Interim Results 23 April 2014 The leading supply chain, trading and - - PowerPoint PPT Presentation

23 April 2014

Interim Results

The leading supply chain, trading and distribution partner in our chosen supply markets - delivering consistently strong returns to shareholders

Connect Group PLC 2 Interim Results April 2014

Connect Group PLC

News Distribution Books Media Education & Care

Smiths News, UK’s largest newspaper and magazine wholesaler, today with a 55% market share A multichannel distributor

• f printed and digital

books, serving retailers, libraries and consumers worldwide Supplying news and inflight media to 80 airlines in 50

• countries. A global partner

to a number of blue chip customers A leading distributor

• f consumables to the

education and care markets

Strategic ambition is to deliver 50% of profit outside of news and magazines by 2016

Evolution of Smiths News Group

2006 2009 2011 2012

3 Interim Results April 2014

Connect Group PLC

Connect Group

News Distribution Media 4 Interim Results April 2014

Connect Group PLC 5 Interim Results April 2014

Core skills and competencies

Operating in large and fragmented markets we connect suppliers with customers – performing an essential and value added role in these supply chains

► Market knowledge and expertise ► Outstanding service ► Change management and integrations ► Unmatched efficiency ► Leading technology ► Talented people

5 year CAGR PBT : 10.3% EPS : 9.1% DPS : 6.8%

Connect Group PLC

Delivering promises; realising potential

6 Interim Results April 2014

Highlights

Mark Cashmore Group Chief Executive

Connect Group PLC 8 Interim Results April 2014

Highlights

► Group revenue £899m -0.3% ► Underlying PBT £24.0m +3.0% ► Free cash flow £11.9m +16.7% ► News & Media: Profit +4.9%, £1.1bn annualised News revenue contracted to at least 2019 ► Books: strong growth in Wordery offset by weaker margin and return on investments impacting profit ► Education & Care: core sales growing at 5.0% ► EPS 10.1p +6.3% ► H1 dividend 3.1p, +3.3%

Group Financial Update

Nick Gresham Chief Financial Officer

Connect Group PLC

Cautionary statement

10 Interim Results April 2014 This document contains certain forward-looking statements with respect to Connect Group 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 Connect Group 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, Connect Group PLC undertakes no responsibility to publicly update any of its forward-looking statements whether as a result of new information, future developments or

• therwise.

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 Connect Group PLC. For more detailed information, please see the interim announcement for the half-year ended 28 February 2014 which can be found on the Investor Relations section of the Connect Group PLC website – www.connectgroupplc.com. However, the contents of Connect Group PLC’s website are not incorporated into and do not form part of this document. The following definitions have been applied consistently throughout this interim results announcement:

• Underlying 2014 and 2013 results exclude non-recurring items and amortisation of acquired intangibles and includes the results of acquired businesses

from the date of acquisition and excludes results from businesses disposed in the prior period.

• Underlying earnings per share are calculated using underlying profit before tax and the Group underlying effective tax rate of 21.5% for HY2014 and

24.9% for HY2013.

• Free cash flow is cash flow excluding the following; payment of the dividend, acquisitions and disposals, the proceeds on the disposal of freehold

properties, repayments of obligations under finance leases, the repayment of bank loans, EBT share purchase, and cash flows relating to non-recurring and

• ther items.
• Net debt is calculated as total debt less cash and cash equivalents. Total debt includes loans and borrowings, overdrafts and obligations under finance

leases.

• Like for like revenues exclude the impact of gains and losses, including contracts, new business and acquisitions reported in the current or prior year

total sales.

• HY 2014 refers to the six months ended 28 February 2014, FY 2013 refers to the year ended 31 August 2013 and HY2013 refers to the six months ended

28 February 2013.

• The Group adopted IAS 19 (revised) in the period which changed the accounting for defined benefit pension schemes. The prior period has been restated

resulting in a £1.5m reduction in both underlying and statutory profit before tax. The consequent changes to the prior periods underlying and statutory earning per share are shown in note 1 to the Condensed financial statements.

Connect Group PLC

Group performance

11 Interim Results April 2014

£m Feb 2014 Feb 2013 Change Non N&M mix %

News Distribution 20.5 19.7 +4.1%

• Media

1.0 0.8 +36.2%

4% News & Media operating profit 21.5 20.5 +4.9%

• Books operating profit

2.3 3.5 (33.8)% 9% Education & Care operating profit 3.0 2.9 +3.4% 11% Group operating profit 26.8 26.8

• 24%

Net finance charges (2.8) (3.5)* Group PBT 24.0 23.3 +3.0 Tax (5.2) (6.2) Group PAT 18.8 17.1*

EPS

10.1p 9.5p* +6.3% DPS 3.1p 3.0p +3.3%

* Restated to reflect IAS19(R)

Connect Group PLC 12 Interim Results April 2014

Non recurring and other items

£m Feb 2014 Feb 2013 Integration costs

• (0.5)

Network reorganisation costs (0.3) (1.0) Release of property provisions 0.6

• Acquisition costs

(0.4) (2.1) Amortisation of acquired intangibles (1.3) (1.4) Impairment of acquired intangibles (0.5)

• Disposal of MMC
• 0.1

Total before taxation (1.9) (4.9) Taxation 0.1 0.4 Total after taxation (1.8) (4.5)

Connect Group PLC 13 Interim Results April 2014

Free cash flow

£m Feb 2014 Feb 2013 Operating profit 26.8 26.8 Depreciation and amortisation 3.7 3.7 EBITDA 30.5 30.5 Working capital (2.8) (7.2) Capital expenditure (4.5) (3.7) Net interest and fees (4.2) (2.1) Taxation (5.2) (5.0) Pension funding (2.1) (3.1) Other 0.2 0.8 Free cash flow 11.9 10.2

Connect Group PLC 14 Interim Results April 2014

Net debt

£m 28 Feb 2014 31 Aug 2013 28 Feb 2013 Opening net debt (98.5) (100.5) (100.5) Free cash flow 11.9 32.6 10.2 Dividend (11.7) (16.0) (10.6) Non recurring items (1.9) (5.9) (2.2) Acquisitions (0.3) (5.1) (3.4) Other (4.5) (3.6) (2.9) Closing net debt (105.0) (98.5) (109.4) Net debt : EBITDA 1.6x 1.5x 1.6x £200m committed facilities to November 2018

• Net debt / EBITDA covenant 2.75x
• Interest cover covenant 3.0x
• Fixed charge cover covenant 2.0x

Business update

Connect Group PLC 16 Interim Results April 2014

76%

► New business wins driving sales ► Strong dynamics in newspaper market: total sales +0.9% ► Continued weakness in magazine sales ► Metro contract: 200m copies per year ► Contract wins: 77% of total revenues secured until 2019 ► £3.2m cost savings in H1: on track for £20m 3-year target ► Customer innovation: driving further efficiency

2014 H1

Total Revenue £748.6m -1.6% LFL Revenue

• 2.8%

Profit £20.5m +4.1%

Segmental LFLs

► Newspapers -0.5% ► Magazines -8.1% % of Group Operating Profit

Connect News & Media – News distribution

Connect Group PLC 17 Interim Results April 2014

Connect News & Media – Media

► Good progress in H1 ► Global BA contract secured to May 2019 ► Mirror contract: 18m copies per annum secured ► 11,000 iPads now deployed across 17 airlines ► Growth in digital services ► Operational integration delivering efficiency

2014 H1

Total Revenue £12.3m +4.2% LFL Revenue +1.8% Profit £1.0m +36.0%

Segmental LFLs

► UK 11.0% ► International

• 4.5%

4%

% of Group Operating Profit

Business update

Connect Group PLC 19 Interim Results April 2014

Connect Books

► Sales mix and margin dilution impacting profitability ► Wordery: doubled sales; now making profit ► Challenging academic environment ► Planned H1 investment adding short term pressure ► Focused long-term growth strategy ► Clear plan addressing immediate challenges ► Close monitoring of return on investments

2014 H1

Total Revenue £106.6m +8.4% LFL Revenue -0.3% Profit £2.3m -33.8%

Segmental LFLs

► Trade -4.6% ► D to C +101.4% ► Public Library

• 14.9%

► Academic

• 9.8%

► Digital +2.2%

9%

% of Group Operating Profit

Business update

Connect Group PLC 21 Interim Results April 2014

Connect Education & Care

► Strong sales performance in core categories +5.0% ► Expanding geographic footprint from framework wins in Scotland and NI ► Continued investment in warehouse management, demand planning and customer service ► Range alignment in new catalogues ► WMS range expanded by 5000 products from 1 March ► Well positioned for H2 peak

2014 H1

Total Revenue £31.2m +2.5% LFL Revenue +3.2% Profit £3.0m +3.4%

Segmental LFLs

► Education +5.1% ► Early Years +12.0% ► Care

• 2.0%

► Other

• 17.8%

11%

% of Group Operating Profit

Summary & outlook

Connect Group PLC 23 Interim Results April 2014

Summary & outlook

► Rebranding complete ► Strong performance in 2 of 3 divisions : representing 91% profit ► Challenges in Books division being addressed ► Diversification strategy unchanged, maintaining target of 50% profit mix by 2016 ► Strong cash flow dynamics and new committed facilities ► Maintaining dividend growth

H1 Metrics PBT +3.0% EPS +6.3% DPS +3.3%

Interim Results

23 April 2014

Appendices

Connect Group PLC 26 Interim Results April 2014

Connect News & Media – News Distribution Income Statement £m Feb 2014 Feb 2013 Change LFL Total revenue 748.6

761.1 (1.6%) (2.8%)

Gross profit 61.7 62.1 Operating costs (41.2) (42.4)

Operating profit

20.5 19.7

4.1%

Gross margin 8.2% 8.2%

• Cost ratio

(5.5%) (5.6%) 10 bps Operating margin 2.7% 2.6% 10 bps

Connect Group PLC 27 Interim Results April 2014

Connect News & Media – Media Income Statement

£m Feb 2014 Feb 2013* Change LFL Total revenue 12.3 11.8 4.2% 1.8% Gross profit 6.1 5.2 Operating costs (5.1) (4.4) Operating profit 1.0 0.8 36.0% Gross margin 49.6% 44.1% 550 bps Cost ratio (41.5%) (37.3%) (420 bps) Operating margin 8.1% 6.8% 130 bps

* Excludes the results for the MMC business disposed of in April 2013

Connect Group PLC 28 Interim Results April 2014

Connect Books Income Statement

£m Feb 2014 Feb 2013 Change LFL Total revenue 106.6 98.3 8.4% (0.3%) Gross profit 19.4 18.7 Operating costs (17.1) (15.2) Operating profit 2.3 3.5 (33.8%) Gross margin 18.1% 19.0% (90 bps) Cost ratio (16.0%) (15.5%) (50 bps) Operating margin 2.2% 3.6% (140 bps)

Connect Group PLC 29 Interim Results April 2014

Connect Books sales comparison

Trade (50% mix)

• 4.6%

Academic (25% mix)

• 9.8%

UK Library (10% mix)

• 14.9%

Consumer (11% mix) +101.4% Digital (4% mix) +2.2%

HY 2014

Trade (58% mix)

• 3.3%

Academic (20% mix)

• 11.4%

UK Library (13% mix)

• 10.9%

Consumer (4% mix) Digital (5% mix) +38.0%

FY 2013

Connect Group PLC 30 Interim Results April 2014

Connect Education & Care - Income Statement

£m Feb 2014 Feb 2013 Change LFL Total revenue 31.2 30.5 2.5% 3.2% Gross profit 12.6 12.0 Operating costs (9.6) (9.1) Operating profit 3.0 2.9 3.4% Gross margin 40.5% 39.3% 120 bps Cost ratio (31.0%) (29.8%) (120 bps) Operating margin 9.5% 9.5%

Connect Group PLC 31 Interim Results April 2014

Reported Sales Performance

FY14 FY13 FY12 H1 Jan IMS FY July IMS H1 Jan IMS FY July IMS H1 Jan IMS Smiths News News (0.5%)

• (2.7%)
• (3.9%)
• (2.1%)
• (1.2%)
• Magazines

(8.1%)

• (9.9%)
• (7.7%)
• (6.6%)
• (7.8%)
• LFL

(2.8%) (2.8%) (4.6%) (4.6%) (5.0%) (4.7%) (4.3%) (4.1%) (3.7%) (3.2%) Total (1.6%) (2.0%) (2.6%) (3.2%) (3.0%) (1.9%) (1.9%) (2.6%) (1.8%)

• DMD

LFL 1.8% 0.2% 1.9%

• (0.3%)

0.5%

• 8.6%
• Total

3.9% 2.0% (7.8%) (6.9%) (3.3%) (1.5%)

• 6.7%
• Bertrams

LFL (0.3%) (0.4%) (0.6%) 2.0% 2.8% 1.5% 5.8% 4.3% 2.5% (0.6%) Total 8.4% 9.7% 7.8% 11.2% 7.0% 4.4% 31.2% 32.5% (5.9%)

• Consortium

LFL 3.2% 4.2% 2.6% 1.4% 3.3%* 5.1%*

• Total

2.5% 4.2% (0.3%) (1.5%) 3.2%* 5.0%*

• 7.2%*

Connect Group PLC 32 Interim Results April 2014

Financial KPIs

£m HY 2014 FY 2013* FY 2012 FY 2011 FY 2010 Revenue 898.7 1,806.9 1,803.9 1,734.4 1,829.6 Profit before tax 24.0 49.9 47.5 38.6 35.0 Profit after tax 18.8 38.9 36.1 28.2 26.4 EPS 10.1p 20.8p 19.9p 15.5p 14.6p Free cash flow 11.9 32.6 27.2 22.5 20.4 DPS 3.1p 9.3p 8.6p 8.0p 7.4p Net Debt 105.0 98.5 100.5 63.3 48.0

Connect Group PLC 33 Interim Results April 2014

Income Statement

£m HY 2014 FY 2013* FY 2012 FY 2011 FY 2010 Revenue 898.7 1,806.9 1,803.9 1,734.4 1,829.6 Underlying Operating profit 26.8 56.4 51.2 41.7 37.1 Non recurring items (1.9) (10.8) (10.9) (6.5) (6.9) Statutory Operating profit 24.9 45.6 40.3 35.2 30.2 Net finance charges (2.8) (6.7) (3.7) (3.1) (2.1) Statutory Profit before tax 22.1 38.9 36.6 32.1 28.1 Income tax expense (5.1) (10.8) (9.1) (10.2) (6.9) Statutory Profit after tax 17.0 28.1 27.5 21.9 21.2 Earnings per share Statutory

• basic
• diluted

Underlying

• basic
• diluted

9.2p 8.7p 10.1p 9.6p 15.4p 14.5p 20.8p 19.6p 15.2p 14.7p 19.9p 19.3p 12.1p 11.9p 15.5p 15.3p 11.7p 11.5p 14.6p 14.4p

Connect Group PLC 34 Interim Results April 2014

Balance Sheet

£m HY 2014 FY 2013 FY 2012* FY 2011* FY 2010 Intangible assets 67.0 68.2 67.1 36.9 12.7 Property, plant & equipment 25.6 26.6 24.5 18.7 21.0 Other non current assets 12.8 12.8 14.5 16.1 5.3 Total non current assets 105.4 107.6 106.1 71.7 39.0 Cash 12.5 10.1 5.1 4.2 4.0 Other current assets 168.2 171.3 164.9 145.2 138.2 Total assets 286.1 289.0 276.1 221.1 181.2 Other current liabilities (192.8) (206.1) (200.3) (194.8) (188.8) Borrowings (116.2) (106.8) (103.1) (65.2) (48.8) Retirement benefit (21.9) (23.3) (36.0) (36.3)

• Other non current liabilities

(8.5) (9.7) (14.3) (12.2) (6.0) Total liabilities (339.4) (345.9) (353.7) (308.5) (243.6) Total net liabilities (53.3) (56.9) (77.6) (87.4) (62.4)

* Restated in respect of retirement benefit obligations

Connect Group PLC 35 Interim Results April 2014

Cash flow

£m HY 2014 FY 2013 FY 2012 FY 2011 FY 2010 Operating profit 26.8 56.5 51.2 41.7 37.1 Depreciation and amortisation 3.7 7.6 6.9 6.8 7.3 EBITDA 30.5 64.1 58.1 48.5 44.4 Working capital (2.8) (5.0) (9.1) (10.3) (1.4) Capital expenditure (4.5) (7.9) (5.1) (3.1) (8.6) Net interest (4.2) (4.2) (3.3) (4.9) (2.6) Taxation (5.2) (10.5) (8.0) (1.7) (5.9) Pension funding (2.1) (6.5) (6.8) (6.2) (6.4) Other 0.2 2.6 1.4 0.2 0.9 Free cash flow 11.9 32.6 27.2 22.5 20.4

Connect Group PLC 36 Interim Results April 2014

Net debt

£m HY 2014 FY 2013 FY 2012 FY 2011 FY 2010 Opening net debt (98.5) (100.5) (63.3) (48.0) (49.5) Free cash flow 11.9 32.6 27.2 22.5 20.4 Dividend (11.7) (16.0) (14.9) (13.8) (12.6) Non recurring items (1.9) (5.9) (10.3) (5.2) (6.7) Acquisitions (0.3) (5.1) (38.1) (17.9)

• Disposals
• 1.0
• Other

(4.5) (3.6) (1.1) (0.9) 0.4 Closing net debt (105.0) (98.5) (100.5) (63.3) (48.0) Decrease/(Increase) in debt (6.5) 2.0 (37.2) (15.3) 1.5 Net debt : EBITDA 1.6x 1.5x 1.6x 1.3x 1.1x

Connect Group PLC 37 Interim Results April 2014

Non-recurring and other items

£m HY 2014 FY 2013 FY 2012 FY 2011 FY 2010 Integration costs

• (1.1)

(2.7)

• Network re-organisation costs

(0.3) (3.3) (2.0) (2.7) (6.7) Acquisition costs (0.4) (3.7) (4.6) (2.4)

• Property provisions

0.6

• (0.5)
• Amortisation of acquired intangibles

(1.3) (2.8) (2.1) (0.9) (0.9) Impairment of acquired intangible (0.5) Interest

• (0.2)
• MMC disposal
• 0.1
• The Returns Company
• 0.7

Total before taxation (1.9) (11.0) (10.9) (6.5) (6.9) Taxation 0.1 1.3 2.3 0.2 1.7 Total after taxation (1.8) (9.7) (8.6) (6.3) (5.2) Non-recurring cash (per cash flow) (1.9) (5.9) (10.3) (5.2) (6.7)

Connect Group PLC 38 Interim Results April 2014

Taxation

£m HY 2014 FY 2013 FY 2012 FY 2011 FY 2010 Current tax 5.1 15.7 13.6 11.3 9.8 Adj in respect of prior year UK corporation tax

• (2.6)

(1.6) (0.5) (1.4) Total current tax charge 5.1 13.1 12.0 10.8 8.4 Deferred tax – current year (0.1) (0.7) (0.6) (0.4) (0.1) Deferred tax – prior year 0.2 (0.3)

• 0.3

Total tax on profit 5.2 12.1 11.4 10.4 8.6 Effective tax rate 21.5% 24.2% 24% 27% 25% Non recurring items (0.1) (1.3) (2.3) (0.2) (1.7) Tax on profit after non recurring 5.1 10.8 9.1 10.2 6.9 Effective statutory tax rate 23.1% 27.8% 25% 32% 24%

Connect Group PLC 39 Interim Results April 2014

Lease commitments

£m HY 2014 FY 2013 FY 2012 FY 2011 FY 2010 Land and buildings within one year in second to fifth year beyond fifth year 7.7 26.1 23.7 8.1 26.2 26.7 10.0 28.9 29.6 9.9 29.3 27.4 8.8 28.7 29.5 Total 57.5 61.0 68.5 66.6 67.0 Equipment and vehicles within one year in second to fifth year beyond fifth year 1.8 2.0

• 1.6

1.6

• 1.3

1.8

• 1.6

1.9

• 1.0

0.8

• Total

3.8 3.2 3.1 3.5 1.8 Total within one year in second to fifth year beyond fifth year 9.5 28.1 23.7 9.7 27.8 26.7 11.3 30.7 29.6 11.5 31.0 27.4 9.8 29.5 29.5 Total 61.3 64.2 71.6 70.1 68.8

Connect Group PLC 40 Interim Results April 2014

Defined benefit schemes

HY 2014 FY 2013 FY 2012 FY 2011 FY 2010 Scheme assets 483.2 469.6 433.1 375.1 408.6 Scheme liabilities (428.0) (419.2) (395.3) (348.3) (367.4) Surplus 55.2 50.4 37.8 26.8 41.2 Asset cap (58.1) (53.2) (40.3) (26.8) (41.2) Additional liability – IFRIC 14 (18.8) (20.3) (33.5) (36.3)

• Liability on balance

sheet (21.9) (23.3) (36.0) (36.3)

• Asset on balance

sheet 0.2 0.2

• The Group operates three defined benefit schemes of which WHS Smith Pension Trust (the ‘Pension Trust’) represents over 96% of

the total obligation at 28 February 2014. The Pension Trust Actuarial deficit £23m at 19 June 2013, Contributions agreed at £4.1m per annum, £2.1m in HY 2014 Managed through Liability Driven Investment Scheme, Closed to further accruals

Connect Group PLC 41 Interim Results April 2014

Contingent liability

£m HY 2014 FY 2013 FY 2012 FY 2011 FY 2010

• No. of Reversionary leases

32 35 59 90 105 Contingent liability 7.3 8.4 10.9 13.9 21.2 Maximum annual liability 5.0 5.0 5.0 5.0 5.0

Under the terms of the 2006 Demerger Agreement, Connect Group Plc has a contingent liability for 35% of any of the total WHS Group potential reversionary leases, whereby a lease liability could revert back to WH Smith is the assignee were to fail.

Connect Group PLC 42 Interim Results April 2014

Restatement of retirement benefit obligation

• During the period the Group adopted IAS 19 (revised) affecting the accounting for defined benefit schemes and specifically to reflect pension

interest in the income statement calculated on the net balance sheet position at the beginning of the period.

• To aid comparison we have restated the pension interest costs and hence the result of the Group for the 6 month period ended 28 February 2013

and the year ended 31 August 2013.

• There is no impact on cashflow or covenants.
• During the year ended 31 August 2013 the Group reconsidered its accounting for deficit contributions of pension schemes and has amended its

accounting to reflect future agreed deficit contributions as a liability on the balance sheet to better reflect the requirements of IFRIC14. Accordingly the February 2013 Condensed financial statements have also been restated to reflect the schedule of contributions as a liability of £22.6m and a resulting tax asset of £4.7m on our balance sheet at 28 February 2013.

• The key impacts on the earnings are set out below:

6 months to Feb 2013 12 months to Aug 2013 £m Reported Adjustment Restated Reported Adjustment Restated Operating profit 26.9 (0.1) 26.8 56.5 (0.1) 56.4 Net interest (2.0) (1.5) (3.5) (3.5) (3.0) (6.5) Profit before tax 24.9 (1.6) 23.3 53.0 (3.1) 49.9 Profit after tax 18.7 (1.6) 17.1 40.9 (3.1) 37.8 EPS – basic 10.3p (0.8p) 9.5p 22.4p (1.6p) 20.8p EPS – diluted 9.7p (0.8p) 8.9p 21.1p (1.5p) 19.6p