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Edited Transcript of CNCT.L earnings conference call or presentation 6-Nov-19 9:30am GMT

Full Year 2019 Connect Group PLC Earnings Presentation

London Dec 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Connect Group PLC earnings conference call or presentation Wednesday, November 6, 2019 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Gary Kennedy

Connect Group PLC - Non-Executive Chairman

* Jonathan Michael Bunting

Connect Group PLC - Interim CEO, CEO of Smiths News & Executive Director

* Michael Holt

Connect Group PLC - Director & Executive Chairman of Tuffnells

* Peter Birks

Connect Group PLC - CEO of Tuffnells

* Tony Grace

Connect Group PLC - CFO & Director

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Conference Call Participants

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* Christopher Bamberry

Peel Hunt LLP, Research Division - Analyst

* Christopher Wickham

Equity Development Limited - Analyst

* Steven John Woolf

Numis Securities Limited, Research Division - Analyst

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Presentation

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Gary Kennedy, Connect Group PLC - Non-Executive Chairman [1]

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Good morning, everybody, and thank you for joining us this morning for our preliminary results announcement. I'm Gary Kennedy. I didn't expect to be standing here during this morning, but I did the introduction last year, I thought that would be the end of it, but I think I'm afraid you're stuck with me this morning.

I would say, just as an overarching comment in terms of the year for us, it's been a year of disappointment. We had a lot of progress in a lot of areas in our business, but our overarching guideline would be one of disappointment. That's really looking at it from a shareholder perspective where we feel we have disappointed in terms of the results and are not seeing the necessary momentum in terms of our multiple and share price. Our focus on our capital management has allowed some distribution in terms of dividend, but obviously not at the level that those shareholders would have expected.

I'm also very conscious of our employee base who have been expending tremendous effort in terms of trying to recover some of the challenges that we have in our business. But while we actually just fell short marginally in terms of the market consensus in terms of our profitability, that was at the expense of any variable pay element, which is not somewhere that I feel very comfortable in terms of one of our key stakeholders have been our employees. And indeed, from a customer perspective, certain parts of our business we've underperformed in terms of the demanding criteria that we set ourselves in terms of customer service.

You would have seen this morning quite a bit of update news in terms of the market. I suppose in terms of director changes, that's probably the most significant. Jos has stepped down as CEO. He goes with our best wishes. He will leave some legacy behind him, particularly around data analytics and a very strong discipline in terms of execution, and we wish him well in terms of future endeavors.

I'm delighted to announce that Jon Bunting here, most of you know, sitting here in the front, has stepped up as Interim CEO. I've had the pleasure of working with Jon now for about 4.5 years, and I've seen him develop and grow in terms of leadership, and I have no doubt that he would bring tremendous focus, drive and energy in terms of the challenges that we face across the broader group.

I'm also joined in the room this morning by the rest of the Board. They're obviously here to support me or somebody, but then it was good to see Mark Whiteling, Denise Collis and Michael Holt, who's somewhere in the room. So it's good to see them. We have obviously other members of management here as well.

So the format this morning will be me to lead in the sort of business end of the review. I'll hand over to Tony in terms of the finances. And then Jon, Tony and myself will be available in terms of the Q&A at the end.

There was another market announcement as well in terms of Tuffnells in terms of strategic review, and I'll cover that a little bit later.

So in terms of the sort of finance headlines, we had expected a decrease in volumes in Smiths News, but we were disappointed by the volume attrition that we had in terms of Tuffnells, and I'll talk a little bit more about that. But against that, our adjusted profit, as you can see, is down year-on-year, but it was just marginally off our market expectations. We said last year, particularly as we faced into some of the challenges, that we would have a big focus on capital management, and I think that has paid dividends this year. We've certainly been very conservative in terms of our CapEx. We've been pretty rigid in terms of how we manage our working capital. We have generated free cash flow, as you can see. Not at the same level as last year, but certainly, we are positive cash generation. That has allowed us to pay down debt. As you can see, we've had 11% discount -- or decrease in terms of our debt. And it's also allowed us, as I said in the earlier part, to pay a small dividend to our shareholders and keeping them, hopefully, on the register.

We didn't announce this morning that we would have an impairment charge. That is really the difference between what you're seeing here in terms of adjusted profit and the statutory profit. So we've taken an impairment charge on Tuffnells, and again, Tony will talk in more detail about that.

So that overarching theme, disappointments, but notwithstanding that, there has been really good progress in certain elements of our business. So we've been on a journey now for a few years. And if you've been following us, you'll see various elements of that journey. We've been doing quite a bit of portfolio rebalancing.

So we've sold businesses that were no longer on the sweet spot for us in terms of the company. We closed down PMP, as you know, and we've done a tremendous effort, completed in the last financial year, of removing any stranded costs in terms of that business.

We have changed our operating model as well, which has allowed Smiths News, in particular, to really refocus on its business. And we've seen tremendous results there, and a big thanks goes out to our Smiths News colleagues in terms of their endeavors throughout the year.

At the center, in terms of restructure, this is work in progress for us, but we have made significant improvements there. So our cost to serve, both internally and externally from that segment of our business, is definitely in good shape, and we'll see that paying dividends in terms of financial year '20 and into the future.

And as I said, the capital management, I think, is a big focus for us. Sale and leaseback in terms of some of our properties, we had a little bit of a roadblock in that this year, but Tony will, again, update us in terms of some of the progress there.

But really, the challenge that we have, which is sort of undermining some of the progress that we're making in the rest of our business, is around Tuffnells. And while there has been good progress there, you can see in terms of this, we have probably underestimated the extent of the challenge around core and legacy issues that we have in that business, and they continue to derail us a little bit in terms of our progress.

I would say that the trading environment in that particular business has been hard. I'll talk a little bit more in detail about that. But certainly, when you look at some of the disruptive practices that have happened in the market in terms of pricing, we should be in a better position to deal with that, but we haven't. We have seen macro events in this particular country around Brexit having a dampening impact in terms of customer habits. And certainly, we've seen down-trading. And we've seen some attrition in terms of our customers as well. Some of it driven by us and some of it by our lack of performance, and I'll talk a little bit more about that. But I suppose the overall message I would leave you in terms of this is that our current model in Tuffnells does not have sufficient flexibility to deal with upside and downside in terms of volume in our business, and that's where our key focus is as a business.

As I said, Smith News had a tremendous performance in our financial year. I suppose the theme there would be that's sort of back in the groove in terms of Smiths News. So we've had a volume decrease, as you can see, but our adjusted operating profit is up 12.1%. That is on the back of GBP 6.5 million worth of efficiency and productivity increases in the business this year, which is a fantastic achievement.

On top of that, the picture you don't see but I see on a regular basis is when you look at their key performance indicators across a whole range of things, whether that's service in terms of efficiency, productivity, health and safety, we have green ticks in all of those boxes, so a really good and strong scorecard.

You would have seen announcements during the year in terms of our progress in terms of renewing our contracts. So we have renewed 80% of our contracts at this stage. That gives us tremendous visibility out to 2024 in terms of the territories that we will deal in, the revenue patterns, but also we're able to model the cash flow impact of that in terms of our business.

We had a disappointing engagement with British Airways. We lost the British Airways contract in terms of DMD business, but the guys move very, very quickly to integrate the operations of that business into Smiths News to mitigate the off -- the margin impact of that loss of contract.

So my overall summary in terms of Smiths News at this stage is that it continues to be an extremely well-managed business s. We have a very predictable business there, both in terms of revenues and it continues to generate good cash flows.

Second item I'd talk about in terms of the business is just the progress we've been making at the center as well. So as I said, our cost to serve is something that we continue to look at both internally and externally from this segment of our business. We have set up an offshore shared service center, which is starting to prove very, very good in terms of dividends for us. At this stage, we've transferred 200 process-related functions in IT, customer service and finance, and we see that as a continuum in terms of addressing that central cost base.

We've also invested, in the past 12 months, in continuous improvement resources, and that has allowed us to really drive process optimization through some of our business segments, but also to make sure that we bring the rigor and discipline of project management and program management to a lot of the initiatives that we have in terms of the business.

And as you see in terms of the last bullet, we have engaged in a zero-based budgeting exercise, the first draft of which we just completed this week. So we're going through that in terms of analysis. And that, I think, again, will lead us to make some productivity gains and efficiencies in terms of that central cost base.

So Tuffnells. Unfortunately, the over -- line sort of head in terms of disappointment is there. But again, Peter Birks is in the room here and Peter represents the constituency of Tuffnells. I know personally from my dealings with Peter and in terms of some of his colleagues, like the amount of effort and focus and energy that's been expended in that business is second to none. Unfortunately, in terms of that journey that I talked about, we're just not at the point where we expected to be in terms of Tuffnells and the journey at this point in time, but I have no doubt that we do have the resolve to get there.

But in terms of that business, when you look at it, I talked about the core and legacy drag effect, but in terms of our financial year, our volumes were down. So our consignment volumes were down from GBP 12.8 million down to GBP 10.8 million in that year, so that's roughly a 15% decrease in terms of volume. We've been putting a huge focus in terms of our RPC, so revenue per consignment. And the improvements that we have made in terms of dynamic pricing with our customer base in certain segments has allowed that 15% volume to only translate into a 6% decrease in revenue in terms of the pricing offset of that.

So what's happening at the customer end? I suppose in the positive side, we've got into the dealer in a lot deeper fashion than we probably would have had before. We've been able to identify those customers that would be revenue-challenged relative to our expectation and pricing levels, and we've taken proactive decision to move those customers off our register. That has a short-term impact because obviously, you've got a volume decrease. And if you don't do something in terms of your fixed cost structure, then there's a short-term negative impact. But that, over time, will give us a better result in terms of profitability.

From the negative side, however, we have fallen short, for a large part of the year, in terms of our own service parameters. So we have exacting standards, as I would say, across our business. We've fallen short for all sorts of reasons, and that has allowed some of our competitors to pick off some of those customers or our customers to voluntarily go to a competitor.

I've talked about the aggressive and disruptive pricing that has been going on in the market. I think if our business model was a little bit better shaped and a bit more mature, we would be able to withstand that, but it has had an impact in terms of it. And there's no doubt that there is a bit of market softening on the back of Brexit and the uncertainty that continues to prevail there. And we've certainly seen the smaller end of our customer base in Tuffnells not moving away from us, but doing quite a bit less business with us, so down 15%, 20% in terms of that cohort, and that's something that we have to think about.

So really, like in a lot of businesses, but particularly in this business, the analogy I'd use is you have to have a [jaws] between your cost and your revenue base. And unfortunately, the fixed cost element of our cost base just does not have a lot of leverage in terms of their jaws to a low reaction in terms of the cost base if we see a downturn in terms of revenue. So effectively, what has happened is the downturn in revenue has fallen straight to the bottom line, and that's where we need to get agility and flexibility into our model and reduce that fixed cost element so that we contain that jaws in terms of revenue and cost structure and profitability.

We are doing some very positive things in terms of network and trunking. We have an initiative underway at the moment, which we looked at just last week. And we think we can do a fairly non-onerous redesign of our trunking, for instance, which could take out significant amount of our fleet in terms of requirements, and we're working through that. So a lot of initiatives that are going to focus on trying to eliminate fixed cost elements and make it a lot more variable and flexible in terms of what we're trying to do as a business.

But notwithstanding all of that, we need to generate revenue, right? So we can do everything you like in terms of the cost side of things, but we need to be a little bit better and more proactive in terms of our focus on the market, and that is a big, big focus. We announced this morning that we would do a strategic review of the Tuffnells business. I'll talk a little bit more about that. But it's really on the back of what I've been talking about here in terms of Tuffnells.

So in terms of -- sorry. Here we go. So in terms of the strategic review, I will lead the strategic review and path of the company. I know a lot of people in -- particularly in the capital markets world, want to hear those 2 terms, strategic review. It usually translates into sale. We're not talking about a sale here. We are talking about taking a measured view and a measured reaction in terms of things that we know are happening in the business. The primacy of that strategic review would be concentrated on operational improvements and turning around the Tuffnells business.

So it's very important when you look at the announcement this morning in terms of Michael Holt, who's an Exec Director for -- in the company, who has had a long career in this business. He -- his most recent executive appointment was Chief Operating Officer of FedEx Express across Europe. He's had a variety of roles in FedEx in the past. And he led a turnaround in terms of another business that he was involved in, APC, Michael, if I am right?

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Michael Holt, Connect Group PLC - Director & Executive Chairman of Tuffnells [2]

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ANC.

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Gary Kennedy, Connect Group PLC - Non-Executive Chairman [3]

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ANC, beg your pardon. I always get mixed up that in some of the African congresses, but -- so like the idea there really is that it's a short-term additional investment of talent into our business. And what we're trying to do here really is transfer a lot of experience, knowledge and expertise from the boardroom into the management structure. And we see that as a good investment of that. And I'm delighted that Michael has agreed to do it, and I know he'll work with a very proactive business with Peter and the team. It won't cure world hunger overnight, but we will make significant improvement, I've no doubt, in terms of our business model there.

At the same time, from a shareholder perspective, we have to think about shareholder value. So while we do that, we will be very conscious about what would be required from a CapEx perspective in terms of turning that business around. What would be reasonable in terms of investment to make.

And the third element of it would be, is Connect Group the right home for Tuffnells? So notwithstanding what we have in terms of a focus, in terms of turning that around, in terms of operational improvement, you've got to figure out, is it actually the right fit within our Connect structure? But I'm not making any assumptions in terms of outcome on that. And I would say the primacy of our focus, given that's the single biggest challenge, is the operational turnaround in terms of Tuffnells.

We haven't put a fine idea on it, but needless to say, there's an urgency around this. And we would expect to make substantial progress and certainly update the market in terms of our interim announcement, which I think is May 20, somewhere around that time frame.

So against that, I'm going to hand over to Tony. I'll come back up and do a quick summary. And then Jon, Tony and myself would be delighted to take any Q&A.

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Tony Grace, Connect Group PLC - CFO & Director [4]

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Thank you, Gary. Good morning, everyone.

So I'm going to turn firstly to the performance overall. This year, we have been tend to focus on simplifying our 2 business units in order to provide greater clarity and accountability.

From a financial perspective, the year -- this year, we combined DMD and Smiths News and disposed of the noncore business, Jack's Beans, in January. Otherwise, the structure is unchanged.

Smiths News delivered an operating profit of GBP 43.6 million, GBP 4.7 million up on last year. The increase in profit was a consequence of 2 key factors. Firstly, the structural decline in news and magazines sales being fully offset at the margin level through the network efficiency program, which delivered a saving of GBP 6.5 million. Secondly, there was a one-off net benefit compared to prior year as the losses in Pass My Parcel of GBP 5.4 million in 2018 did not repeat. It's also worth noting there was no major football tournament in FY '19, which had contributed profits of GBP 2.8 million from World Cup sticker sales in the prior year. So to give some granularity on sales, Smiths News revenue of GBP 1.3 billion was down 4.2%, remaining within our strategic forecast of minus 3% to minus 5%, and with price rises continuing to partly mitigate those volume declines.

In Tuffnells, the operating loss of GBP 14.1 million represents a decline of GBP 9.1 million on the previous year. Although we had expected the recovery to be challenging, this remained a disappointing performance driven by the factors already outlined by Gary and which led to the strategic review of Tuffnells being initiated. Tuffnells revenue of GBP 164.6 million is down 6.1% year-on-year.

Group adjusted operating profit of GBP 29.5 million is 13% down on the previous year. Finance costs increased by GBP 800,000 to GBP 6.3 million as a result of a higher annualized interest charge under the bank facility agreement signed in October 2017.

Group adjusted profit before tax was therefore GBP 23.2 million compared to GBP 28.4 million in 2018, which is a decrease of 18.3%. This tax charge of GBP 3.8 million was GBP 1.7 million below last year as a result of the lower profits and gave an effective tax rate of 16%.

Adjusted earnings per share was 7.9p, down 15%. Our statutory continuing loss after tax was GBP 31.5 million compared to a GBP 38.1 million loss last year, which reflects the further impairment of Tuffnells assets.

Turning now to adjusting items. Pretax adjusting items were GBP 60.8 million, which compares to last year at GBP 63.9 million. The cash cost of adjusting items in the year was the same as last year at GBP 8.3 million.

At the year-end, management reviewed to the carrying value of the Tuffnells goodwill and other intangible and tangible assets. And in the light of trading results and considering the time and investment that will be required for a sustainable turnaround, we concluded that a further impairment charge of GBP 45.5 million is required against the goodwill and assets of the Tuffnells business. The business has now written down the carrying value of the intangibles to 0. The amortization of acquired intangibles of GBP 6.8 million in the year relates primarily to the Tuffnells business and will not recur in FY '20 as a consequence of the impairment.

Network and reorganization costs of GBP 6.4 million were incurred in the year, up 3.3% on prior year. As Gary said, at the end of FY '19, we did a GBP 2.5 million reorganization provision for the outsourcing of technology, customer service and finance to a third-party shared service center in India.

We've made significant progress during the year to resolve some legacy matters on the balance sheet. In Tuffnells, we settled the legacy Brierley Hill claim with the HSE and the National Minimum Wage review with HMRC in line with the expected provisions made.

In October 2018, Smiths News reached an agreement with the trustees of its defined benefit pension scheme and agreed a buy-in of the scheme's assets. A cost of GBP 2.2 million related to this event was recorded in adjusted items.

The exit from Pass My Parcel was executed smoothly and a surplus order contract provision of GBP 300,000 was released at the year-end.

During the year, the group received a one-off payment of GBP 0.5 million in resolution of an IPR dispute.

We hosted in January 2019 a sale and leaseback initiative relating to 16 Tuffnells properties. Although no transactions were completed before the year-end, we did complete the sale of the first portfolio of 6 properties at the end of September. We received proceeds of GBP 10 million for this, which has been applied to the reduction in borrowings. Professional fees incurred during FY '19 on the transaction was GBP 700,000.

As Gary said, the company has generated free cash flow. And in what was a difficult trading environment, the group generated GBP 8.3 million of free cash flow, which compares to GBP 20.2 million last year.

EBITDA fell by GBP 7 million as the profit recovery at Smiths News was offset by challenging trading at Tuffnells. Depreciation and amortization was lower by GBP 2.6 million, primarily as a result of the depreciation charge of Tuffnells' 16 properties ceasing as properties were treated as held for sale.

Working capital in the period was adverse to last year, which is largely a factor of lower provisions and year-end cash timing as the direct debit receipt cycles weekly and the payment cycle to publishers and suppliers is monthly.

Capital expenditure of GBP 8.6 million was in line with the prior year. Tight CapEx control meant we remain focused on maintenance CapEx, with the application of very strict criteria for -- on investment CapEx returns. Overall, CapEx remained less than 25% of EBITDA.

Finance lease payments are down GBP 1 million as IT lease arrangements continue to expire. This is a favorable benefit within net debt.

Net interest and fees at GBP 5.1 million were lower than last year by GBP 700,000. There are 2 elements to this movement. Bank interest was GBP 900,000 higher. However, this was offset by a prior-year bank arrangement fee payment of GBP 1.6 million. Tax payments of GBP 2.6 million are down GBP 3.9 million due to the cash payment like on lower profits this year and last year.

And finally, I shall now turn to look at the net debt position of the group. Group net debt has decreased by GBP 9.5 million compared to August 2018. It should be noted that net debt is sensitive to movements in the Smiths News working capital cash inflows and outflows during the course of a normal month's trading.

Pension deficit repair payments were down GBP 3.1 million on the prior year and the buy-in of the pension assets has resulted in the actuaries advising the trustees' future deficit repair payments can cease. The continuing expiry of IT finance lease resulted in year-end finance lease credits reducing by GBP 2.8 million, with GBP 2.5 million remaining within net debt.

No cash dividend payments were made in the year as the focus in the year has been on reducing net debt. However, we are proposing a final dividend of 1p payable in February 2020. Consequently, net debt on the full year of GBP 73.9 million represents leverage of 1.9x EBITDA.

Following the targets we discussed at the Capital Markets and Strategy Day in January, we remain on track to reduce leverage year-on-year through the combined outcomes of the sale and leaseback of Tuffnells properties and free cash flow generation from trading. We remain committed to the target to reduce net debt to 1x EBITDA by the end of FY '21.

Thank you. I shall now hand over to Gary and -- before we invite further questions.

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Gary Kennedy, Connect Group PLC - Non-Executive Chairman [5]

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Thanks, Tony. So just sort of a wrap-up and summary before we cut to the Q&A. Hopefully from what I've said and what Tony has relayed to you, you get very definitely our sort of intent and travel direction.

I was thinking about this last night. It was a reminder to -- I listened to a commentary in a match one time. And the commentator said it was a game of 2 halves. He said the first half was even and the second half was even worse. We sort of have 3 halves, if you can have 3 halves, I know you can't. But we have a very definite challenge around Tuffnells, but equally, we have to maintain focus and attention in terms of what we need to do in terms of Smiths News. And also I don't want to ignore what we're continuing to do in terms of the center.

So that is going to be a theme as we go through the next number of months with us. There's no doubt, in terms of Tuffnells, we've talked about in terms of our customer focus, the need to generate revenue. We need to get flexibility into our model and continue some of the programs that we have in terms of cost optimization there is very, very definitely front and center. There are a lot of things and initiatives that are going on, particularly around the network and the trunking side of things, which I think can actually pay a lot of dividends in terms of that model. There's no doubt about that. We will not relax anything in terms of capital management. That probably means, in the short-term, that our shareholders won't see the same type of dividend yield as what we've seen in the past because we have to be very conscious of necessary investment in the business, but also really taking a view in terms of debt. I know we will have previously indicated our ambitions around our debt-to-EBITDA and getting that down towards 1x.

Underpinning all of this though, you can see the last bullet here is we will not achieve what we need to achieve without leveraging the most important stakeholder group that we have, which is our employees, and making sure that they're motivated and energized. And that's why I really feel good about -- in terms of Jon Bunting stepping up as Interim CEO and in terms of his leadership in terms of that. So that journey that we've started a couple of years ago in terms of portfolio rebalancing, changing our operating model, getting focus into our business and improving our underlying models, we are a long way along the journey, but we still have to complete that. And I look forward to doing that in conjunction with Jon.

So with that, we'll move to Q&A. I think there's a series of mics. You might just sort of give us your name as well. And Jon, are you coming?

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Questions and Answers

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Steven John Woolf, Numis Securities Limited, Research Division - Analyst [1]

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Steve Woolf from Numis. Just a couple on Tuffnells, if I may. Just in terms of the restructuring, have you got sort of a medium-term cost number or focus you would like to, hopefully, to reduce that cost base for if -- the short to medium term as you try and build in some flexibility?

Secondly, in terms of the customer service levels or customers' attrition that you've lost, I appreciate the discipline, obviously, on getting rid of some of the more unprofitable ones. What's your thinking in trying to win back some of the ones that you lost that were good customers rather than purely a race to the bottom on price?

And then thirdly, as you're building out the models on Tuffnells going forward strategically, have you got a rate of return in mind that you'd like to achieve from the business for shareholders?

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Gary Kennedy, Connect Group PLC - Non-Executive Chairman [2]

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Thank you very much.

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Tony Grace, Connect Group PLC - CFO & Director [3]

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I'll take the first one?

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Gary Kennedy, Connect Group PLC - Non-Executive Chairman [4]

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Yes.

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Tony Grace, Connect Group PLC - CFO & Director [5]

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Our plans for the current year are predicated on a GBP 10 million cost reduction within operating costs in Tuffnells, Steve. That was based on the plan that we started the year with. As we've said already, volumes are soft and continue to be so. So the next round that we will work with Peter and the team on this to take further costs out of the business. But one of the key things as well is to be altering that, the proportion of fixed cost versus variable cost. We need to get a more variable cost model so that we are much more flexible in the short term, even within a week in terms of the resources that we apply to the business.

So as we've said already, we've taken significant costs out in the back end of last year. In our collection rounds, we reduced the number of collection and collection and delivery rounds by 10% to 15%. I think Peter and the team are already looking at another 5% on that. The network optimization in itself will be significant cost savings, so that's about how quickly we can implement that to get further savings in the year. And one of the challenges we've got is a rather old and previously ill-maintained fleet that we have to deal with to allow us to reduce the costs that we incur on that. So that's the shorter term.

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Gary Kennedy, Connect Group PLC - Non-Executive Chairman [6]

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Good. I mean, I'd kick it off on the service level, and Jon and Peter, indeed, if you want to contribute in terms of that. I mean, look, we have slightly different targets for our service in Smiths News versus Tuffnells at this stage. But like our minimum expectation in terms of customer service is around 95% in terms of Tuffnells. And we don't want to stop there. We want to get that up closer to the 97%, 98%, 99% because then you are setting the standard in terms of service. We don't particularly feel at 95% we're behind the market. But when you've got other things going negatively in your business, it would have a compounding impact in terms of the service level.

To maintain that -- and we are back at 95% by the way, notwithstanding taking out 12% to 15% of our delivery and collection routes since week 46 of the last financial year. So that will lead to incredible efficiency and productivity gains, but there was a short-term impact in terms of service as a result of taking that number, I think it was about 130, 132 routes that we took out. But we're back up to our service levels, so we found a way to perform with that. But we've got a sort of -- we've got to build on that.

Jon, do you want to add anything in terms of service or Peter?

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Peter Birks, Connect Group PLC - CEO of Tuffnells [7]

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No. I think it remains a key focus for the business. Maybe I want -- just in terms of win-backs. So here, we now have a better value proposition for our commercial teams. So typically, we're looking at about 200,000 [bonds] a week. Now that we have some specific targets in those customers we've lost, the greater value proposition in order to take to the market, which we believe is compelling, to allow them to win back those customers that we want to. We already have some traction with that playing out some 6, 8 weeks ago.

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Gary Kennedy, Connect Group PLC - Non-Executive Chairman [8]

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Yes. And in terms of the return, and I guess Tony can help me out here, but like getting back to cost of capital would be fantastic. We're not obviously anywhere near that, but that's a minimum criteria that we apply in terms of allocation of capital within our business. So we need to at least hit that hurdle rate before we consider anything else.

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Tony Grace, Connect Group PLC - CFO & Director [9]

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I think, Steve, historically, this business has been talked about as a 7% to 8% PBT return. I don't think we are aiming for that in the medium term. The challenge is breakeven and then we can start to look to how we return to proper profitability.

To Peter's point there, as we reduce the cost base, so that allows us to take on business at lower pricing levels because it's profitable. The challenge we've had up to now is we've been taking -- or we inherited a lot of business way below the cost per item it took to process those items.

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Jonathan Michael Bunting, Connect Group PLC - Interim CEO, CEO of Smiths News & Executive Director [10]

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I think the only comment I would make is, in the Smiths News business, we're used to dealing with volumes in decline and volumes varying by day and by week and month. And we've managed to find a way of consistently removing costs from the business without damaging our service. So applying that logic to the Tuffnells business will be the start point.

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Gary Kennedy, Connect Group PLC - Non-Executive Chairman [11]

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Yes. There's probably one, but without getting too deep or technical on this one, but our business, because of the end of the market, logistics doesn't lend itself to online scanning. So when you're trying to drive your service performance up above 95%, you need to have scanning accuracy at a very, very high percentage. And just put some of the goods, they just don't lend themselves to go on to our conveyor belts where you get automatic scanning and get actually of that through the whole sort of delivery process. So that's something else that we're wrestling with a bit as well. Chris?

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Christopher Wickham, Equity Development Limited - Analyst [12]

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Yes. Chris Wickham, Equity Development. Just 2 questions, one specifically on sort of normalized free cash flow. I mean, what should we be thinking going forward? And what sort of conversion rate would you think would be normal?

And then secondly, just in terms of how the 3 of you see it. I mean, you must have some view. I know you talked a bit about a game of 3 halves and -- but then looking forward, what sort of time horizon would you have in terms of how long it's going to take to get the group into the shape that you want it to be in, getting the operating performance, getting the team or the right team in place, and then in return for that, actually the right financial performance? I mean, what sort of time horizon are we looking at?

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Tony Grace, Connect Group PLC - CFO & Director [13]

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So if I pick up on free cash flow, clearly, the major source of free cash flow from the overall group is Smiths News. So immediate task at hand is to continue to generate as much cash as we can from that vehicle by the continued mitigation of the volume decline and maintaining the profitability. The plans that we have to generate -- to control costs within the center obviously help as well. And then returning Smiths News to positive again will help -- sorry, Tuffnells to positive will significantly increase the operating cash flow that we have.

EBITDA at the moment is significantly below previous operational levels. So the first challenge is to get it back to those levels, which was above GBP 40 million a year. And that's the challenge at hand and it's all dependent, in the short term, on the recovery program that you alluded to in Tuffnells. As I said already, we remain committed to reducing net debt to 1x EBITDA by the end of financial year '21.

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Gary Kennedy, Connect Group PLC - Non-Executive Chairman [14]

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Thanks, Tony. And in terms of the second part, Jon will have given you a hospital pass, but you want to in respect to that one, and then I’ll maybe add something to it?

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Jonathan Michael Bunting, Connect Group PLC - Interim CEO, CEO of Smiths News & Executive Director [15]

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Yes. I mean, I have a clear view on some things we need to change at pace and we'll do within 4 weeks. As in keeping with my style, I'll talk to my colleagues about that first, but yes, clearly, I understand how you manage distribution businesses that have challenges. Peter and I have an excellent working relationship, and I think that will only strengthen our position. And with Michael coming in to help as well, we've got even more resources focused on the turnaround. So I don't want to say too much about what we are going to do at this stage because my colleagues should hear that first, but we do have a very clear plan and it's just execution there.

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Christopher Wickham, Equity Development Limited - Analyst [16]

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In terms of time horizon then, that's really what I'm -- I mean, in terms of...

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Gary Kennedy, Connect Group PLC - Non-Executive Chairman [17]

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Well, the time horizon, in terms of update, we'd certainly be expecting to give a substantial update in the May horizon in terms of the interims. And there'll be a lot of energy and focus put in, in the next 6 months, Chris, in terms of that period. So we'd expect to make progress but we won't have everything solved, but we'd certainly, I think, at that stage, be able to make significant progress, but we'd be able to have a very clear direction in terms of the impact of the programs that are underway and the time line in terms of those. Hopefully, we'll also have some sort of clarity of picture in terms of the macro events in the United Kingdom and see how the economy actually reacts to that.

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Christopher Bamberry, Peel Hunt LLP, Research Division - Analyst [18]

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Chris Bamberry, Peel Hunt. With regard to Smiths News, at what level of cost savings are you targeting for 2020? Of the remaining 20% of revenues that you haven't renewed, what's the anticipated timing on those?

And turning to Tuffnells, the GBP 10 million of cost savings, how much of that would you expect to deliver in this year? And what's the likely fees in between the first half and second half in 2020?

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Jonathan Michael Bunting, Connect Group PLC - Interim CEO, CEO of Smiths News & Executive Director [19]

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Okay.

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Gary Kennedy, Connect Group PLC - Non-Executive Chairman [20]

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Jon, you do the first one?

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Jonathan Michael Bunting, Connect Group PLC - Interim CEO, CEO of Smiths News & Executive Director [21]

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Yes. Yes, absolutely. So we typically look to drive efficiencies of circa GBP 5 million per annum in Smiths News. And this year, we'll be around that number again, maybe a little higher. So that, hopefully, is reasonable guidance for you on that one.

In terms of the timing of the associated news contract, which is the major outstanding contract, I would expect that to be concluded within this financial year.

And then the third part of the question was -- sorry.

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Gary Kennedy, Connect Group PLC - Non-Executive Chairman [22]

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It was the Tuffnells. Tony, do you want to...

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Tony Grace, Connect Group PLC - CFO & Director [23]

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Yes. So I called it, Chris, GBP 10 million split into 3 key buckets, if you like, and that's network optimization, trunking; collection and delivery, last mile; and fleet. The collection delivery kicked off from Month 1, Week 1 because it's the root of the program that we had implemented in July and August. So therefore, we get a full year's benefit of that, and that will form the majority of the savings. The fleet and the warehouse -- the fleet and the network savings will be more H2 as we implement the, first of all, investment, and secondly, the plan itself. So the majority coming from C and D already in place.

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Unidentified Analyst, [24]

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[Keith Scott] from [Hartman]. Can you talk about the -- what your plans and what the timescale is for sorting out the executive team? It didn’t appear as one of the key priorities. Is it something you've pushed back for the moment?

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Gary Kennedy, Connect Group PLC - Non-Executive Chairman [25]

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Jon, I'm going to pass this to you. I think in fairness to Jon, he just assumed the Interim role, so you need to give him a little bit of time and room to actually make his mind up on that. We don't have a huge executive team to be very honest with you. Jon is going to be double-jobbing. He's going to be Interim CEO and also continue his role in terms of Smiths News. We have Peter in terms of CEO of the Tuffnells business, which is going to be augmented by Michael Holt as an additional investment. Tony is obviously a member of that executive team and runs a lot of the stuff, particularly the focus in terms of the core group. We have somebody who's involved in the IT side, but also in a lot of the change management and the continuous improvement programs that we have. So it's not a big executive team, but I think he deserves a little bit of time and opportunity to develop that.

Very good. We're done? Listen, thank you very much, a, for coming along and for your ongoing interest in the company, and I look forward to talking to you afterwards. And indeed, hopefully it won't be me talking to you in May and I'm hopefully sitting back down in the audience, but looking forward to seeing you again in May at the interims with Jon and Tony. Thank you.

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Tony Grace, Connect Group PLC - CFO & Director [26]

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Thank you.

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Jonathan Michael Bunting, Connect Group PLC - Interim CEO, CEO of Smiths News & Executive Director [27]

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Thank you.