandemic and the continuation of a prudent approach to capital management. We also identified the need to accelerate our approach to sustainability in a way that drives positive change for our people, culture and the wider supply chain. So starting with the recovery from the pandemic on Slide 13. As you can see from the graph, while relative resilient compared to some consumer sectors, the last two years have been volatile relative to our historic trends.

12:45 Newspapers with greater opportunity for plant location substitution and less reliance on impulse sales in the high street locations, stabilized more quickly than magazines, which were more severely impacted by the restrictions on movement and guidance to work at home.

13:00 This explains why we see the year on year gains in h two last year as we compare against the prior lockdown. In relation to movements this half year, we are still comparing to relatively soft periods last year. So whilst performance is pleasing, we should not necessarily see this as a long term trend. Looking ahead, there are still some sales opportunities in return to greater levels of travel and commuting. So at a high level, the key message is that our markets have now substantially stabilized. For the sake of clarity, we will continue to maintain a prudent long term planning forecast of minus 5% per annum for our newspaper and magazine sales. Moving to Slide 14. The second priority of managing cost and efficiency plays to our core strengths and experience. Breaking down what is often bundled together, the pressure in the period actually came from three areas, labor shortages and the and the knock on impact of contractor costs, the rising cost of fuel, and the impact of the national minimum wage.

13:58 These are not costs that can be avoided nor there are they a temporary blip. So in addressing their impact, we were always clear that we would not employ short term slash and burn tactics that damaged our long term capability and market leadership. What we have done is to develop location by location plans, seeking to carefully offset the necessary additional costs with productivity gains and revenue opportunities that maintain our service KPIs and minimize waste. In many respects, the drive for operational efficiencies is very much business as usual for SMITHS NEWS. However, we have been agile in finding additional revenues from areas such as the renting of spare warehouse space, and revenues from the sale of waste paper for recycling has also benefited from an increase in prices after they had taken a dip in previous years.

14:46 In summary, the net impact of inflation and efficiencies is in line with our forecast. There will be some carryover of additional costs to next year, particularly from wage and fuel inflation, for which, as you might expect, we are already making plans. So if we turn to Slide 15 and sustainability. Our sustainability and people goals were refreshed last autumn, and we continue to make good progress, engaging our people and our industry partners in what is a long term commitment to making a difference and being the best that we can. Highlights since we adopted our new approach include the further reduction on environmental emissions, something we'll be validating for the full year, trials for the collection of recycling cardboard and plastic from our independent retailers, health and safety with all our major sites now accredited to Ross Per Gold Standard, maintaining our close involvement with Passyton, the campaign we launched in 2017 to help homeless people that last year became an independent charity, An investment in colleague communication that includes a new collaborative Internet, more regular engagement surveys, and a relaunch of our employee forums to make them not only more effective as a consultation channel, but also to draw on the talents and commitment of our people.

15:58 More broadly, our actions in this area are helping to further strengthen strengthen relationships with our major re major retailers and major publishers, all of whom are working hard to make our supply chain as sustainable as possible. So if we turn to Slide 16. In relation to capital management, we remain committed to meeting the needs of all stakeholders, pursuing a prudent approach that balances investment to the business with lower borrowings and strong cash returns for shareholders. Bank net debt is now below one times EBITDA, benefiting from from some planned one off contributions as well as the continued prudent management of cash. Looking ahead, we are budgeting for our total capital spend to be circa £4,000,000 per annum, giving us flexibility for targeted investment while still paying strong dividends in line with the newly increased distributions cap.

16:48 Following the recent final payment of 7,500,000 from Tuft North, the major one off benefits are now behind us, we remain confident of further reduction in average net debt given the cash generative nature of our business model. And so in summary, we are focused on building on the first half performance to deliver an equally strong full year result.

17:08 In pursuing this goal, our priorities have not changed, but the golden triangle of costs, service, and productivity at the heart of our strategy. More broadly, while our primary focus remains the delivery of sustainable value creation from our core business, we continue to explore and review opportunities to drive new and incremental profit streams that would deliver enhanced shareholder value. And by way of outlook, trading since the March 1 has been in line with recent trends, And while inflation must be monitored carefully, we remain on track to meet expectations for the full year. So that concludes our presentation, and we're very happy to answer any questions. Jonathan, Paul, thank you very much for your presentation. Ladies and gentlemen, please do continue to submit your questions using the q and a tab, which is situated on the top right hand corner of your screen. But just while Jonathan and Paul take a few moments to review those questions submitted today, I'd like to remind you that a recording of this presentation along with a copy of the slides and the published Q and A can be accessed via your investor dashboard.

18:09 Jonathan, as you can see, we've received a number of questions throughout today's presentation. Thank you to all the investors for submitting those. Could I just ask you to read out those questions and get where it's appropriate to do so? And then I'll pick up from you both at the end. Okay.

18:24 So so the question we've got here is, can you talk a little bit about any pro any progress on further revenue streams to mitigate the declining top line, which very, very happy to do. So we should think about this in in two ways, really. So from an organic perspective or tactical perspective, we very much looked at our assets and said, you know, how do we sweat them to make sure we've got maximum productivity, not only from our people, but also from our assets? And that's very much from a tactical perspective. So to give you an example of that, we have 36 warehouses of different sizes. Some of those warehouses are only open from sort of midnight through till breakfast time because they're distributing newspapers only. And therefore, we have spare capacity in those warehouses.

19:11 And therefore, on a location by location basis, we've assessed what that capacity is, and we've done some rental agreements with third parties to enable them to use that space whilst we are not using it. So that's that would be an example of something I think is opportunistic and tactical, and we've made good progress on that this year. The the other angle, there is organic, so things that we can look to create ourselves and and test and trial. And we've been doing that, as I mentioned earlier, with a small trial in the West Midlands looking at the collecting cardboard and plastic from our independent retailers, recycling it, and getting a revenue stream from that. And the reason we've been doing a a

19:53 small scale trial is because we need to understand, in in a true sense, what the demand is with our retail customers, which so far has been high, and what our own economics are and making sure that rather than it being a vanity project, we actually do know whether we can make a contribution from an initiative like this or not. So that that I guess there are two examples that I can talk about. And then the third, at a more strategic level, is clearly we're very mindful of the fact that we do have a declining top line, and we're ambitious to find new areas of profit growth. Equally, we don't want to do things that undo the good work we've done on the balance sheet over the last three years or, in any way, shape, or form, put at risk the, you know, the attractive dividends that we can offer our shareholders. So we are looking at things that we think from an acquisition perspective are more small scale to medium scale.

20:44 We're certainly not looking at transformational acquisitions that could put at risk those things. And we're very much looking at assets that we believe would be complementary to the distribution business that we that we have today. So there's no new news on on that at this moment in time, although, clearly, I will come back to the market if there's something to say. But that's very much how we're approaching our our diversification. The one thing I would say is if you think about our three year plan for the business, it's not actually predicated on delivering new profit streams.

21:15 It's it's predicated on our core business continue to operate in the way that we run it. And therefore, we would we can take our time, and we will take our time to make sure we find the right new revenue streams. Hope that answers your question, Simon. Thanks, John. I've got another question here from Simon around the 7,500,000. So the question reads, have I understood it correctly that the 7,500,000 we see post half year end for deferred Tuft North payments is in lieu of the 8,500,000, I e, 1,000,000 less as it was received

21:47 early rather than waiting until May 2023. Yes. That is correct. It was 7,500,000 received in final settlement of the deferred consideration from Tuft North. After backing out the interest, it's a settlement of 91p in the pound, which the the board felt was the right thing to do to remove the uncertainty, especially given the current inflationary environment and to enable the business to focus on its core. The the only thing I would like to add to that, Simon, is if you if you think about the the transaction we we did with the exit of Tuft North, you know, there was a 6,500,000 working capital loan. We've had all of that back, and the 15,000,000 deferred consideration, well, we've now had the vast majority of that, as you can see. So, actually, overall, we're we're we're pleased to draw a line under that. And as Paul said, we can now use that that cash injection to pay down debt and also also enable us to focus on what we ought to do with the business going forward.

22:43 Perfect. So I'll put them on SLAs, John. Jeez. Can you confirm if there are any trends with service levels from your retailer customers? Yeah. Sure. So our service levels and let's start with the with the SLAs. So our contractual KPIs haven't changed through the COVID period, and we continue to be ahead of all of our contractual KPIs. What what I think is changing, and it's very much at at our initiation working with our retail customers, is to try and find ways of making trading frictionless. And by that, I mean, make it making it easier for our retail customers to trade with us and to sell newspapers and magazines. So there's lots of things we've been introducing over the last twelve to eighteen months, particularly based on utilization of EPOS data, and we'll continue to do so. But in terms of our service levels, we continue to be ahead of all of our contractual KPIs.

23:39 And, like I say, we're very much focused on how can we improve service to help customers make it easy to sell newspaper magazines.

23:46 Thank you, John. We've got another question here from Quentin saying, are you going to be impacted in any way by the current situation at McCall's convenience stores? When I just say, you know, with McCall's, we've had an open dialogue over the course, what, since since January, and they continue to pay us on a weekly basis in line with our expectations. So, you know, we would certainly hope that, you know, they get through their their issues, and we will continue to serve them, you know, as a trusted partner. Okay. Paul, a couple of questions on share buybacks asked by different individuals, but you want to perhaps perhaps pick that up? Yeah. Sure, John. So, yeah, you know, our our stated capital policy is a two times dividend cover. We don't quite get there without banking agreement, but we're you know, the new refinancing in December, you know, has enabled us to increase our distribution as you've seen by the interim dividend.

24:41 You know, what we did is we took some advice on share buybacks. We spoke to our advisers. Certainly, with our liquidity as well as our market cap, you know, we can see this, you know, other businesses that try that struggle to show the the, really, the returns to shareholders from those schemes. So, actually, we we managed to, because of our employee benefits trust, buy some shares, in the marketplace and test that piece, and and it impacted our liquidity. So in the in the in the short to midterm, we see the dividend distribution as the way to reward our shareholders. Yeah. Okay. Oh gosh.

25:26 Technology problems. So so there's a question from oh, that's share buybacks again. So I think I answered that one. I've done I'm gonna take that one. That one. Yep. So a question from Marques. Do you think there's a limit to how much cost you can take out of the business over the medium term? So, yeah, so you you'll be aware that we published, I'm sure, a commitment to reduce our cost base by a further £15,000,000 over the next three years, we are still confident we will do that. Clearly, you can't take scale cost savings out forever. We do still believe there'll always be a small amount of cost you can take out because of the nature of a a marketing decline.

26:17 All of our warehouses are operating off activity based costings, which means as volumes reduce, we are very clear on which activities should reduce, how much labor should therefore come out of the business, and we're mindful of that. In terms of, you know, what happens when you reach the end of the road, which, as I say, we we don't think we're anywhere near yet, well, we're you know, that's why we're looking at some of the new revenue opportunities we're looking at so that if if we get to the point where we no longer feel scale savings are appropriate for the business, then, you know, we'll have built up some compensating new revenue streams or new profit streams to help compensate for that. Thank you, John. Do you wanna pick up a one about automation and where? So, yeah, question for me in there on the the extent to which there's scope for further automation in our warehouses.

27:07 I think limited at this moment in time is is the honest answer. We've we we constantly look at technology that could come in and do that all around the world, actually. We we, on an annual basis, do a little review of that to make sure there isn't anything that we're missing. But at the moment, we haven't found anything that would give us a big enough productivity benefit to justify the capital expenditure. And think the other thing to bear in mind with newspapers is, you know, it's the ultimate time sensitive product, isn't it? Because it comes into us, we and we have to turn that around incredibly quickly. So we don't really want to be hugely reliant upon technology that could let us down at that vital moment. So the short answer, I guess, is we're looking at it, but we haven't have found anything yet that works for us. Thank you, John. There's a question here from Peter.

27:54 Do you see operating cash flow being maintained at current levels in half two and beyond? Yeah. I think that's one of the reasons that we showed that that net debt chart that showed the 20 just ahead of 20,000,000 of operational cash flow when you exclude all of the one off items. And I think that is the level at which we plan and see the business in the near term for sure. Clearly, we're mindful of inflation that's in the market and and the fact that we're gonna have to react accordingly to offset that, but that is our planning assumption. Okay. One for you, Paul, from Richard. Can you add color around the 20,000,000 payments out that occurred after the half year end? This is a big swing factor in your cash generation capability. Yeah. I mean, just to be clear, that 20,000,000 is just part of our normal cycle of working capital. So our publisher payments, so we we receive money from our independents on a weekly basis and some of our retailers on a weekly or or or or fortnightly basis. And, actually, we paid the publishers at the end of the month. So this is just a cutoff in working capital. It's part of our ongoing cycle, and has fallen sort of outside of our sort of reported cutoff period, for the last few years.

29:03 But nothing more than that. A couple of questions relating to the interim dividend and whether one third, two thirds should be expected. If you look at our historic trend in terms of when we were issuing dividends, that was very much the approach that the business took. We're mindful of that going forward as well. Now, clearly, we've still got to trade through the second half of the year, but I think that's the direction of travel we are moving in. Yep. So I think that's answered the dividend questions. I think that's the share buybacks. Interest. So yeah. So the I mean, there's one on interest costs. Oh, it's just moved.

29:50 Can we expect interest costs to reduce as average debt levels are reduced, or will this be offset by higher market interest rates? I mean, certainly, on our current, facility, the current rates, we would expect that to decrease, but, know, we'll have to keep mindful eye of future interest rates. But, clearly, our average debt reduction and the payment for on April 29 will help our average net debt and reduce interest rates even further. Jonathan, Paul, thank you for that. I think you've actually managed to address all those questions from investors. And, of course, the company will review all questions submitted today and publish their responses on the investment company platform. But just before redirecting investors to provide you with their feedback, which I know is particularly important to you both, Jonathan, can I just ask you for a few closing comments?

30:37 Yeah. Sure. I mean, firstly, thank you for finding the time to dial in this morning and and and to listen to Paul and I. You know, when we set out on this journey as a business two or three years ago, we said it was very much about rebuilding trust, about demonstrating that we would deliver on our promises. And I hope you feel that each time you listen to us, we are doing exactly that. So we're really pleased with where we find ourselves at the half year. We think we're in a good place for the full year performance, and we're starting to explore some interesting new revenue opportunities as well. So thank you for dialing in, and thank you for being a supporter of SMITHS NEWS. Jonathan, Paul, thanks 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?

31:23 This will only take a few moments to complete, and I'm sure it'll 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 morning to you all.