RM plc (RM) Earnings Call Transcript

Hello, and welcome to the RM plc 2022 Half Year Results Presentation. My name is Alex, and I'll be coordinating the call today. [Operator Instructions] I will now pass it over to your host, Neil Martin, Chief Executive, to begin. Neil, over to you.

Thank you, Alex. Hello and welcome to RM's Interim Results for 2022. Thank you for taking the time to join us. My name is Neil Martin, RM's Chief Executive. I'm very pleased to be joined on this webcast this morning by our new interim Chief Financial Officer, Emmanuel Walter, who joined recently. Emmanuel joins us with excellent experience and I'll ask him to introduce himself when I hand over. The agenda, I'll run through today, I'll give an overview of the first half. Emmanuel will then take you through the first half financials. And I will conclude with a section on strategy and outlook before Stephen from Hedland joins us, and we open up for questions. So starting with the 2022 H1 overview. We grew revenues in the period by 4% on the prior year. This resulted from good growth in our Assessments and Resources divisions, which more than offset the decline in our technology division, where we've outlined the need for a wider turnaround. We're also seeing a strengthening revenue development in key areas, which will support our longer-term plans. However profitability fell in the period, reflecting the weaker performance in the Technology division, impacts related to some challenges experienced in our IT change program and the negative impacts of high inflation, most notably in elevated international freight costs and resources. As mentioned, aspects in our IT implementation program in the Resources division have been problematic and caused delayed shipments at period end and driving inefficiencies, which elevated costs. This is now stable and throughput is building ahead of the new school term. However this experience has resulted in the need to derisk and extend the implementation time line, which will require additional costs through to completion in 2023. As a result, net debt was elevated at the period end of GBP 41.5 million. Responding to this, we've agreed revised debt leverage covenants with our banks for May and November this year. And furthermore, whilst we recognize the importance of the dividend, we've decided to prioritize balance sheet prudence whilst we have elevated debt levels and will not be paying interim dividend at this stage. We've not taken this decision lightly and remain committed to a sustainable dividend policy and the position will be reviewed again ahead of the prelim results. Looking at the wider market context, the macroeconomic backdrop is challenging for all markets at the moment. And despite its relative resilience, the education market is not immune to the economic headwinds. School funding is increasing, but the backdrop of increased salaries, energy costs and inflation will create near-term budget challenges for schools. That said, the underlying market drivers of digital maturity and changing buyer behavior and education continues to strengthen, and we are seeing positive sales momentum, which will support the longer-term path to sustainable growth. I will now hand over to Emmanuel to take you through the financial summary.

Thank you, Neil. I'm very pleased to have been given the opportunity to join RM plc a month ago and take the role of interim Chief Financial Officer. I have more than 25 years of international experience, in Europe and Asia, have held various senior financial positions with multinational and as group CFO for 4 listed companies specializing in the TMT as well as engineering sectors. So moving on then to look at our financial overview. Revenue grew 4% to GBP 100 million with good growth in the Resources and Assessment division, more than offsetting a decline in RM Technology. This also reflects the impact of some revenues moving into H2 as challenges associated with the IT implementation causes dispatch delays. The program challenges alongside inflationary pressures impacting the wider financial performance with adjusted operating profit decreasing by GBP 3.6 million to GBP 5 million. Adjusted diluted EPS decreased to 4.0p. Net debt at the end of the first half of 2022 at GBP 41.5 million was GBP 31 million higher than at the same time last year, with the increase driven by ongoing investment in our IT program and the return of normal seasonal working capital outflows following COVID disruption. As a reminder, we have a GBP 70 million revolving credit facility in place, which we continue to use to fund those investments. On the next slide, we bridge our GBP 4.3 million revenue movement versus 2021. In RM Resources, revenue increased GBP 3.4 million to GBP 51.6 million, driven by strong international and curriculum brand growth both of which recorded pre-COVID levels. Underlying growth was stronger as it was offset by some delayed shipment due to our IT program implementation. Revenue growth in our Assessment business of GBP 2.7 million to GBP 18.2 million results from 2022 being the first full exam series since 2019. In our Technology business revenue, declined GBP 1.9 million to GBP 30.4 million, which is mostly driven by reduced hardware sales, which was seasonally high in 2021. Pipeline development is strengthening with the new contract wins across the group. On the next slide, we bridge profit movement versus 2021. Profit reduced in our Resources business by GBP 1.6 million, with revenue growth offset by GBP 1 million of inbound freight cost inflation and elevated warehousing. Distribution and packaging expenditure associated with the IT implementation. In our Assessment business, profit declined GBP 0.5 million, which improved revenues from exams, offset by the absence of onetime benefit in 2021 and higher short-term delivery costs associated with software development and [ housing ]. Technology divisional profit reduction of GBP 2 million reflects lower revenues, compounded by the impact of inflation and higher service delivery costs as business transition under new leadership. The following slide shows the division revenue and profit splits. I do not intend to go through the variances again in details, but this highlights the revenue increases in both the Resources and Assessment divisions as well as a profit decline being focused within the Resources and Technology division. On this slide, we set out the key components of our income statement, focusing specifically on the items below adjusted operating profit, interest was GBP 0.8 million for the first half and comprise the cost of servicing of debt facility together with the finance costs associated to our defined benefits pension scheme. Adjusted profit before tax was GBP 4.2 million, down GBP 3.8 million from GBP 8 million in the prior year. Tax in the period was GBP 0.8 million and the adjusted effective tax rate or ETR was 20%. Lastly, post tax adjusted items were GBP 9.3 million, which is an increase of GBP 5 million versus 2021. GBP 6.1 million of these items relate to costs incurred in respect of our new IT platform implementation, with an additional GBP 2.3 million from dual running cost associated with the implementation. The remaining GBP 0.8 million is amortization and acquisition of intangible assets. After deducting adjusted items, we report after tax a loss of GBP 5.9 million. On the following slide, we take a look at the key driver of our cash flow, focusing on items below adjusted operating profit. Noncash items are mainly depreciation and amortization with 2021 and 2019 at reduced levels due to one-off benefits from provision releases and share-based payments. Moving to working capital. The first half of the financial year is normally a working capital outflow period for the group with inventory purchases ahead of the second half fixed selling and the majority of the cash inflow from examination also coming in the second half and 2022 has seen a return of that seasonality versus 2021. This result in an adjusted cash generated from operation outflow of GBP 3.6 million in the first half, which is GBP 12.4 million [ adverse ] to 2021, also more aligned to the GBP 1.2 million outflow in 2019, the last normalized working capital movement period. Normal financing and investment outflow come next, including business as usual, CapEx, pension contribution, interest, tax and dividends, which [ I know use ] 2021 and GBP 4.7 million below 2019, mostly due to investment being focused on our IT change program in 2022. This result in adjusted cash outflow of GBP 11.4 million for the first half before adjusting items, which was GBP 2.3 million better than 2019. We then deduct the GBP 11.8 million cash impact of adjusted items, which are mainly IT [ programmability ] relating to arrive at a cash outflow for the period of GBP 23.2 million, leaving net debt at GBP 41.5 million. I think it's important to note again here that our cash outflow was driven by continued spend on our 2 investment programs and a normalized level of working capital outflows. In terms of guidance, we extended the program time line and in conjunction with the continued review of the completion roadmap, we expect spend to remain elevated through to program completion in 2023. Moving on to pension. Our IAS19 pension position improved by GBP 8.3 million from the end of November 2021, increasing the surpluses from GBP 30.4 million to GBP 38.7 million. The improvement was driven primarily by an increase of 1.9% in the discount rate, which is based on corporate yields, but partially offset by reduced scheme asset valuation. We also concluded the latest triennial valuation in the first half of 2022, with a scheme deficit reducing from GBP 46.5 million to GBP 21.6 million. The deficit recovery payments of GBP 4.4 million per annum will continue to the end of 2024 before reducing to GBP 1.2 million until the end of 2026, were recovery payment fees. I will now hand back to Neil.

Thank you, Emmanuel. In February I outlined our approach to taking RM forward. This addressed the market opportunity emerging post-COVID. We need to reset the strategy and have a transition phase, which focused on key enablers to unlock growth, which would subsequently enable us to build a sustainably growing business with strong cash generation. This was the slide I presented, so let me update you on our progress in these areas. The market changes on which we set our path continue to strengthen. The long-term growth in the use of technology and education will continue and the Department of Education recently issued a study highlighting a view that only 9% of schools were considered digitally mature. Along that theme, we believe that assessment will ultimately be fully digital, and we echo the view of others in the sector that is now a matter of where, not if. And we are seeing engagement building post-COVID and have broadened the target segments on which we focus. Importantly, in our core English schools market, procurement is changing and schools are aggregating into school groups or trusts. The government has also clarified its position on this and wants all schools to become academies now that are part of a group of schools of at least 10 by 2030. These midsized buying groups are the key target market for our Technology division, and we estimate that 70% of English schools will be in this category by the 2030 deadline, which covers around 14,000 schools. Finally the pandemic has shown lights on critical elements of education where RM has strength, such as the STEM curriculum and Early Years Development with governments around the world investing in additional funding to mitigate learning loss as a result of COVID. We also outlined that to deliver on the opportunities, we needed to go through a 2 year transition phase. The focus of this was to set out the longer-term strategy and direction, structure the business alongside the market opportunity, which required us to change the divisional structure, which we've now done. We also said we would bring in new leadership, which has seen us make changes to the executive team in the last 6 months. And finally, upgrade systems and processes from our legacy IT infrastructure to a new group-wide IT platform, which moved into its implementation phase in the second quarter of this year. As you've heard, this is the area of transition that is proving most challenging. Our implementation and resources did not progress to plan and has taken time to remediate. As previously outlined, we now have a grip on this and the new system is stable and performance continuously improving and it's now critical that we reflect on the learnings to build assurance. Although this was the most complex or end-to-end implementations in the program, with many of the challenges flowing through to the warehouse operation, we are focused on derisking subsequent employments. That said, the program remains a critical building block to establish a platform on which to build RM's improved service delivery, efficiency and propositions, and we are committed to completing this successfully to create the right foundation for the business to scale and ensure a smooth delivery from this point forward. So let me move on to talk about the status of each of the divisions, which are at different stages of development and focus. Starting with RM Resources. Clearly this has been at the forefront of the IT delivery in the first half in its Consortium brand. But if we put that to one side, the underlying progress is positive. It is the market leader and has strong brand alignment with a focus on post-COVID lost learning, particularly in its strength areas of STEM curriculum and Early Years Development. Growth opportunities, comfortable leveraging, its channel strength in the U.K., where 90% of primary schools buy from resources, but our share of wallet can be enhanced through improving digital channels, which will come through from our new IT platform. Also 20% of revenues currently come from international markets, where we expect growth to be stronger than in the U.K. And as you can see, the year-to-date progress has been positive in these areas with international and our curriculum specialist brand, TTS, recording record periods. The focus going forward is to complete the implementation of the IT platform across both brands, which will unlock digital channel benefits and deliver efficiencies from a consolidated automated warehouse. There is also a need to improve our logistics and supply chain approach. This has had the greatest impact on margins with container rates at high multiples to what they were pre-pandemic. We have maintained product margins well despite the inflationary backdrop and put in new solutions, for example, following Brexit, to enable more effective movement in and out of Europe. But we know that we're behind where we wanted to be in mitigating these wider logistics challenges, particularly international freight. Moving on to RM Assessment. The market opportunities here are material as the assessment market looks at digital options in the wake of COVID. We like many believe that the future of assessment is fully digital. In the first half of this year, we've seen progress in our sales pipeline after COVID disruption with much of it coming from our focus on new target segments, including our first customer in higher education. While it's fair to say these contracts are smaller than our traditional large school exam contracts, which continue to lack the change in the wider market, but it does demonstrate the opportunity to build out from our core market. Moving forward, we plan to ensure our products are engineered to scale to ensure that some of the elevated development and support costs to date, which have impacted margins, are managed as we broaden our reach. Also as a business with long-term contractual relationships, we have a reasonable indexation coverage and good revenue visibility. However we will need to carefully manage our cost base still as inflation continues to impact and we have limited options to move costs outside our contractual framework, with some areas of inflation exceeding that indexation such as our support from our organization in India. The focus is also to develop our go-to-market capability as now is the time to optimize customer acquisition through an important period in the sector and ensure our product roadmap is aligned to the opportunities that are emerging. Finally RM Technology. This is an important market, which is going to undergo significant change as the running of schools moves to academy school groups who will need to consider their technology strategy more carefully in the future. Although we are the leading provider of managed services in this sector, there is an opportunity to improve and turn around the division to lead in a marketplace where we anticipate good growth potential in the coming years. Historically we've been strong in running large local authority programs. But as the market fragmented and customer contracts became smaller and shorter, we haven't adapted commercially to leverage as effectively as we would like. As the market starts to re-aggregate, we have now appointed a new Managing Director with excellent pedigree in cloud and managed services to lead our transition. We're still strong in the larger school group customers that are coming to market, including winning the largest infrastructure deal in the sector in the first half of this year. The opportunity is material, but it will take time to improve our systems, processes and commercial structure to create greater client stickiness, improving margins and to build out the managed service offering and digital maturity journey for schools. The inflation backdrop is challenging also in this area as there are a greater number of short-term contracts with small customers. So the transition opportunity will be about more broadly improving commercial management and margin focused alongside customer retention. Now I've spoken a lot about transition here, which needs to be done as we need to address the near-term focus and opportunities that exist. But looking further out, I wanted to take a moment to remind us of our ambition to deliver sustainable growth in an important and resilient market as it is both realistic and material. It is realistic because we are leading -- we have leading customer reach and channel strength in each of the markets in which we operate, which itself creates further development opportunities in the future. And it is material because the market is changing in a way that benefits the positions that RM hold. It will deliver consistent mid-single-digit revenue growth and improved operating leverage from a double-digit margin position. So in summary, near-term funding, although increasing, is likely to be challenging for our customers managing their budgets, which will need to be observed carefully, particularly in U.K. resources and with single school customers. That said, the underlying market drivers continue to strengthen for us around the theme of digital maturity and education. We are progressing through our transition phase to build a better and more scalable business. And through transition, profit conversion will remain subdued versus our aspirations as we turn around the Technology division, manage a challenging economic backdrop for ourselves and our customers and deliver a complex IT implementation. But we hold leading market positions, but are showing signs of strengthening sales momentum in relatively resilient markets, which will undergo significant change and require the expertise and value that RM can bring. Thank you, everyone. I'll now pass back to Stephen to open the Q&A.

Thank you, Neil. We're just going to take some questions from the webcast platform first, and I'll hand over to Alex, the host on the conference call, for any from telephone lines. So the first question I've got here is, Neil, looking at the transition, could you provide an updated view as to when you expect to have that transition completed by?

Yes. So in February, we laid out a transition period of 2 years, and we're still planning to complete the transition in that period. We've made good progress in changing the divisional structures to align to the market opportunity. And we brought in new executive leadership in the first half of this year with great expertise and capacity that creates. Clearly the challenges through transition have been associated with the IT roadmap and some of the complexity we had in implementing in resources. This is the most complex of the implementations that it moves all the way through order fulfillment, financial operations, CRM through to warehouse management and automated warehouse system. There are other elements of the implementation that are going better. We are putting in service now in our technology division at the moment. But I think it's critical that the system is now stable. We have a group on the program, throughput through the warehouses where we wanted it to be after a period of not having that up to speed. And I think it's an important point now that we ensure that we take stock of our learnings through this period and ensure that we derisk the remainder of the program and deliver successfully and smoothly without disruption to our customers, which will elongate the period with which we deliver the time line. But the benefits are material when we come out of the other side and we still expect to complete in that initial 2-year transition phase. So although we will have some slightly delayed transition benefits coming through, we still expect to be through the material works of our transition period in the 2 years we laid out in February.

Thank you, Neil. The next question is sort of linked to the sort of thing, but diving into more detail on one area is, how should we think about the resourcing plans of the overall change strategy across the business? Have those senior roles been filled? Is there still a likely staff change that needs to be worked through?

So I think like all of these, the key focus to begin with was to change the divisional structure. We split the assessment and technology divisions into 2, which were previously running on the single management. And the key there for us was to ensure that we have the right leadership in each of the divisions. We brought in a new managing director who joined us in April in the Technology division. He brings excellent experience. I think it's fair to say during the last 6 or 7 years, we haven't had a managing director from that managed service and cloud environment. So the appointment of this managing director, I'm extremely pleased about. We have a new Chief People Officer, a new Customer Strategy Director and a new Chief Financial Officer, Emmanuel. So I think the executive team, we are now very confident that that is a strong team and able to deliver the transition. A few of those have joined in the last 6 months, and they will want to take stock of the transition activities they had ahead of them and ensure that we have the right team, the right plans, the right progress. But I'm confident that we've made a good job in the last 6 to 9 months of building an executive team to take us through transition.