Connect Group upbeat despite serious market struggles

Connect Group updated the market on its trading for the 19 week period ended 12 January on Tuesday, saying its overall performance for the period was in line with management expectations.

The London-listed news distributor reported that it was making “good” early progress with its strategy for a sustainable recovery, based on rebuilding the strengths of its core businesses, underpinned by a disciplined approach to capital management.

It said total group continuing revenue was £516.7m, which was a decrease of 4.0% for the year-to-date.

Continuing revenue in Smiths News and DMD was £458.5m, which was down by 3.3%, while revenue in Tuffnells was £58.2m, down by 8.8%.

The board said that performance was in line with its expectations, with the decline in Smiths News and DMD being a result of well-established trends in the newspaper and magazine markets.

It said the decline in Tuffnells' revenue arose from the continuation of service performance and trading challenges experienced in the second half of last year, which it said were being actively addressed.

The group said its organisational restructure had delivered “greater focus and accountability” in its core businesses.

Good progress had also been made in streamlining head office support functions.

Overall, it said costs were therefore in line with management's plan, and its performance targets for ongoing service and efficiency improvements remained on track as it prepared the group for a sustainable recovery.

“The recently announced contract awards confirm the momentum in our plans to accelerate the publisher contract renewals,” the board said.

“Smiths News has now successfully negotiated new 5-year contracts amounting to 38% of its total sales at current values, amounting to 61% of its magazine revenues and 26% of its newspaper revenues.

“We are in advanced discussions with the remaining key publishers and are confident of achieving our goal of renegotiating the critical mass of contracts this financial year.”

Connect Group said planned cost savings in Smiths News were on track, aided by the return to a more focussed management.

At Tuffnells, Connect Group said it was continuing to feel the impact of issues and trading challenges from the second half of the 2018 financial year.

“While revenue is down on the prior year we have made progress in stabilising operations and building improvements to revenue quality, whilst generating momentum in new customer acquisition.

“The business was cash flow neutral in [the first] quarter and, given this underlying progress, we continue to target a return to profitability in [the second half], while recognising there is inherent uncertainty in forecasting the speed of sustainable progress.”

Connect Group said its medium-term strategy was focussed on delivering sustainable improvements to the core businesses, underpinned by the introduction of lean process management and continuous improvement principles to drive efficiency savings and improved customer experience.

It said “good progress” had been made with the immediate priorities that it outlined in its preliminary financial results in November, with the directors confident of making further improvements over the remainder of the year.

In January, in line with its focus on those priorities, Smiths News sold its vended coffee proposition - trading as Jack's Beans - to an industry specialist, removing “another non-core distraction”.

“While our immediate focus is on rebuilding core operations, the group's strategy recognises a medium term opportunity to offer distribution solutions that leverage our skills and infrastructure in near adjacent markets.

“These near adjacent propositions will be pursued and evaluated against strict investment criteria that ensure there is limited financial risk or operational distraction.”

Connect Group said its strategy would be underpinned by a disciplined approach to capital management, that recognised and balanced the interests of all stakeholders.

The board said it intended to take a more prudent and disciplined approach to capital management, expecting free cash from operations to be sufficient to fund the investment needed for recovery, with the surplus used to reduce net debt while also maintaining an “attractive” total shareholder return.

It announced proposals for the sale and leaseback of 16 freehold and long-lease properties - a process expected to raise up to £35m of net proceeds before tax, with the firm currently in the process of inviting bids from interested third parties.

“The net cash proceeds will be used to reduce the group's net debt with its banking syndicate.”

Net debt as at 31 August was £83.4m, representing a net debt-to-EBITDA ratio of 1.8x.

The group said it was targeting a reduced net debt-to-EBITDA ratio of 1x by the 2021 financial year, with repayment achieved through a combination of surplus free cash from operations as well as proceeds from the proposed sale and leaseback of selected freehold and long lease properties.

“In the near term, due to the lower EBITDA run rate from the 2018 financial year and continued weak trading in Tuffnells, we anticipate the net debt-to-EBITDA ratio to peak at 2.0x at the half year, prior to the receipt of proceeds from our sale and leaseback proposals.”

Capital expenditure, including remedial expenditure required in the Tuffnells business, was expected to be in the range of 30%-50% of EBITDA, with the application of strict criteria for return on capital employed.

Connect Group said that while it would not be proposing an interim dividend in the first half, it anticipated recommending a full-year dividend of no less than 1.0p for 2019, subject to meeting its cash and profit expectations and the continuation of a positive trading outlook.

Looking ahead, the board said its medium-term priority was to continue strengthening the balance sheet while maintaining a progressive dividend as a proportion of average free cash flow.

In that regard, it said it would target the payment of a full-year dividend in the range of 10% to 15% of free cash-flow from operations.

“Overall performance for the 19 weeks to 12 January is in line with management's expectations,” the board said.

“The group has made good progress with its priorities for 2019, developing a strategy that is focused on the sustainable recovery of its core businesses, while recognising and preparing for wider opportunities in the medium term.

“The group's plans are underpinned by a disciplined approach to capital management, which aims to meet the needs of all stakeholders.”

Connect Group said it would announce its interim financial results for the six months ending 28 February on 1 May.