Smiths News plc

Good morning, and thank you to everybody for joining us today. While the format of this morning's presentation is different to usual, we hope to cover much the same ground, and I look forward to answering your questions, which we'll take at the end of the call. You should all have received a copy of the presentation, but before we get into the detail, I should say that I'm conscious that at the end of February, when our results period closed, now feels like a very long time ago. However, in many ways, this makes the group's position at that time especially relevant. in that it provides the clearest benchmark for our exit and recovery from the current period of lockdown. With that in mind, in addition to the formal results, we'll also today give an update on the actions we are taking in response to the coronavirus. And I'm happy to take questions on this at that end too. So, by way of an overview of our first half performance, the group has performed in line with our expectations for the first half, albeit that a number of one-off and non-core items have combined to reduce profit on last year. To this news, the key engine of our profit in cash was also in line with our expectations, achieving £3.1 million of cost savings and more than meeting its critical target of sustainable efficiencies, offsetting the impact of margin decline. And at the centre, we have pressed ahead with the changes that have delivered £1 million of savings and with substantially more to come following the sale of Tussle. More broadly, these results were delivered in a context of challenging strategic goals, all of which, I am pleased to say, have been achieved. The Strategic Review of Tufnells, which we announced in November, was completed. The sale and leaseback of seven Tufnells properties for £15 million was completed in November. And throughout, we maintained our prudent capital management policy, delivering positive cash flow and a reduction in net debt over the period. And so, as we entered March 2020, the general context for the group was one of continuing outperformance by Swift News, being offset by continuing weakness at Tuff North, with the key strategic goal being to dispose of Tuff North early in the second half. And then, of course, the world as we knew it changed. But despite that, we completed the crucial disposal in early May. And as a consequence, we are much better placed to manage through the lockdown and deliver shareholder value. I will look in detail at the impact of the COVID-19 pandemic on the group after Tony has covered the financial results for the period. But I would just like to emphasize three points now. Thanks to the magnificent efforts of our colleagues, we have maintained a full service to the retailers and communities in all territories. We are working cooperatively across the supply chain to ensure we all come through together and in the best possible shape as restrictions ease. And last, but far from least, despite all the challenges, we continue to trade on a profitable and cash-generative basis. I look forward to giving a summer update later, but for now, I'll hand over to Tony. Tony.

Thank you, John. I will now look at the continuing group's results in a bit more detail. With news, adjusted operating profits declined by £0.9 million year on year, reflecting a solid core performance that was then impacted by two key one-off events. A fall in the income received from news and magazine paper recycling, as market price per tonne fell by 50% year on year. And secondly, a decision by a major discount retailer to remove the news and magazine category from their stores. Aside from these factors, the business continued to perform well, with network labour and distribution efficiency savings ahead of target and supplemented by further central cost savings initiatives. This presented £3.1 million of savings and negated the margin decline. DMB returned adjusted operating profits of half a million pounds, which were in line with management expectations, but down on last year after the loss of the British Airways contract in June 2019. Group operating profit was therefore £19.9 million for the period. I will now consider some other key results in the period. Finance costs increased by £600,000 to £3.6 million, due to an additional charge of £900,000 related to the application of IFRS 16. This was offset in part by lower interest charges due to gross bank borrowings in the period being lower. The net impact of IFRS 16 on continuing adjusted profit before tax is a £400,000 charge in the period. The tax charge of £3.1 million was half a million pounds lower than last year as a result of lower profits, but the effective tax rate remains at 19%. Consequently, adjusted continuing earnings per share was 5.4 pence, 0.7 pence lower than the prior year. In line with our focus on prudent capital management and mindful of the current priority to maintain liquidity, there will be no interim dividends this year. I shall now move on to the next slide, which looks at adjusting items. Pre-tax continuing adjusting items were £7 million higher than last year, at £9.6 million. Network and reorganisation costs of £2.3 million were incurred in the period. This primarily reflects the £1.9 million cost associated with the establishment of our shared services centre in India. As mentioned earlier, the DMV operation has been temporarily suspended, save for a few remaining customers, and a significant number of employees have been furloughed. At the half-year, a goodwill impairment charge of £5.7 million has been taken against this business. triggered primarily by the COVID-19 pandemic's impact on airlines and airports' future trading prospects. Similarly, a bad debt provision of £0.9 million has been recognised following extensions and delays to payments requested by customers. Finally, the Group incurred professional costs of £400,000 related to the buy-in of an insurance-backed annuity relating to WH Smith Pension Trust. This is part of the plan to rationalise the group's pension schemes portfolio. I will now look at free cash flow, both on a continuing and discontinued basis. Overall, the group generated £9.1 million of free cash flow during the period, compared to £5.8 million last year. Continuing free cash flows were £5 million, and discontinued cash flows after the proceeds from the top-low sale and leaseback were £4.1 million. Adjusted operating profits reduced at Smithnews, and Tackle's adjusted operating losses increased. Overall, EBITDA increased by £3.2 million, primarily as a result of the transition to IFRS 16, which required rental charges to be replaced by a depreciation charge. The working capital movement in the period was a £2.7 million cash outflow. Capital expenditure for Smithnews and Tufnells was £3.2 billion higher than last year, reflecting an increase in IT and fleet expenditure in the first quarter in Tufnells. Smithnews CapEx plans remain focused on replacement rather than growth CapEx spend. The proceeds from the sale and leaseback of Tufnells properties helped to offset the Tufnells operational cash outflow in the period. Both lease payment and net interest paid increased materially in the period, due to a revised cash categorisation of lease and interest payments under IFRS 16. However, interest payable under the bank facility fell during the period as gross bank borrowings continued to fall. The cash cost of adjusting items in the period was £5 million, down compared to £6.8 million last year. This primarily represented both continuing and discontinued network reorganisation costs of £2.8 million, sale and leaseback fees of £1 million and pension buying costs of £0.4 million. Finally, I shall now turn to look at the net debt position of the group for the half year. Bank net debt of £68 million has fallen by £9.5 million compared to February 2019. and by £5.9 million from the year-end FY19. Turn death represents leverage of two times and it remains our intent to continue to reduce this over the medium term. The group has generated three cash flows in the period of £9.1 million, out of which dividends of £2.4 million were paid and the balance of the cash generated was used to reduce borrowings. Looking below the bank net deadline, The application of IFRS 16 leases accounting standard has resulted in a technical lease adjustment of £77.7 million, resulting in a revised closing debt position of £145.7 million at the end of February 2020. A corresponding rate of use asset is recognised on the balance sheet. All other bank covenants remain tested on the prior gap measure at the half year and full year. Looking ahead, we continue to focus on our prudent capital allocation strategy of reducing debt ahead of completing the refinancing of a bank facility by the autumn of 2020. I shall now hand back to John to give some more detail on the business outlook.

Thank you, Tony. Before we look in detail at the effects of the lockdown on the business, it's important to stress that Smith News is the exclusive supplier in our territory. There is no alternative distributor should we fail and therefore, in addition to the commercial benefit of doing so, we have a wider social responsibility to maintain as full of service as possible. As a consequence, our recruitment staff are designated as key workers and we have worked to four guiding principles which ensure we meet our social responsibility while safeguarding the well-being of colleagues and protecting the long-term interests of the business. These principles are Firstly, that the safety of our colleagues and customers is paramount. Secondly, that we have a responsibility to maintain as full a service as possible to our customers and their communities. Thirdly, that mitigating actions must not damage our long-term capability. And fourthly, that we must be mindful of wider supply chain sustainability and work proactively with our partners for that end. In all the choices we have to make, we have borne these principles in mind and taken the action which best aligns with these goals. So how have we done? Well, first and foremost, we have maintained our service to all territories throughout the crisis, delivering to all retailers which continue to trade with only relatively minor disruption. The social distancing requirements mean we have to introduce new procedures, and these have now bedded in. Looking at the market, At the peak, 10% of retailers closed. That's now slightly improved to 9%. But I should clarify that these have a disproportionate impact on sales because typically they were among our highest volume outlets and especially so for magazines, the most notable of which was WH Media Retail, the UK's leading retailer of magazines. Our customer service support centre in India has had its own lockdown to manage through, hence we have had to put contingency arrangements in place and are currently running a hybrid model with some UK and some offshore support. Of course, we have taken substantial measures to mitigate impact on margins, but the short shelf life of newspapers and magazines means that route consolidation is always limited and unlike other parcel deliveries, we can't elongate the timings of our delivery runs because to do so would miss the critical sale window. In addition, DMD, which supplies airlines and travel points, and in-store, our field marketing business, have been temporarily closed except for a skeleton start servicing those few customers which remain active. Across the group as a whole, we've had to furlough over 500 colleagues. So, it is clear that the crisis will have a material impact on at least H2, but the extent of that is uncertain. Margin is impacted by the reduced sales which follow from retail closures, restrictions on movement and some titles temporarily suspending publications. Total newspaper and magazine revenues are down 25% since the lockdown took place. The cancellation of the UEFA Football Championship will also impact sticker sales, although we should have a compensating benefit next year. Cost savings will help to mitigate, and I can tell you that we are looking at every opportunity in the depots and the centre to find sustainable savings within our guiding principles. But the reality is this cannot fully offset the impact at a cost-per-copy delivered level. Cash flow is further impacted by the need to credit returns for resupplies which are closed without a compensating resupply. And finally, it remains uncertain what shape the exit from lockdown will take and over what timescale. So in summary, the full extent of the impact is unclear, and it will remain so for a while yet. Subject to there being no significant worsening of the situation, we believe Smiths News operations will remain profitable and cash-generative. In the meantime, we are not standing still, but are focusing on five clearly defined immediate priorities for the group. These priorities are, firstly... Managing through the lockdown as successfully as possible. That means sticking to the guiding principles while turning every stone to mitigate the impact. Secondly, preparing the business for the easing of restrictions and the gradual return to more normal trading patterns. The implications of the exit roadmap for the new supply chain are not yet clear, but there will certainly be a need for ongoing safety measures, while high traffic flow retailers, such as those in the airports, train stations and the high street, may require more permanent solutions. Thirdly, we are pressing ahead with the resizing of the group function. Following the sale of Tufts North, there will be an immediate £4 million reduction in central overheads. In addition, we've identified a further £4 million of additional savings, and we will look to go further depending on how and at what pace we move towards more normalised trading paths. Fourthly, the renewal of our banking facilities will, we believe, be less complicated following the disposal of Tufts North, and we're working to reach an agreement by the autumn. And lastly, we need a more defined strategy to deliver shareholder value, which gives clarity of expectations to all our key stakeholders. I'm looking forward to working on this over the coming months with our new chairman, David Blackwood, and my colleagues on the board. Before I move on to questions, I'd like to take a moment to explain why we have confidence in our ability to deliver shareholder value. This slide shows some of the key metrics and achievements of Miss News over the last seven years. And the reasons I'm keen to share it is that when we talk about a leaner and more focused group, I want to be absolutely clear that this does not mean a smaller or less predictable set of returns from Connect. In fact, quite the reverse. If we look at revenue first, and as we all know, it has declined. It's done so in a predictable and established pattern. The average revenue decline over the last seven years has been well within the strategic range of 3% to 5%. which we believe is broadly the rate at which it is possible to sustainably manage compensating efficiencies. And as you can see, the savings we have achieved year in, year out, have consistently compensated for the margin impact of those lost sales. The only blip was in FY18, when the group attempted to integrate Smiths News and Tough North, resulting in distraction and diseconomism scale. But you will also note that this was swiftly recovered in 2019, when the business returned to its own focus. If we look now at the chart showing Smithnews EBITDA over that same seven-year period, it shows the business delivering a consistent level of cash returns and with percentage operating margin increasing from 2.6% to 3.2%. The reason for such strong EBITDA performance is that the business model of Smithnews operates with a low CapEx requirement and high profit-to-cash conversion. In the past, much of that has been used to support central functions and other projects But looking ahead, the more focused group will lead to a material reduction in central costs and a greater ability to deliver shareholder value. Free from the drag and distraction of personal misuse is an even better position to continue delivering the lever returns that have always been the bedrock of the group's profit in cash. And we are confident, post-COVID-19, that it can continue to do so for the foreseeable future. Since 2019, we have successfully renegotiated all of the key contracts that have come up for renewal on improved terms, and now over 80% of our business is secured until at least 2024. We remain clear that we are the market leader in this sector, with the best service for both publishers and retailers, and a deeply experienced and proven management team which understands and is wholly committed to the strategy of service efficiency and restructure. These are very solid foundations for delivering shareholder value in a measured and transparent way. The proposed rebranding of the group announced today, back to its former name of Smith News PLC, is a first step in the process of being as clear as possible on our future direction. So, to summarise before we move on to questions. Over the period, the Group has performed in line with expectations for H1, achieving its stated strategic goals and Smith's news has continued to exceed our expectations. Our current priorities are very clear. Most immediately, we must manage through the lockdown and exit phase of the current crisis without damaging capabilities. Meanwhile, we will press ahead with the resizing of the Group's deal savings and look to renegotiate the Group's banking facilities by the autumn. Looking ahead, The COVID-19 pandemic and subsequent restrictions continue to cause significant uncertainty for the group and will, of course, impact our performance in the half year. However, Smiths News has maintained its service and capability throughout the lockdown and we expect sales to gradually improve as the current restrictions are eased. The business continues to trade on a profitable and cash-generative basis and we are working through the requirements for the new normal at the same time as preparing a clear strategy to deliver shareholder value. As we have said previously, the timing and pace of the exit from the current restriction is inherently uncertain and it is therefore not possible to quantify with any certainty the impact on the full year. However, we continue to monitor the situation and we will of course protect the market as appropriate in due course. Thank you very much for listening and I am now very happy to take questions.