Smiths News plc

Good afternoon, ladies and gentlemen, and welcome to the Smiths News PLC investor presentation. Throughout this recorded presentation, investors will be in listen-only mode. Questions are encouraged. They can be submitted at any time via the Q&A tab that's just situated on the right-hand corner of your screen. Please just simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company can review all questions submitted today and will publish those responses where it's appropriate to do so on the InvestorMeet company platform. And before we begin, as usual, we would just like to submit the following poll. And if you could give that your kind attention, I'm sure the company would be most grateful. And I would now like to hand you over to the executive management team from Smiths News PLC. John, good afternoon, sir.

Thank you, Jay. Good afternoon, everyone, and welcome to SmithsNews interim results for the 26 weeks ending the 1st of March 2025. I'm John Bunting, CEO of SmithsNews, and with me today to talk through a half year results presentation is Paul Baker, our Group CFO. So starting with the headlines, we've made a good start to the current financial year and the business is on track to deliver the FY25 results in line with market expectations. We've seen an increase in operating profit up 3.2% alongside a strong cash flow performance in the period. As highlighted in our full year results in November last year, we continue to leverage our news and magazine business whilst also seeking to drive growth. We have made progress across all three growth verticals comprising Smith News Recycle, New Categories and Final Miles. Our internal investment programme has also gathered pace with the successful implementation of a new warehouse management system at one regional hub and the broader rollout will be complete in this financial year. We have 91% of our existing publisher revenue streams secured to 2029, which not only provide assurance of revenues across the short and medium term, but also provides the foundations to support our strategic intent to broaden our early morning end-to-end supply chain solutions. We have again generated strong cash flow in the period and today announced a proposed interim dividend of 1.75 pence per share. I'll now hand over to Paul to walk through the financials before coming back to discuss each of these points in a little more detail later in the presentation.

Many thanks, John, and good afternoon, everyone. Starting with the financial summary. Revenues declined 0.6% in the period, lower than our guidance of a 3% to 5% decline, supported by the benefit of our 2024 contract wins in London and the Midlands, as well as football and Pokemon collectibles. We will look at revenue in more detail on the next slide. Adjusted operating profit increased by 0.6 million to 19.4 million in the first half, driven by improved sales in collectibles, the annualisation of the 2024 contract wins and increased profit from our growth activities. Importantly, our ongoing cost efficiency programme is in line with plan and in the first half delivered another 3 million of gross improvements. Adjusted earnings per share increased by 10% to 5.4 pence, benefiting from the increased operating profit and the lower interest cost under our new banking facility signed in May last year. Average net debt has reduced by £11.4 million to £1.1 million, driven by consistent cash flow in the first half, but noting that the ordinary and special dividends were paid in February at the end of the reported period. Just to give a little more colour to our revenue numbers, our headline revenue numbers show a decline of 0.6% in the first half, which is again below the 3% to 5% annual decline which we guide to. Since COVID, our underlying newspaper and magazine performance, which makes up over 90% of our total revenue, has been impacted by a number of things, pricing, contract wins, and last year, the 53rd trading week. So, for example, the annualisation of our additional contract wins last financial year give a 1.6% benefit year on year. And this drives the majority of the difference between our headline number of a minus 0.6% and guidance. If you exclude this annualisation, newspaper and magazines showed a decline of minus 3.1%, which is within our expected range of 3 to 5%, albeit at the lower end. Collectibles increased in the half by 4.3%, demonstrating the continued popularity of football collections and the increased interest in the latest Pokemon series. Revenue from strategic growth initiatives, while relatively small compared to the headline newspaper and magazine revenue, also contributed to the headline movement, increasing by 25% in the two. On to the adjusted income statement. Below operating profit, net finance charges in the period are 1.2 million lower than last year, driven by the continued reduction in average debt and the improved commercials in the banking facility signed last year. We recently extended this facility for an additional year to May 2028 and have a remaining option available in 12 months' time to extend further to May 2029. With lower finance charges, Profit before tax increased by 1.8 million or 11.3% to 17.7 million with earnings per share then increasing by 10% to 5.4 pence. An interim dividend of 1.75 pence in line with last year has been approved by the board and will be paid in July. Total free cash flow for the half was an inflow of 13.3 million an increase of £9.1 million from last year, partly due to a favourable timing of our working capital cycle, but also included the inflows from both the McColls administrators and the pension tax refund, which are included within adjusting items of £2.1 million. Capital expenditure at £2.3 million is £0.4 million higher than last year and we expect this rate to accelerate into the second half in line with our planned increase in investment over the next three years. Lease payments have increased by £0.6 million year on year due to inflationary impacts on lease renewals of which there have been seven over the last 12 months. Net interest and fees are lower than in 2024 by 0.8 million, thanks to the cash impact of the lower levels of borrowing and interest margins mentioned earlier. Over the last 12 months, the business has generated an underlying cash flow of £24.2 million, consistent with the £20 to £25 million annual inflow the business has been delivering for some time. Additional income, including amounts received from the McCall's administrator and a pension tax refund, have been positive one-offs, recorded in adjusting items of £2.1 million. 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 £12.5 million in half one 2024 to just £1 million in the first half this year, noting that the dividend payments were made at the end of the period in February and do not significantly impact the average. As a reminder, at the end of the last financial year, we announced a special dividend on top of our two times ordinary dividend. For the current year, the board will again assess the cash generated from trading, along with the needs to invest in both the core and growth sides of the business before deciding on any further distributions in line with our capital allocation policy. I'll now come back to John.

Thank you, Paul. I'll now do a quick refresh of our strategic priorities before looking at our H1 performance in a little more detail. Before I walk through our operational and strategic progress, I wanted to quickly remind everyone of our broader vision for the business. Simply put, our aim is to consolidate our position as one of the UK's leading providers of early morning end-to-end supply chain solutions, and our substantial news and magazine footprint provides an ideal platform to deliver that. We're doing this by making our customers' lives easier and more profitable, enabling them to focus on what they do best. Our existing news and magazine business is a great example of this purpose in action. Our publisher clients could create their own distribution teams, drivers and van fleet, but this is not what they do best. What they do best is create fabulous content for consumers. Having a trusted partner to undertake the logistics execution enables our clients to fully focus on their areas of differentiation. Lastly, our existing capabilities and expertise will ultimately provide the backbone to our success. We already deliver end to end services and are able to draw on our significant experience in warehousing, logistics and reverse logistics. We have an established presence in the all important early morning and final mile markets, and we are able to leverage our high density UK delivery network to further our growth objectives. Turning to the next slide. We have a very well established and respected logistics business that has two distinct features, an early morning focus and a high density B2B final mile delivery and collection capability. We have established our proven expertise in the time sensitive newspaper and magazine industry, but these core competencies are transferable. Our strategy therefore seeks to do just that, build out from our existing news and magazine business into three new and targeted verticals that offer the potential to penetrate circa 160 million of profit opportunity. Our strategy strives to exploit that in a controlled and measured way, complementing our news and magazine business. With the news and magazines, we've delivered another robust performance in the period, showing minimal headline revenue decline at just 0.6%, which, as Paul explained, was ahead of our medium-term expectations of an underlying three to five percentage point decline. We have 91% of publisher revenues contracted to 2029. Revenues were boosted by collectibles in the period, including strong demand for football collections and the latest Pokemon collection, which has been particularly popular this year. We continue to invest in strengthening our core capabilities while simultaneously maintaining our asset light business model, which supports and enables our ongoing cost out program. We are on track to deliver circa five million of cost savings once again this year, and I'll provide more granularity on our investment in the future capability later in the presentation. Turning to slide 14 to look at our recycling activities in more detail. We are continuing to make progress in expanding our operations and driving up demand from our existing customer base, with customer numbers up 5% versus FY2024 across over 900 routes. As detailed at the full year results in November, we have evaluated the economics of this market, which is worth £230 million in revenue, is growing at 3-5 percentage points per annum and offers an EBITDA margin of 10-15%. We have recently commenced a small-scale trial alongside selected routes in the northwest of England to extend our recycling services to non-news and magazine customers. This trial will be crucial as we seek to build our understanding of potential dynamics and secure customers beyond our existing independent retailers. Part of our trial process will be to assess market appetite for our services alongside a more appropriate and efficient method to acquire new customers. Our aim is to drive a deeper understanding of the broader economics of the sector, notably the cost of acquisition and the cost to serve. The results of the initial trial will determine how we can scale the service across our broader footprint. As we all know, regulation is increasing in this area with simpler recycling and the returns deposit scheme both set to go live in the next two years. We believe both will be helpful in creating further demand for our services. And finally, I'm delighted to say we've appointed a managing director to our recycling operation. We have deliberately chosen a highly commercial director from the waste management sector to help us build the capability required to exploit the opportunities in this growth market, both now and indeed in the future. We expect them to join by the start of our new financial year. Moving on to look at our news category. Moving on to look at our new category vertical. This area seeks to capitalise on our Smith News warehousing and early morning final mile services and diversify the suite of products we deliver. We've continued to make progress in the period, delivering books and home entertainment to multiple national supermarket chains, Our ongoing investment in our warehouse management system has enabled us to consolidate activities into a single hub to drive further efficiencies and importantly create future capacity for broader expansion. We've also commenced our collaboration with Hallmark in the period, trying the selection and delivery of a bespoke range of Hallmark greeting cards to our independent retailers. And this is a good example of our strategy at work. An independent retailer can now get their news, magazines and collectibles from us, also their greetings cards, and we can collect their recycling. This enables both parties to access the benefits of a deeper relationship utilising our existing warehousing and final mile capabilities. Turning to look at the final mile vertical. Our supply chain is the critical element in building this out. We are actively exploring a number of operating models to further understand where we can maximise value across our footprint. Smith News has a unique in-depth knowledge of the dynamics of the early morning final mile delivery market and we believe we can use this expertise to expand our customer offering in this area. As an example, the engineering parts sector is currently serviced by multiple stock delivery options, including roadside vehicles, lockers or forward stock locations. We think there is a place for Smith News within this ecosystem, so we are working to understand how best to maximise our market and revenue opportunities in this area and have commenced a small scale trial to better understand that market. We are committed to further expanding beyond our traditional operating model, and as highlighted across the presentation, our teams are busy trialling and testing in sectors and areas where we believe we can sensibly evolve our marketing reach. As highlighted in November, our three-year investment programme has now commenced, increasing investment to six million per annum over the next three years to future-proof the business. Part of this investment will help us optimise warehouse operations and enhance our capabilities and efficiencies to support both existing operations and our growth verticals. We've already implemented a new warehouse management system at a key regional hub on budget, on time and with no disruption or service interruption to our existing customers. And we're rolling this out across our other two major hubs during the second half of the year. This additional investment ensures we have the systems and structures in place to maintain our high level of service delivery and remain a trusted partner for our customers across all four verticals. So in summary, our news and magazine vertical continues to underpin the business's good performance and our growth verticals are all progressing well. I've outlined a number of ongoing trials across the business, which will provide us with more clarity as we seek to further leverage our early morning supply chain expertise and expand our offerings. The cost out initiatives continue to deliver scale savings and our internal investment programme will support both our news and magazine activities alongside recycled new categories and final miles. As we did last year, we shall assess our cash generation alongside our investment needs at the end of the year before deciding on further capital allocation in accordance with our policy. Pleasingly, Smith News remains on track to deliver full year results in line with market expectations. And I look forward to updating you all again in November and very happy to take any questions you may have.

That's great, John Paul. Thank you very much indeed for updating investors. Ladies and gentlemen, please do continue to submit your questions just using the Q&A tab situated on the right hand corner of your screen, which is why the guys take a few moments to review the questions submitted already. I'd just like to remind you that a recording of this presentation, along with the copy of the slides and the published Q&A will be available via your Investing Lead Company dashboard. John Paul, you've had a number of questions from investors throughout your presentation. So firstly, thank you to everybody for your engagement. If I may just hand back to you, if you could read out the questions where it's appropriate to do so, and I'll pick up from you at the end.

yeah thanks very much um start with one from lc firstly thank you for the kind comments about the work i've done that's very kind but the question reads my question is regarding collectibles based on my personal experience pokemon trading cards continue to be extremely popular in the uk they're often sold out and i struggle to find them in supermarkets or retail stores for my kids what is management view on the collectible segment heading into the second half of the year john

Yeah, OK. Yeah, I think it's a good observation. I mean, certainly we've been pleased with our collectible sales in H1. The macro trends of Pokemon and broader football collections continues to be at the heart of our collectibles proposition. And we're expecting a continuation of those positive trends in H2. There will not be a major men's football tournament in the summer. So we went to the benefit of that. But from a collectibles perspective, we're expecting a reasonable second half. In terms of their general availability, I mean, that's really an issue for the manufacturers in this area. There is a view, for example, that scarcity can also drive demand. And therefore, I'm not expecting the manufacturers suddenly start to flood the market with Pokemon product in order to maximize sales, because scarcity is also an important marketing tool, I believe, for for uh trade comp providers to answer that in more detail thanks john we've got one from damian c um about the publisher revenues where we say we're contracted to 2029 are there many any minimum revenue levels etc that's a very uh good question and a simple one to answer no there are not any minimum revenues that are guaranteed what we have secured are the revenues that are available five-year period, and then margins reflect that.

Thanks, John. And then in our key, you've got a question about, this will test us looking forward, what operating profit mix do you envisage by the end of this decade, between news and magazines, distribution versus new growth areas, i.e. recycling?

It's a great question, and not one I'm going to answer. The truth over the years to come. And we have our own internal targets as to what we think a good result would be. But in terms of my answer to that question,

How large is the opportunity in delivering additional categories like books or greetings cards? And are these expected to become material contributors to revenue?

Yeah, I mean, we do believe that they're a large opportunity. both the number of categories we distribute and indeed the number of retailers that we apply that distribution to.

So yes, we still see all this as a material and scale opportunity. Another one here from Ida, I've got a couple of questions coming up. First one is, do you plan to take any steps to reduce the wedding capital volatility to have more balance sheet flexibility and possibly higher shareholder distributions? I'll answer that one. Our working capital isn't volatile actually. What's volatile is just the reporting date. It's one of the reasons why we look when we try and show what our free cash flow generated over the course of a 12-month period looks like so you can see the consistent cash flow generation. Our working capital last year was impacted by the year end and the fact that the publisher payments that happened at the end of the month came into our reported period. but there really is no real fluctuation in our working capital cycle. In fact, our working capital probably has a slight outflow each year driven by the reduction in using max as an overall sector, but otherwise it's very, very static. So, thanks for the opportunity to answer that question. It has then asked a question around the rough operating margin of the growth activities, and the reason that we're just starting them and clearly we have some investments to make, and also we're utilising the vehicles that we use, using Magsport, so there's an allocation of costs that we need to get our heads around there from an operating profit point of view. It's fair to say, though, as John alluded to in the presentation, the EBITDA margin for recycling, 10 or 15%, internally is above that because we're utilizing you know the assets that we already have in place so our internal margins are better than the sector margins that they see so hopefully that helps you helps you um answer that question um just find the next one somebody's going to find remote tv so damien c the next question is given the strong free cash flow do you expect foreseeable future. Great question, Damien, and you will have seen that our average net debt reduced to 1.1 million in the half, albeit that the payment of the special dividend happened at the end of February, so that didn't really impact the half too much. We have a capital allocation policy that states we'll run the business at less than one times. It's not our intention just to keep running for cash and keep cash building on the balance sheet. We'd love to, as the capital as our core business. We'll secure the two times ordinary dividend. And then, you know, if there's any M&A, we'll allocate the capital that way. And if none of those things require additional capital, we will look to then return funds to shareholders by any means. And we'll look to that at the end of the year. There is one here about share buybacks. We had a pre-loaded question earlier one that was submitted was around our cost of capital and our share price. Is it cheaper to be considering shared buybacks? Now, clearly, we have a very, very split view across our register. Some people like income, some people want us to consider shared buybacks. We changed our capital allocation policy following our refinancing in May last year. Previously, it stated that all distributions would be by way of special dividend, but we changed that to be more broad and the board would be considering when they look at this again at the end of the year what is the right way to return to shareholders be that buybacks or specials so we absolutely do look at it it's a good conversation with the board when we do and people do look at that but right now we felt last year was the right thing to do to reward shareholders with the special we'll look at those opportunities as we go forward and see Good results. May I ask how big is the impact of national insurance and minimum wage on the business? The national insurance, which is sort of the incremental piece, we did mention in November. So the impact in this year, albeit obviously only from April, is half a million, which is built into consensus, which you can find on our website. The full year impact of national insurance is 1.2 million. So that's the impact that we'll here from Gavin L. Card Factory Fully results were out earlier. They are looking for wholesale customers to deliver their products. What is your greeting card delivery trial offer and who with?

Your thoughts on the upside. So our trial is with Hallmark Greetings Cards, principally currently in the independent channel. So we're focused very much on our independent customers. units to them.

Great. And a question from David S. Why was the dividend not increased marginally to show confidence? Thanks, David, for that question. It allows me to answer it. Look, we'll look at the full year. I think we've got a two-time stated dividend cover policy. That will be maintained. We'll look at what the profit looks like able to do that didn't seem any point at the half year we've got the second half won't be as strong as last year last year we had you know 53rd trading week and the football tournament so it'll be slightly different and felt it was sensible just to keep the interim as it was and we'll reflect the two times cover that's a full year basis question from you i think on from lc Can you talk more about the new MD of the recycling business? Yeah. And when will the MD be on board?

Okay, delighted to do that. So yes, we're delighted to have secured an MD from the waste management space, proven director with a strong commercial background. And we really wanted to bring those skills on board to ally them to our strong operational skills. So I think over the last few years, we've demonstrated that operationally, we're more than capable of managing the recycle opportunity, but our heritage is not that opportunity that exists. So we're really pleased to have secured someone of that individual's calibre and we expect them to be on board in time for the start of the new financial year.

Thanks, Sean. And then one from David S. Greetings, Kemp. Cards sound the perfect fit, especially as high value, low weight and density items. Are you talking to other card suppliers

In terms of fit, theoretically, it should be a good fit for us for all the reasons you suggest. But no, at this moment in time, we're working exclusively with Hallmark on the trial that we're undertaking.

And the final one for now, unless anyone's got any others that you can type quickly, is from Wade B.

Conversations with WH Smith have been encouraging in terms of the desire to retain that estate as the hub of the community and with news magazines being an important part of that. So what I can tell you is they're an important customer of ours and we'll work closely with them to try and optimise the opportunity that exists for the new management team.

That's great, John. Paul, you've taken all the questions from investors, so thank you once again to everybody for your engagement this afternoon. John, I know investor feedback will be particularly important to you and to Paul, and I'll shortly redirect those on the call to provide you with their thoughts and their expectations. But before doing so, if I may, just come back to you for a couple of closing comments.

Yeah, thank you. So just four things I'd like to finish by saying, really. I mean, I think we're pleased with where we find ourselves at the H1 mark. It's good to have a set of financials that are once again on plan. We're pleased about that. I think you can see we're making progress on our growth strategy across every vertical, which is important. We've also implemented the first of our future tech implementations. So the warehouse management system that's gone in on time, on budget, without disruption. So that's great. And overall, we're on plan to make sure that we are delivering our full

That's great. Paul, John, thank you very much indeed for updating investors. Could I please ask investors not to close this session as we'll now automatically redirect you for the opportunity to provide your feedback in order that the company can better understand your views and expectations. This may take a few moments to complete, but I'm sure will be greatly valued by the company. On behalf of the management team of Smiths News PLC, we'd like to thank you for attending today's presentation and wish you all a good rest of your day. Thank you.