Smiths News : Interim results 05.05.21

This announcement contains inside information

Smiths News PLC

(Smiths News or the Company)

Unaudited Interim Financial Results for the 26 weeks ended 27 February 2021 and

retirement of Chief Financial Officer

Resilient performance giving confidence to future restoration of dividend

Smiths News has returned a resilient performance despite challenges in the wider economy and against a comparative period that pre-dated the COVID-19 pandemic. Our plans to deliver value by focusing on core operations and strengthening the Company's financial base are firmly on track. Subject to current performance being maintained, the Board expects to reintroduce the payment of a dividend later in H2 FY2021.

Continuing Adjusted results (1)

Revenue

Adjusted EBITDA (ex IFRS16) (3) Adjusted Operating profit Adjusted Profit before tax Adjusted Basic earnings per share

Statutory continuing results

Revenue

Operating profit

Profit before tax

Basic earnings per share

Interim dividend per share

Free cash flow (2)

Bank net debt (4)

Net debt (including IFRS16 lease transition)(4)

Headlines

26 weeks to	26 weeks to	Change
27 Feb 2021	29 Feb 2020(6)
£551.6m	£623.1m	-11.5%
£20.5m	£21.7m	-5.5%
£18.9m	£19.9m	-5.0%
£14.4m	£16.3m	-11.7%
4.6p	5.4p	-14.8%
£551.6m	£623.1m	-11.5%
£18.8m	£10.3m	82.5%
£16.0m	£6.7m	138.8%
5.3p	1.8p	194.4%
Nil p	Nil p	-
£4.6m	£5.0m	-8.0%
£70.0m	£68.5m	2.2%
£101.3m	£146.2m	-30.7%

• Overall performance in H1 2021 was in line with the Board's expectations, with good progress on strategic priorities.
• Adjusted EBITDA of £20.5m (H1 2020: £21.7m) is a resilient performance despite the challenging environment.
• The core newspaper and magazine wholesale business delivered EBITDA ahead of last year.

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• Newspaper and magazine sales were impacted by COVID-19 but more stable in the period compared to H2 2020, with significantly fewer retail closures in the subsequent lockdowns.
• Savings from operations and central overheads fully offsetting the margin impact of reduced core wholesale revenues.
• Statutory profit before tax of £16.0m, was £9.3m favourable on the prior year period which had included impairments.
• Successful refinancing in November 2020 and targeted reduction of net debt to 1 X EBITDA on track by end of FY2023.
• Tony Grace (Chief Financial Officer) has confirmed his intention to retire on 31 December 2021-a process to appoint his successor is underway.

Outlook

Trading for the year to date is in line with the Board's expectations and on track to meet the market's expectations for the full year. Subject to current performance being maintained, the Board expects to reintroduce the payment of dividends later in H2 FY2021.

Jonathan Bunting, Chief Executive Officer, commented:

'In what have been challenging circumstances we have made good progress with our plans to focus operations and deliver improved value for stakeholders. Despite the further lockdowns we have secured material efficiencies that will bring continuing benefits as restrictions are eased. We are therefore confident in the ongoing performance of the business and of returning to the payment of a dividend later in the financial year.'

Enquiries:
Smiths News PLC
Jonathan Bunting, Chief Executive Officer	Via Buchanan
Tony Grace, Chief Financial Officer
www.corporate.smithsnews.co.uk
Buchanan
Richard Oldworth / Jamie Hooper	020 7466 5000
[e-mail]
www.buchanan.uk.com

A recording of the presentation for analysts will be made available on the Company's website from 11.00am on 5 May 2021

• see the Investor Relations section atwww.corporate.smithsnews.co.uk/investors.

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Notes

The Group uses certain performance measures for internal reporting purposes and employee incentive arrangements. The terms 'bank net debt', 'free cash flow', 'Adjusted revenue', 'Adjusted operating profit', 'Adjusted profit before tax', 'Adjusted earnings per share' 'Adjusted EBITDA' and 'Adjusted items' are not defined terms under IFRS and may not be comparable with similar measures disclosed by other companies.

1. The following are key non-IFRS measures identified by the Company in the consolidated financial statements as Adjusted results:
   Continuing Adjusted operating profit - is defined as operating profit including the operating profit of the businesses from the date of acquisition and excludes Adjusted items and operating profit of businesses disposed of in the year or treated as held for sale.
   Continuing Adjusted profit before tax (PBT) - is defined as Continuing Adjusted operating profit less finance costs attributable to Continuing Adjusted operating profit and before Adjusted items.
   Continuing Adjusted earnings per share - is defined as Continuing Adjusted PBT, less taxation attributable to Adjusted PBT and including any adjustment for minority interest to result in adjusted profit after tax attributable to shareholders; divided by the basic weighted average number of shares in issue.
   Adjusted items; are items of income or expense that are considered significant, in nature or value, and are excluded in arriving at Adjusted profit measures. The purpose is considered to enhance the users understanding of the Company's performance as it aids the comparability of information between reporting periods and business units by adjusting for non-recurring or uncontrollable factors which affect IFRS measures. The specific items vary between financial years, and may include certain disposal related costs, legal provisions, amortisation of intangibles, integration costs, business restructuring costs and network re-organisation costs including those relating to strategy changes which are not normal operating costs of the underlying business. They are disclosed and described separately in Note 4 of the financial statements to provide further understanding of the financial performance of the Company. A reconciliation of Adjusted profit to statutory profit is presented on the income statement.
2. Free cash flow - is defined as cash flow excluding the following: payment of the dividend, the impact of acquisitions and disposals, the repayment of bank loans, EBT share purchases and cash flows relating to pension deficit repair.
3. Adjusted EBITDA (ex IFRS16) - is calculated as Adjusted operating profit before depreciation and amortisation, excluding the impact of IFRS16 changes to leases. In line with loan agreements Adjusted Bank EBITDA used for covenant calculations is calculated as Adjusted operating profit before depreciation, amortisation, Adjusted items and share based payments charge but after adjusting for the last 12 months of profits/(losses) for any acquisitions or disposals made in the year.
4. Bank net debt - is calculated as loans, borrowings, overdrafts, obligations under finance leases (excluding the adoption of IFRS16 lease accounting standards) less cash and cash equivalents, as bank covenants are tested under frozen GAAP. Net debt (including IFRS16 lease transition) is calculated as loans, borrowings, overdrafts, obligations under leases less cash and cash equivalents.
5. H1 2021 - refers to the 26 weeks ended 27 February 2021 and FY2021 refers to the 52 week period ended 28 August 2021. H1 2020 refers to the 26 week period ended 29 February 2020 and FY 2020 refers to the 52 week period ended 29 August 2020.
6. The Interim Results have been prepared and presented on a continuing operations basis after adjusting for the discontinued operations of the Tuffnells business.

About Smiths News PLC

Smiths News PLC and its core business, Smiths News, is the UK's largest newspaper and magazine wholesaler, with an approximate 55 per cent. market share. It distributes newspapers and magazines on behalf of the major national and regional publishers, delivering to approximately 24,000 customers across England and Wales on a daily basis. The speed of turnaround and the density of Smiths News' coverage is critical to one of the world's fastest physical supply chains.

Ancillary businesses include: Dawson Media Direct (DMD) which supplies airlines and travel points in the UK; and Instore, which offers field marketing services to retailers and suppliers across the UK.

Notes to Editors

This document contains certain forward-looking statements with respect to Smiths News PLC's financial condition, its results of operations and businesses, strategy, plans, objectives and performance. Words such as 'anticipates', 'expects', 'intends', 'plans', 'believes', 'seeks', 'estimates', 'targets', 'may', 'will', 'continue', 'project' and similar expressions, as well as statements in the future tense, identify forward-looking statements. These forward-looking statements are not guarantees of Smiths News PLC's future performance and relate to events and depend on circumstances that may occur in the future and are therefore subject to risks, uncertainties and assumptions. There are a number of factors which could cause actual results and developments to differ materially from those expressed or implied by such forward looking statements, including, among others the enactment of legislation or regulation that may impose costs or restrict activities; the re-negotiation of contracts or licences; fluctuations in demand and pricing in the industry; fluctuations in exchange controls; changes in government policy and taxations; industrial disputes; war and terrorism. These forward-looking statements speak only as at the date of this document. Unless otherwise required by applicable law, regulation or accounting standard, Smiths News PLC undertakes no responsibility to publicly update any of its forward- looking statements whether as a result of new information, future developments or otherwise. Nothing in this document should be construed as a profit forecast or profit estimate. This document may contain earnings enhancement statements which are not intended to be profit forecasts and so should not be interpreted to mean that earnings per share will necessarily be greater than those for the relevant preceding financial period. The financial information referenced in this document does not contain sufficient detail to allow a full understanding of the results of Smiths News PLC. For more detailed information, please see the Interim Financial Results for the half-year ended 27 February 2021 and the Report and Accounts for the year ended 29 August 2020 which can be found on the Investor Relations section of the Smiths News PLC website - www.corporate.smithsnews.co.uk/investors. However, the contents of Smiths News PLC's website are not incorporated into and do not form part of this document.

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OPERATING REVIEW

Overview

Overall performance was in line with the Board's expectations for the period and is on track to meet full year market expectations.

Adjusted EBITDA of £20.5m was down 5.5% (H1 2020: £21.7m) from revenues of £551.6m that were down

11.5% (H1 2020: £623.1m), confirming the continuing resilience of our business model given that prior year comparators are from an entirely pre-COVID-19 period.

Sales trends of newspapers and magazines have recovered and stabilised from the sharp declines experienced in H2 2020, with significantly fewer retail outlets having closed in the subsequent lockdowns. Nonetheless, the pandemic has continued to impact sales and profitability, requiring decisive action to control costs while maintaining essential service to the communities we serve.

Our plans to deliver greater value through more focused operations are on track. Central and operational plans have delivered overall savings marginally ahead of schedule, helping to mitigate the ongoing impact of the pandemic in the period.

The key financial metrics of Adjusted EBITDA, cash and capex are in line with expectations. Net debt remains well within the covenants of our new banking facilities and the first term loan amortisation payment of £7.5m was completed in April 2021. We remain on track to reduce bank net debt to 1 x EBITDA by the end of FY2023

Subject to current performance being maintained, the Board expects to reintroduce the payment of dividends later in H2 FY2021.

Operational priorities

At our preliminary results in November 2020 the Company set out three operational priorities for this financial year: proactively managing through the pandemic; securing efficiencies sufficient to offset the decline in core sales; and progressing the next generation of operational efficiencies.

Overall progress on these priorities is good, with an understandable focus on managing through the pandemic in a way that maintains service while pressing ahead with improvements in operational and central costs. As lockdown restrictions ease, we plan to embed the efficiencies we have secured to date and, thereafter, to make further progress on wider network opportunities.

Core wholesale operations

The core wholesale business delivered strong profit and cash generation, with cost efficiencies fully offsetting the decline in margin from sales despite the additional impact of COVID-19. Cost control measures implemented in the first lockdown of 2020 have been maintained and further savings were made in central costs following the disposal of Tuffnells in May 2020. Demonstrating the resilience of its business model, the profitability of the Smiths News core wholesale business is ahead of the prior year.

Sales of newspapers and magazines continued to be challenged in the period but have recovered and stabilised from the sharp declines and fluctuations seen in the early months of the pandemic in 2020. Core sales (excluding DMD) are down by 9.5% in the period with newspapers performing better than magazines, especially in the first quarter. This compares to a decline of 16.9% in H2 2020 and a three-year average decline of circa 3-5% prior to the pandemic. Excluding the impact from travel and commuting retailers (which remain severely impacted by the COVID-19 restrictions) we estimate overall sales in other retailers to be down by circa 8%.

Operational efficiencies have been helped by action taken earlier in the pandemic and we anticipate many of the routing and trunking consolidations will remain until such time as increased volumes justify further costs. Longer term efficiency opportunities will be reviewed once the operational impact of the easing of lockdown restrictions becomes clearer.

Looking ahead, the long-term impact of the pandemic remains unclear, but we are optimistic of prospects for the second half of the year with potential sales increases from the return of sporting events and a gradual return to higher levels of travel and commuting. Our plans for further operating efficiencies are ongoing and we have clear roadmap to secure the necessary savings while maintaining the service excellence that underpins our business model.

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As previously reported, following the completion of the long term agreement with Associated Newspapers in October 2020, Smiths News has now secured its contracts with all the major publishers until at least 2024. These contracts encompass 95% of current revenues, with the remainder operating on rolling agreements.

Ancillary businesses

DMD and Instore continue to be more severely impacted by the COVID-19 restrictions. The decisive action we have taken means both businesses are operating on a break-even basis. Nonetheless, the impact on profitability in the period is a year-on-year decline of £1.4m. We are cautiously optimistic of improvement over time, however, our overall plans and expectations are not dependent on any recovery.

COVID-19 - impact, response and recovery

Restrictions on social movement and retailing have continued throughout the period, moving from a regionally tiered approach in the autumn of 2020 to a comprehensive lockdown in the early months of 2021.

Service to customers and communities has been fully maintained throughout, requiring adjustments to working procedures and additional costs arising from the continued deployment of necessary safety measures. The Company ended the use of the UK Government's furlough support (CJRS) in FY2020 and has not taken any other financial assistance in this financial year.

The impact on overall sales in the period is estimated to be in the region of 7.5%, calculated as the difference between historic trends and the period's year-on-year performance. The long-term impact on sales cannot yet be quantified, however, our plans are not dependent on a return to former volumes.

Profitability impact has been mitigated by a combination of operating efficiencies and the swift removal of central costs following the sale of Tuffnells.

Sales to retailers serving travel, commuting and business customers remain especially challenged, and more broadly we continue to see weaker sales of products such as one-shot magazines and sticker collections. The return of major sporting events and the gradual increase in travel and commuting is likely to have a positive impact, but it is too early to quantify or plan with any certainty. We are, however, confident that any additional costs from a return to more normal sales patterns can be managed in line with the benefit of any increased volume.

It is too early to quantify the impact of the UK's roadmap to removing COVID-19 restrictions, however, the trajectory is likely to be positive for our customers and publisher partners. We are therefore cautiously optimistic that sales in the second half will maintain their current stability as we press ahead with plans for further efficiency improvements.

Cash Flow and Bank Net Debt

Continuing free cash flow of £4.6m (H1 2020: £5.0m) and bank net debt of £70.0m (H1 2020: £68.5m) reflect management's focus on liquidity through the uncertain period of the COVID-19 restrictions. The first amortisation of the term loan, amounting to a repayment of £7.5m, was completed 30 April 2021.

Capital Management

The underlying financial position of the Company continues to strengthen, and all lending covenant ratios remain comfortably within the requirements of the new banking facilities, announced in November 2020. Our ongoing approach to capital management is consistent with the conditions of our current banking facilities.

We remain on track to reduce bank net debt to 1x EBITDA by the end of FY2023 and it is the Board's intention to maintain leverage at around that level over the long term. Capital expenditure for maintenance requirements will continue to be closely controlled at a level approximately equal to depreciation of circa £4m per annum. Any incremental capital expenditure for growth would be required to achieve an appropriate risk adjusted return on our cost of capital.

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