Smiths News (LSE:SNWS) — Unaudited Interim Financial Results for the 26 weeks ended 27 February 2021

0:03 Good morning, ladies and gentlemen, and welcome to the SMITHS NEWS PLC investor presentation for the unaudited interim financial results for the twenty six weeks ended twenty seventh of February 'twenty one. Throughout the presentation, investors have been in listen only mode. Questions are encouraged and can be submitted at any time via the q and a tab situated on the right hand corner of your screen. Simply type in your question and press send. Company may not be in a position to answer every question it receives during the meeting itself. However, the company review all questions submitted today and publish responses where it's appropriate to do so. These will be

0:34 available via your investor me company dashboard, and you'll be notified once they're 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 John Bunting, CEO and Tony Grace, CFO of SMITHS NEWS PLC. Good morning. Thank you very much. Good morning, everyone, and welcome to our presentation of the SMITHS NEWS PLC's interim results. The format, I'm sure, will be familiar. After I give a brief review of the headline performance, Tony Grace, our CFO, will take us through the financial results in more detail. I'll then review operational and strategic progress with a particular focus on our management through the pandemic and the impacts it's had on the business and our markets. Lastly, but importantly, I'll cover our capital management policy and our plans to deliver shareholder value over the medium term.

1:25 At the end of the presentation, Tony and I will then take questions. So turning to the headlines. I'm pleased to report that we are on track with all the key elements of our business plan despite the continuation of difficult macro trading circumstances. Overall, profit is in line with expectations as a result of careful management of operations throughout the second and third lockdowns and the underlying resilience of our business model. Indeed, the core wholesale operation of SMITHS NEWS is ahead of last year with overall profit down due to the impact of the pandemic on our ancillary businesses. Given that the comparable prior year period predated the COVID pandemic, this is a strong performance from what is the main engine of the business. I'm pleased to confirm that as sales have stabilized, we've once again achieved a critical measure of savings and efficiencies offsetting the margin impact of the decline in core sales.

2:19 To be doubly clear, we have done so without impact on service, maintaining a full service to customers throughout the subsequent lockdowns. Meanwhile, our capital management objectives are on track following the successful refinancing in November 2020. So turning to the pandemic. We continue to provide a full and safe service to all of our customers with KPIs at pre pandemic levels. Importantly, sales in lockdowns two and three did not see the sharp decline that we witnessed in March to May 2020, with far fewer retailers closing. Travel and commuting retailers, however, remain severely impacted and they will continue to represent a substantial portion of the decline in the market as a whole. From the perspective of our financial performance, it is the relative stability that drives our ability to reduce costs and maintain controls whilst meeting our service obligations.

3:12 In this respect, our teams have done a magnificent job. As the country gradually returns to more normal patterns, we are confident that progress we have made can be sustained and with any increase in costs from potentially increased volumes being kept strictly in proportion to the benefits. Beyond the core wholesale operation, our ancillary businesses of DMD and in store have suffered year on year profit impact as a consequence of the pandemic. However, I can confirm they are operating at breakeven or marginally better, and our expectations are not reliant on their recovery in this year. So turning to dividends and capital management. We have been clear that we would pursue a prudent approach to capital management with a focus on maintaining liquidity throughout the pandemic and reducing debt in line with our new banking arrangements.

3:58 The tight control of cash, debt and CapEx has been achieved in line with our expectations. And as we gradually emerge from the COVID restrictions, we can be confident with the ongoing performance of the business. In that context, and of course, subject to performance being maintained, we are planning for the return to the payment of dividends later in this financial year after the bank financial covenant tests are met at the end of this month. I'll give more detail on these points later in today's presentation. But for now, I'll hand over to Tony to talk you through the numbers. Thank you, John. Good morning, everyone. The first half of the financial year includes a number of significant events, most notably the completion of our refinancing in November 2020 and our response to the impact of the lockdowns in November and the months after Christmas.

4:50 So let's now turn to the adjusted continued income statement.

4:55 Total revenue declined year on year by 11.5% with 5% reflecting the underlying structural decline of newspapers and magazines and the balance to continuing closure of retailers located in travel hubs and the more general additional impact of the lockdowns in the period. Adjusted EBITDA excluding IFRS sixteen weeks ago was 20,500,000, 1,200,000 down in the same period last year. This was a resilient performance in a challenging environment with planned cost savings dovetailing with incremental cost controls as the business flex to adjust to lower volumes. The decrease in EBITDA can be attributed to three distinct business drivers: a reduction in margin across all businesses of $8,200,000 as a result of the decline in revenue and volume.

5:46 However, the reduction in volume was partly offset by depot and delivery cost savings within SMITHS of approximately £4,000,000 A proportion of these costs are variable with volume in nature and we expect these to increase as revenues and volumes recover in H2. The final element is overhead savings of approximately £3,000,000 a result of the restructuring implemented at the end of FY 2020, including the transfer of activities to a shared service center in India. Operating profit, including IFRS 16, but excluding adjusting items, is 18,900,000, down 1,000,000 year on year, which comprises a reduction of 500,000 for SMITHS NEWS and $05,000,000 reduction for BMD.

6:33 Operating margins increased to 3.4% compared to 3.1% in h one twenty twenty, which underlines the flexibility and resilience of the business model. Finance costs increased by $900,000 to $4,500,000 due to the increased amortization cost of the facility arrangement fees of 600,000 and increased interest cost and borrowings of 300,000. Adjusted profit before tax was 14,400,000, down 1,900,000, which is 11.7%. The effective tax rate was 20.8% with a tax charge of £3,000,000, which is a £100,000 lower than last year.

7:18 Adjusted earnings per share was 4.6 p, down 13%. It's worth noting that on a statutory basis, the recovery in financial performance has been more marked. Profit before tax was 16,000,000, up 9,300,000 with adjusted items in the p, a 1,600,000 credit, which relates to the reassessment of recovery of the tough notes deferred consideration. Statutory earnings per share in h1 twenty twenty one was 5.3 p, up 3.5 p on h1 twenty twenty and higher by 0.7p compared to adjusted continuing EPS in the period. We believe we have now established a stable profitable foundation on which we can build a revised capital allocation policy, which John will explain later in the presentation.

8:09 I will now look at free cash flow on a continuing basis. Free cash flow generation remains one of the company's key strengths. And in these COVID 19 challenging times, the company has maintained its clear focus on cash generation and liquidity. In what was a challenging trading environment, the group generated 4,600,000 of free cash flow compared to 5,000,000 last year. It should be recognized that the business continued to be cash generative throughout all COVID-nineteen lockdowns. Overall, adjusted EBITDA, this time including the $3,900,000 impact of IFRS 16 in h one twenty one declined by 500,000 to 24,400,000.

8:55 The working capital movement in the period was 4,800,000 cash outflow higher than the same period last year and is driven by the timing of receipts from retailers and payments to publishers. It's worth noting that during the COVID nineteen lockdowns in the period, we did not experience any significant abnormal returns of newspapers and magazines from the closure of retailers. Capital expenditure for SMITHS NEWS was £3,200,000 lower than last year as the company maintained strict control of our cash outflows. CapEx plans remain focused on replacement and maintenance rather than growth CapEx, and total spend will be broadly in line with the annual non non IFRS 16 depreciation charge, which is £4,000,000.

9:42 Lease payments declined by 1,200,000 oh, sorry. Lease payments declined by 1,000,000 to 2,900,000 as some IT equipment leases came to an end in the prior year. Net interest paid has increased by 200,000 to 3,500,000, a result of higher interest rates under the new debt facility. Average borrowings of 89,500,000 in the first half of the year were 9% lower than in the prior year. Arrangement fees of 2,800,000 paid in the current year relates to the debt refinancing completed in November 2020. Tax payments of 2,800,000 are higher than the prior year due to an additional quarterly payment made in February 2021. The cash cost of adjusting items in the period was 2,600,000 compared to 4,200,000 last year.

10:33 This primarily represented network reorganization costs of 2,000,000 and pension buyout costs with similar outlays expected in h two twenty twenty one. Finally, I shall now turn to look at the net debt position of the group at the half year. Business has continued to remain focused on deleveraging and this is reflected in the amortization schedule in the new bank facility. The first out amortization of 7,500,000,000 was completed in the last week of April.

11:06 At the half year, closing bank net debt of 70,000,000 excluding IFRS 16 had increased by 1,500,000 compared to last year. However, compared to the year end, net debt is down 9,700,000 as a result of 4,600,000 from positive trading free cash flow and discontinued cash inflows of 5,400,000 following full repayment of the temporary working capital loan provided to the new owners of Tough Sports. Following the adoption of IFRS 16 lease accounting, property leases on our depots have been added to the calculation of net debt, giving an IFRS 16 total net debt of 101,300,000 at the half year. We successfully refinanced a £120,000,000 bank facility for three years in 11/20/1020.

11:58 Our bank covenants continue to be measured on the frozen GAAP and consequently bank net debt at the half year was 70,000,000, which represents leverage of 1.8 times EBITDA, a reduction from the two times at the last half year. I should now hand back to John for an update on operational and strategic progress. Thank you, Tony. So briefly, just to outline that in this section of the presentation, I'm going to cover five topics. Firstly, the actions we've taken in managing through the pandemic and the consequences for service and operations. Secondly, an overview of its impact on our sales and markets and what this means going forward. Thirdly, I'll cover our ancillary businesses and provide reassurance on their prospects.

12:46 Fourthly, capital management policy and our approach to dividends going forward. And then last but not least, our priorities and outlook for the remainder of the year.

12:57 Starting with the pandemic. On the right hand side of this slide, you'll see the principles we've established last year, which continues to guide all of our actions. When we spoke last November, we could not have known that there would be two subsequent lockdowns and that these principles would remain quite so central to our plans. I'm pleased to confirm that they continue to be met without compromise to the safety of our colleagues or the progress of our business plan. Clearly, the pandemic continues to impact sales and operations with disruptions in shopping, travel, commuting, as well as wider social events, including sports that help drive newspapers and magazine sales. The second and third lockdowns were however, less impactful than the first with significantly fewer retail closures, down to circa 120 outlets from a high of over 2,000 in the early days of lockdown one.

13:53 This not only helps with availability in sales, it also supports our cash flow and our index linked delivery service charges. Our contracted delivery model is a further element of resilience, which allows for greater flex in variable costs of volume fluctuate. The removal and consolidation of routes has played a key role in mitigating the impact of reduced margin. The action we took on central costs following the sale of Tufnils is also flowing through in line with our plan as our longer term operational savings in the business. Our ancillary businesses have been harder hit, especially DMD, which serves international travel markets. The impact across all these businesses year on year is around £1,400,000 profitability terms. Looking ahead, we have kept costs under tight control and through there is a year on year impact in the period they are operating at breakeven or above, but we do not consider them a material risk to our meeting our expectations going forward.

14:51 More widely, we remain cautious and focused in our management of operations as we hopefully exit the pandemic in an irreversible way. Meanwhile, there will be no compromise to our core principles and we will work with our industry partners to recover as much lost ground as possible, albeit that our plans for the year are not dependent on volume recovery. If we look at sales, the graph on the slide shows the impact of the pandemic on our sales over the last eighteen months. As you can see, sales were formally following the established pattern of declines in the region of up to 5% per year. During the first lockdown, sales were dramatically impacted, especially in April and May. At the peak of the crisis in April, magazines were down by nearly 50% and newspapers were down by 18%.

15:39 Since then, a more stable pattern has emerged, albeit with ongoing sales decline of circa 11%, indicating that the pandemic has reduced sales by circa 6% on top of the established declines. The situation broadly continues. And in lockdowns two and three, we did not see a return to the initial reductions of spring of last year. In part, this is because only circa 120 retails remain closed. That said, you can see the impact of the regional restrictions on magazines in the first quarter of this financial year, and there is some impact here on the timing of on sale dates and monthly publications. One of the benefits of our business model is that we distribute all retail channels and we are not exposed to one specific channel. For example, travel.

16:25 The traveling and commuting sector remains severely challenged and we can all see that. However, we've seen our sales increased amongst independent retailers as consumers have shopped locally. We believe the current picture is broadly positive and compared to many other retail sectors shows remarkable resilience in the level of disruption.

16:48 Before closing the operational section, I'd just like to cover the ancillary businesses. Firstly, to stress these typically represent only 5% of our overall EBITDA. Nonetheless, they make a valuable contribution and are complementary to the core wholesale business. As such, we remain committed to their future whilst recognizing their suffer disproportionately from the pandemic. The impact on DMD sales will be obvious. However, some years ago, we integrated its physical operation in The UK into SMITHS NEWS. This means there are no additional fixed costs and therefore with careful management DMD is running a skeleton operation at breakeven. As and when travel returns, we would expect to pick up, but in the meantime, the risks are contained. The situation with in store is similar with the pandemic causing major retailers to remove outsourced merchandising often for safety reasons. And thereafter, they need to reconsider their needs.

17:41 In store has greater fixed costs than DMD, but has sufficient ongoing contracts to cover these and indeed the business made a small contribution in the period. In summary, the outlook for these businesses remains uncertain, but we believe there is more upside than risk. And importantly, we are not dependent on their recovery to meet our profit and capital management expectations. So turning to capital management. Our capital management remains a key priority following the successful refinancing in October 2020. And by way of further context, the securing of all major contracts last year gives us high levels of cash flow visibility for the next four years.

18:26 Combine that with the resilience we have shown through the pandemic and the result is that despite the challenging conditions, our goals for cash, maintenance CapEx and debt are all on track. Indeed, further to the period end, the first debt amortization payment of $7,500,000 was made in April of this year. Looking to our policy, which I'm pleased to outline today, our objectives are: the reduction of net debt to one times EBITDA by the end of FY 2023, and we'll do that through this strong free cash flow, which supports $15,000,000 of annual amortization payments on Term Loan A and then the application of any cash from the Tuthmills deferred consideration on the pension surplus against Term Loan B. This will then allow us to maintain net debt at around similar levels beyond 2023.

19:18 We plan to maintain CapEx in line with depreciation of circa £4,000,000 per annum. Any additional CapEx required for growth will achieve a return of at least our adjusted cost of capital. And then returning to payment of dividend from the second half of this financial year with a dividend cover of two times. However, under the terms of our current banking facilities, our ability to make dividend payments is restricted to £4,000,000 in FY 2021 and £6,000,000 in FY 2022 and FY 2023. In the event there is excess cash after having applied the policy, we would look as a matter of policy to return this to shareholders in the way of special dividends. So our strategy for shareholder value is founded on three distinct components. The cash benefit of reduced interest payments, boosting profit before tax, potential capital growth from a stronger balance sheet underpinning our valuation and share price, and then the restoration of dividend payments from later this financial year and in the event of excess cash, the returning of special dividends to shareholders.

20:24 So if we look at our priorities and outlook, Our operational priorities for H2 are clear and within our control. They are to manage through COVID-nineteen, ensuring any increased costs from increased volumes are kept strictly in line with the sales benefits maintaining progress on securing efficiencies without compromise to our service KPIs, which give us our market leadership

20:47 and then the close control of our ancillary businesses such as any recovery is a welcome extra, but without ongoing risk. Shareholder value remains a key focus for our capital management plans. And in that regard, we have balanced objectives that meet the needs of all stakeholders. We plan to strengthen the balance sheet with target debt of net times one, And in line with our confidence in the business and of course subject to continued trading in line with expectations, we're expecting to return the payment of dividends later in this financial year. So in terms of the outlook, the prospects for ongoing trading as COVID restrictions ease are clearer and more positive than they've been for some time. Trading for the year to date is in line with the Board's expectations and on track to meet market expectations for the full year.

21:34 I would just like to say before closing, a special thank you to Tony Grace for his commitment and contribution to the business, as well, of course, for his personal support to me in my time in this role. As you all know, Tony has taken the decision to retire, And we'd like to take an opportunity to thank Tony for the huge role he's helped us play in navigating through immense challenging change over the last three years. It's very much to his credit we've come through stronger and clearer in our direction and prospects. And on behalf of the board, we'd like to wish him well in his retirement and are delighted to be around for a good number of months yet to enable a smooth handover. After that, I'm very happy now to take any questions. Fantastic. Thank you, John. Thank you, Tony, very much indeed for the presentation. And ladies and gentlemen, do please continue to submit your questions using the Q and A tab situated on the right hand corner of your screen.

22:25 I'll let just, Joel, John and Tony take a few moments to review those investor questions submitted already. I'd like to remind you the 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 Investor Me company

22:37 platform. I'd also like to remind you that your feedback is really important to the company, and immediately after the presentation has ended, you'll be redirected for the opportunity to provide feedback in order the company can better understand your views and expectations. Job Tony, before we move on to some of the questions submitted during today's event, we did receive a number of presubmitted questions from investors. Perhaps if I could start the q and a session off with those. The first one reads as follows. Given the balance sheet is heavily negative net tangible assets and the bank borrowings are expensive at 5.5% to 6% above LIBOR, Would it not make more sense to rapidly reduce debt and refinance it at a cheaper rate before resuming paying dividends? I'll take that one, John. Okay. Good question. Thank you. First of all, the margin is not the 5.5.

23:27 That is the headline rate, but because of the good performance of the business and strong cash management and the ratchet within the facility, it's actually an ongoing margin at the moment of about 4.25. Still on the high side, yes, probably if we went into the market and the market allowed us to do so, we could probably take a hundred, hundred and twenty five basis points off that. However, we have a very clear plan here on achieving one times EBITDA in terms of our leverage. We've talked about getting there by f y twenty three. We believe, actually, there is the opportunity, not certain, but there is the opportunity that we could get there quicker. And that's because of two things. First of all, let me talk about the structure of of our debt, and that will help explain.

24:16 So we have a 45,000,000 term only, which amortizes in 7,500,000 every six months, as I said already, with the first prepayment being made in April on April 29. So that will continue to amortize at £50,000,000 per annum going forward. By the end of November of this year, it is that that facility will set at about 30,000,000.

24:44 So that's good to hold that thought. Secondly, term loan b, which is 35,000,000, and that what we see is a bullet repayment. However, in the event that we received the deferred consideration from tough notes and 6,500,000 of that is due again in November of this year, that must be laid against term loan b.

25:07 We also have the likelihood of a surplus from our defend the five benefits funds, which has been subject to a buyout and is in the process of wind up. And that could be another £9,000,000 that we would receive sometime in h one of next year. It is feasible that by November, we will have reduced our debt to about 50,000,000. So 15,000,000 through amortization and 15,000,000 through the receipts of tough notes and deferred consideration and such like and the pension supports. Plus on top of that, there would be an RCF. However, markets allowing and such like, we will look to refinance at the nearest opportunity, but we have a clear plan to get to one times EBITDA through the amortization schedule and the receipt of these these funds.

26:02 Fantastic. Thank you very much indeed, Tim. The next question we've got here reads as follows. Can you expand further on the current status of DMD and in store?

26:12 Sure. Yeah. I'm happy to take happy to take that. So as I mentioned in the in the presentation, both businesses are either running at breakeven or making a small contribution and are operating with a skeleton team. We are not benefiting from furlough in any way and haven't throughout this financial year. And we are largely waiting for those markets to come back. So if you take DMD, which services the airlines and airport market, we can all understand why volume and demand has disappeared over the last few months. Equally, I think we all recognize there is lots of pent up demand for people to start flying again, whether that's for holidays or business trips or anything else. So we are confident the market will come back and therefore we're managing our cost base to ensure that it's not a risk in the interim period.

26:59 Thank you, John. Next one we have here is, are there further steps planned to improve your operational efficiency? Yes. So if you look at our for those of you that have followed our stock for a while, you know over the last eight years, we've got a really strong track record of delivering on our numbers and managing to offset margin decline through operational efficiencies. And we're on plan to do it again this year. We tend to operate in three year cycles when it looks at our operational efficiencies. So if we take the cycle we're starting now, so it's for the next three years, we've got absolute detail for where our $5,000,000 of savings will come from next year. We've got a reasonable amount of detail for the year after and then headline savings probably for year three. Typically, where they come from are firstly in our operational savings. So all of our warehouses operate activity based costings, which means as volume declines, we know exactly which processes we we have, which should reduce by which amount, by location. So that's the first thing. The second thing is we also constantly look at the the physical infrastructure that we've got, the number of warehouses we've got. And typically, we take some physical infrastructure off the map to drive some efficiencies and we would expect to do some of that over the next three years.

28:19 If we then look at our head office costs, well, we did a major restructure of those in the summer of last year, and and you've seen some of the benefits of that now. We took that decision because we felt that this year was likely to be more volatile given the pandemic, and we wanted to establish the right cost base and I think that's proven to be the right decision. Going forward, we'll continue to look at ways in which we can drive efficiency. So for example, we have a shared service center in India

28:47 and we allocate roles there where we feel we want that role, but we benefit from the labor arbitrage of having it provided in India. Now at the moment, for all the reasons we understand, there's a very human tragedy going on in India and now would not be the right time to add more roles into that area. In fact, actually we're providing support to our colleagues and have just set up a hardship fund to support our colleagues out in India. But in the medium term, when COVID is maintained and controlled, I should say, in India, then we would see an opportunity to do some more outsourcing there. So we have a proven track record of taking at least GBP 5,000,000 a year out of our cost base, and I'm confident we'll do that for at least the next three years, which is our operational cycle. That's great. Thank you very much, John. Antonio, I think you've probably covered this one often really. Is possible we can get to net debt to one times EBITDA before the end of full year 2023?

29:44 Yeah. I think I said already that if if the deferred consideration is paid in in the manner it's contractually obliged to be and the pension surplus come in, we have a good chance of of getting there quicker, perhaps even within the next nine, twelve months. That's brilliant. Thank you. And then the final one we've got here, again, touching on those those cost savings, I think you just mentioned, John. But you've been very successful historically taking out cost to match the decline in newspaper and magazine margins. Margins. How sustainable are these cost savings going forward?

30:17 Yes. I mean I think I'm not sure I can add too much to my previous answer on that one. Like I say, we are confident for the next three years because we work in three year cycles. And typically, it's about 5,000,000 a year. So no doubt next year, I'll be able to update that again as we move into the year one of the three year cycle. But right now, we are confident, yes.

30:39 That's fantastic. John, Tony, thank you very much indeed. That covers off the pre submitted questions we've had from investors. Obviously, we can see from the q and a tab, we've had a number of questions come in today. Perhaps I could just ask you just to click on that tab and respond to those where appropriate to do so. If I may ask you just to read out the question and and even who it's from, that would be fantastic. Thank you.

31:01 Okay. So let's start. So there's a question here about what's our number one board level priority aside from managing the COVID impact. I'm very happy to take that. So, yes, of course, we've got what I would call three key priorities for for the business. The first and unashamedly is managing the impact. We need to manage that not only in terms of our service and operational delivery, but also the impact on our colleagues and our customers. And so that is clearly a priority. Secondly, we know that it's really important that we deliver on our promises. And when Tony and I stand here or as we did in November and tell you what we think our results are going to be, that we must deliver on that. So that unashamedly is our is our second priority, making sure we deliver the numbers in a way that SMITHS NEWS as a business actually has for a very, very long time if you look at its track record.

31:54 And then the third thing and a more medium term priority over the next twelve months is to really start to think about the strategy for the group

32:01 over the next twelve months. So what will that strategy look like in the medium term? So we've not started that work yet because understandably, last year was very busy on the disposal of tough mills, completing all the publisher contract negotiations, refinancing the business, and then more recently, managing through the pandemic. So we're starting that piece of work now, but they're the three priorities. Manage the pandemic, deliver on our numbers, and determine the medium term strategy for this business.

32:33 While John's looking at the next couple of questions, which I think you've probably touched on, John, already, I'll take the the final two or three questions there from Julian h, which which is around the debt. Hopefully, I can summarize it and give one answer to the three questions, but I'm sure Julian will let me know if that's not the case. Continuing as John said already, a key point the bit John and I in the last eighteen, twenty four months has been reestablishing trust of all of our stakeholders, and our banks and shareholders are two of those key groupings. And when we've constructed our approach to debt and and set the target level of one times EBITDA, we've cut nice and off one strong EBITDA, the cash flow that comes from that, and the feedback that we're getting from those stakeholders as to what they would find acceptable in terms of the level of debt they withhold.

33:29 Getting to zero debt has never really been a consideration or, an objective set by any of our stakeholders, firmly enough. And achieving the right balance between debt levels and dividend payout to satisfy the sometimes conflicting needs of the different stakeholder groups. So that's how we've got to a target level of one times EBITDA.

33:52 Maybe in the medium longer term as the EBITDA started to just if it started to reduce, so we don't see that anytime soon, then we may consider further lowering the level of debt, but not at this point. Hopefully, that answers your question. Thank you. Thank you, Tony. I've got a couple of questions here from Tim L. So first one of those is, are your contract prices with publishers directly linked to publisher cover prices? Yes. They are. So we are rewarded on the basis of the product the product that we sell, I. E. Volume, but at the cover price. So that is why you will sometimes see if you look at our numbers that our volume may be down by, say, 8%, but our value, our revenues are down by 5%.

34:41 And as you know, given the market's in structural decline, slow structural decline, but it is in structural decline, typically, you see cover prices going up. So when you're buying your newspapers and magazines, I'm sure you've noticed that cover price sent to us, that works for us. We're delivering the same amount of product but at a higher price point and we get a percentage of that price point. Tim's also got a secondary question. What is the biggest threat to achieving your targets over the next two years? Well, none of us know what we don't know. So there may be something from left field that none of us can foresee. I think the single biggest threat is not a continuation of current business. We've mapped all that out. We've built that into our numbers and and we're comfortable with that. It's if there was something probably to happen to the revenue line, which would be unforeseen and much, much different to the current trading. So if there was to be a pandemic where we went back to lockdown one levels, where hardly anyone was moving and hardly any retail outlets were open, then clearly that would have an impact on our performance.

35:45 But outside of that, just looking at normal trading, you need to remember that our contracts are secured till 2024, 2025. We've got an agile cost base with use of our contractor model for final mile distribution. We've got our three year plans in place for for cost savings. So yeah. So I think we're in good shape. But that would be the that would be the the single thing that could take us off course if something just happened to our sales line that none of us could foresee. Further question from Tim L. How much would you expect DMD to contribute to EBITDA if travel starts to recover? Good question, Tim.

36:31 You know, in the medium term, DMD is certainly a 7 figure business, a very small 7 figure business, one point something probably. What we don't know is how quickly the market will recover simply because it's a DMD services the world, if you like. So one of its leading clients is Emirates, and we operate across a number of different countries for Emirates. So even if The UK starts to recover, it will depend on what's happening in The Middle East or Asia before we fully start to get the market back for DMD. But it's a it's a small 7 figure business when the market's operating at its norm. Is it Have we got any other questions? Yeah. There's an interesting follow-up there from Julian. Julian, I think the the the the best for the businesses cannot be determined without considering the wishes of stakeholders.

37:22 So a security's answer to to your question maybe. But, actually, at this point in time, I think the one times EBITDA is the right level for this business. We've carried higher levels of debt taken on to to to finance acquisitions and such like. That hasn't worked out. It was too onerous. We're more more than comfortable carrying one times EBITDA at this in the the medium term, certainly. So hopefully, that answers the question. Okay. There's a question from Peter D in terms of what are the key inflation risks for the business. I'm very happy to pick that one up. So if you look at our warehousing and final mile distribution, We charge our retail customers what we call delivery service charge for that service.

38:12 So we deliver seven days a week, three, six, four days of the year. That is index linked. And therefore, should cost go up in the overall sector, that would be reflected in the costs that we have in the prices that we charge our customers. From an overall inflationary perspective, we're not particularly exposed. We're not exposed to fuel, for example. So it's not something that typically has a material impact on our business. Clearly, if there was a change of policy at government and all of a sudden the minimum wage was to massively increase beyond what we're all forecasting, then that would be outside of our plan. But that they're probably the that's probably the key position. Thanks, John. E and G, how do you anticipate your interest rate will fall as you approach one times EBITDA with with further savings and interest rate? Under the current facility that the the interest rate margin, the maximum is 5.56 on term one b, actually.

39:12 But that then can come down across the piece to the lowest level of 3.5. We're heading heading towards that as quickly as we can by managing, well, managing performance, as simple as that, and and doing the right things with cash management. And I think that pretty much takes us through the questions, guys. If there's anything further, I think that we've pretty much There's there's one interest in one of the at the bottom, Bob. So if we just take that on that. Absolutely. ENG again. The company has sorry. The trustee has already completed the buy buy out. So now all the risk liability sits with an insurance company, and they will feed the assets.

40:02 And having done that, there is a cash surplus of about £16,000,000 sitting there at the moment. Some expenses, will have to be paid to to before the trust is wound up completely and before things can be any surplus can be passed to the company. You may well know that, any such surpluses attract tax rate of 35%, and, therefore, 16,000,000, we believe, could be somewhere between 8 and 10,000,000 for, the company in the event of the consultation with members, which is on progress at the moment, and it's successful and regulatory approval is a is received from the patient regulator. So it it's there. It's real.

40:48 Trustee has indicated that they will pay to the company, but there's a few hurdles to to go through to go over. Sorry. Fantastic. Thank you very much indeed. John, Tony, thank you very much indeed for addressing those questions from investors this morning. And, of course, anything further that comes through, you'll get the ability to review those, and we can publish responses where appropriate to do so. John, perhaps I could just ask you for a few final words to wrap up before we redirect. So let me just give you guys some feedback. Sure. I mean, I I think, firstly, thank you to everyone who's taken the time to to listen to us this morning. We very much appreciate that. Hope you found the presentation honest and authentic, and you've got a good understanding now of of our business. What I would say to you is this is not a complicated business, and it's not a volatile business.

41:37 And we've worked very, very hard over the last decade to make sure that was the case. And I personally have been the managing director director of of SMITHS NEWS Wholesale since 2012. And if you look at our track record from there until now, we've always delivered our numbers. And since Tony and I became the management team looking after the PLC, we've also delivered our numbers. And what I would ask is that you look at our stock again with fresh eyes, listen to everything we've said to you today around how well we've traded through, what has been a very, very challenging period for the whole economy. And then look at our capital management policy and look at the relative share price. And just think again as to whether we might be a good home for somebody who's looking to invest. So thank you very much for your time and hopefully we can do this again in November when we're presenting our full year results.

42:27 That's fantastic. John, Tony, thanks again for updating investors today. Can I please ask investors not to close the session? We should be automatically redirected for the opportunity to provide your feedback. Your feedback is important to the company, so do please take a few moments to submit it. On behalf of management team of SMITHS NEWS PLC, we'd like to thank you very much for attending today's presentation. That concludes today's session. Thank you.