Smiths News PLC

LSE:SNWS

Earnings Call Transcript 2021-Q4

[Jonathan Michael Bunting, CEO & Executive Director]

Before I start the presentation, I'd just like to take a moment to introduce Paul Baker, our new CFO; and Paul will let 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 sorry to retire. He done a fabulous job for us over the last 3 years. And I've personally valued not only his contributions to the business, but his advice to myself, and we'll be sad to see him go. So I just want to acknowledge that. So should 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 performance ahead of market expectations and another year of delivery against all of the key priority areas we set out to achieve. EBITDA of GBP 42.6 million is up 9% from revenues, which are actually down 4.7%, but are back in line with the historic norm of 3% to 5% decline. Free cash flow was more than doubled to GBP 24 million and bank net debt at year-end is reduced by 1/3 to GBP 53.2 million, with a reduction in our average net debt of circa GBP 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 GBP 6 million, driven one-off sales opportunities such as the euros and worked closely with our retailers and our publishers as the markets emerge on the most disruptive period in recent memory. Our people are rightly proud of this performance because it's the acquisition initiatives 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 with a final dividend announced today. Tony will of course touch on this shortly. It is also our intention to reduce our net debt to 1x 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, of course, a 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 that we are well placed to continue to create and grow value, delivering strong profits and cash that are used to meet the needs of our shareholders, our financial partners and the future indeed of our business. I'd now like to hand over to Tony to take you through the numbers.

[Anthony Grace, Director]

Thanks, Jon, and good afternoon, everyone. A great pleasure to be here and presenting my final set of results for Smiths News before handing over to Paul, not least because they confirm a strong performance, which shines the light on the underlying strengths of a business that shall be -- that I shall, in many ways, be sad to leave.Let's start with revenue, which at minus 4.7% year-on-year, has returned within the historic range of structural decline in -- of the market. Given the ongoing disruption of the COVID-19 pandemic, this is a great result, reflecting the market resilience and the ongoing strength of demand with 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 GBP 42.6 million. Operating profit at GBP 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 GBP 8.7 million due to the fees and expenses associated with refinancing the business in November of 2020. With an effective tax rate of 14.9%, adjusted tax charge for the year was GBP 4.6 million, which is GBP 0.4 million higher than the previous year. Finally, adjusted earnings per share of 10.8p 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 GBP 0, which compares to GBP 11.7 million in FY '20. Charges in respect of network and reorganization and asset impairment have reduced by GBP 6.9 million and GBP 4.8 million, respectively, compared to FY '20. The major elements of adjusted items in the current year relate to the impairment of our joint venture investment, amounting to GBP 1.6 million, costs related to the wind up of the pension schemes of GBP 1 million and GBP 1.1 million of costs related to transformation and long-term planning programs. These have been offset by the GBP 3.5 million accounting unwound weight for the topmost deferred consideration as recoverability became clear and more certain. And in fact, GBP 6.5 million, the first period due under the agreement, was received last Tuesday. Free cash flow, a very strong message here as the company generated GBP 24 million of free cash flow in FY '21 compared to GBP 10.9 million in FY '20, an increase of 120%. A significant improvement has been driven by increased EBITDA, GBP 4.6 million, improved working capital of GBP 6.7 million and lower capital expenditure of GBP 4.6 million. These have been partially offset by higher net interest and fees, GBP 3 million; and GBP 4.1 million of additional tax payments. Looking at net debt, the closing bank net debt of GBP 53.2 million, representing 1.2x EBITDA, that compares to a rate of 2x in the prior year when reported closing by net debt was GBP 79.7 million. The reduction in net debt is driven by 2 key factors: the GBP 13.1 million improvement in free cash flow versus FY '20 and the cash inflow from the repayment of the GBP 6.5 million working capital loan made to the buyers of Tuffnells in May 2020, which was repaid in October 2020. This item alone represents a GBP 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.

[Paul Baker, CFO & Director]

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 1. In the last 4 weeks, I've managed to meet more than 90 leaders of the business and visit 3 operational sites to get a hands-on understanding of our operations and our business model as well as spending time with our advisers and auditors. It's been a busy time, but exciting. And as you should have seen from Tony, Tony's presentation, the business, the financials of business are solid, with strong cash generation. For what has also impressed me in my first few weeks is the passion that 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 sort of tracked GBP 7.7 million of operating lease charges from our statutory IFRS 16 EBITDA of GBP 50.3 million. I know many of you already used the IFRS 16 measure, and we will reference to 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 GBP 81.2 million includes lease liabilities of GBP 29.2 million relating to 44 leases with an average total length of 6 years. When you also add back the unamortized bank fees from the 2020 refinancing of GBP 1.2 million, you get to an adjusted bank net debt of GBP 53.2 million, which Tony referenced. I look forward to speaking to you all in the future, but for now back to Jon.

[Jonathan Michael Bunting, CEO & Executive Director]

Thank you, Paul. Thank you, Tony. So let's look at the year we've just completed. Looking at the activity behind numbers, we can see 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 are in deep negotiations for our banking arrangements. We are also, at that time, cautiously optimistic about the likelihood that there a fewer social restrictions. Obviously, that didn't prove to be the case. And by the late autumn, it was clear that we're in for a tough time from a winter perspective with a reimposition of lockdown, the so-called canceled 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. Results have been a gradual recovery from the deep lows of spring of 2020 and an overall performance, which at minus 4.7% sits within the long-term trends for our industry. Importantly, as the volumes increase 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 that 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 interest and meet the needs of our wider stakeholders. More on this shortly. At the half year, our interim results confirm the progress we are making with the financial performance that was ahead of pre-pandemic comparative period. Cash generation and broader capital goal were on track, allowing later in the year for the return to the payment of dividends after a 2-year gap. And we closed the second half week -- 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 2 further highlights to report. Firstly, on the 2nd of November, we received a payment of GBP 6.5 million in relation to the deferred consideration for the sale of Tuffnells. The proceeds will be used to reduce bank debt further. Secondly, we have 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 & General in March 2021. The surplus net of additional professional fees and tax charge is GBP 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 our target of net debt times -- at 1x 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 GBP 15 million of cost savings over the next 3 years, and we are open to new thinking about how we can extend our vision for sustainability. We are a market leader in our market, and these -- and all of our behaviors represent that. Our sales and markets have stabilized from the disruption of the pandemic, and significantly, we have not seen a 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 traveling and indeed, community. And importantly, we should remember that this business has 3 multiple income streams: newspaper margin, magazine margin and carriage service charges. And it means that the impact on our margin is typically 2 to 3 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. Smiths News has always been cash-generative business, which 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 3-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 anniversary impacts 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 higher volumes sold through local independent retailers. Whilst the last few months have been positive, the situation remains fluid and what we target to predict is exactly how much of the lost sales will come back as community travel passes 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 2-year period. Looking ahead, we are planning on the basis of 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 inflationary pressures and put them into context. The background will no doubt be familiar to everybody. There are some particularities, however, of our model that'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 and reassessment people have made about how they want to manage their working arrangements and lifestyles. Looking ahead, there is no mistaking the increase in costs, and certainly, there will be an additional element of the merger 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 flatten 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 nonnegotiable 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 subcontracted 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 charged 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 a 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 of EBIT -- the impact on EBITDA this year will be in the region of GBP 2 million per annum after the cost mitigating actions we plan to attain. Now on to 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. But 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 a 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 5-pillar approach based on UNSDG 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 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 you like, help set the compass for our future direction of travel. These include the migration over time to nonfossil fuel vehicles in our fleet and that's a vast -- 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 cost-based returns process. This has been designed to enable our largest retail customers to improve the cash flow 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 -- the 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 talent and commitment, ensuring that we drive their engagement and improving diversity and inclusion, it's 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 in 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 1 to 2 years, we'll start to see a better recovery of that business. Importantly, our plans are not dependent upon 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 finalize, 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 the 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 prudent capital management approach, ensuring that cash generation benefits all stakeholders. And in that regard, we have 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, recognize that the inflationary pressures in distribution markets are real and immediate, and we must manage these in a sustainable way. And in terms of the 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 the inflationary pressures that I've so far mentioned.