Smiths News (LSE:SNWS) — Preliminary Results

0:01 Good afternoon, ladies and gentlemen, and welcome to the SMITHS NEWS PLC Preliminary Results Investor Presentation. Throughout this 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 in the right hand corner of your screen. Simply type in your question and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company will review all questions submitted today and publish responses where it's appropriate to do so. These will be available via investment company dashboard, and we will notify you by

0:31 email when these are ready for your review. I'd also like to remind you that this presentation is being recorded. 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.

0:48 Thank you very much. Good afternoon, everybody. Before I start the presentation, I'd just like to take a moment to introduce Paul Baker, our new CFO and Paul will let No doubt talk a little bit later in the finance section. And I'd also like to pay tribute to Tony, the outgoing CFO who's decided to retire. He's done a fabulous job for us over the last three years and I personally valued not only his contributions to the business, but his advice to myself and we'll be sad to see him go. So I just want to acknowledge that. So should we start with the presentation?

1:27 So if we turn to the headlines. So let's begin with an overview of the year. I'm pleased to report a continuation of our progress with the performance ahead of market expectations and another year of delivery against all of the key priority areas we set out to achieve. EBITDA of £42,600,000 is up 9% from revenues, which are actually down 4.7%, but are back in line with the historic norm of 3% to 5% decline.

1:59 Free cash flow has more than doubled to £24,000,000 and bank net debt at year end is reduced by a third to £53,200,000 with a reduction in our average net debt of circa GBP20 million. What's especially encouraging is this progress has been built on solid foundations, giving confidence that the business is better placed to deliver shareholder value than it has been for several years. Looking at our operations and what have been hugely challenging circumstances, we've maintained our laser light focus on service efficiency, on which all of our plans and prospects depend. Throughout the year dominated by the pandemic, we have served our communities without fail, made efficiency savings of £6,000,000 driven one off sales opportunities such as the euros and worked closely with our retailers and our publishers as the markets emerged from the most disruptive period in recent memory.

2:49 Our people are rightly proud of this performance because it's their commitment to initiatives that have largely driven this. In July, consistent with our commitment to meet the needs of all stakeholders, we returned to the payment of regular dividends within the scope allowed by our financing arrangements. And it is our intention to maintain that momentum with a final dividend announced today. Tony will, of course, touch on this shortly.

3:15 It is also our intention to reduce our net debt to one times EBITDA, and again, we'll touch on this shortly. In August, we began to feel the impact of the inflationary pressures in distribution markets, and these have since increased, confirming in our minds at least that this is not a temporary blip. I'll talk about our approach to managing these challenges later in the presentation. As we look ahead therefore, there is a course of mix of opportunities and indeed challenges, both in the short and longer term, but we are addressing these from a position of much greater stability and strength. As such, I'm confident we are well placed to continue to create and grow value, delivering strong profits and cash that are used to meet the needs of our shareholders, our financial partners and the future indeed of our business. I'd now like to hand over to Tony to take you through the numbers.

4:02 Thanks, John, and good afternoon, everyone. A great pleasure today in presenting my final set of results for SMITHS NEWS before handing over to Paul, not least because they confirm a strong performance, which shines a light on the underlying strengths of a business that have shall be, as shown in many ways we start to lead. Let's start with revenue, which at minus 4.7% year on year has returned to within the historic range of structural decline in the for the market. Given the ongoing disruption of the COVID-nineteen pandemic, this is a great result reflecting the market resilience and the ongoing strength of demand for traditional newspapers and magazines. Adjusted EBITDA on a pre IFRS 16 basis, which is the alternative performance measure used by management to manage and control the business increased by 9% to $42,600,000 Operating profit at $39,600,000 is a 12.8% increase from the previous year as a result of improved margin and continuing strong cost control.

5:11 Operating margin of 3.6% compares to 3% in financial year 2020. Net finance charges increased to $8,700,000 due to the fees and expenses associated with refinancing the business in November 2020. With an effective tax rate of 14.9%, adjusted tax charge for the year is $4,600,000 which is $400,000 higher than the previous year. Finally, adjusted earnings per share of 10.8p is an increase of 11.3% year on year. Coming now to adjusted items. There has been a significant decrease in the value of adjusted items compared to the previous year.

5:59 The total charge after tax in the year is nil, which compares to $11,700,000 in FY 2020. Charges in respect of network and reorganization and asset impairment have reduced by $6,900,000 and $4,800,000 respectively compared to FY 2020. The major elements of adjusted items in the coming year relate to the impairment of a joint venture investment amounting to $1,600,000 costs related to the wind up of the pension schemes of £1,000,000 and £1,100,000 of costs related to transformation and long term planning programs. These have been offset by the £3,500,000 accounting unwind and the tough notes deferred consideration as recoverability became clear up more certain.

6:48 And in fact, pounds 6,500,000 is the first payment due under the agreement, which received last Tuesday. Free cash flow, a very strong message here as the company generated $24,000,000 of free cash flow in FY 2021 compared to $10,900,000 in FY 2020, an increase of 120%.

7:15 The significant improvement has been driven by increased EBITDA $4,600,000 improved working capital of $6,700,000 and lower capital expenditure of 4,600,000 These have been partially offset by higher net interest and fees $3,000,000 and $4,100,000 of additional tax payments.

7:41 Looking at net debt, the closing bank net debt of $53,200,000 representing 1.2 times EBITDA that compares to a rate of two times in the prior year when reported closing bank net debt was $79,700,000 The reduction in net debt is driven by two key factors, the $13,100,000 improvement in free cash flow versus FY 2020 and the cash inflow from the repayment of the $6,500,000 working capital one made to the buyers at ToughNotes in May 2020, which was repaid in October 2020. This item alone represents a $13,200,000 improvement year on year. I'll now hand over to Paul to introduce himself and discuss the impact of IFRS 16 on our results.

8:31 Thank you, Tony, and good afternoon, everyone. Before I talk to this more technical slide, let me briefly introduce myself. I joined the company as Chief Financial Officer on the October 4 and have been actively engaged in a thorough induction program since day one. In the last four weeks, I've managed to meet more than 90 leaders of the business and visit three operational sites to get a hands on understanding of our operations and our business model, as well as spending time with our advisers and auditors. It's been a busy time, but exciting. And as you've just seen from Tony Tony's presentation,

9:08 the business, the financials of the business are solid with strong cash generation. But what has also impressed me in my first few weeks is the passion the people in the business have for what they do and the depth of their understanding and control in managing the operational performance. The planning and measurements within the business reflect this attention to detail, giving me confidence as I take up my new role. Now back to the charts. In our financial performance, we use an adjusted performance measure of pre IFRS 16 EBITDA, which Tony mentioned. This subtracts $7,700,000 of operating lease charges from our statutory IFRS 16 EBITDA of $50,300,000 I know many of you already use the IFRS 16 measure and we will reference this more going forward.

9:59 The lease charge within the business primarily relates to our 37 distribution sites and the underlying impact is broadly consistent year on year. The reported net debt of GBP £81,200,000 includes lease liabilities of £29,200,000 relating to 44 leases with an average total length of six years. When you also add back the unamortized bank fees from the 2020 refinancing of £1,200,000 you get to an adjusted bank net debt of £53,200,000 which Tony referenced. I look forward to speaking to you all in the future, but for now back to John.

10:42 Thank you, Paul. Thank you, Tony. So let's look at the year we've just completed. Looking at the activity behind numbers, we can see immensely busy and challenging year, but a year importantly where we once again delivered on all of our promises. Back in November 2020, we secured the last of our major publisher contracts and we were in deep negotiation for our banking arrangements. We were also at that time cautiously optimistic about the likelihood of there being fewer social restrictions. Clearly, that didn't prove to be the case. And by the late autumn, it was clear that we were in for a tough time from a winter perspective with the reposition of lockdown, the so called council Christmas and a long period when a return to normal working life seemed a distant prospect.

11:28 And yet our markets proved remarkably resilient. Majority of retailers remained open and we in turn provided a full service helping to maintain both sales and delivery service charges. Results have been a gradual recovery from the deep lows of spring twenty twenty and an overall performance, which at minus 4.7% sits within the long term trends for our industry. Importantly, as the volumes increase in the second half of the year, we were able to contain the increased distribution costs proportionately, so that the benefit flowed through to the bottom line. Even more importantly, our cost savings have once again offset the decline in our core margin, driving profit and cash growth this year. Whilst nobody can be certain the pandemic is entirely behind us, we look forward with increased confidence, that we'll continue to plan on realistic and prudent assumptions of the market trends.

12:19 Longer term, we must also acknowledge the pressures on all distribution businesses in relation to sustainability and our impact on the environment. We've always been a responsible business and have a track record of making meaningful improvements. But this year, we started the process of looking and challenging ourselves even further. Our aim is to take an active role in shaping solutions that are compatible with our best interests and meet the needs of our wider stakeholders. More on this shortly. At the half year, our interim results confirmed the progress we were making with a financial performance that was ahead of pre pandemic comparative period. Cash generation and broader capital goals were on track, allowing later in the year for the return to the payment of dividends after a two year gap. And we closed the second half week and as we closed the second half, we have maintained our overall momentum despite the early signs of inflationary headwinds.

13:10 As I said earlier, I'll come on to talk about that. Then finally, into this financial year, we have further two further highlights to report. Firstly, on the second of November, we received a payment of GBP 6,500,000 in relation to the deferred consideration for the sale of Tufts Mills. The proceeds will be used to reduce bank debt further. Secondly, we have received confirmation from the trustee of the defined pension scheme that they will return to the company the cash surplus that arose from the buyout of the scheme by Legal and General in March 2021. The surplus net of additional professional fees and tax charged is GBP 8,000,000 and is expected to be paid to the company later in this month. Again, the proceeds will be used to reduce net debt and this puts us firmly on track to deliver on our target of net debt times at one times EBITDA, but ahead of our initial August 23 target.

14:06 If we think about our plans and priorities, again, we're on track. We have an excellent control of our operations in terms of both service and costs and we have clear plans to maintain this performance over time. We are targeting CHF15 million of cost savings over the next three years And we are open to new thinking about how we can extend our vision for sustainability. We are a market leader in our markets and all of our behaviors represent that. Our sales and markets have stabilized from the disruption of the pandemic. And significantly we have not seen the closure of large numbers of news retailers. This helps support both our sales revenues and our delivery service charges. Looking ahead, there are opportunities for the recovery to continue in the short term with a greater return to traveling and indeed commuting.

14:54 But importantly, we should remember that this business has three multiple income streams, newspaper margin, magazine margin and carrier service charges. And it means that the impact on our margin is typically two to three percentage points lower than the headline decline in sales revenues. And finally, looking at capital management. In the improvement of our underlying finances, we are strengthening the foundation of future shareholder value. SMITHS NEWS has always been a cash generative business, which is just the prudent management of that asset, which has delivered reduced debt, control of capital expenditure and the return of dividends, which we are committed to growing in line with our continued financial progress.

15:35 So let's look at sales. As you can see, this is a three year view of our markets and they were severely impacted by the first lockdown, but it did follow by a relatively swift improvement as retailers reopened, albeit with sales still showing a significantly greater decline than the typical structural trend. The recovery of the summer and autumn of twenty twenty then slowed somewhat as we moved into regional restrictions and then later the second lockdown. However, it's easy to see the adverse impacts in the chart on the right hand side. It's interesting to note the relatively lower volatility of newspapers compared to magazines in part due to the higher volumes sold through local independent retailers. Whilst the last few months have been positive, the situation remains fluid. And what is hardest to predict is exactly how much of the lost sales will come back as commuting and travel passenger turn.

16:27 As it stands, we estimate the pandemic to have impacted the market by roughly an additional 5% over and above the decline we might have expected across the two year period. Looking ahead, we are planning on the basis of return to the previous trend of minus 5%, but we remain both alert to the potential for further disruption and indeed for the opportunities for further sales gains.

16:56 Before closing my review of sales and costs, I also want to look at the inflationary pressures and put them into context. The background will no doubt be familiar to everybody. There are some particularities however of our model that is worth explaining. Firstly, it is clear there is a national shortage of drivers, not just in HGV categories, but all levels, including smaller vehicles and subcontractor operators. Less well publicized is the pressure on warehouse operators, in part driven by Brexit and the availability of labor and in part we believe by lockdown, the reassessment people have made about how they want to manage their working arrangements and lifestyles. Looking ahead, there is no escaping the increasing costs and certainly they will be an additional element of the merger pressure this year. Of course, we will seek sensible efficiencies and offsetting opportunity, but as a matter of policy, we will not take measures, which might flatter the numbers in the short term, but endanger the business and its reputation down the line.

17:52 Service KPIs are critical not only to our contractual obligations, but also to the wider efficiency of our operations, which is why maintaining them is paramount and non negotiable in our approach to managing through the issue. In this regard, our contractor model provides us with some limited protection because we renew these contracts on an annual basis. And just as importantly, we have a good relationship with our subcontracted delivery drivers. On the positive side, this gives us some breathing space to ensure the actions we take and the investments we make are carefully judged and targeted. And there's also much we can do to ensure that we have the most efficient routes within the caveat of maintaining our service KPIs. And you can rest assured that we'll leave no stone unturned in our search for sensible mitigations.

18:41 But for all that, we must recognize that the pressures are not just a result of media headlines, they're real and they require robust solutions. It will be a false economy to overcut today if it damages our capability for tomorrow. Therefore, we currently estimate the impact on EBITDA this year will be in the region of £2,000,000 per annum after the cost mitigating actions we plan to take. Now on to sustainability. I mentioned earlier this year, we've taken the opportunity to review our approach to sustainability and ESG goals. By way of context, it's worth stating that we've always been a responsible business, leading the market in many ways. It's also clear that stakeholder expectations are changing, and that we must all look further into the future than perhaps we have previously thought.

19:30 I could go on, but I'm sure the direction is already clear to us all. So we have set out to create proactive vision, embraced by our people and shared by our stakeholders. We want an holistic approach, not limiting our ambition or isolated targets or narrowing our focus too much by adopting the format of the UN Sustainable Development Goals together with the measurement standards of the Global Reporting Initiative, we hope to bring greater transparency and direction to our sustainability strategy. We already have adopted a five pillar approach based on the UN SDG and GRI standards. And you can see them on the right hand side of the slide. But given the limited time today, I will not go through those in detail, but you'll be able to see them on our website and indeed in our annual report. If we think about the longer term, we have a number of ambitions and these if you like help set the compass for our future direction of travel.

20:23 These include the migration over time to non fossil fuel vehicles in our fleet and that of our subcontractors by 2035, plus net carbon neutral warehouses by 2030, a colleague engagement score of 70% or higher each year and a material improvement to the level of diversity in our leadership population, including the Board. In addition to that, we will continue to support our Homeless Charity Passed It On. Now, of course, it's fine to have long term targets, but it's important to have tangible short term targets too, and we have those as well. So this year, we'll be introducing electric fleet for our location that is servicing the London airports. We've already run a carbon neutral conference in October and we already buy all of our electricity from renewable energy providers.

21:14 In the year we've just completed, we reduced our use of pallet shrink-wrap by 79% and by better sorting and recycling, we've diverted 100% of our waste from landfill. These are all the sorts of things that we do year in year out and are well understood in our business. But perhaps we've not done a good enough job of explaining it externally. So let's turn to our priorities. You would not be surprised to hear that service and efficiency remains very much at the top of our list. It's intrinsically linked to our business model, the cash flow generation and how we plan to mitigate some of the inflationary pressures. It's also interesting to note that one of our developments over the last twelve months has been that of

22:02 EPOS based returns process. This has been designed to enable our largest retail customers to improve the profitability by reducing the labor they dedicate to the category and reducing their shrink levels. We think this is an important commercial goal for our business. We also think that the sustainability agenda that we've developed will be an important part of the tender process for contracts in the future. And therefore, it's very much aligned to not only the broader global strategy around sustainability, but also our corporate one. Linked to that is the commitment of our people. You'll have heard me say probably before that harnessing their talents and commitment, ensuring that we drive their engagement and improving diversity and inclusion is fundamental to what we do. We are a people business.

22:53 We have a number of smaller ancillary businesses who found the pandemic period more challenging than actually the core business did. And to put that in perspective, we have a business DMD that put newspapers and magazines into airlines around the world. Understandably that business was impacted by the pandemic and whilst it was never a drain on cash, it wasn't providing the contribution it would have otherwise provided. We are hopeful that over the next one to two years, we'll start to see a better recovery of that business.

23:22 Importantly, our plans are not dependent upon the recovery of that business or any of our ancillary businesses. So I think it's important to say that our prudent approach to capital management remains unchanged. We will retain our firm grip on cash, capital expenditure and the reduction of net debt. And with regard to dividends, within the constraints of our current financial agreements, we will seek to deliver regular and growing dividends whilst meeting the investment needs of the business. So to finalize, we have delivered a strong performance in a challenging year, once again delivering all of our commitments. Our progress has been founded on the focus and close control of our operations with a determination to come through the pandemic as a stronger business. In that regard, we've achieved all of our critical targets.

24:11 From a shareholder value perspective, we've materially improved the underlying finances, strengthened the balance sheet and with a significant reduction in net debt. We've held true to our promise of a prudent capital management approach, ensuring that cash generation benefits all stakeholders. And in that regard, we've restored the payment of dividends and are committed to regular returns for our shareholders.

24:33 In terms of the outlook, well in some ways the flight path is more predictive than it's been for a number of years. Our markets and business model continue to demonstrate resilience and we have opportunities as society moves back to a post pandemic norm. We must however recognize that the inflationary pressures in distribution markets are real and immediate and we must manage these in a sustainable way. And in terms of current trading, I'd just like to mention the fact that year to date trading is in line with the Board's expectations after the allowance for inflationary pressures that I've so far mentioned. And that's it. So on that note, I'd like to hand back to Alessandro and we'd be happy to take any questions that you may have. Jonathan, Paul, Tony, thank you very much for your presentation. Ladies and gentlemen, please do continue to submit your questions using the Q and A tab situated on the top right hand corner of your screen.

25:23 But just while the company take a few moments to review those questions, I'd like to remind you that a recording of the presentation along with a copy of the slides and the published q and a can be accessed via investor dashboard on the investment company platform. I'd also like to remind you that your feedback is important to the company. Alright. Immediately And after the presentation has ended, you'll be redirected for the opportunity to provide your feedback in order that the company can better understand your views and expectations. Just before we go into the live q and a, perhaps I could read the question we we received ahead of today's event, which reads as follows. What is the exact nature of the conditions laid down by the banks in relation to dividend payouts? Terry, do want to cover that? Very simply, the year financial year 2022 and 2023, we can pay we can make distributions of £6,000,000 in each of those years.

26:16 There are no other conditions, it doesn't fall away early if we make advanced payments on debt or anything like that. It's a simple very simple formula.

26:26 Thank you very much, Tony. Investors have also submitted a number of questions during today's presentation and I want to hand back to you to respond to those which are appropriate to do so. Could I ask you just to read out the question and then who it's from?

26:39 Yes. I'll read out the first one. I think John will answer. So can you talk a little about the recent distribution deal with Carabao Energy Drinks and how this plays to your to utilizing the SNWS distribution network? Yes, very happy to answer that. So this is a new relationship for us with one of the world's actually largest industry providers and we are providing a full end to end service for them. So we're selling their products into our independent retailers, taking the orders, distributing it and collecting the cash. So it's as the question implies, it's just a further utilization of our capability and assets. It's relatively small at this stage, but they're a good partner and we're looking forward to working with them. Thanks, John. I think the next one from Tim for Tony is, is your net bank debt target of 1x EBITDA based on reported net debt or average net debt?

27:37 It's based on reported net debt. And the question also says that we take account of interim working capital swings. Obviously, that's within that's why we started reporting average net debt to give the market better understanding of that 20,000,000 to $30,000,000 swing in the month, which comes from the timing payments of payments to publishers and receipts from supermarkets and other customers. Okay. Thanks, Dolly. So next one from Tim. In terms of basis points, what reduction in the weighted average cost of debt would you expect in FY 'twenty two from FY 'twenty one's 9.6%, given the switch from LIBOR to Sony, lower amortization of arrangement fees and before taking account of any increase in base rates?

28:36 So the first of all, there's no difference between moving from LIBOR to Sonya. It costs about $25,000 a year or something like that, so it's minimal. $9,600,000 was clearly inflated as a consequence of bringing forward some previous amortization of fees. I'm answering a question of Elliot as well, which talks about later. Our core interest charge is about 4%. We expect to pay about £7,000,000 in total in terms of interest amortization, So hopefully that I don't want the exact percentage at hand, but hopefully that answers the question. We can give more detail if that doesn't answer the question.

29:31 One for Jonathan. Can you confirm there will be no repeat of the tough news fiasco and the company will focus on its core competency in the future? Good question. So yes, I mean, we've been I think we've been really explicit over the last couple of years that we have been very focused on running the business in the way that we know best. And I think we've done a good job of doing that. And if you look at what's happened to the share price over the last twelve months when it's doubled, the reintroduction of the dividends, etcetera, etcetera. I think there's evidence to suggest that. It would be wrong with us as a management team not to ever consider looking opportunities outside of the news and magazine structure. But there's nothing that we're actively looking at right now and we're very focused on delivering the cash that our business is capable of doing.

30:22 I think the next two questions cover off questions on inflation. First one is about does does our notes on inflation impressions include the headwinds of published driver shortages? And the answer is yes. Yes. And the second question being, how confident are you in the effects of inflation in the labor distribution market? I mean, this case is about 2,000,000 in FY 'twenty two. That is our current plan and that is our view of your pleasure as we see it today. Yeah. So the next question from Tim is, do you expect the efforts needed to mitigate recent inflation pressure reduce your ability to make savings that you've been achieved over the years to mitigate structural sales decline? It's a really good question, Tim. I mean, we committed today to CHF fifteen million of savings going forward. And if you look at our track record of doing that, it holds up to very close inspection.

31:23 We've got good visibility of where those savings are going to come from this year and indeed into next year. And then in the third year, as it is in every three year cycle, there's less detail around that. So it's a fair question, but it doesn't dilute our either our focus or our confidence that we can continue to reduce our cost base. And final one for now, Tony, what do you expect maintenance CapEx to be in FY 'twenty two on a cash basis? Yes, mean our capital allocation policy which we just earlier this year, we say CapEx will be on average 10% of EBITDA, so broadly 4,000,000 There'll be pluses and minuses. There was $2,600,000 this year.

32:11 It'll be around $4,000,000 get about $8,500,000 quite I would imagine, and how tightly all was the post shrinks. Think there was one right up at the top, but one of the post I'm I'm happy to take that. I'll use that for you. John's happy to say this one. So I'll I'll just read it out. So distribution centers are important in the digital economy. Are your distribution centers able to service this part of the economy in addition to the newspaper business, Joel? Yes, so we have 36 warehouses and we operate from a hub and spoke structure. Our scale locations are absolutely equipped to provide the sorts of solutions that fulfillment businesses might want.

32:57 Our spoke locations less so, they're very much smaller units and very much designed for a small cross stock operation rather than any kind of stock holding. But yes, should there be an opportunity to do something in that space and should we determine that was the right thing for the business, then we would have lots of the capability to do so. Thank you, guys. I think you've addressed pretty much all the questions there from Vestas today. And of course, the company will review any further questions submitted and published responses where it's appropriate to do so. Jonathan, just before redirecting Vestas, I wondered if I could ask you for a few closing comments. Yes. No, thank you very much. I mean, firstly, thank you for your time today and dialing in and listening to the progress that we continue to make as a business. I hope you can see that the business is in good has good strength.

33:53 It's very cash generative and you can see how we're using that cash to both benefit our shareholders and indeed our financial lenders. So as Tony already mentioned, the business itself is relatively asset light, doesn't require a lot of CapEx. And so the free cash that we throw off really can be used to create value for our key partners. Jonathan, Paul, Tony, thanks once again for updating investors today. 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 that the management team can better understand your views and expectations. This will only take a few moments to complete, however, 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.

34:43 That now concludes today's session and good afternoon to you all.