Reach plc (RCH) Earnings Call Transcript

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

Thank you, Lily, and thank you, everyone. Good morning, and welcome to the half year results 2026 from Reach. My name is Piers North, I'm the Chief Executive, and we'll run you through a quick overview of the year as well as some financial details and some market and strategic context. I'm conscious some of you may have seen some of these slides before. So we will strike the balance between slide turning and a summary of where we're at. This is our usual disclaimer, which I hope you'll be familiar with. But otherwise, if not, you could take a read. As I said, I will start with a very quick summary of the year, and then I'll pass to Darren for the financials before I'll return, and I'll give you some of the context around our strategic progress as well as the market and the ever-changing online landscape. So I think it's fair to say that the first half of this year has been marked by significant external change. The media landscape, and it doesn't matter whether you're the BBC or ITV or any of the like is changing very, very quickly and publishing is probably at the front of that change as well. We've seen material ways our content is discovered online, which has led fundamentally to a decline in our referral traffic and our traffic overall by 40%. However, against that backdrop, I'm reassured by the resilience we've shown, including being on track this year to deliver on our expectations. And we've been partly able to mitigate the stark decline in our page views with other content and priority areas, which means our revenue declined only 11% where, of course, our traffic declined by 40%. The priorities that we set out this time last year were deliberately set a year or so ago because we knew the market would change. And those priorities remain the same, connecting with our audiences, accelerating the use of our technology and diversifying our revenues. And I'm pleased that those have driven tangible results over the first half of this year, although as I said, we're acutely aware of the overall challenges we have. Excluding our local business, where our direct revenues grew by 6%, and that was supported by our expansion of our video content and strategy as well as, of course, launching subscriptions, which is now live across 17 sites as of today, 15 as when this presentation was originally written. We're over 40,000 subscribers, and we're well on track to meet our stated target of 75,000 by the end of this year. We've also made great strides in our technology. All of the technology we've talked about that requires us or that we need to make the transition. We're launching our new Launchpad content management system, which is in the hands of some of our editorial teams, and that brings together all of our AI tools into one place rather than in many. Operationally, we've continued to take decisive action. Our print closures that we announced in the early part of this year are tracking ahead of plan. Darren will talk a little bit more of that. Our ongoing focus on cash and cost has ensured that we've delivered an adjusted operating profit of GBP 43 million. So in short, whilst we've had to navigate serious external change, the core of our business still remains strong. We're building a more focused brand-led business, and I'm proud of the momentum we've maintained even against such a significant shift in the referral and online market. I'll now hand over to our CFO, Darren, who will take you through some of our financials.

Good morning, everybody, and thank you for joining us. I think Peter has given a good summary there on maybe some of the challenges in the market, but also the things that we are doing. Just in terms of financial highlights, Peter has already mentioned the performance on profit was strong at GBP 43 million, but also and importantly, for us, we had a very strong cash conversion of 113%. We do continue to be disciplined with our strategic cost management. This is a real strength of the company. And reflecting the trading environment, we have reduced operating costs by 10%. I'll cover that in a bit more detail a bit later, but that's well ahead of our 5% to 6% target that we had set ourselves. We've also had an increase in our margin to 18.5%. That's 1 basis point higher, again, showing a strong performance and cash generation remains robust with adjusted operating cash of GBP 49 million. In revenue, just coming to revenues. Revenue has declined 9% or GBP 23 million to GBP 233 million. Within that digital revenue declined 11% to GBP 54 million despite the 40% decline in paid views, which Peter has already referenced. Our print revenues, which are about 3/4 of our business, declined 8% to GBP 178 million, and I'll come on to a bit more detail on that a bit later as well. And we ended the period with a GBP 48 million net debt balance, again, which is a strong number for us. Turning to digital in a bit more detail. So revenue overall has declined 11%. This is broken into direct and indirect. Direct revenues declined GBP 1 million or 4%, but that was partly affected by our decision to improve margins across our local advertising business by focusing on high-quality revenue. So excluding local, we actually grew 6% on the direct side of our business. In terms of our indirect performance, we have revenues for our diversified products, which include premium subscriptions, affiliates e-commerce and partnerships. Subscriptions rollouts on plan, as Peter has already said. And revenues declined GBP 1 million through indirect. Let's move on to print revenue. So print revenues. Print revenues declined overall 6.6% with cover price increase mitigating an elevated 22% volume decline. We have seen the volume decline a little bit elevated in comparison to prior years where we've typically seen a 17% to 20% reduction. This has been caused partly by the most recent cover price increase that we put through in May. We put in 3 cover price increases every year. This is the first time that we have seen a cover price increase, which has gone outside of our normal tolerances for a decline. Now what we're doing is we're going to continue with the CPI that we have scheduled for August in order to get another data point because at the moment, we don't fully know all of the reasons for that impact on the last CPI could be obviously the price increase itself, which is likely to be a part of it. But also we are in a very difficult environment in terms of the macro at the moment. And oddly enough, it also could be things such as the weather, where people aren't sort of getting out to get their daily paper as the weather is so warm. Moving on to operating costs. So operating costs, as I said, we declined 10%, much higher than what we expected or what we had advised against. So firstly, mainly this is labor. So we've had a restructuring program at the back end of last year, which we've got the run rate through the rest of this year for the full year. We have the print rationalization, which I'll come to in a moment, but that has played a role in effectively reducing our costs as we've outsourced 2 of our print sites to newsprinters. And thirdly, we've been making sure that our vacancy management is really considered when we're looking at vacancies, whether we rerecruit, whether we bring in new skills and so forth. So a very good performance on the labor cost reductions. Newsprint is probably the other main one and newsprint costs have come down organically. As you know, as we -- as our print volumes decline, obviously, we get a lower cost of sale. Moving on to print operations. So this is what we announced at the start of the year, where we have outsourced 2 of our sites, Saltire and Watford to newsprinters. This is a major piece of work that we've been delivering during the course of this year. We are well ahead of our plan, both from a cost but also a delivery point of view. So it's been a very -- we're very proud of the teams who have been working through what is a very, very complex program. In terms of where we are today, we have now exited all of our titles from both of those sites, either moving them into our Oldham site or into outsourcing arrangements, both with newsprinters, also DC Thompson in the Northeast of Scotland. And we will see the benefits of those coming through this year. And then into next year, we'll get the full benefit of that. This does give us an elevated cost of change. So we -- the cost of change attached to that program is around GBP 25 million, and you'll see most of that money coming out in the back half of next year. Moving on to uses of cash. So this is a very familiar slide. Firstly, pensions, the big number, the first big gray number there. As you know, we have pension scheme obligations. They are GBP 57 million a year. They will drop down in 2028 to GBP 15 million in January 2028 and then decline down to GBP 1 million beyond that point. So we are tantalizingly close to seeing the end of the pension scheme obligations that we've had for so many years. Dividends, GBP 14 million. Now we have announced when we announced our results that we were going to reduce the dividend. So we paid GBP 14 million in the first half of the year. But next year, at the same point, this will be GBP 7 million. Restructuring is GBP 8 million. That's typically what we'd expect our restructuring to be. It's normally around GBP 12 million to GBP 13 million on an annual basis. That does exclude, of course, the cost of change for the print rationalization. So you will see in the second half of the year an elevated restructuring number in the cash flow. CapEx of GBP 6 million, that's a fairly consistent number, GBP 6 million will be GBP 12 million on an annualized basis. And then HLI, we've only paid GBP 1 million out this year, this half year. That's primarily because we're still waiting for responses from a legal point of view on the final cases which we have outstanding. We have a GBP 4 million provision, which I'd expect to pay in the next 12 months. So that's leaving us with a net debt number, as I said earlier, of GBP 48 million. I do expect in the second half of the year for that to be higher given that cost of change I've spoken about. Capital allocation. So as I've said, we have reduced the dividend. And what we're doing is we're effectively rebalancing the dividend or that dividend reduction we've made toward our investments, making sure that we have those underpinned around our 3 priorities because they are clearly what we see as being the longer-term future in terms of our revenue streams and our business. In terms of market expectations, so firstly, revenues, we retain a cautious outlook for the remainder of this year. We still have, obviously, those headwinds from a macroeconomic perspective. We still have the uncertainty around traffic performance. So we'll continue to be cautious around our revenue. Costs -- operational costs is expected to be broadly similar to half 1, depreciation between 13% to 15% charge. Operating profit on track to deliver market profit expectations. Cash, print closures cost of change to be GBP 25 million, which I've already spoken about. Also pension of GBP 57 million, which I've spoken about and CapEx broadly similar to full year '25. And then 2027, we expect operating margins to remain at a similar level, high level of circulation volume decline. We are expecting what we've seen in terms of an elevated decline in the last CPI to continue. But again, we'll continue to look at that as we go through the next one. And we will continue our proactive management of the cost base. I think that takes it back to you, Piers.

Thank you, Darren. So that's just a brief summary of not only the overall but also the financials. So I will now give some of the context around both the strategy and the market as we see it. Just a quick reminder, these are the 3 priorities that we set out last year, and I'll talk through each of them at a very high level. They remain our priorities because they were built and designed for the market that we're operating in now. So just a reminder, they're connecting with our audiences, and that essentially means that we've got to go where our audiences are not necessarily where we want them to be. The idea that we are going to build our business on referral traffic back to browsers, those days, I think, are gone. We need to think about what we're moving from a world of SEO to kind of AIO sort of artificial intelligence optimization. We've got to make sure we're on distributed platforms. So that is the likes of YouTube and the social platforms. And also, we need to make sure that the content they're seeing on those platforms, namely video is kind of what they expect. So those kind of -- that reprofiling of our content strategy is still very, very important. To do all of that, we need to make sure we are accelerating the use of tech and AI internally as a business. We cannot do what we want to do unless we are leveraging all of the tools and weapons in our arsenal to do so. And that includes, as I said, revamping our content management platform, which is called Launchpad to make sure that we give our content creators and journalists the best ability to write the content. So that's bringing all of our AI tools that we've talked about before, Mantis, Content Score, Guten, originality score, all of those technologies into one dashboard as well as third-party data. Under that pillar is also our licensing conversations, which I'll talk about very briefly. We see that world licensing to the LLMs and the AI companies as an important part of the mix going forward. And then, of course, lastly, diversifying our revenues. And that, I guess, is the shorthand for many people has been our rollout of subscriptions into the market. Obviously, traditionally, we haven't been a subscription-led business. But this time last year, we recognized that we need to make sure that we have at least the top of the pyramid or bottom of the funnel, depending on the way you like to draw your diagrams of where we send our users. And that is the rollout that we've been pushing very hard this year. So in terms of connecting with our audiences, I think it's just worth reminding, despite all of the challenges that we've had over the course of this last year with the change in referral traffic, we still reach over 2/3 of the online population in the U.K. And that is obviously through our traditional brands, but it is also through our new brands like all our Football and the podcast network. It's also, of course, when we've launched in the U.S. So what we know is 35 million adults in the U.K. still visit us every month. They have definitely seen us less as that browser profile has changed, but we still reach and reach for both our advertising partners and also ourselves a huge amount of people. And despite the challenges of page views, we're still delivering over 200 page views every sort of second every day, every week, every year. So within that challenge, we still have huge relevance, and that is all about that strategy of making sure we are being where people live. And we talk about that not just about geographically, but also in terms of their consumption. Our social video views are up by over 50%. Our social followers are up over 15%. And of course, what we're now seeing is we can monitor when AI bots scrape our content, those numbers are moving forward high. So we know that the content that we create is still a value to both man and machine. But the challenge, of course, is how we reprofile our digital business to take advantage of that. In terms of tech and AI, clearly, our tech has improved. It has allowed our infrastructure to roll out subscriptions in double quick time, but also at a very cost-effective rate. And as I said, we are launching Launchpad in the back half of the year, which is going to be a very important part of our maturing in this space for our content creators. It means our journalists can use data for ideation. They can grab images from our archive. They can edit and upload video more easily in one place. They can distribute it from their mobile rather than realistically being on a much bigger device. We can use AI to look at headline optimization and also bring together all of the kind of sites and the network of the content that we produce into one place. So it's a hugely important push for us in the back half of the year. Within that, of course, I'm increasingly optimistic about licensing revenues. The way I see it, there are 3 buckets of licensing opportunities. There are the big companies that you'll be very familiar with. There are a large number of mid-range companies. These tend to be the kind of financial services and B2B companies, and we're starting to do deals in that space. And then also increasingly, we're seeing a long tail of AI companies wanting to access information. And we can't and probably won't be able to do individual deals with a long tail, and these are the many hundreds of thousands of companies globally. What's increasingly happening is marketplaces are being set up where our content sits in the marketplace and we get paid per transaction, a small fee every time that the transaction occurs and a small bit of data and a small bit of content leaves our ecosystem. Now again, these are very nascent revenues, but I'm increasingly optimistic about how at least the market is understanding that there is a platform and a negotiating field to work on. I think all parties are figuring out the true value of all of this. But at least now we have, whereas we didn't have 12 months ago, commercial negotiations ongoing. And I'm optimistic in the back half of the year that we will announce a couple of deals in this space with some of the big players. And finally, on the strategy of diversifying our revenues. I said it's clearly really, really important as the market shifts and the environment changes. At the moment, it only represents about 15% of our digital revenue, but it's growing. And a lot has happened over the last 7 months, and I'm ambitious as to where this could go. We've obviously, as I said, rolled it out to now 17 brands, Coventry and Teesside at the latest in the last couple of days. We're well over 45,000 subscribers, and we're on track to hit our target of 75,000 for the end of the year. We've seen success across the network. We've launched about big and small. The big ones, you'll be very familiar with. We've had real success in things like WalesOnline, but also smaller ones like the Stoke Sentinel. So it suggests to me that there is a market out there. Our challenge now is just to make sure we keep managing the churn and growing that business overall. I think video is probably one way to zoom in and you get a sense of how we're bringing all 3 areas of the strategy together in one. Obviously, as I said, video is important to be able to connect with them. The Daily Expresso is a great example. You'll see there on the chart. Our studio revenues are up 70%. So we make money through -- primarily through advertising, and that is advertising that the platform sell, but it is also advertising that we sell and also sponsorships. A number of our shows now have sponsors, which is a really important part of it. Daily Expresso, for example, is the most -- was the most watched show on news show on YouTube in June, so being off some of the bigger more high-profile competitors that you'd be aware about. It's not to everyone's taste, but it's an important mark of express. The Mirror is getting going in this space, and we have -- we'll have some news on that in the autumn of some of the programming that's going to go on The Mirror. We clearly also need to make sure that we are expanding those video shows and making sure they sort of succeed off platform. Make Football Great Again was our World Cup podcast. That's going to morph into the Premier League with our all-out football network, and that continues to grow very well. And then, of course, we bring back all of it in terms of revenue, people like Nestle, not traditionally an advertiser with us. We've traditionally done well in retail and betting and government and the like, but to get FMCG brands like Nestle, not only doing one campaign with us, they're now renewing for a second time around. So that shows that the content that we're producing, the commercial relationships that we have remain strong. And video is a virtuous circle. The more program we put out, the more briefs we get, the more we win, and we hopefully continue to push forward on video overall. So I'm pleased with the way video is going. In terms of the way we look forward, we have got to make sure that in this world that we have much more focus on original content. We have always produced original content. Some of the criticism of the business has been that we haven't. But the reality is that's because we produce so much. And of course, within that, there is a spectrum of kind of the original kind of high-profile, high-cost content. We do have gone right through the spectrum to the much cheaper and much more fluffy content. That fluffy content is not cutting through in the new world. So we need to make sure we double down and renew our focus on the original content and also making sure that our brands have very clear distinctive places they can win. It's a very, very competitive space. Google has encouraged all publishers to be very bland and broad front. Those days are done. And therefore, we need to move to a much more focused approach. In terms of the back half of the year, we've clearly got to make sure we nail the continued rollout subscriptions. As part of that, we are rolling out 3 community brands to test whether a low-cost, more subscription weighted product is going to succeed in the market. Clearly, there are a number of small 1-man, 2-man bands out there in terms of local publishing. So we're looking to see whether using Launchpad, we can test that across 3 of our traditional print brands that have never had a digital presence. So we're going to see how that goes. That's the Southport Visiter, Newcastle Journal and also the Ayrshire Post in Scotland. We will make sure that Launchpad is rolled out fully across all of our news across U.K., Ireland and the U.S. I've talked about the podcast. They will obviously relaunch as part of the new Premier League system, Premier League season in a couple of weeks. We've kicked off an investment with Amazon to archive or digitize our archive better, again, all supported by AI to make sure that both our consumers and our journalists can access the archive better, and we'll continue to focus on licensing and with the large language models. So I guess in summary, the priority really is to make sure we continue to focus on those 3 pillars that I talked about, make sure we've got that renewed focus on our content strategy. We will continue, as always, as a business, we always do and we always have done, make sure we have a very strong discipline around our cash and our cost, and we have a long track record in doing so. The on-platform audience has stabilized over the last 100 days. So that has been a pleasing sign, but we obviously have to retain a cautious outlook in terms of what comes. As Darren said, this is just an ultimate year of the pension funding contributions that can't be underestimated in terms of both the outlook, but also the incumbency that we've had on those commitments. We are very, very close to being able to see the end of those. Overall, the business has strong foundations, big audiences. We have clear reaction, and we're very focused on creating that long-term value for our shareholders. And with that, I will draw the formal presentation to close, and I think we will move to Q&A.

[Operator Instructions] I'd like to remind you the recording of this presentation, along with a copy of the slides and the published Q&A can be accessed by our investor dashboard. And Jo, if I could just hand back to you just to run through the Q&A, and I'll pick up from you at the end.

Thanks, Lily. I'll try and take some of these in kind of logical order. So starting with revenue. Would you be able to give an overview of why the company revenues are in decline and whether this is a reflection of management?

Yes. I mean, Darren can follow up with the detail. But clearly, many publishers have struggled with the shift away from print. Print remains 3/4 of our revenue. And over the years, over the last decade or so, the last 15 years, the business and all publishing businesses have tried to turn kind of print dollars into digital dollars. But of course, reality is it's print dollars into digital sense. We're not alone in that challenge. I think it's also worth thinking about the change that has gone on in just -- well, frankly, the last 2 years, let alone in the last 10 years. So it's been -- there are very few publishers who have made that successful transition. It's different if you're a kind of a niche publisher or a B2B publisher, but for broad consumer publishers, it's a challenge. We obviously compete in an English language market, which competes for the U.S. And of course, we have the BBC who continue to invest a significant amount of the license fee into the local news agenda. So there are a lot of headwinds. So I don't think the management team -- this management team or prior management teams will be happy the way the state we want to be in a growing business. But the key priority right now is to kind of manage the changes in the ecosystem. And you think about how much it's just changed in the last 6 to 12 months, it is quite extraordinary. But I remain focused on the fact that the priorities are right. We want to get to the point where we have a very defensible sort of spine of digital business, and that is around getting control more of our own destiny, which, frankly, the platforms have hoovered up both the advertising and the copyright for good or for over the last couple of years.

And, if I could just add to that, I think the management of the print decline over many years has been a real success for the company. It's been managed very well. It's only just now that we're starting to see perhaps a bit of that elasticity start to be stretched slightly. So similarly, the cost management has been strong for many, many years, managing our profit number, which I'll come back to. And also, we know that we are focusing on the right things in digital, particularly taking control of our revenue through our 3 priorities. So all of those things, I think, the right things for us to be doing. But also just keep in mind that this company for some years has had some constraints around its ability to use its -- the cash it generates, given that we've had obligations to our pension schemes that we've talked about, thankfully coming to an end. But also, you'll remember the days where we had significant funds going out of the business because of historic legal issues, which is an issue that we have resolved with only GBP 4 million to go. So I think the way the business has been managed and ran has been appropriate by management.

Thank you. And in terms of strategy, this touches on some of the brand work that you talked about, Piers. The Mirror has done quite a lot in terms of monetizing celebrity gossip in recent years. Would you consider moving The Mirror back to its roots as a leftwing newspaper?

Well, I wouldn't accept that overall premise. The Mirror has always had a very strong core of what it would call kind of the serious thoughtful tabloid leftwing content. Has it done celebrity and the stuff? Yes, of course. But frankly, if you go back to the paper in the 1990s, there was a significant amount of celebrity, showbiz, gossip in there. If you think back to the stuff The Mirror has done just recently in terms of covering the end of [indiscernible], the campaign they've got for the moment for saving lives in out drowning, there are -- we -- I can spend hours, the awards they won to the Island of Strangers video series that they did around immigration in the back half of last year. There is endless. People tend to sort of focus in on the show or the tip, whatever you want to call it. The truth is that is always part of a broad through Mirror brand. But having said that, of course, we need to make sure that The Mirror, especially with the new Prime Minister and as he beds in, we need to make sure that The Mirror is still the heart of the kind of center left labor -- voice of labor. We had a great interview with Andy Burnham, and we've had a lot of content from over the weeks of the Prime Minister, and we'll continue to do that. And Mirror+, which is obviously the subscription element of it, will be there to make sure that the content that we do deliver that we stand by with has an option to be monetized through subscription. So it will continue to. We're launching a new video series for The Mirror in the autumn at the Labor Party Conference. So you'll hear more about that. So Mirror has been through a lot of change, but it is still at its heart of that kind of sense thinking online and in print.

Brilliant. Thank you. Coming on to costs. As revenues decline, can you continue to reduce cost to maintain profit? And what are the costs hidden or costs of that change?

Yes. So look, we will continue to manage the decline of particularly the print side of the business by using costs. Again, we've been doing that for a number of years. Some of that is managed. Some of that is organic, as I talked about earlier, newsprint being an example. What you may have picked up in our announcement, our results announcement is we are looking to put a cap, if you like, on the margin. So we're not intending to take the margin above 20% going forward. What that will mean is that, that will fall to profit. So just keep in mind that we are not continuing to do those same level of cost reductions in order to continue to increase margin. We will not go beyond a 20% cap to make sure we're protecting the business.

And the associated cost of changes of any cost measures?

Sorry, Jo, thank you. So yes, the cost of change, I mean, this year, they are elevated. So as we've already said, you have GBP 25 million associated with the print rationalization. If we were to do those big sort of step change activities again in the future, you would see, again, a step up to make sure they are delivered. More generally, the costs of change are pretty consistent at around about GBP 12 million to GBP 15 million. And again, I'd expect that to be the case as we go forward.

And an operational one. In the market, News U.K. recently awarded long-term contracts with Smiths News. Does that have any impact on our distribution choices for The Mirror and the Express?

I can take that one. Well, obviously, we work with both as the News U.K. and [indiscernible], we work with both Menzies and Smith. Menzies is now owned by InPost, which has subsequently been owned bought by FedEx. They actually operate -- we operate almost monopolies in regions, although there's 2 providers, they effectively operate as monopolies in certain regions. We're obviously engaged with both of those. This is, I think, a natural evolution of the print market. We've consolidated down our printing works. There is inevitably going to be consolidation down in things like distribution. So we're engaged with both parties. We're under contract with both for the foreseeable future, but we'll have those conversations with both parties or one party in the coming months and quarters.

In terms of the print closures, these 2 sites, can you comment on the realizable values of the properties?

So we are just at the moment in the decommissioning period. We've literally last week handed over the last titles from the Watford site. We will then move on to valuation further towards the back end of the year, and then we'll market them for sale. We don't have at the moment a valuation, a formal valuation, and I wouldn't feel comfortable, therefore, just giving an estimate at this point in time.

Okay. In terms of financial commitments, we've had a number of these over the years, whether that's kind of additional payments for M&A, HLI or historical legal issues, essentially backing and the pension contributions. Do you still foresee any future commitments coming and financial obligations?

No. So the 2 big ones historically have been HLI, as you said. I mean at the M&A point, if that's something that companies do from time to time, that would obviously be creating value for the business, whereas HLI and pensions or obligations we just need to pay from a historic point of view. So once HLI and more importantly now, given the size of the pensions are over, I don't expect to see those sorts of commitments or obligations by any stretch in the future.

And a couple here on capital allocation. Firstly, did you consider a buyback?