Reach plc (RCH) Earnings Call Transcript

Good afternoon, and welcome to the Reach plc investor presentation. [Operator Instructions] Before we begin, I'd like to submit the following poll. And I'd now like to hand you over to Piers North, CEO. Good afternoon, sir.

Thank you very much, Lilly, and welcome, everyone, and thank you for joining on this Wednesday afternoon, if you're in the U.K. for the Reach half year presentation. A quick introduction. My name is Piers North. I'm the Chief Executive of Reach. I took over this role in March of this year, and I'm delighted to be leading the organization talking to you today. I am conscious that some of you may have seen the full presentations at half year. So today, what I would propose is we're going to compress down the messaging a little bit, abbreviate the slides. I will talk through kind of where we are as a business at the moment, where we see the future, our future priorities, how we kind of the highlights of the half years before I'll hand over to Darren for again, a quick summary of the financials of the half year. And then, of course, we will take as many questions as we can. So moving on. I guess, firstly, I want to start by reminding that we have a very strong media business at Reach. I've inherited a company that is in a good position, both from an audience and a financial point of view. I think sometimes the strength of our business is somewhat overlooked, but we remain a significant player in the U.K. media market. And that's, of course, both over our legacy print titles, but it was increasingly in the digital space. We reach over 70% of the U.K. population. And increasingly, we're obviously starting to explore opportunities beyond our stores in the U.S., where we currently reach 10% of what is obviously a considerably larger digital population. In fact, once you take out the tech platforms in the BBC, we are leading the pack in terms of audience reach in digital from a publishing point of view. And that's obviously something not only are we very proud of, but I think it obviously speaks to the potential opportunity for further monetization going forward. We benefit from a broad brand portfolio. This is increasingly important in the digital web whilst it can lead to challenges across managing multiple domain sites and apps, it does also provide some kind of mitigation to headwinds in the marketplace from a traffic point of view. And we leverage our network, whether that be our national scale or our local relevance for our advertisers. And increasingly, we'll leverage our network for our consumers as well in terms of populating content. We've made good progress over the last couple of years around our data strategy. And at the same time, over that period, we've navigated big macro headwinds from COVID to the Ukraine war and also changes in the referral mix. But we are in a place where we are going to build on -- and I'll talk more about the priorities, but we're building on a solid foundation of both not only audience reach, but kind of data depth. And that's always underpinned, and Darren will talk more through this from a financial point of view. We have strong financials as a business, and that is something that we are proud. We have market-leading operating margins and managing our costs and all of our operating models is critical for us as we maintain our profitability going forward. So in truth, what we have at the moment, when we look at the present, we have a strong business and a business that we can build some foundations on. And the choice really in the 100 days that I've had since I've been in this role has been talking to people about how we can accelerate digital. We are now at 2% digital revenue growth. That is not what we're satisfied with, and we believe we can do more. The challenge for us is what are we going to focus on, on the basis that we can't do everything. What are we going to focus on to kind of accelerate that digital growth. So really what's happened in the last 100 days, I've worked with the management team here and working groups across the business to see where should we focus. And we've narrowed it down to 3 important areas. So I just want to talk through very briefly what they are. Unsurprisingly, we starting with audiences. We want to connect with our audiences better, and that isn't both our existing audiences, but new audiences as well. We're going to focus particularly here on video. Video is already part of our business, but we need to accelerate both the output that we produce and also obviously the revenue that flows from that. Video is high yielding. And importantly, when we look at our off-network growth along -- amongst the social channels and also our partners such as MSN, video is critical to that. So for sure, one thing we're going to concentrate on is video. Beyond that, clearly, it is making sure that we continue the growth in the U.S. to make sure that we grow that business on a profitable basis, which it is at the moment, and that we continue to expand our footprint over there, as I said, which is currently around 10% of the population. We're also going to spend time deepening our brands. Our brands online in the chase for audience is always a risk that they become diluted. We need to make sure we can chase both the scale in terms of those efficiencies and content, but also make sure that the brands themselves resonate in what is obviously a crowded online space. The second pillar, which is equally important, is making sure that not only do we carry on the good work that we've had building up our first-party data set for our audiences that are on our own platforms, but we need now to start thinking about how we can make that data work harder, especially in the space of AI. Our data at the moment is built very much for advertisers to interrogate, and that's always going to be an important part of what we do. But we also need to think about internally how do we leverage our data sets for internal AI work to optimize and improve our workflows and get the most out of all the content and the audiences we create. AI is obviously a hot topic. You'd be forgiven for thinking that many investor meets to talk about AI, and that's unsurprising. It's transforming not only obviously our sector but other sectors as well. We feel we've already lent well into that model across our editorial and our commercial. Our editorial has obviously used its proprietary Guten technologies to help create content. And it's important to note that these are tools for our journist. They're not -- it's not [indiscernible]. It is always a human plus machine in the way that we create our content. That is the way we add value, and that's the way we differentiate ourselves. But it is helping improve that baseline productivity to make sure that we can focus on the stories that really matter rather than the legwork. It's also helping on things like translation. I talked about the U.S. We're looking to see how Mantis drive can help on Spanish translation for the Spanish market. We create fantastic content around our sports. We need to make sure that, that reaches the biggest possible audiences. We're also increasingly using it, obviously, in commercial. We've had Mantis, our proprietary AI tool, which has helped around brand safety and targeting, and we want to do more on that. How do we build on top of that tool, take it out to more partners to monetize that technology. But importantly, I think it's also what we're making an effort is to make sure that we expand AI outside of what I think people would view the traditional scope of AI in our business as a media organization, editorial and sales. There's a huge amount you can do in our technical department as we look to scale up and move quicker into some of the priority areas. We need our tech and our coding to be done quicker. It can help with everything from HR through to our data analytics. We analyze a huge amount of audience and add data every single day. At the moment, it's relatively labor-intensive, it's human-led. How can AI help us interrogate large data sets in a real-time basis. So across the board, AI is going to be an increasing focus for our business to make sure that we can get the most and drive that digital growth. The third thing I want to talk about is diversifying revenues. We've made some steps already on e-commerce and whether that be affiliate links or indeed our own Beauty Box. We've launched our own marketplace, which is increasingly scaling across the board in terms of sellers on our -- wanting to reach our audiences. But we can do more in this and obviously, both across those existing e-commerce channels, but increasingly, there is one area that we haven't really played in, and that is what people would call subscription or reader revenues. And now is the time for us to explore that more fully. We have, as we said, a significant 70% of the U.K. population. But at the moment, in a way, we're a pyramid without its top. We need a place where we can take our users and have direct relationship with them, offering them both subscription types of content or podcasts, but also products and services beyond that. We have a huge portfolio of our business from Mirror books to the Mirror archive, how can we allow people to access that as well as offers and discounts from partners and indeed, our own e-commerce. So we absolutely want to explore that more. This is obviously an increasingly well-trodden path. It's important to say I do not envisage our business being a dominated digital subscriber business. The bulk of our digital revenues will always come through advertising or advertising-related activities. There is an element where we need to find a way to have that direct relationship with consumers. So that will be a feature of what we're doing. In terms of what you can see next, as I said in the half year results, we will trial this in Q4 on one of our bigger sites, not the biggest, but one of our bigger sites, really to get the technology up and running. We have the infrastructure in place. It just needs -- we have call centers and the like. We just need to make sure that it's set up. So we'll be trialing this over Q4. This will help inform technical. It will help us inform how we do it, what kind of products and services we need to offer ahead of a much further rollout in 2026. And just to bring some of this to life, I just want to show in a very short 90-second show that brings some of these aspects to life. [Presentation]

Thank you. So I hope that show really gave you some indication of how we're changing as a business. And I think the feedback we get is a lot of the work that we do around video and stuff somewhat goes unnoticed, but we are transitioning our offering to be that more video led, and you'll see more of that in the coming months and quarters. Just very briefly, I did want to touch on diversified revenues. As you know, in our print business, where we dominate in terms of circulation revenues and advertising makes up a small part of our pie. Obviously, in digital, it's the reverse, where advertising dominates, but we do want to expand the nonadvertising side of our business in digital. You'll see here sort of 3 priorities that I've talked about already. Affiliates, I guess, is the bottom of the kind of another pyramid in the way. This is the large volume for small percentage cuts of transactions, and it's kind of built into our day-to-day. A lot of our titles are writing stories about subscription offers or whatever else, and we're offering that to our readers as a value add. We obviously also do the Beauty Box. This is a product that we own entirely, very strong engagement rates and churn rate and a nice business that complements what we do in the entertainment and beauty space. And the third one, as I've talked about is Yimbly. Okay, this is a business that is growing very, very quick on an order basis. It has very excellent reviews from a customer service point of view, which is critical. And we're scaling both the products and the suppliers that we have on that marketplace where suppliers are seeing it as another route to transact and trade their products. And clearly, obviously, when we come back in the full years, we'll also be talking about subscriptions, as I've already said. In terms of advertising, this, as I said, is the bulk of our digital business and we will continue to be so for the foreseeable future. And I did just want to pull out 4 examples, which I think bring to life some of the priorities that I've already talked about and how we're going to do more of in the future. We will have talked about Tesco before. They're a very important advertiser to us. Tesco in many ways represent our audience. We are mainstream brand, high street Britain and Tesco fit very snugly into that corner. And we've worked a lot with them across print and digital. But obviously, this year, the first year, we've matched our data with our own retail data and again, driving better performance and better targeting. And we can see that as a theme -- we'll see that as a theme in our industry going forward. And a lot of the agency changes are built around making sure that data matching can continue a pace. Again, Boots, another brand that's synonymous with our kind of our audiences. We work with them around a pharmacist first conversation, again, fitted perfectly well with kind of mirror mission of taking the light -- taking the weight off the NHS. So again, perfect alignment with that campaign. And again, using content but also Mantis contextual targeting drove significantly better performance than the industry averages. But it's not obviously those high street brands. You think of Manchester City as a global brand. They're obviously also very local in their community. So using the Manchester Evening News to drive awareness of things like stadium tours and also the women's football matches, again, that perfect concept of marrying scale with local relevance and driving, again, better than industry performances. And we've talked about video and how that can be monetized. Delighted to say we're launching a new football show for the new season called All-Out football. This will be a full magazine video broadcast that lives -- it's on YouTube, but it's also cut and clicked to be shared across our own network. So if there's a segment on the old firm Derby, then clearly, that will be shown on the daily record. Delighted to say that, that kind of stuff allows us to secure sponsorship deals with the likes of SkyBet. So again, across the board, I hope you can see examples of how we start to bring the strategy to life and how we can use some of those priorities, whether it be video, whether they be data or diversified revenues as well to drive that digital growth that we need. I'll hand over now to Darren just to talk about the financial highlights.

Thank you, Piers, and thank you to everybody who joined the call today. We much appreciate your interest. I'm Darren Fisher, I'm the CFO here. I've been here since February 2023. So just let me give you a bit of a summary on the financials, a bit less detail and perhaps have gone through with the results announcement, but hopefully giving the headlines for you with highlights for you. Look, I would say in summary that we have an overall good performance in the first half of the year. We've managed our decline in revenue to 3.4%, which is a good performance in the context of us being declining business at the moment, particularly because our print business continues to be 75% of our overall revenue. They declined overall 4.8%, but this has been supported by twofold price increases to mitigate the circulation volume declines that we see in that part of our company. We do continue to focus on value for our readers with promotions and offers, offers such as free bets, National Trust and also promotional offers from our retailers. So we continue to make sure that the quality of the product is bringing value to our readers to make sure that we are continuing to be able to do those CPI increases as well. The print format also continues to be attractive to the advertisers and are benefiting from our scale and reach. Piers spoke a little bit earlier about the digital side of advertising. We still see very good support for our print products on the print side as well. Digital revenue grew 1.8% with momentum building in the second half of the year, which is pleasing to see. Direct digital revenue was up against a strong comparator with the Men's Euros last year and the buildup to the Taylor Swift concerts. So the direct revenue actually declined by 7%. But within our direct revenue, we have our diversified revenues, which actually grew over the 6%. So we did see some macro headwinds as well on the direct side as we've gone through the first half of the year. Indirect digital revenue grew in the period. That was partly contributed to by the growth in our page views of 6%. We delivered GBP 45 million in adjusted operating profit, which is what I expect it to be, and it's a 17.5% margin, which we see as being market leading, certainly one of the strongest ones in the market. This includes a 4.2% reduction in our cost base as we continue to be disciplined in this area. We've guided to 4% to 5%, so we're within that range for the first half of the year, and we continue to expect us to deliver that for the full year as well. Cash generated from operations remained strong at GBP 58 million. Cash conversion was 102%. So again, we're continuing to see a very strong cash performance of the business. Really important to us as we continue to have some quite significant uses for our cash. For example, the pension schemes, which paid GBP 32 million in the first half of the year. And also, we continue to pay the dividend of GBP 14 million. Our net debt of GBP 26 million includes a few one-off cash items just so that you're aware, one of which is the property sale, which is on the use of the cash slide we used in the presentation last week. And also, we had a tax refund from HMRC of around GBP 5 million. Those 2 things are one-offs. So when you're thinking about our net debt number of GBP 26 million, just to be mindful, we've got those 2 one-off transactions, which came in as well. That's really all I want to do from covering the summary in terms of key highlights. So I think it's back to you, Piers.

Yes. Thank you, Darren. And I think the full details of all the financials are in the appendix of this presentation as well or online on our investor website. So just before we move to conclusions, I guess, as I close the half year results, I would say we're obviously looking to the future. We have our focus on our 3 priorities. that's connecting more deeply with our audiences, accelerating the use of tech and AI and diversifying our revenue streams. And whilst we talk of the future, this is all as Darren has just outlined, clearly underpinning the presence with a focus on cost and cash efficiency delivering on what we have promised. The trends that we're seeing in the market, which there may be some questions about audience behavior, platform changes, rapid adoption of AI, whatever they may be, we definitely see these as opportunities to seize rather than necessarily challenges to fear. We've got strong foundations as we outlined in the business. We've got clear priorities. We now have a good strong internal vision, and we're obviously ready to move forward into the back half of the year with speed and focus and ambition. So with that, I just want to thank you for joining us on this presentation. And if there are any questions submitted, we will take them now.

[Operator Instructions] Joe, as you can see, we received a number of questions throughout today's presentation. So if I could just hand back to you to share the Q&A of the team, and then I'll pick up from you at the end.

Okay. Thank you. And yes, let's start. What has the Board been doing to boost the share price, which has not moved materially over the last 3 years?

Do you want to take that one piece given that you just -- would that be fair?

Yes. So look, management are clearly incentivized to create shareholder value. So that's what we're here for. That's what we're always aiming to do. What I would say, certainly in the period I've been here, the things that we've been doing have been all around trying to create that value, things like we have resolved the historical issues, which have been in the business for a long period of time. So we now have certainty around things like pension schemes and the phone hacking cases that we've had before. We've delivered in line with expectations, and we continue to deliver strong profit and cash performances -- along, obviously, we're growing our digital revenue while managing the decline in our print business. So from a performance point of view, we've been working very hard to make sure that we're continuing to drive the company in the right direction and also deal with those historic issues as well. Also, what I would say is there has been quite a difficult market for a period of time now, even going back when we had the Ukraine war, the significant inflation we saw at that time on things like energy prices, which affected our print cost base. Facebook deprioritization of news, which had a significant hit on our page views at that time, which we had to respond to and react to. And generally, I think the uncertainty in the market, which has been around for some time now, both macro and also geopolitical, all of those things, I think, are having some impact on not only our share price, but in the market more generally, certainly around the media and media [indiscernible]. The stage is set out for new strategy today, the company's 3 priorities. That's again, all about how we look forward and how we continue to look at ways in which we believe we can drive that value.

Thanks, Darren. One I imagine for you, Piers. With the CMA's move on Google and the changing referral dynamics, how are you future-proofing distribution?

Okay. Yes. I mean that's a big question, which I'll try to answer as briefly as I can. For those of you aren't aware, obviously, that Google have been designated by strategic market status by the CMA on a couple of areas, but particularly around search. I think that is, I guess, going to happen in the background. It will be interesting to see what comes with that. I don't think we're relying on that in the short term. We need to get on and play the ball as it currently lies. The question about referrals, I think, is a very valid one. We kind of break our audiences down. Clearly, we have our secure audience strategy. That's the audience that comes direct to us, and we nurture that and cherish that and we work with that. We also have a deliberately -- deliberate off-network strategy point where our content is and breathes on other platforms, notably MSN, Apple News and the like. And again, we will continue as part of our push on connecting our audiences and growing that. That is a big focus for us. But the third one, clearly, you talked is that audience that is referred to us normally but not exclusively by Google. There's been a lot of discussion around what the change of AI overviews is going to do to that search market. It's a long conversation. And it's -- for me, it's a lot more nuanced than I guess can be explained away in certain publications and online. But clearly, our plan on referrals is to make sure we have a diversified referral platform, whether that be Facebook, Google, Reddit, X, you name it, of all the platforms. So we continue to make sure we diversify as much as possible and we'll respond to any changes in the macro. But look, we're aware of the changes and the teams monitor it clearly. We did in our update call out a Google update. These aren't necessarily related to AI, although they may well be, we wouldn't have that visibility. They do happen fairly regularly. And sometimes they're positive and sometimes they're negative. But at the time of writing, we felt it was prudent. But we are now through that update that finished a couple of weeks ago. So these things constantly move and shift. Darren referred to the Facebook changes in '23. We respond accordingly.

Great. Thank you. A couple here around the U.S. Can you tell me how big is the opportunity there? And what have you learned and what success have you seen?

I take that one. Look, I think we're very pleased with the way the U.S. has gone. We've done it in a very prudent manner. We recognize that in an English language market, clearly, the temptation, the opportunity is very large on the basis that the online audience is 3x what it is -- more than 3x what it is over here. So we've progressed very diligently. We have around 40 to 50 people out there at the moment. We run 3 of our brands as U.S. versions. The focus there is just to continue to grow the audience at the moment. We don't monetize a direct basis out there at the moment, but we are looking at that, but we probably need the audience to grow a bit more before then. What we've learned out there is a new operating model. Clearly, that team is 100% digital. They have obviously no print incumbency. So actually, what we've been doing is learning, especially in response to events how that team operate and looking at the lessons that we can bring back over to the U.K. The flip side, obviously, is the U.S. can benefit, whether that be Donald Trump listing Scotland to play on its golf courses, we can look at leveraging the content synergies between those 2. And clearly, next year, there are a couple of big events, obviously, most notably the World Cup out in the U.S. So again, it's a good footprint for us to be out there.

Brilliant. Thank you. Darren, can you give me an update on the pension deficit, please? I will move to the pension slide as well.

Yes. So the pension deficit on an accounting basis is GBP 26 million. From an actuarial point of view, the way the schemes look at it, it's higher, which is why we're still paying quite significant amounts of contributions to the schemes each year. We're currently paying GBP 60 million a year certainly through to the end of 2027, at which point we expect that to decline down to GBP 15 million. So those contribution schedules are all set to be able to get the schemes to the funding position that they need to be in. And at that point in time, we'll start to see that cash generation significantly improve as that winds down. So we can certainly see the end in sight, but it's really important for the company. Obviously, as we move towards that period that we are starting to really understand and think what that opportunity is for us in terms of having that extra cash being generated and being available to the business to do things like investments and so forth.

Thanks. And that brings me quite neatly on Reach has usually been cash generative business, but recently, the pension legacy issues have outweighed the cash generated. When will peak debt peak? And what is the longer-term profile for cash generation?

Yes. So cash should peak in 2028. So in terms of net debt, I should say, will peak in 2028. But we will continue to look to run the business in a way where we can continue to maintain our profits and continue to generate the types of cash that you sort of see in the numbers today, as you will have seen if you look back 2 or 3 years, the sorts of numbers that we've been producing. So cash generation is something we're highly focused on. It's very important to us, and it is something which we'll continue to focus on.

Thank you. Piers, video is central to our strategy. Can you give us some idea of where we are today on that and where you're looking to get to in 12, 18 months?