Smiths News plc

Before I start the presentation, I'd just like to take a moment to introduce Paul Baker, our new CFO. And Paul will no doubt talk a little bit later in the finance section. And I'd also like to pay tribute to Tony, the outgoing CFO who's He's done a fabulous job for us over the last three years and I personally valued not only his contribution to the business but his advice to myself and will be sad to see him go. So I just want to acknowledge that. So shall we start with the presentation? So if we turn to the headlines. So let's begin with an overview of the year. I'm pleased to report a continuation of our progress with the performance ahead of market expectations and another year of delivery against all of the key priority areas we've set out to achieve. EBITDA of 42.6 million is up 9% from revenues which are actually down 4.7%, but are back in line with the historic normal of 3% to 5% decline. Free cash flow has more than doubled to 24 million, and bank net debt at year end has reduced by a third to 53.2 million, with a reduction in our average net debt of circa 20 million. What's especially encouraging is this progress has been built on solid foundations, giving confidence that the business is better placed to deliver shareholder value than it has been for several years. Looking at our operations and what have been hugely challenging circumstances, we've maintained our laser-like focus on service and efficiency, on which all of our plans and prospects depend. Throughout the year dominated by the pandemic, we have served our communities without fail, made efficiency savings of £6 million, driven one-off sales opportunities such as the Euros, and worked closely with our retailers and our publishers as the markets emerged from the most disruptive period in recent memory. Our people are rightly proud of this performance because it's their commitment and initiative that has largely driven this. In July, consistent with our commitment to meet the needs of all stakeholders, we returned to the payment of regular dividends within the scope allowed by our financing arrangements. And it is our intention to maintain that momentum for the final dividend announced today. Tony will, of course, touch on this shortly. It is also our intention to reduce our net debt to one times EBITDA, and again, we'll touch on this shortly. In August, we began to feel the impact of the inflationary pressures in distribution markets, and these have since increased, confirming in our minds, at least, that this is not a temporary blip. I'll talk about our approach to managing these challenges later in the presentation. As we look ahead, therefore, there is a course of mix of opportunities and indeed challenges, both in the short and longer term. but we are addressing these from a position of much greater stability and strength. As such, I'm confident we are well-placed to continue to create and grow value, delivering strong profits in cash that are used to meet the needs of our shareholders, our financial partners, and the future, indeed, of our business. And now, Lysander, it's Tony to take us through the numbers.

Thanks, John, and good afternoon, everyone. A great pleasure today in presenting my final set of results for Smith News before handing over to Paul. not least because they confirm a strong performance which shines a light on the underlying strengths of a business that shall in many ways be sad to leave. Let's start with revenue, which at minus 4.7% year on year, has returned to within the historic range of structural decline for the market. Given the ongoing disruption of the COVID-19 pandemic, this is a great result reflecting the market's resilience and the ongoing strength of demand, for traditional newspapers and magazines. Adjusted EBITDA on a pre-IFRS 16 basis, which is the alternative performance measure used by management to manage and control the business, increased by 9% to 42.6 million. Operating profit at 39.6 million is a 12.8% increase from the previous year as a result of improved margin and continuing strong cost control. Operating margin of 3.6% compared to 3% in financial year 2020. Net finance charges increased to 8.7 million due to the fees and expenses associated with refinancing the business in November 2020. With an effective tax rate of 14.9%, the adjusted tax charge for the year is 4.6 million, which is 0.4 million higher than the previous year. Finally, adjusted earnings per share of 10.8 pence is an increase of 11.3% year-on-year. Coming now to adjusted items. There has been a significant decrease in the value of adjusted items compared to the previous year. The total charge after tax in the year is nil, which compares to 11.7 million in FY20. Charges in respect of network and reorganisation and asset impairment have reduced by 6.9 million and 4.8 million respectively compared to FY20. The major elements of adjusted outcomes in the current year relate to the impairment of a joint venture investment amounting to 4.6 million, costs related to the wind-up of the pension schemes, £1 million, and £1.1 million of costs related to transformation and long-term planning programmes. These have been offset by the £3.5 million accounting unwavering on the Tufts' deferred consideration as recoverability became clearer and more certain. And in fact, £6.5 million of the first payment due under the agreement was received last Tuesday. Free cash flow, a very strong message here as the company generated 24 million of free cash flow in FY21 compared to 10.9 million in FY20 and an increase of 120%. The significant improvement has been driven by increased EBITDA, 4.6 million, improved working capital of 6.7 million and lower capital expenditure of 4.6 million These have been partially offset by higher net interest and fees, 3 million, and 4.1 million of additional taxpayers. Looking at net debt, the closing bank net debt of 53.2 million represented 1.2 times even that. It compares to a rate of two times in the prior year when reported closing bank net debt was 79.7 million. The reduction in net debt is driven by two key factors, the $13.1 million improvement in free cash flow versus FY20, and the cash inflow from the repayment of the $6.5 million working capital loan made to the buyers of Tough Notes in May 2020, which was repaid in October 2020. This item alone represents a $13.2 million improvement year on year. I'll now hand over to Paul to introduce himself and discuss the impact of IFRS 16 on our results.

Thank you Tony and good afternoon everyone. Before I talk to this more technical slide, let me briefly introduce myself. I joined the company as Chief Financial Officer on the 4th of October and have been actively engaged in a thorough induction program since day one. In the last four weeks, I've managed to meet more than 90 leaders of the business and visit three operational sites to get a hands-on understanding of our operations and our business model, as well as spending time with our advisors and auditors. It's been a busy time, but exciting. And as you've just seen from Tony, Tony's presentation, The business, the financials of the business are solid with strong cash generation. But what has also impressed me in my first few weeks is the passion the people in the business have for what they do and the depth of their understanding and control in managing the operational performance. The planning and measurements within the business reflect this attention to detail, giving me confidence as I take up my new role. Now back to the charts. In our financial performance, we use an adjusted performance measure of pre-IFRS 16 EBITDA, which Tony mentioned. This subtracts 7.7 million of operating lease charges from our statutory IFRS 16 EBITDA of 50.3 million. I know many of you already use the IFRS 16 measure, and we will reference this more going forward. The lease charge within the business primarily relates to our 37 distribution sites. and the underlying impact is broadly consistent year on year. The reported net debt of 81.2 million includes lease liabilities of 29.2 million relating to 44 leases with an average total length of six years. When you also add back the unamortized bank fees from the 2020 refinancing of 1.2 million, you get to an adjusted bank net debt of 53.2 million, which Tony referenced. I look forward to speaking to you all in the future, but for now, back to John.

Thank you, Paul. Thank you, Tony. So let's look at the year we've just completed. Looking at the activity behind the numbers, we can see an immensely busy and challenging year, but a year, importantly, where we once again delivered on all of our promises. Back in November 2020, we secured the last of our major publisher contracts, and we were in deep negotiation for our banking arrangements. We were also, at that time, cautiously optimistic about the likelihood of there being fewer social restrictions. Clearly, that didn't prove to be the case. And by the late autumn, it was clear that we were in for a tough time, from a winter perspective, with the reposition of lockdown, the so-called Council Christmas, and a long period when a return to normal working life seemed a distant prospect. And yet our markets proved remarkably resilient. The majority of retailers remained open and we in turn provided a full service, helping to maintain both sales and delivery service charges. The result has been a gradual recovery from the deep lows of spring 2020 and an overall performance which at minus 4.7% sits within the long-term trends for our industry. Importantly, as the volumes increased in the second half of the year, we were able to contain the increased distribution costs proportionately so that the benefit flowed through to the bottom line. Even more importantly, our cost savings have once again offset the decline in our core margin, driving profit and cash growth this year. Whilst nobody can be certain the pandemic is entirely behind us, we look forward with increased confidence, but we'll continue to plan on realistic and prudent assumptions of the market trends. Longer term, we must also acknowledge the pressures on all distribution businesses in relation to sustainability and our impact on the environment. We've always been a responsible business and have a track record of making meaningful improvements, but this year we started the process of looking and challenging ourselves even further. Our aim is to take an active role in shaping solutions that are compatible with our best interests and meet the needs of our wider stakeholders. More on this shortly. At the half year, our interim results confirmed the progress we were making with a financial performance that was ahead of pre-pandemic comparative period. Cash generation and broader capital goals were on track, allowing later in the year for the return to the payment of dividends after a two-year gap. And as we close the second half, we have maintained our overall momentum despite the early signs of inflationary headwinds. As I said earlier, I'll come on to talk about that. And then finally, into this financial year, we have two further highlights to report. Firstly, on the 2nd of November, we received a payment of £6.5 million in relation to the deferred consideration for the sale of Tufnall's. The proceeds will be used to reduce bank debt further. Secondly, we received confirmation from the trustee of the defined pension scheme that they will return to the company the cash surplus that arose from the buyout of the scheme by legal in general in March 2021. The surplus net of additional professional fees and tax charged is £8 million and is expected to be paid to the company later in this month. Again, the proceeds will be used to reduce net debt, and this puts us firmly on track to deliver on our target of net debt at one times EBITDA, but ahead of our initial August 23 target. If we think about our plans and priorities, again, we're on track. We have an excellent control of our operations in terms of both service and costs, and we have clear plans to maintain this performance over time. We are targeting 15 million of cost savings over the next three years, and we are open to new thinking about how we can extend our vision for sustainability. We are a market leader in our markets, and all of our behaviours represent that. Our sales and markets have stabilised from the disruption of the pandemic, and significantly, we have not seen the closure of large numbers of news retailers. This helps support both our sales revenues and our delivery service charges. Looking ahead, there are opportunities for the recovery to continue in the short term with a greater return to travelling and indeed commuting. Importantly, we should remember that this business has three multiple income streams, newspaper margin, magazine margin and carry service charges. And it means that the impact on our margin is typically two to three percentage points lower than the headline decline in sales revenues. And finally, looking at capital management. In the improvement of our underlying finances, we are strengthening the foundation of future shareholder value. Smith News has always been cash-generative business, but it is the prudent management of that asset, which has delivered reduced debt, control of capital expenditure, and the return of dividends, which we are committed to growing in line with our continued financial progress. So let's look at sales. As you can see, this is a three-year view of our markets, and they were severely impacted by the first lockdown, but it did follow by a relatively swift improvement as retailers reopened, albeit with sales still showing a significantly greater decline than the typical structural trend. The recovery of the summer and autumn of 2020 then slowed somewhat as we moved into regional restrictions and then later the second lockdown. However, it's easy to see the adversarial impact in the chart on the right hand side. It's interesting to note the relatively lower volatility of newspapers compared to magazines, in part due to the high volumes sold through local independent retailers. Whilst the last few months have been positive, the situation remains fluid. And what is hardest to predict is exactly how much of the lost sales will come back as commuting and travel passengers return. As it stands, we estimate the pandemic to have impacted the market by roughly an additional 5% over and above the decline we might have expected across the two-year period. Looking ahead, we are planning on the basis of a return to the previous trend of minus 5%. But we remain both alert to the potential for further disruption and indeed for the opportunities for further sales gains. Before closing my review of sales and costs, I also want to look at the inflation repressions and put them into context. The background will no doubt be familiar to everybody. There are some particularities, however, of our model that it's worth explaining. Firstly, it is clear there is a national shortage of drivers, not just in HGV categories, but all levels, including smaller vehicles and subcontractor operators. less well publicized is the pressure on warehouse operatives in part driven by brexit and the availability of labor and in part we believe by lockdown the reassessment people have made about how they want to manage their working arrangements and lifestyles looking ahead there is no escaping the increasing costs and certainly they will be an additional element of emergent pressure this year Of course, we will see sensible efficiencies and offsetting opportunities, but as a matter of policy, we will not take measures which might flatter the numbers in the short term, but endanger the business and its reputation down the line. Service KPIs are critical not only to our contractual obligations, but also to the wider efficiency of our operations, which is why maintaining them is paramount and non-negotiable in our approach to managing through the issue. In this regard, our contractor model provides us with some limited protection because we renew these contracts on an annual basis. And just as importantly, we have a good relationship with our subcontractor delivery drivers. On the positive side, this gives us some breathing space to ensure the actions we take and the investments we make are carefully judged and targeted. And there's also much we can do to ensure that we have the most efficient routes within the caveat of maintaining our service KPIs. And you can rest assured that we'll leave no stone unturned in our search for sensible mitigations. But for all that, we must recognize that the pressures are not just the result of media headlines. They're real and they require robust solutions. It will be a false economy to overcut today if it damages our capability for tomorrow. Therefore, we currently estimate the impact on EBITDA this year will be in the region of £2 million per annum after the cost mitigating actions we plan to take. Now onto sustainability. I mentioned earlier this year we've taken the opportunity to review our approach to sustainability and ESG goals. By way of context, it's worth stating that we've always been a responsible business, leading the market in many ways. It's also clear that stakeholder expectations are changing and that we must all look further into the future than perhaps we have previously thought. I could go on, but I'm sure the direction is already clear to us all. So we have set out to create a proactive vision embraced by our people and shared by our stakeholders. We want an holistic approach, not limiting our ambition or isolated targets, Or narrowing our focus too much by adopting the format of the UN Sustainable Development Goals, together with the measurement standards of the Global Reporting Initiative, we hope to bring greater transparency and direction to our sustainability strategy. We already have adopted a five pillar approach based on the UN SDG and GRI standards, and you can see them on the right hand side of the slide. but given the limited time today i will not will not go through those in detail but you'll be able to see them on our website and indeed in our annual report if we think about the longer term we have a number of ambitions and these if if you like help set the compass for our future direction of travel these include the migration over time to non-fossil fuel vehicles in our fleet and that of our contractors by 2035 net carbon neutral warehouses by 2030 a colleague engagement score of 70% or higher each year, and a material improvement to the level of diversity in our leadership population, including the board. In addition to that, we will continue to support our homeless charity, Pass It On. Now, of course, it's fine to have long-term targets, but it's important to have tangible short-term targets too. And we have those as well. So this year we'll be introducing electric fleets for our locations that are servicing the London airports. We've already run a carbon neutral conference in October, and we already buy all of our electricity from renewable energy providers. In the year we've just completed, we reduced our use of pallet shrink wrap by 79%, and by better sorting and recycling, we've diverted 100% of our waste from landfill. These are all the sorts of things that we do year in, year out, and are well understood in our business, but perhaps we've not done a good enough job of explaining it externally. So let's turn to our priorities. You would not be surprised to hear that service and efficiency remains very much at the top of our list. It's intrinsically linked to our business model, the cash flow generation, and how we plan to mitigate some of the inflationary pressures. It's also interesting to note that one of our developments over the last 12 months has been that of EPOS-based returns process. This has been designed to enable our largest retail customers to improve the category profitability by reducing the labor they dedicate to the category and reducing their shrink levels. We think this is an important commercial goal for our business. We also think that the sustainability agenda that we've developed will be an important part of the tender process for contracts in the future. And therefore, it's very much aligned to not only the broader kind of global strategy around sustainability, but also our corporate one. Linked to that is the commitment of our people. You'll have heard me say probably before that harnessing their talents and commitment, ensuring that we drive their engagement and improving diversity and inclusion is fundamental to what we do. We are a people business. We have a number of smaller ancillary businesses who found the pandemic period more challenging than actually the core business did. And to put that into perspective, we have a business, DMD, that put newspapers and magazines into airlines around the world. Understandably, that business was impacted by the pandemic. And whilst it was never a drain on cash, it wasn't providing the contribution that it would have otherwise provided. We are hopeful that over the next one to two years, we'll start to see a better recovery of that business. Importantly, our plans are not dependent on the recovery of that business or any of our ancillary businesses. So I think it's important to say that our prudent approach to capital management remains unchanged. We will retain our firm grip on cash, capital expenditure and the reduction of net debt. And with regard to dividends, within the constraints of our current financial agreements, we will seek to deliver regular and growing dividends whilst meeting the investment needs of the business. So to finalise, We have delivered a strong performance in a challenging year, once again delivering on all of our commitments. Our progress has been founded on the focus and close control of our operations with a determination to come through the pandemic as a stronger business. In that regard, we've achieved all of our critical targets. From a shareholder value perspective, we've materially improved the underlying finances, strengthened the balance sheet, and with a significant reduction in net debt. We've held true to our promise of a proven capital management approach, ensuring that cash generation benefits all stakeholders. And in that regard, we've restored the payment of dividends and are committed to regular returns for our shareholders. In terms of the outlook, well, in some ways, the flight path is more predictable than it's been for a number of years. Our markets and business model continues to demonstrate resilience and we have opportunities as society moves back to a post-pandemic norm. We must, however, recognise that the inflationary pressures in distribution markets are real and immediate, and we must manage these in a sustainable way. And in terms of current trading, I'd just like to mention the fact that year-to-date trading is in line with the Board's expectations after the allowance for inflationary pressures that I've so far mentioned.