Smiths News plc

Welcome, everybody. Thank you for joining us today. Ideally, we would have liked to have been meeting face to face, but actually because of the inconsistency of the rail network at the moment, we felt it was more practical just to have a virtual meeting. But we're very much intending and hoping that when we come to half year results, we'll be back face to face. So without more of ado, let's make a start. So welcome to our Smith News annual results. The presentation is being recorded and will be available to view on the investor section of our website later this afternoon. Together with Paul Baker, our chief financial officer, we will cover the highlights of the key events of our year, review our financial performance and give some wider context on the progress we've made. It is, I believe, a strong story, reflecting the underlying stability of Smiths News and its markets and what has been, by anyone's standards, a very uncertain economic environment. The second part of today's presentation, I'll also give some insight into the assessment we've made of opportunities to enhance our core business through organic growth and potential entry into new markets. For clarity, what I plan to share is our approach and direction, not a specific route map. To make it as tangible as possible, I'll give some examples of the trials initiatives we have underway. But the key message here is we're already testing our strategy in a low risk way.

We will of course welcome any questions anyone may have at the end of the formal slides.

So, starting with the headlines, we've delivered a good performance, underpinned by a determined focus on our key deliverables, together with some pragmatism in achieving our short-term goals. As a result, performance is ahead of expectations, with adjusted profit before tax up 0.6% to £31.1 million and adjusted operating profit of £38.1 million down 3.8%. Free cash flow of £48.2 million is an outstanding performance, up over 100%, benefiting from the planned one-off that came through in the first half. As a consequence, year-end bank net debt of £14.2 million is down by 73%, well below our target of one times EBITDA by the end of 2023, and frankly, a transformation from where we were just three years ago.

There's no one single factor for achieving these results.

Rather, they're founded on sustaining the positive circle of close cost control, maximising sales and an agile response to ancillary revenue opportunities. Looking ahead, these qualities will remain essential. As I indicated earlier, we're in a strong position to continue delivering value to shareholders alongside the important service we provide to our publisher clients and retail customers. Our reduced borrowings mean we can be confident in paying dividends this year to the full extent of the £10 million cap that was agreed under the new banking agreements from December 2021. The recent award of publisher contracts amounting to 35% of our total revenues and over 50% of our magazine revenues sends a clear message about the future shape and security of our network. And finally, we have identified a range of options to enhance the core by taking our skills and assets into adjacent markets. I'll talk later about these, but for now, I'll hand over to Paul, who will talk you through the numbers in more detail.

Thank you, John, and good morning, everyone. Starting with the financial headlines on slide five. revenue was down 1.8%, a better performance than the pre-pandemic decline of 3% to 5%, and was buoyed by better-than-expected one-shots from magazine sellers. The impact of inflation was managed in line with guidance given earlier in the year, with the net impact of £2.1 million largely flowing to adjusted EBITDA, which was down £1.9 million at £40.7 million. Adjusted operating profit down £1.5 million will become our new profit performance measure from 2023 and includes both depreciation and IFRS 16 lease accounting adjustments. Re-cash flow increase 100% to £48.2 million and includes the final settlement of deferred consideration from Tufnells of £14 million and the return of the pension surplus of £8.1 million. Both receipts were used to pay down debt in line with the terms of our financing agreement. As a result of these cash inflows, bank net debt was reduced to £14.2 million at the year end. Reported leverage is now 0.3 times EBITDA compared to 1.2 times last year. Average net debt, meanwhile, reduced 40% to £49.9 million for the full year. we are pleased to show a dividend per share of 4.15 pence for the year. We have increased this dividend from 4 million in 2021 to 10 million, which John referred to in his headlines. Now onto the adjusted income statements on slide six. The 1.8% decline in revenue has a 20 million impact at the top of the income statement. The impact as a profit level, however, is mitigated due to the strong product mix towards magazines and one-shots. We shall cover this further on the next slide. As I mentioned on the previous slide, the main driver of the 1.5 million reduction in operating profit was the net impact of inflation of 2.1 million. As previously guided, we saw pressure on contractor and warehouse staff costs from early in the financial year. which we have managed to offset through cost reduction measures and the benefit of higher pricing on the sale of waste paper. As we move into 2023, we're still subject to inflationary pressures in the broader economy, but we are not seeing the same level of staff and contractor shortages we did this time last year. As a result, we remain confident that our cost outlines and additional revenue activities will enable us to offset the annualisation impact of inflation as we go forward. The net financing charge was reduced by £1.7 million due to low levels of debt, and as a result, profit before tax increased to £31.1 million. The tax charge at an effective tax rate of 17.4% was £1.2 million higher than last year, which benefited from the final utilisation of the Tufnells losses. Adjusted items after tax of £2.3 million were £2.2 million higher than last year and included a £4.4 million provision for bad debt following the administration of the McColls retail group. Excluding the impact of McColls, adjusting items continue to reduce from prior years. Adjusted EPS is maintained at £10.8 as lower profit is offset by the dilutive impact of our own share purposes. Now moving on to slide seven and revenue. It is worth explaining how this year's result fits into historic trading patterns and the impact on profitability. Newspapers continue to decline, but at the lower end of historic ranges. This has been supported by cover price inflation as publishers look to recover higher input costs. Magazine sales were declining at 5% or 6% prior to the pandemic, and have also shown some resilience with a decline at less than 3%. Higher levels of travel and a year free of lockdowns have helped support sales levels. One-shots performed very strongly, up 43% year on year, and are now contributing more to our profit than before the pandemic. While sales have benefited from the return to school compared to 2021, the publishers have had a real success with Pokemon and Premier League football trading cards, which are sustaining sales into 2023. This chart shows the last 12 months' improvements in bank net debt, which, supported by 22.1 million of one-off receipts, showed a 73% reduction. Closing net debt of 14.2 million is 0.3 times EBITDA compared to 1.2 times at the end of 2021, and well below our target at one times. Average net debt, which is more representative of our overall borrowing levels, as it takes into account the material work and capital movements we have each month, reduced by 40% to £49.9 million. In the last quarter, this average net debt dropped further to £34 million, compared to £73 million in Q4 last year. Operating cash flow on this chart represents the underlying cash generated by the business available to pay down debt and to pay dividends. We expect similar levels of operating cash flow from the core business for the foreseeable future. We have used the next slide, which is slide nine, to set out modeling guidance. We use a basic premise that both profit and underlying cash flows are maintained. Declining newspaper and magazine revenues are offset by cost out savings and other mitigating measures and ancillary revenue activities. Net debt and interest both reduce as a result of cash flow generation. Interest has a Sonia underpin and will therefore move in line with base rates. CapEx of 2 million in the last two years has been lower than guidance. The depot refurbishment and IT improvement programmes, which are now underway, should increase this CapEx to around 10% of adjusted operating profit on average going forward. And the dividends of 10 million that are permitted in the banking facility, we hope to maintain. And finally, just a brief update on a change to the headline performance measures the business will use in 2023. The business will move from the current adjusted EBITDA pre-IFRS 16 to an adjusted operating profit APM, which is a number you will see on our income statements. This will enable the business to continue to focus on operational performance, including the impact of leases through depreciation, whilst moving away from the historic measure. Thank you, and it's now back to John.

Okay, thanks, Paul. I'd now like to spend a little time looking at the key drivers in the core businesses here. For top priorities, we have so relentlessly pursued and where the position is in terms of our future opportunities and direction. There should be no major surprises in this first section, but I'm sure the sharp-eyed amongst you will have noticed the title I've used here, which is Enhancing the Core. More of that later. That's because, as I said earlier, I plan also to share the outcomes of the work we've undertaken to identify avenues for growth and the judgment calls we will have to make to enhance the business in a way that continues to meet the needs of all stakeholders. But first, let's look back at those key drivers. In essence, there are four major factors. Firstly, the gradual fade out of the impact of the COVID pandemic, aside from the Omicron variant, which amazingly was only this time last year. We are now coming around to a point where the various restrictions are no longer a significant year-on-year influence to our UK wholesaling operation. Secondly, sales of newspapers and magazines have returned to best and historic trends, albeit with softer annual caparals in H1. Pleasingly, the margin benefit from the sale of one-shots and stickers and albums has been sustained throughout. Thirdly, the cost mitigations to help offset inflation have been ongoing throughout the year, and as a result, we have limited the net impact to our forecast of circa £2 million. As you would expect, there will be some carry-in to the current year, which we've allowed in our forward planning. And fourthly, through a range of initiatives ranging from small tactical gains to opportunities with longer-term potential, we have generated welcome additional revenue that we are confident we can repeat and develop further. Finally, the improvement to our debt and cash flow, benefiting from the expected inflows but also from the disciplined management of capital, has reduced our interest payments and, as I said earlier, transformed the underlying financial strength of this business. This in turn supports the increase in dividend, while the new contracts give us confidence in the ability of cash flows that will further underpin shareholder value going forward. As I said earlier, no surprises, I hope. It should be no surprise, too, that we have made good progress with the priorities we set this time last year. I don't propose to go through each one that's listed here. The key point I want to make is that the results we've delivered have the cost of compromising our future, and this remains a fundamental philosophy of the running of our business. And hence, looking forward to the future opportunities, we should be clear that we're building on a very solid core business with a clear path to sustaining value generation. Historic drivers of service and efficiency are once again the key challenges we face, and our track record, skills and expertise mean we are well-placed to continue managing these imperatives. Our markets have stabilised after the disruption of the pandemic, and although wider economies are under pressure, we have benefited from both price and margin links. And finally, the contract renewals are a milestone in securing our future. Our model is based on long-term partnerships and a matching commitment to the supply chain. And we are confident of reaching equivalent agreements with the other major publishers in due course. So in short, this is one of the core values of our model and all the work we've done in relation to the future is focused on how we build from these foundations. That's why it was so important that we first establish the underlying financial strength and flexibility that will enable us to enhance the core by moving up the value chain as the right opportunity to present themselves. Thoughts of the future and beyond the core. Are there opportunities to leverage our network, skills and relationships in new markets without diminishing our all-important focus? And how do we grow the business in a way that's ambitious for the long term, but remains mindful of the immediate needs of all of our stakeholders, and indeed the missteps of our past? These are the questions that many shareholders have been asking us, and I'm conscious of wanting to try and provide some meaningful insight without laying out every single detail in a way that might create actually new barriers to our executions. So before I come on to the specifics, it's worth saying that in looking ahead, we first tested our business model and its capabilities against trends and opportunities that are emerging in our market and those that are adjacent to our market. All the options for growth we've identified are grounded on these twin tracks of a robust market assessment and a detailed review of our capabilities as they stand today. This robust analysis included assessments of opportunities against the macro trends in logistics and distribution, forecasted changes in consumers' behaviours, the future requirements of our publishers and retailers beyond what we do for them today, and last but not least, the practical transferability of our skills to give us a competitive advantage. In parallel to this review, we've also set out a set of guiding principles to ensure our strategy meets the needs of all stakeholders. First and foremost, we will seek to enhance our core business and will not allow the pursuit of growth to distract our progress. In short, we will grow from this enhanced core, not in isolation of its foundational importance. This is what we mean when we talk of pursuing adjacent opportunities rather than outright diversification. Secondly, where possible, we will prioritise opportunities to facilitate enhanced partnerships with our existing retail customers and publisher clients. Thirdly, and this is pivotal to what we have to say today, we will pursue an adaptive and agile approach, combining all gathering opportunities with focused, bolt-on acquisitions. Importantly, we will test and explore opportunities through real-life trials, rather than textbook theories or detailed modeling assumptions. And finally, we'll maintain capital prudence throughout, ensuring the investment parameters allow for continued strong dividends without materially higher levels of debt. So what are some of the tangible opportunities we've targeted? Well, we've identified a range of adjacent opportunities that both play to our strengths and enhance our core business. From all of the top half of the graphic, we have the opportunity to leverage our physical capabilities using latent or spare capacity, either directly or in partnership with others. This is about expanding our service to existing customers or partnering with the logistics provider to use spare capability in our network. In the middle, we have a supply chain integration, which refers to Miss News playing a bigger role in our existing supply chain. And towards the lower half of the spectrum, we have direct consumer sales, which also represents a potentially large opportunity to partner differently with suppliers and retailers. Lastly, category and data partnerships refer to opportunities to work with suppliers and customers using our depots, data, and technology systems to manage the supply chains of complementary categories. And in line with the principles of first testing our capability, and indeed testing market appetite, we have a range of initiatives already underway. So let's start at the top with service expansion. In Birmingham, we have launched a service for cardboard and plastic waste collection that backed on to daily deliveries. It offers a simple solution to what is a growing issue for retailers, and after encouraging early trials, we are now expanding it and have around 50 customers signing up each week. For logistics services, We've partnered with a major national courier to provide storage and sortation using spare capacity at a selected depot. In relation to supply chain, we now have two national home delivery businesses operating from within our facilities. To give some idea of scale, New Seymour Lone delivered to 60,000 homes, making 420,000 home deliveries a week. If we look directly to consumers, we recently made a seed corn investment in a joint venture with Lucid Digital Magazines. It's called MyMax, and it's been developed with publishers and readers to create a one-stop shop solution that enables consumers to browse and order single issue magazines and newspapers digitally. and then to swiftly download these to their tablets or phones. By offering a simple solution that's accessible at the fixture or in store, My Mags complements traditional print sales and effectively increases the range of titles that are available in stores, albeit digitally. And then finally, in category-endangered partnerships, this summer we supplied and serviced over 50,000 DVDs into a leading supermarket using our EPOS-driven replenishment and our systems and depots. It meant that the stores did not have to handle or hold stock, process returns or forecast demand. From the retailer's perspective, it's a super simple solution for an otherwise time-consuming and complex to manage category, while from our perspective, we are simply applying our existing deliveries, invoicing relationship, and smart replenishment systems to a new product category. So as I said earlier, these are some of the trials and tests that are already underway. And at the risk of laboring the point, they cover a range of options for growth, all of which are adjacent to our markets and complementary to our existing capabilities. They are also part of the process of evaluation we've established. And whilst we're excited about their prospects and potential scalability, we're also realistic enough to know that some will work whilst others will prove too complex or distracting. Understanding which are the most appropriate is precisely the purpose of approach we've adopted and the principles we've set out earlier. Importantly, the progress we've made so far in the core business means we can choose carefully on those decisions that will shape the company's future. In the meantime, we have very clear plans and priorities to continue delivering value. From sustaining the core business to generating the cash flows that underpin strong returns, we focus on all the action in between. And confident we have the right balance of ambition and realism that's necessary to sustain progress. The fundamentals of great service and tight cost control remain central to our operating model. The renewal of our contracts in a way that works for all parties will give further certainty and visibility of cash flows, Investing in capability through people, system and processes will help the core but also complement our pursuit of growth. And the last but not least, we will seek to maintain strong returns for our shareholders, paying dividends subject to performance up to the full limit of the £10 million can. This overarching commitment to the reliable delivery of tangible value remains our number one priority. So in summary... We believe we are well-placed to grow shareholder value. The core business has come through some difficult years in good shape, and it remains a solid foundation for tangible value creation. The discipline we have shown these last three years has not only strengthened our finances, it has given us the flexibility to explore new opportunities without compromise to the deliverables that our stakeholders expect and indeed rely on. In terms of outlook for the current year, we've made a good start. Our markets return to historic trends and the relative predictability that brings. Inflation remains a key pressure, but it's within our forecasts, and year-to-date trading is in line with our expectations. So that's the end of the formal presentation, and Paul and I would now be very happy to take any questions you might have.