Smiths News plc

Good morning. Everyone should be, everyone has been admitted now. Right, good morning, everyone. Welcome to the Smiths News Interim Results presentation. Before handing you over to John and Tony to run through the presentation and go into Q&A, I'm just going to ask all attendees if they could kindly mute themselves. And then when we open up to Q&A, usually the raise hand function, we will then take questions or if you can type them in the chat bar, whichever works best. So over to you, John.

Good morning, everyone. Welcome to the Smiths News presentation. The presentation is being recorded and you'll be able to view it later on our website. For those of you that are joining us, once again, you'll be familiar with our format. I will cover our headline performance before handing over to Tony, our CFO, who will talk us through the financial results in more detail. I'll then review our operation on strategic progress, with particular focus on management through the pandemic and the impact it's had on our business and our markets. Lastly, and importantly, I'll cover our capital management policy on our plans to deliver shareholder value over the medium term. At the end of the presentation, we'll then take questions. So if we look at 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 trading circumstances since the presentation of our full year results in November 2020. Overall, profit is in line with expectations as a result of careful management of our operations through 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-19 pandemic, this is a strong performance from what is the main engine of our business. I'm pleased to confirm that our sales have stabilised and we've once again achieved the critical measure of savings and deficiencies offsetting the margin impact of the decline in core sales. To be doubly clear, we have done so without impact on service, maintaining a full service to our customers throughout the subsequent lockdowns. Meanwhile, our capital management directives are on track following the successful refinancing in November 2020. If we turn 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 lockdown two and three did not see the sharp decline that we saw in May to March of 2020, with far fewer retailers closing. Travel and commuting retailers, however, remain severely impacted and they 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. In this respect, our teams have done a magnificent job. As the country gradually returns to more normal patterns, we are confident that the progress we have made can be sustained. 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 impacts as a consequence of the pandemic. However, I can confirm they are operating at break-even or marginally better, and we are not reliant on their recovery in the second half of the year. Turning to dividends and capital management, We have been clear that we will pursue a prudent approach to capital management with a focus on maintaining liquidity through the pandemic and reducing debt in line with our new banking arrangements. The tight controls of cash, debt and capex have been achieved in line with our expectations and as we gradually emerge from Covid restrictions, we can be confident in the ongoing performance of the business. In this context, and of course subject to the performance being maintained, we are planning for the return to the payment of dividends later in this financial year. Indeed, after the bank financial covenant tests are met at the end of May, 2021. I'll give more detail on these shortly, but for now I'll hand over to Tony to take 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 in the months after Christmas. So let's now turn to the adjusted continuing income statement. Total revenue declined year on year by 11.5%, reflecting the underlying structural decline of newspapers and magazines. the continuing closure of retailers located at travel hubs, and the more general additional impact of the lockdowns in the period. Adjusted EBITDA, excluding IFRS 16 lease accounting, was 20.5 million, 1.2 million down in the same period last year. This was a resilient performance in a challenging environment with planned cost savings dovetailing with incremental cost control as the business flexed 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 8.2 million as a result of the decline in revenue and volume. However, the reduction in volume was partly offset by depot and delivery cost savings within Smith News of approximately £4 million. 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 million, a result of the restructuring implemented at the end of FY20, and includes the transfer of certain activities to a shared service centre in India. Operating profit, including IFRS 16, but excluding adjusting items, is 18.9 million down 1 million year-on-year, which comprises a reduction of half a million for Smith News and half a million reduction in DMV. Operating margins increased to 3.4% compared to 3.1% in H1 2020, which underlines the flexibility and resilience of the business model. Finance costs increased by 900,000 to 4.5 million due to the increased amortisation cost of the facility arrangement fees, 600,000 and increased interest costs and borrowings of 300,000. Adjusted profit before tax was 14.4 million, down 1.9 million, 11.7%. The effective tax rate was 20.8% with a tax charge of 3 million pounds. which is 100,000 lower than last year. Adjusted earnings per share was 4.6 pence, down 13%. However, it's worth noting that on a statutory basis, the recovery for financial performance has been more marked. Profit before tax was 16 million, up 9.3 million, with adjusted items in the period of 1.6 million credit, which relates to the reassessment of the recovery of the tough notes deferred consideration. Statutory earnings per share in H1-21 was 5.3 pence, up 3.5 pence on H1-2020, and higher by 0.7 pence compared to adjusted continuing EPS in the period. I 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. I want to 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 the challenging trading environment, the group generated 4.6 million of free cash flow compared to 4.3 million last year. It should be recognised that the business continued to be cash generated throughout all COVID-19 lockdowns. Overall, adjusted EBITDA, this time including the £3.9 million impact of IFRS 16, declined by half a million to £24.4 million. The working capital movement in the period was £4.8 million 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-19 lockdowns in the period, we did not experience any significant abnormal returns of newspapers and magazines from the closure of retailers. Capital expenditure for Smith Hughes was £3.2 million lower than last year as the company maintained strict control over 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-IFRS 16 depreciation charge, that's £4 million. Lease payments declined by £1 million to £2.9 million as some IT equipment leases came to an end in the prior period. Net interest paid has increased by £200,000 to £3.5 million as a result of higher interest rates under the new debt facility. Average borrowings of £89.5 million in the first half of the year were 9% lower than in the prior year. Arrangement fees of £2.8 million paid in the current year relates to the debt refinancing completed in November 2020. Tax payments of £2.8 million 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 2.6 million compared to 4.2 million last year. This primarily represented network reorganisation costs of 2 million and pension buyout costs with similar outlays expected in H2 2021. Finally, I shall now turn to look at the net debt position of the group at the half year. The business has continued to remain focused on deleveraging, and this is reflected in the amortization schedule in the new bank facility. The first amortization of 7.5 million was completed last Friday. At half-year, closing bank net of 70 million, excluding IFRS 16, had increased by 1.5 million compared to last year. However, compared to year-end net debt to the year-end, net debt was down 9.7 million a result of 4.6 million from positive trading free cash flow and discontinued cash inflows of 5.4 million following full repayment of temporary working capital loan provided to the new owners of Tufto's. 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 101.3 million pounds. at the half year. As I've said already, we successfully refinanced a £120 million bank facility for three years in November 2020. Our bank covenants continue to be measured under frozen gap and consequently bank net debt at the half year was £70 million, which represents leverage of 1.8 times the EBITDA, a reduction from two times at the last half year. I shall now hand back to John for an update on operational and strategic progress.

Thank you, Tony. So briefly, just to outline that this section of the presentation, I'm going to cover five topics. Firstly, the actions we have 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 for us going forward. Thirdly, I will cover our ancillary businesses and provide some reassurance on their prospects. Fourthly, our capital management policy and our approach to dividends going forward. And last but not least, our priorities and outlook for the remainder of the year. So let's start with the pandemic. On the right hand side of the slide, you can see the principles we established last year and which continue to guide us now. When we last spoke last November, we could not have known there'd be two subsequent lockdowns and these principles would be quite so core to the way we operate our business. But I'm pleased to confirm that they continue to be met without compromise through either colleagues or indeed our business plan. Clearly, the pandemic continues to impact sales and operations with disruptions in shopping, travel, commuting, as well as wider sporting events and social activities. It's these activities that drive the sales of newspapers and magazines. The second and third lockdowns were however less impactful than the first with significantly fewer retail closures, down to a circa 120 retail outlets, temporary closing, which compares to over 2000 during lockdown one. This not only helps with availability in sales, it also supports our cashflow and our index linked delivery service charges. Our contractor delivery model is a further element of resilience, which allows for greater flexibility in variable costs as volumes 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 Tufts North is also flowing through in line with our plan, as are the longer-term operational savings in the business. Our ancillary businesses have been hit harder, especially DMD, which services international travel markets. The impact across all these businesses year on year from a profit perspective is 1.4 million. Looking ahead, we've kept costs under very tight control and though there is a year on year impact in the period, they are operating at break even or slightly above. We certainly do not consider them to be a material risk to meeting our future expectations. More widely, we remain cautious and focused in our management of the 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 as lost ground as possible, albeit that our plans are not dependent on volume recovery. If we turn to sales, a graph on the slide shows the impact of pandemic on the sales over the last 18 months. As you can see, prior to the pandemic, our sales were following the established pattern of decline of up to 5% per annum. During the first lockdown, sales were dramatically impacted, especially in April and May. At the peak of the crisis in April, magazines were down nearly 50% and newspapers were down 18%. Since then, a much more stable pattern has emerged with an ongoing sales decline of circa 11%, indicating that the pandemic had reduced sales by a further 6% on top of the established declines. This situation broadly continues, and in lockdown two and three, we did not see a return to the initial reductions of spring of last year. In part, this is because of the 120 retailers that closed, But actually, you can see that the regional restrictions in magazines in the first quarter of last year had minimal impact. In fact, there was probably a greater impact from the changing of on-sale dates between monthly publications. One of the benefits of our business model is that we distribute to all retail channels, and we are not exposed, therefore, to one specific channel. For example, we all know that travelling and commuting is a sector that has remained severely challenged. However, on the flip side of that, we've seen a sales increase in our independent retailers as consumers have shopped more locally. We believe the current picture is broadly positive and compared to many other retail sectors, our sector shows a remarkable resilience despite all of the disruption. Looking at the ancillary businesses. looks like it's frozen okay so first thing to note on these businesses is they are relatively small in terms of their contribution to up to the total group ebitda so less than five percent nonetheless they do make a valuable contribution and they are complementary to our core wholesale business As such, we remain committed to their future whilst recognising they have suffered disproportionately from the pandemic. The impact on DMD sales is obvious. However, some years ago, we integrated its physical operation into Smiths News. This means there are no additional fixed costs, and therefore with careful management, DMD is running a skeleton operation at break even. And when travel returns, we would expect a pickup, but in the meantime, the risks are contained. The situation within the store is similar, with the pandemic causing major retailers to remove or reduce the amount of outsourced merchandising going into their stores for safety reasons. We expect this decision to be reviewed in time, but in-store has greater fixed costs than DMD, but we have a number of contracts that mean that we are at least covering those fixed costs, and indeed the business will make 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 upon their recovery to meet our profit in capital management expectations. So turning to capital management. This clearly is a key priority following the successful refinancing in October slash November 2020. And by the 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. 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, Indeed, further to the period end, the first net debt amortisation payment of £7.5 million was made in April 2021. So, looking to our policy, I'm pleased to outline today our objectives are, firstly, to the reduction of net debt to one times EBITDA by the end of 2023. through firstly, strong free cash flow, which supports 15 million of annual amortization on term loan A, and then the application of any cash from the Tufts North Deferred Consideration and the pension surplus against term loan B. This will then allow us to maintain net debt at around similar levels beyond 2023. We plan to maintain capex in line with depreciation of circa £4 million per annum. Any additional capex required for growth will achieve a return of at least our adjusted cost of capital. We will return to the payment of dividends from the second half of this financial year with a dividend cover of two times. However, under the terms of our current facilities, our ability to make dividend payments is restricted to £4 million in the current financial year and £6 million in each of FY22 and FY23. 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 by the way of special dividends. So hopefully our strategy for shareholder value is founded on three distinct components that are now clear. The cash benefits of reduced interest payments, boosting profit before tax. The potential for 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 payment of special dividends to our shareholders. So, in terms of our outlook, the prospects for our 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 I'm trying to meet market expectations for the full year. Before closing, I would like to make a personal comment, however, which goes to my colleague here, Tony Grace, who we've announced today will be retiring at the end of this calendar year. I'd like to thank Tony for his contribution and commitment to the business. And I'd also like to thank him for his personal support to me in my time in this role. If we think back to when Tony joined the company, he has played a huge role in helping us navigate through an immense amount of challenge and indeed change. It's very much to his credit we've come through stronger and clearer in our direction and prospects. On behalf of the board, we'd like to wish him well in his retirement, and I'm delighted to be around for a good few months yet to enable a smooth transition to his successor. Beyond all of that, I'm very happy to take any questions anyone may have.

Thanks, John. If anyone wants to put their hand up within the chat function, I can see Owen already has. Thank you. Owen, I'll unmute you in a second.