Smiths News plc

Good afternoon and welcome to the Smith News PLC interim results investor presentation. Throughout this recorded presentation, investors will be in listen-only mode. Questions are encouraged and can be submitted at any time by the Q&A tab situated in the right-hand corner of your screen. Just simply type in your questions and press send. The company may not be in a position to answer every question received in the meeting itself. However, the company can review all the questions submitted today and publish responses where it is appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Jonathan Bunting, CEO. Good afternoon to you, sir.

Good afternoon everyone. Welcome to Smiths News PLC's interim results for the first half of 2024. I'm delighted to report another robust performance from the business over the last six months. Furthermore, we have this morning announced our new finance facility and revised capital allocation policy and I look forward to discussing this in more detail alongside our progress to date with you this morning. Today's presentation will follow our usual format. I will cover a summary of the highlights. Paul Baker, our chief financial officer, will then review our financial results before I return to discuss progress of our wider strategy. As always, we will welcome any questions you may have, and we'll take these at the end of the presentation. Finally, a copy of the presentation will be available to view on the investor section of our website later this afternoon. Turning to the headlines. Let me start by saying how pleased we are to have announced today that we have successfully concluded our debt refinancing agreement, which not only reinforces the group's strong financial position, but also creates a more flexible financial template to invest in the business and reward our key stakeholders. Furthermore, the removal of the 10 million distribution cap allows us to better align shareholder distributions with our revised capital allocation policy. And we will go through this in more detail later in the presentation. Overall, we are pleased by the group's continued solid trading performance throughout the period. We delivered an adjusted operating profit of £18.8 million, down £1.6 million versus H1 2023, which was a very strong comparator that was boosted by events including the state funeral of Her Majesty the Queen and the winter timing of the Men's Football World Cup, which generated an additional £1.2 million of operating profit. in terms of funding average net debt was reduced by 53 in the period to just 12.5 million with the business maintaining strong levels of cash generation we're also pleased to report an interim dividend of 1.75 p per share an increase of 25 versus last year's interim the business traded in line with our internal expectations and was supported by ongoing operational efficiencies alongside further optimization of our network infrastructure We successfully commenced distribution of regional titles for Midlands News Association alongside additional News UK distributions in London. And we expect to receive an additional boost in the second half driven by collectibles from the men's UEFA European Championships. Elsewhere, our teams have now secured 74% of contracted revenues through to 2029, providing visibility of contract renewals and certainty of revenues, which is critical for future planning. Most importantly, we now have good momentum in our organic growth strategy, and we expect to see the contribution tripling to 2 million in the current financial year. So in summary, a very pleasing six months for the business, which is focused on optimizing our business operations while securing additional revenue opportunities which complement the core business. I'll now hand over to Paul, who will discuss the first half financial results in more detail.

Thank you, John, and good afternoon, everyone. Starting with the financial headlines, revenues decreased 1.9% in the half, ahead of the historic norm of a 3-5% decline which we have previously guided to. Price increases have continued to support revenue and partially offset volume decline, although these increases are expected to slow in second half. The second half will see the benefit from the men's Eurofootball collectibles and the start of the new wholesale contracts announced last year. Adjusted operating profit decreased by £1.6 million to £18.8 million, of which the Royal Succession and the 2022 Football World Cup contributed £1.2 million. In addition, softer waste prices impacted the sale of magazine waste by £0.9 million, which was offset by the continued expansion of our growth initiatives, which increased by £0.7 million versus half on 2023. The operations team continues to focus on our cost out initiatives and have delivered 2.4 million of savings in the half, which, along with 0.7 million of overhead savings, have helped offset inflation. With the benefit of the 2024 Euro football collectibles in the second half, the results are in line with plan and we are confident of delivering full year expectations. Adjusted earnings per share is down 0.7 pence, of which 0.4 pence is due to an average lower shareholding in our employee benefit trust. Free cash flow is in line with expectations and ahead of last year due to the timing of our customer payment, which last year came in just after the reporting period. The interim dividend, as mentioned, is proposed at 1.75 pence, an increase of 25%. On to the adjusted income statement. Below operating profit, net finance charges in the period are down 0.4 million, driven by the continued reduction in the bank debt. Profit before tax was down 1.2 million at 15.9 million as a result. The tax charge of 4.1 million reflects an effective tax rate which has increased to 25.8%. due to the rise in the main rate of UK corporation tax to 25% in April 2023. Profit after tax of £11.8 million is therefore £1.5 million lower than last year, and this has reduced adjusted earnings per share by 0.3 pence. The remainder, as mentioned, was due to lower owned shares held by the company. Free cash flow for the half was an inflow of 4.2 million and compared to a small outflow last year of 0.2 million. In the first half of the year we have a working capital outflow which is part of our normal working capital cycle and is 6.3 million better than last year due to the timing of a large customer payment. As a result our free cash flow for the full year will include the impact of the 53rd week and will therefore include the publisher payments we make at the end of the calendar month leading to a full year working capital outflow. Capital expenditure at 1.9 million is slightly lower than last year As John will outline later, having now completed our refinancing and as part of our overall strategy, we aim to increase our investment in the business by up to two million per annum for a three year period before returning to four million per annum thereafter. The majority of this expenditure has positive returns to our growth and cost out programmes, with the remaining amounts representing investment in our facilities. Lease payments have reduced 0.5 million year on year due to the exit of one lease and the timing of renewals. With inflationary pressure, I would expect full year lease payments to be circa 7 million when all of the leases have been renewed. Net interest and fees are slightly down than 2023 by 0.3 million, driven by lower net debt. And the impact of cash on the adjusting items was a small level of 0.2 million. Bank net debt continues to reduce and the business generated 21.5 million of cash flow before working capital and dividends in the last 12 months. Over the last two years, we have focused on average net debt as a headline measure, as reported net debt is impacted by the timing of our working capital cycle. Average net debt has reduced from 26.3 million at the first half 2023 to 12.5 million in 2024. A consistent level of cash flow between 20 and 25 million for the last three years allows the business to reduce debt and plan with certainty. Turning to the refinancing announced this morning, we have in place now a facility which matches the key requirements of our business model, reduces costs and enables management of our interim working capital cycle. The facility also provides flexibility in the uncommitted accordion to support any Bolton acquisitions identified in implementing our strategic ambitions. Before briefly taking you through the details of the facility, I would, on behalf of the Board, John and the business, like to thank all four banks in the old syndicate for their support of the business over the last few years. The principal facility is a £40 million revolving credit facility designed to meet our working capital cycle and enable us to support investment both in the news and magazine business and in our strategic growth objectives. The tenor of the facility is based on a 3 plus 1 plus 1 whereby, subject to lenders agreement, in each of the first two anniversaries the facility could be extended. The margin of 2.45% is 155 basis points below that of our previous facility. As John stated, the previous distribution restrictions have been removed, and this has enabled the business to revise its capital allocation policy. Turning to that policy, which is detailed on this chart and was included in both press releases issued this morning, the business has worked hard over the past few years to rebuild a strong balance sheet, and this will remain a cornerstone of the business model. We will continue to invest in the news and magazine business and organic growth activities. And as I mentioned earlier, we will see an increase in capex over the next three years as we ensure we have the capabilities to meet our customer needs. As part of our strategic plan to build on our organic growth platforms, we will look at potential Bolton acquisitions, but as in 2023, when we walked away from a potential deal, we will be disciplined and seek clear accretive returns. Importantly, the new financing facility enables the board to implement the previously stated two times cover policy for dividends. The removal of the distribution cap also allows the board to consider further capital returns to shareholders. I'll now hand back to John.

Thank you, Paul. Turning back to the wider business, I want to spend the next few slides giving a recap of both our strategic priorities and the group's ongoing progress. Let's start by reminding ourselves of the headlines. Smith News is a long established track record of delivery. It is very pleasing to deliver another set of solid financial results built on ongoing efficiency gains, strong cash generation and a growing contribution from organic growth in adjacent markets. Our standout headline, however, has to be the successful conclusion of the group's debt refinancing, which Paul has already covered off in detail. Ultimately, this new agreement provides flexibility across our capital allocation policy, which is directly into generating ongoing value for our shareholders and broader stakeholders. The business has continued to mitigate the impact of inflation in line with plan, and our teams have maintained a clear focus on optimising our network and processes. Sales have continued to outperform the historic trends of minus three to minus five. And importantly, we continue to build momentum with our growth strategy and are on plan to treble its contribution year on year. In all, a very pleasing outcome across a high number of strategic fronts. Many of you will be familiar with this slide. It clearly captures the three core elements of our strategy. Firstly, we remain focused on our core business to ensure we continue to serve our customers with a highly efficient service proposition whilst generating reliable profits and cash. Secondly, we will seek to further leverage our capabilities across new and complementary markets in a measured and highly methodical way as we are building out from a very solid newspaper and magazine business. And finally, we are committed to delivering for all stakeholders by both meeting the needs of the business, our clients and customers, and providing attractive returns for our investors, which is underpinned by a strong balance sheet. To remind everyone, we have re-secured 74% of our newspaper and magazine revenues until 2029, with the remaining material contract discussions making good progress. This degree of revenue visibility provides both stability and assurance of revenue and future cash flows from our core base and allows us a certainty of the backdrop against which to introduce operational efficiencies. It also enables us to plan our growth services with full foresight of the distribution network for the foreseeable future. It is this base that underpins our confidence as we seek to further broaden our revenues going forward. Importantly, we also plan to invest in enhanced technology capabilities, predominantly in our warehouse and final mile services. These investments will enable the business to continue to meet the needs of our existing clients and customers, drive efficiencies and give enhanced capabilities to apply to growth opportunities. Whilst our news and magazine markets continue to be robust, it is a fact that we are handling less volume each year. This creates excess capacity, some of which we utilize as part of our efficiency program and some of which we utilize to provide complementary new services to our existing customer base. In short, we're able to provide highly cost-effective pick, pack, distribution and reverse logistics services with a higher level of margin contribution than would be the norm. Over the last months, we've added further customers to the news service areas we have previously outlined. To give a little more colour on this, we are now providing our recycle collection service to circa 5,000 customers, up 25% over the last six months. We now have two supermarkets that we service with a supply chain solution for books and home entertainment products. In addition, we continue to grow the number of final mile delivery clients we work with and most recently added a national retailer to that list. Pleasingly, our service levels are landing well in these markets, and as each offers more scale, we are using our methodology of trialling and reviewing to further refine the offers we present and the way we execute to both improve quality and efficiency. I look forward to providing a fuller update at the full year. A critical pillar of our strategy is to continue to deliver for all stakeholders. You will have heard me talk in the recent past about the great progress we have made on reducing our debt, renegotiating extended contracts with our clients, our pleasing colleague engagement scores and our sustainability commitments and the progress in that area. Today we have announced a new refinancing agreement which will enable us to continue to deliver on that stakeholder promise. Our new agreement when aligned to our revised capital allocation policy, will enable us to invest in our business, improve our service for clients, customers and colleagues, and further reward our investors. We believe therefore that our new finance agreement and revised capital allocation policy is good news for all stakeholders. So to summarise, we have made a very solid start to the current financial year, with clear progress made across all key business imperatives. Our core markets remain resilient and we have good momentum in our areas of growth. Debt continues to reduce and our revised capital allocation policy will be good news for all stakeholders. All of this is only possible because of the dedication and great skill of our Smiths News colleagues and indeed our broader business partners. We remain on track to deliver results in line with full year expectations and I look forward to updating you again later in the year. Now on that basis, Paul and I are happy to take any questions you might have.

Perfect. Jonathan, Paul, thank you very much for your presentation. What I'll do is I'll just bring your cameras up for the Q&A. Ladies and gentlemen, please do continue to submit your questions just by using the Q&A tab, which is situated on the top right-hand corner of your screen. But just while the company take a few moments to read those questions that have been submitted today, I'd like to remind you that recording of this presentation, along with a copy of the slides and a published Q&A, can be accessed via your investor dashboard. As you can see, we have received questions throughout today's presentation, and Jonathan Poole, if I could just ask you to read out those questions and give responses where it's appropriate to do so, I'll pick up from you both at the end.

Thanks, Alexander. Right, I sat with the first question that came in, which was from Simon H. As ever, some very good results. Well done. Thank you for that. And then, do you see debt reduction as a priority in capital allocation over increased dividend, and how does the board view the balance here? I think we've just concluded the refinancing this morning. So first of all, we're really pleased to be able to implement the two times dividend policy that we've now announced and then increase the interim dividend. Ideally, we'd like to continue with our strategy to diversify the business and grow the business. organically and if possible you know with inorganic growth opportunities and we'll continue to review those options and clearly the board will continue to look at where we are going forward but early days yet having just refinanced this morning Gavin L again you know great set of results well done so thank you but his question really is what could go wrong

So what are the risks, I guess, is the question in H2. Good question. We still have some further costs to take out of the business. And whilst we have clear plans for that, it's never a given and never take it for granted that it will be done. So we still have that to do. Although I would always remind you of our strong track record in that area. But until it's done, it's not done. We have some sales that are baked in for the student performance from the Euros. And again, until that tournament takes place, we won't know whether all of those sales have been achieved or not. And of course, we've got some further growth to come from our adjacent categories. And again, until it's delivered, you never know. But as I sit here today with Paul, I think we look at the full year number with a degree of confidence, but recognise that until those three things are delivered, we don't have certainty.

Thank you, John. The next question is from Simon C who said, you mentioned the European Championships. Could you expand on how you plan to use the tournament to enhance performance in the second half of 2024?

Yeah, this is simply a budgeting piece. I mean, the tournament takes place in the second half and the sales of that, which we assume will be similar to the Winter World Cup of 2022, will fall into that period. So naturally, that will give us a benefit in H2 that we didn't have in H1.

yeah and that was part of the swing factor that you saw in in half one given the world cup last year was in in the winter as opposed to the normal summer and so that was one of the things we tried to explain to the impact of the profit half on half but that's the one that gives us confidence that our full year expectations are in line with plan um simon h are there any particular service offerings that customers often ask for that you don't currently provide

I wouldn't say there are necessarily service offerings. What I would say is progress we're making both in the adjacent categories for books and home entertainment products and indeed with recycle has enabled us to have different conversations with our retail customers about whether there are additional categories that we can provide, for example. So I think it's less likely to be completely different service offering for our existing customers and more likely to be things that are adjacent to what we do now.

Thanks, John. And then Gavin, I'll come back with it. Are institutional investors wanting Smith's to be a growth or income stock? It's a great question. Institutionally, investors don't all align on their view. It's fair to say, given the fact that we're in a declining sector currently, that income is important for our investors and we will continue to ensure we are clear about our dividend distribution and maintain that. I think when we said that we'd look at diversification and inorganic growth, we always said that we wouldn't put the balance sheet or the dividend at risk. So maintaining that income for people is important to us and we know it's important to them But we do have some shareholders who would like us to invest in growth and provide longevity of profit. And we're looking to do that and to reward them as well over time. Yeah. So Hill C, could you comment on the issue of shortage of drivers and staff?

So I think it's really probably a broader question around what's the market like for recruiting right now. From a driver perspective, you know that we have a subcontractor model. So we don't employ all our own drivers. We have subtracted drivers. And that picture is much, much better than it was, say, two or three years ago. And what we really see now is geographic differences. So it's tougher in certain geographies to recruit drivers than it is in others. But generally, that market is better than it was two or three years ago. From a colleague perspective, in terms of people working either in the offices or in the warehouse, that market has come back quite a lot over the last couple of years, and we don't see the shortages that many businesses are experiencing not that long ago.

Thanks, John. The next one is about the deposit return scheme. And are we investigating potential opportunities around that, which is currently delayed till October 24? We have had discussions about it, haven't we?

Yeah, I mean, I think it's something that we've looked at, I'm sure lots of businesses have, but it's very much moved into the medium term as something we're considering again in due course. But it's not something we're currently expanding too much energy around.

Thanks. And then Peter, asks, does your capital allocation potentially include a buyback program? I mean, we haven't I think we say we haven't ruled anything out. I think one of the tweaks to the capital allocation policy that was published in May 21 was to be more broad about the further distribution opportunities for the board. I think previously we'd said any surplus of cash would be distributed as specials and we've been more broad on that, basically because our shareholders have a mixed view of what would be a sensible distribution piece and the board would consider all, including potential buybacks in the future. and then he'll see could you also comment on the progress of distributing third-party goods to retailers I understand you are now distributing some energy drinks chocolates Etc what's the response so far good question yeah good question so yes we've been doing that for a little while now we've got Circa 3000 customers that we send additional products to and as you say energy

It plays to our core strengths of warehousing, the pick, pack, final mile, and reverse logistics piece. The challenge for us is to make sure we find the right products for our customers. And by that, I mean it's obvious for many of our independent customers that they can seek product from a cash and carry. And therefore, we have to offer them alternative products that they may not identify for themselves or indeed may not want to go and get from a cash and carry. So we're working with two or three different partners there to identify the right products. because our sweet spot is the logistics piece um it's not the procurement piece um so yeah more to come from this i'm sure but at the moment 3 000 customers um and making a contribution to our growth number although it's not the the largest part by any means thanks john and that was the last question but we've got one more coming in um from john b have you identified possible acquisitions good question um We're constantly looking is the honest answer to that. There is nothing imminent, that is fair to say, but we are constantly looking. But we're being very choosy, very fussy about the sorts of thing that we think will genuinely add value to our business and enable us to expand out in the areas of growth we wish to expand out into. So if we think we can add scale and capability to the operation that we've got, then we're definitely interested. But as I think four years to improve the balance sheet, and we're not going to do anything in the short term that puts that at risk. So as far as we're concerned, protecting the balance sheet, rewarding our investors are really, really important parts of our strategy. We will look for acquisitions, but they will be small and relatively bolt-on.

Perfect. Jonathan, Paul, I think you've actually managed to answer all the questions for investors. And of course, the company can review all the questions that have been submitted today, and we'll publish those responses on the InvestorMeet company platform But just before redirecting investors to provide you with their feedback, which is particularly important to you both, Jonathan, could I just ask you for a few closing comments?

Yeah, I mean, once again, thank you, everyone, for taking the time to dial in and listen to our story and the progress we're making. We're really pleased that this is the fourth year on the trot now. We're able to sit in front of you and talk about the fact that we've delivered numbers at least in line with expectations, if not in advance. I think the refi is actually really good news for all stakeholders, and I hope you feel that too. And I hope you're encouraged also by the 300% growth we're seeing from growth. It's an important part of our business strategy going forward, and it's important we've got that momentum. Underlying all of this, guys, is we've got a very solid news and magazine business with relatively low amount of debt and lots of free cash. And the new capital allocation policy gives us greater flexibility as to how we deploy that. So thanks once again for listening in and I look forward to updating you at the full year.

Perfect. Jonathan, Paul, thank you once again for updating investors today. Could I please ask investors not to close the session as you now be automatically redirected to provide your feedback. in order that the management team can better understand your views and expectations. This will only take a few moments to complete, but I'm sure it will be greatly valued by the company. On behalf of the management team at Smiths News PLC, we'd like to thank you for attending today's presentation, and good afternoon to you all.