RWS Holdings plc

Good morning, everybody, and welcome to the RWS Half Year Results. I'm Ian Al Mockadam, CEO, and I'm joined at the moment by Rod Day, our interim chief financial officer. Unfortunately, our chairman, Andrew Brodie, is slightly delayed, but we hope he will join us during the course of the session. The structure for today's presentation is I'm going to start with a brief overview. I'll then hand over to Rod for the financial review. I'll then come back to do a strategic and operational review, followed by current trading and outlook, and then we'll take questions. So moving straight into the overview, a brief reminder of who we are, a unique world leading provider of technology enabled language content and IP services with a really strong track record of growth, both in terms of revenues and profits. And a great story, which is one of the reasons I joined the business almost a year ago now, building from a small UK-focused business to the truly global leader in our industry that we are today. And another one of the reasons I joined this business was the really impressive client list that we serve and continue to serve. A very diversified client base these days with the top 10 about 30% of group revenues, the top 30 about 41%. Very high levels of tenure which speak to the quality of service that we deliver and our responsiveness to the changing needs of those clients as their businesses evolve. You know, revenue growth, you know, good story around revenue growth, you know, with those key accounts as we really partner with them. And that is underpinned by very high levels of customer satisfaction with an MPS score of 41. And it covers, you know, a whole spectrum of industries, which gives the business really good diversification. But that list of high quality names says a lot about us and we're very proud to serve them all. Moving straight to the numbers, a very robust performance with H1 profit ahead of our expectations. Revenues up 9% at $357 million, profits up 20% at $60.7 million, obviously reflecting a full half of SDL in those numbers, as well as obviously some organic growth. Good progress on gross margin. We'll talk more about that, but part of that is due to the early stages of us putting more volume through our language experience delivery function. CapEx at the lower end of the range that we guided to at 4% as we start to slumber up some of the investments we talked about at the Capital Markets Day. Adjusted basic EPS up 13%. An interim dividend up 13%, reflecting our continued commitment to progressive dividend policy. Very strong cash conversion at 120%. And I'll let Rob talk a bit more about that in a second. And Rocky now at the lower end of the range that we communicated as our ambition at the Capital Markets Day. So that's also, I think, really encouraging. We introduced our new growth model at the Capital Markets Day, and it won't surprise you to learn that you'll hear me and my colleagues talking about this a lot, overcoming results sessions. And as a structure, it's quite a good way to give you some headlines on what's been going on in the business in the first six months of the year. So we've had new wins in our major accounts and Globe Global, sections of our language services business. I'll talk more about all of this later on, including winning some new electric vehicle manufacturers. Pleasingly, we've seen some progress with our e-learning sales, both to new logos and cross-selling to some of our established clients. Our linguistic validation service in RI continues to grow very strongly, and we are investing in that space, as many of you know. And we have started the investments in go-to-market in sales to start to drive that growth in our technology businesses. In terms of our expertise, we are recruiting to support some of those growth initiatives that we announced at the Capital Markets Day. We're improving the way we manage our freelancers in terms of onboarding and managing them through the LXD. And our campus program, a key pillar of ESG, as well as a very essential tool for us in terms of building our capabilities in rarer language pairings, continues to expand with the addition of eight new languages in six countries in Africa. In terms of technology, we have restructured the way we run our technology businesses, perhaps bringing them more into line with the philosophy of RWS, which was clear P&L ownership. So we now have four P&L owners for the four technology areas in the business. And I think we're seeing already some early stage progress there with a return to organic growth in our language and content tech division, even after an increase in SAS revenues, which is also obviously a really positive thing. We've also had a significant win with a robotic software provider for Tridian, our content management platform. In terms of developing our portfolio, strong cash conversion continues to support our ability to grow. We've started the development of our updated data annotation proposition. We've also made good progress with the acquisition of Fonto that we announced in March. In terms of leveraging our scale, as I've mentioned, we've started to put more volume through the language experience delivery function. Our IP transformation program is progressing and we have initiated the programs that we announced in March to start to move the group onto a common finance and HR set of platforms. So those are the headlines. I'll come back in a minute to talk in more detail about the divisions, but I'll now hand over to Rod.

Great. Well, thanks, Ian. And as Ian summarised, we're pleased to report good financial progress in the first half of the financial year. Revenue was up 9% year on year. This includes the benefit of one month extra revenue of SDL in 2022. Organic constant currency revenue growth was up 1%, with good performance in regulated industries, language services and technology, being offset by an anticipated decline in IP services. Gross margin was up 100 basis points. In addition to growth, the benefits from the synergies from the SDL acquisition were an important factor. We've also increased volume through our efficient in-house translation team, LXD, and we've also been addressing unprofitable customers, and this has contributed to improved gross margin percent. Admin expenses as a percent of revenue improved by 40 basis points, again helped by the SDL acquisition program. The net result is profit before tax of £60.7 million, running at 17% of revenue. It should be remembered that the RWS profit as a percent of revenue is typically lower in H1 than the second half, and so this 17% in H1 is consistent with a full year outlook of 18%. There are a number of adjusting items which are detailed in the accounts. These include exceptional items of £9 million, as well as amortisation of intangibles of £17 million relating to past acquisitions of SDL and Moravia. Looking at reported tax, prior year included a credit of £2.4 million relating to a US tax adjustment, so reducing the comparable. Reported tax expense for H122 was £9.3 million. Once we've taken account of adjusting items such as exceptionals and the amortisation of acquired intangibles, the adjusted effective tax rate came in at 23.7%, consistent with our earlier guidance and expectations. Finally, adjusted EPS came in at 11.9 pence per share, up 13% on the prior year, and this increase is consistent with the Board's agreed increase in the first half dividend. So turning to page 10, this shows the drivers of revenue variance between H1 2021 and H1 2022 in a bit more detail. As I said, the biggest change resulted from the extra month of SDL revenue in 2022. Then looking at the operating divisions on a constant currency basis, language services showed solid growth of 2%, driven by our Go global accounts and major accounts. Regulated industries showed an improvement of 5%, with linguistic validation showing particularly strong growth. Technology grew by 2% despite the fact that SaaS new revenue accounted for 34%, up from 24% in the prior year. This dynamic suppressed revenue growth in the segment by 3% year on year, although obviously for longer term SaaS revenue is more valuable given its recurring nature. The FX impact was relatively minor, primarily due to the strengthening of the sterling against the euro compared to the prior period. Ian will discuss the business unit performance in more detail later. Turning to the cash bridge, operating cash flow before working capital movements came in at £69.7 million. Cash conversion in H1 was 120%, slightly higher than expectations, and once again demonstrating the strong cash generation of the group. Significant outflows, not surprisingly, related to dividends, tax, capex, and of course, the acquisition of Fonto. Total cash at end March 22 was 80.6 million pounds, and net cash after loans was 38.2 million pounds. For information, as is typical, lease liabilities have not been included in these figures. The balance sheet remains strong, and when comparing March 22 with September 22, there's only limited change. Some points to note are that Goodwill increased by £17.4 million, driven by the acquisition of Fonto, a movement in the dollar relative to the pound between the end period dates. Intangible assets were amortised by £24.4 million. Networking capital was relatively flat, a small improvement, with cash collection rates in H122 very similar to the prior period. So I think some of you will recognise this slide as we've presented it at our Capital Markets Day. However, this time we've broken down the 50 million of CAPEX and the 47 million of OPEX that we referred to at the time. You'll note that the first bucket, building long-term relationships, is all about OPEX, which is not surprising given this is largely about sales effectiveness. We anticipate a fast payback in these investments. The next two, Culture and Technical Expertise and Unique Technology, are a mix of OPEX and CAPEX. Each component of these investments is closely tracked and monitored to ensure we get strong returns on a timely basis. The largest bucket of investment for CAPEX is leveraging scale and reach. This again is not surprising as it encompasses three large programs, updating and simplifying our tax and HR platforms, a program that many other businesses have already undertaken. We're also improving the workflow and automation of LXD, which should allow for a material contribution to margin. Similarly, we're improving our workflow with IP services where the system is redesigned. This should improve both cost efficiency and our go-to-market. We view all these investments within this bucket as relatively low risk. They also provide a much stronger platform for future growth and acquisitive growth. That said, I wanted to give some context around the investment capex. We note in our earlier outlook that capex would peak at 7% of revenue versus a business as usual run rate of 4%. This increase to 7% equates to approximately 18% of our cash conversion. So say for this half, rather than running at 120%, we'd be running at 102%, so still healthy. A final note is not to forget M&A. We continue to actively seek accretive deals, particularly those that will enhance our future revenue profile. Finally from me, just a reminder of our capital allocation policy, which again you've seen before, which I think we view as a sort of key recipe for success at RWS. On top of the BAU maintenance, we look to invest to grow, We continue with our progressive dividend policy, as we've done this half, and we look to acquire for further growth. This creates a virtuous circle for building future value. With that, I'll hand over to Ian.

Thanks, Robert. Thanks, Rod. Right, so continuing on to dive into the business a little bit more. Obviously, at the Capital Markets Day, we announced our new strategy, just a reminder of our core purpose, unlocking global understanding, our description of our business, a unique world-leading technology-enabled language content and IP services business. Clarity around our core proposition, which is about content transformation, multilingual data analysis, and using that unique combination of technology and expertise to help our clients to grow by ensuring they're understood anywhere and in any language. Our growth model, which I've already touched on. And very importantly for me, our values. We partner, we pioneer, we progress and deliver, which are a really important part of unifying the business post the SDL merger. And I have to say, since we launched this at the Capital Markets Day, we've been running a series of communication exercises, both internally and externally with our clients, with very positive feedback to the way we have now focused the business and aligned it in a very customer-centric way. Just reminding you a bit about how we're organized but also commenting a little bit about how the business is changing. So the four divisions that we report on remain unchanged. What we have shown on here is the revenue split and I think this is important because one of the themes around our strategy was gradually shifting the group to have greater exposure to the higher growth segments. So you see here some early signs of progress there. So, bit more regulated industries, little bit more language and content technology, a little bit less IP services, a little bit less language services. So, that mix to those higher portions is already starting to take shape. We've talked about our language experience delivery function a little bit already, but I have to underpin the importance of this. It's a unique capability. It's where we blend our technology with our in-house translators, with our huge network of external freelancers. which allows us to offer a 24-7 service to our clients and allows us to optimize both quality and margin. And for those who like a little bit of numbers, the volume going through our LXD has increased from 853 million words in the prior period to 935 million words in the half year we're reporting on here. So that is a real sort of shift in volume to use there. Rod's already touched on the investments that we're starting to make to underpin, in particular, our finance and HR functions, which will again give us further opportunity for efficiency as those come in as we build some shared services off the back of those platforms. If we turn now to a review of the individual divisions, starting with language services, 2% organic growth at constant currency, slight reduction in the reported adjusted operating profit, although there is a currency effect there of about 1.8 million, which changes that a little bit. If you look underneath this business a little bit and what's been going on in here, as you may all remember, this business is roughly split 50-50 between our enterprise investment internationalization clients, who are our big technology clients broadly, and then our other major accounts and our go global accounts, who tend to be smaller businesses who are globalizing for the first time. I think the headline here is that the major accounts in Go Global had a really good first half, slightly behind year on year in our big tech clients, but we don't think there's anything particular to comment on there. They often can be a little bit lumpy. There's no loss of clients there, and we're confident of rebuilding that up in the second half. America's region was strong, including those new EV manufacturers that I mentioned earlier. Go Global was strong, and we've expanded that capability to cover markets, including Japan and South Korea. And despite being slightly behind in the first half in the tech account segment, we have had some very good revenue growth with our large global digital retailer client, and also with one of our large technology companies. So, you know, a very solid kind of first half. We're starting to also make progress on things like e-learning, which is one of our growth initiatives where we've already had some client wins and some encouraging progress with cross-selling, and we are ramping up our efforts to relaunch our data services proposition in the next financial year. If I turn now to regulated industries, pleasingly, 5% organic growth at constant currency here, a really fantastic performance in terms of operating profit. This is the division more than any which is putting more volume through the LXD. And if you look at what's been going on here, continued penetration and really good growth in linguistic validation, including collaboration with a US-based clinical trial platform provider. Solid performance with our largest life sciences client with good growth with them in regulatory and clinical work. An overall good period on period growth with 14 of our top 20 clients here. Gross margin we've touched on. I think the other thing that's worth pulling out is we have exited some loss making or low margin clients that came with the SDL merger. And I think that's absolutely the right thing to do in terms of value creation. And the effect of that is roughly about a percentage point of growth in that first half number. So it's kind of reasonably material, but very important, I think, for the long-term health of this division. Turn now to language and content technology. We're really pleased to report a return to growth in this space. It was flat for the full year last year. And this obviously is a really important part of our strategy moving forward. And that 2% organic growth belies the fact that actually we've had a meaningful shift towards SAS revenues, with SAS revenues in that mix now 34% in the period as opposed to 24% in the prior period. That obviously is really good for the long-term health and predictability of this part of the business, but it actually has the effect of suppressing that headline growth rate by about three percentage points. So it's actually relatively meaningful in terms of, again, the progress that we've made here. Profit margin reflects, I think, a more efficient go-to-market model, progress with things like cloud costs that underpin the offerings here. And I think what we have done, as we mentioned earlier, is put P&L accountability into the four product lines that we now have. That's Trados, our translation management and translation productivity brand. It's Tridian, our content management platform. Contenta, our other content management platform aimed at the defense and aerospace industries. And very importantly, LanguageWeaver, our AI and MT business. They're now in clear hands. We've had good growth in content technologies with client renewal and extensions. We've got a major new Trideon client, a robotic automation software company. And we've just as part of refreshing that technology product offering, launched a new release of TradOS Studio, which is our translation productivity tool. And we would expect that to underpin further growth in the second half of the year. I'm also pleased to report that Fonto that we acquired in the content management space has settled in nicely into the group with integration broadly on track. In terms of IP services, as everybody knows, I think, this business being hit by the long-flagged arrival of the unitary patent. It is in line with the expectations we set at the Capital Markets Day, so 8% revenue decline at constant currency. with actions underway to mitigate that impact as much as possible. So we've referred to the transformation program, which will have a more medium term effect in terms of automation and efficiency and enhanced proposition for customers. But then in the near term, we've made some changes to the sales team in this business to accelerate growth in areas like renewals and patent attorney sales, where we think there is opportunity to improve growth there. And we've also taken cost actions in the first half, roughly a run rate of about a million pounds of cost there. So we'll see, I guess, half of that coming through in the second half of the year to underpin the margin. The actual date when the industry patent comes into effect remains a bit of a moving target, but our best estimate is calendar Q4 this year. So pretty much where we thought we would be when we talked about this at the Capital Markets Day. In terms of ESG, we continue, I think, good progress on all three pillars here. We're making good progress in terms of our commitments on carbon with a shift to science-based targets being the primary focus and we're on track to submit our proposals on that for FY23. We're also currently preparing our disclosure to CDP. As I've mentioned, we've spent quite a lot of effort rolling out our purpose and values internally. Our campus program continues to expand into new countries. And especially in the slightly challenging world we've all been in the last couple of months, I'm really quite proud of some of the efforts our teams have been making, supporting things like Translators Without Borders, who help people get critical information often at really difficult moments, and that has been helping people fleeing the conflict in Ukraine. And our eye division is also really proud to have supported one of our clients at Jude's Children's Research Hospital to evacuate more than 600 children with cancer from Ukraine to neighboring Poland and then on to North America and other European locations. They're again helping with what we can do best, English to Ukrainian translations in this case. In terms of governance, our CFO and Company Secretary roles are already now separate and we just announced today the appointment of Jane Hyde, our new Company Secretary and General Counsel. She's a really experienced professional and we're excited that she will be joining us on the 1st of October. As promised, we launched our new group-wide code of conduct and the training on that across the group is underway. We've also launched our new sustainable procurement policy with supporting actions to underpin that in place across all of the divisions. Turning now to current trading and outlook. This is the chart exactly as we presented it at the Capital Markets Day with our near term and outer years guidance. I think if you think about the numbers that we've presented today, growth is clearly the focus area for us. Margin, very nicely on track. Cash conversion well ahead of those near-term targets. CapEx at the lower end of the range here, and ROKI now in that 11% to 13% range, having been just below it when we reported last time. So early days, but I think encouraging start. And we haven't talked much about M&A, but we clearly remain very focused on looking for value creating M&A will help to accelerate that shift into the higher growth segments that we've talked about. In terms of Outlook, as we've talked about, encouraging initial signs of organic growth in language and content tech with the benefits of that reorganization starting to show. New client wins across the business, especially in language services and RI. Starting to see real focused efforts on some of those growth levers, linguistic validation, e-learning, Go Global, data services, which will start to phase an impact over the next year or two. In terms of investments, we've talked about the LXD and the importance of that in terms of underpinning our gross margin. We are investing in those core technology products as evidenced by the launch of Trados Studio a couple of weeks ago. The infrastructure programs are up and running and we've made a number of changes internally to make sure that we've got the right people driving those growth initiatives with new talent like Jane joining us from the outside as well. In terms of full year guidance, our outlook is in line with the latest guidance and market expectations. We remain confident in the medium to long term drivers of demand for our products and services, notwithstanding the more challenging economic backdrop that we are all facing. And our very clear focus is on delivering the accelerated growth plan that we announced in March. That's it in terms of presentation. We now turn to Q&A. I think what we'll do is we'll start with questions here in the room. We'll then invite questions for those on the webcast and take it from there. And if you could just wait for the microphone if you're in the room and just say who you are, that would be wonderful. I think, James, you want to go first?