Connect : Preliminary Results announcement for the year ended 31 August 2018

Audited Preliminary Results Year Ended 31 Aug 2018

Released : 06 Nov 2018 07:00

RNS Number : 4153G

Connect Group PLC 06 November 2018

6 November 2018

Connect Group PLC

('Connect Group' or 'the Group')

Audited Preliminary Results Announcement for the year ended 31 August 2018

A year of significant challenge and changes

Connect Group, a leading UK specialist distributor, today announces its audited preliminary results for the year ended 31 August 2018.

Adjusted continuing results	FY18	FY17	% Change
Revenue	£1,534.3m	£1,594.3m	(3.8%)
Profit before tax	£28.4m	£48.0m	(40.8%)
Earnings per share	9.3p	15.5p	(40.0%)
Statutory continuing results
Revenue	£1,534.3m	£1,594.3m	(3.8%)
(Loss)/profit before tax	(£35.5m)	£34.2m	(203.8%)
(Loss)/earnings per share	(15.5p)	11.0p	(240.9%)
Dividend per share	3.1p	9.8p	(68.4%)
Free cash flow	£20.2m	£28.7m	(29.6%)
Net debt	£83.4m	£82.1m	(1.6%)
Headlines:

• ·Adjusted continuing profit before tax £28.4m, down £19.6m

• ·Performance driven by losses in Tuffnells and Pass My Parcel and weaker trading in Smiths News

• ·Free cash flow of £20.2m, down £8.5m

• ·No final dividend - making a full year dividend of 3.1p, down 68.4% (FY 2017: 9.8p)

• ·Smiths News - impacted by shortfalls to cost reduction targets and disappointing World Cup sales

• ·Pass My Parcel closed in light of continued losses

• ·Tuffnells materially impacted by operational integration, leading to service and efficiency shortfalls, and coinciding with more competitive trading conditions

• ·Statutory continuing loss before tax of £35.5m, includes a goodwill impairment for Tuffnells of £46.1m

• ·Appointment of Jos Opdeweegh as Chief Executive Officer from 1 September 2018

• ·Turnaround actions underway, spearheaded by Tuffnells recovery plan

• ·Full strategy for recovery and growth, including capital allocation, to be confirmed in January 2019

Gary Kennedy, Chairman, commented:

"A year of significant challenge exposed weaknesses in our strategy and its execution, with a consequent impact on results.

While it is disappointing not to succeed, we have taken decisive action to address underperformance and respond to the lessons learned. I am confident that under the new leadership of Jos Opdeweegh, and a return to more focused operations, we can reenergise the business, restoring stability and confidence."

Enquiries:

Connect Group PLC

Jos Opdeweegh, Chief Executive Officer Tony Grace, Chief Financial Officer

01793 563641 01793 563721

www.connectgroupplc.com

Buchanan

Richard Oldworth/ Jamie Hooper / Maddie [e-mail]

020 7466 5000

A meeting for analysts will be held at the office of Buchanan, 107 Cheapside, London, EC2V 6DN on 6 November 2018 commencing at 9.30am. Connect Group PLC's Preliminary Results 2018 are available atwww.connectgroupplc.com

An audio webcast of the analyst meeting will be available from 12 noon today via the following link:http://webcasting.buchanan.uk.com/broadcast/5bb4ae6ec6ec681d9e06bbf5

About Connect Group

Connect Group PLC is a UK based specialist distributor and a leading provider of distribution solutions in complex and fragmented markets. The Group's networks are focused on serving high drop density early morning deliveries, and the demands of mixed and irregular sized freight.

The Group's core businesses are each leading players in their markets:

Smiths Newsis the UK's largest newspaper and magazine wholesaling business with an approximate 55 per cent market share. It distributes newspapers and magazines on behalf of the major national and regional publishers, delivering to approximately 27,000 customers across England and Wales on a daily basis. The speed of turnaround and density of Smiths News' coverage is critical to one of the UK's fastest physical supply chains.

Dawson Media Direct (DMD)supplies newspapers, magazines and inflight entertainment technology, serving 115 airports in 47 countries globally. Delivering to strict time windows with security accreditation, DMD serves the specialist needs of airlines and travel points in the UK and worldwide with printed and digital media.

Tuffnellsis a leading distributor of mixed and irregular freight, serving approximately 5,000 small and medium sized enterprises across the UK. Its network of 37 depots collects and delivers mixed parcel freight consignments, specialising in items of irregular dimension and weight ("IDW"), examples of which include bulky furnishings, building materials and automotive parts. With a mix of local and national clients, Tuffnells completes up to 70,000 daily deliveries, offering a range of timed services that are responsive to customer demand.

Notes to Editors

This document contains certain forward-looking statements with respect to Connect Group PLC's financial condition, its results of operations and businesses, strategy, plans, objectives and performance. Words such as 'anticipates', 'expects', 'intends', 'plans', 'believes', 'seeks', 'estimates', 'targets', 'may', 'will', 'continue', 'project' and similar expressions, as well as statements in the future tense, identify forward-looking statements. These forward-looking statements are not guarantees of Connect Group PLC's future performance and relate to events and depend on circumstances that may occur in the future and are therefore subject to risks, uncertainties and assumptions. There are a number of factors which could cause actual results and developments to differ materially from those expressed or implied by such forward looking statements, including, among others the enactment of legislation or regulation that may impose costs or restrict activities; the re-negotiation of contracts or licences; fluctuations in demand and pricing in the industry; fluctuations in exchange controls; changes in government policy and taxation; industrial disputes; war and terrorism. For a more detailed description of these risks, uncertainties and other factors, please see the section titled "Principal Risks" in the preliminary announcement for the full year ended 31 August 2018. These forward-looking statements speak only as at the date of this document. Unless otherwise required by applicable law, regulation or accounting standard, Connect Group PLC undertakes no responsibility to publicly update any of its forward-looking statements whether as a result of new information, future developments or otherwise. Nothing in this document should be construed as a profit forecast or profit estimate. This document may contain earnings enhancement statements which are not intended to be profit forecasts and so should not be interpreted to mean that earnings per share will necessarily be greater than those for the relevant preceding financial period. The financial information referenced in this document does not contain sufficient detail to allow a full understanding of the results of Connect Group PLC. For more detailed information, please see the preliminary announcement for the full-year ended 31 August 2018 which can be found on the Investor Relations section of the Connect Group PLC website -www.connectgroupplc.com. However, the contents of Connect Group PLC's website are not incorporated into and do not form part of this document.

The Group uses certain performance measures for internal reporting purposes and employee incentive arrangements. The terms 'net debt', 'free cash flow', 'adjusted operating profit', 'adjusted profit before tax', 'adjusted earnings per share' 'adjusted EBITDA' and 'Adjusted' are not defined terms under IFRS and may not be comparable with similar measures disclosed by other companies.

• (1) The following are the key non-IFRS measures identified by the Group in the consolidated financial statements as Adjusted results:

  Adjusted operating profit is defined as statutory operating profit from continuing operations, excluding the impact adjusting items (defined above). This metric is reconciled on the face of the income statement, with detail of each adjusted item disclosed within note 4.

  Adjusted profit before tax is defined as statutory profit before tax, excluding the impact of adjusting items (defined above). This metric is reconciled on the face of the income statement, with detail of each adjusted item disclosed within note 4.

  Adjusted earnings per share; is defined as adjusted PBT, less taxation attributable to adjusted PBT and including any adjustment for minority interest to result in adjusted profit after tax attributable to shareholders; divided by the basic weighted average number of shares in issue. This metric is reconciled in note 10.

  Adjusted items; are items of income or expense that are considered significant, in nature or value, and are excluded in arriving at Adjusted operating profit. The purpose of excluding these items from adjusted measures is to provide additional performance metrics to users of the financial statements that exclude the impact of the items the directors consider to have a significant impact on reported results and do not relate to the underlying trading activity of the Group. The specific items vary between financial years, and for the current year include certain disposal related costs, legal and regulatory provisions, amortisation and impairment of intangibles, impairment of property, plant and equipment, integration costs, business restructuring costs and network re-organisation costs including those relating to strategy changes which are not normal operating costs of the underlying business. They are disclosed and described separately in note 4 of the financial statements to provide further understanding of the financial performance of the Group. A reconciliation of adjusted profit to statutory profit is presented on the income statement.

• (2) Free cash flow; is defined as cash flow excluding the following: payment of dividends, dividends from associates, acquisitions and disposals, the repayment of bank loans, EBT share purchase, proceeds of share issues and cash flows relating to pension deficit repair. This measures shows the cash retained by the Group in the year and is considered by the Directors to provide additional information on the cash available for shareholders returns. A reconciliation of free cash flow to the net movement in cash and cash equivalents is shown in note 35.

• (3) Adjusted EBITDA is calculated as Adjusted operating profit (as defined above) before depreciation and amortisation. This metric is reconciled on page 16.

• (4) Net debt; is calculated as total debt less cash and cash equivalents. Total debt includes loans and borrowings, overdrafts and obligations under finance leases. A reconciliation of net debt is presented in the Group Cash Flow Statement.

• (5) Continuing operations excludes the sale of Education and Care sold on 30 June 2017 and Books division which was classified as held for sale as at 31 August 2017 and sold on 14 February 2018. Discontinued profit for the year is the Books division for the period after tax.

• (6) FY2018 refers to the full year ended 31 August 2018, FY2017 refers to the full year ended 31 August 2017.

• (7) All movements are calculated to round thousands.

OPERATING REVIEW

INTRODUCTION

In what has been a significantly challenging year, weaker trading in Tuffnells and Smiths News (including losses in Pass My Parcel) was compounded by operational inconsistency and shortfalls against efficiency targets. In the light of the underperformance, we have halted our integration and businesstransformation plans, appointed energetic and experienced new leadership, and taken decisive action to stabilise operations and improve accountability in our core businesses.

In January 2018 the Group announced that as a result of weaker trading it expected full year adjusted profit before tax for its continuing operations to be in the range of £42m to £45m. Following further poor trading, in June 2018 the Group announced that this forecast would not be achieved and the Board had materially reduced its expectations for full year Adjusted profit before tax. In September 2018 the Group further confirmed to the market that following a continuation of the challenging trends it expected the full year trading performance to be below our revised expectations.

Group Adjusted profit before tax for continuing operations of £28.4m is down by 40.8% (FY2017: £48.0m) and Adjusted Earnings per Share is down 40.0% to 9.3p.

Following an impairment of £46.1m in the goodwill of Tuffnells, Statutory continuing loss before tax is £35.5m (FY2017: profit of £34.2m) and Statutory continuing earnings per share is a loss of 15.5p (FY2017: earnings of 11.0p). The Statutory continuing and discontinued loss after tax is £47.0m (FY2017: profit £36.6m), and Statutory continuing and discontinued earnings per share is a loss of 19.1p (FY2017: earnings 14.9p). The Statutory continuing and discontinued results are also impacted by the closure of Pass My Parcel and the sale of the Books business for an enterprise value of £18.7m.

Free cash flow of £20.2m from continuing operations (FY2017: £28.7m), demonstrates the Group's underlying cash generative business model even in a difficult year. In the light of challenges in the year and mindful of the benefits of strengthening the balance sheet as we position the business for recovery, the Group has resolved not to recommend a final dividend, making the full year dividend 3.1p, down 68.4%.

GROUP INTEGRATION AND ORGANISATION RESTRUCTURE

In July 2017, following recent disposals, the Group restructured its leadership and operations in pursuit of a more integrated business model. Good progress was made in centralising support services, but it is now clear that there are not the same efficiencies to be achieved in sales & marketing and at an operating level. Indeed, the move to integrate into a single structure weakened operational performance and impacted internal accountability and controls. A detailed review of the Group's networks also concluded that opportunities for combining physical operations of Tuffnells with Smiths News are limited, giving further impetus to a return to more focused management.

In response, we have taken decisive action to address the lessons learned. The closure of Pass My Parcel, the appointment of new leadership and the return to focused business units were critical first steps in restoring stability to core operations. In order to address a weakening of controls and accountability which followed our integration programme, we have made improvements to business information and the control and accountability framework. This has helped to identify the root causes of underperformance and clarified our immediate priorities for FY2019.

On 1 September 2018 Jos Opdeweegh was appointed as Chief Executive Officer and we have subsequently further refreshed the senior management team strengthening the relevant experience and capabilities to lead our recovery. The appointment of Michael Holt as a non-executive director also enhances the Board's experience and knowledge of the parcels and freight markets.

Operationally, the integration activity across our two networks has ceased. We have re-established dedicated management teams and leadership for Smiths News and Tuffnells, returning accountability for revenue and costs to the individual businesses, while supporting them with the newly integrated central services. Both businesses remain leaders in their fields with strong market positions, giving confidence that by refocusing on core service and efficient operations, stability can be restored.

Strengthening the efficiency, operational excellence and network quality of Smiths News and Tuffnells will underpin the Group's recovery plan, driven also by improved capability in business analytics and an energised culture of continual improvement. We have actions underway to address the immediate priorities and aim to share details of the fully developed turnaround strategy in January 2019, including confirmation of our capital allocation plans.

SMITHS NEWS

Adjusted operating profit in Smiths News was £35.9m (FY2017: £40.4m) with revenue of £1,335.1m (FY2017: £1,383.4m). This performance includes the sales and costs of Pass My Parcel, amounting to a loss of £5.4m (FY2017: loss £6.3m). Sales and profit this year were boosted by sticker sales associated with the FIFA World Cup, albeit these were down on expectations and the levels achieved in previous tournaments.

While newspaper and magazine sales declined at the higher end of our strategic forecast, they continue to demonstrate an overall resilience and relative predictability that gives confidence to future revenue planning. Newspaper sales of £841.8m were down 3.9%, with price mitigating volume declines; magazine categories, including one-shots and partworks, were down by 3.8%.

Planned headcount reduction from network integration did not materialise and costs in the first half of the year were further impacted by service issues at the Hemel Hempstead depot that required an additional £0.6m of necessary service related costs to rectify. In hindsight, it is clear that the Group's integration strategy impacted operational focus and controls; in addition, planned savings were not fully achieved, resulting in a £3.3m shortfall to the target of £5m efficiencies in the year.

Distribution contracts were successfully renewed with two of our largest publisher clients: News UK (July 2018), and Frontline (October 2018). In total, these contracts account for circa 30% of Smiths News' current sales and the new agreements secure our territories with these publishers for a further five years. Discussions with a number of the other publishers are ongoing, and we are confident of renewing the long term agreements with all our key partners.

On 1 October 2018 Jonathan Bunting, formerly Chief Operating Officer, was appointed as Chief Executive of Smiths News. Jonathan has deep experience of the business and news industry, having embedded knowledge and strong relationships with our key publishers and retailers.

In what was a challenging year the capabilities of Smiths News were severely tested; its resilience in the face of these difficulties demonstrates its underlying value to the Group. Looking ahead, with the combination of renewed contracts, the closure of Pass My Parcel and a return to dedicated operational management, Smiths News is well positioned to continue delivering a relatively predictable flow of revenue and cash that will help to underpin the Group's recovery plans.

CLOSURE OF PASS MY PARCEL

Pass My Parcel made an Adjusted operating loss of £5.4m in the period up to 23 May 2018. Following a detailed review of its prospects, the Board resolved to close the operation and its associated network of local retailers. Consequently, a further £6.7m attributable to closure and ongoing onerouscontracts has been charged to Adjusted Items.

Discussions with key clients to exit ongoing contracts have progressed more quickly than first anticipated, impacting costs in FY2018 but reducing the quantum and potential for ongoing impact. Deliveries and collections representing over 95% of volumes ceased during August 2018 and distribution services for the remaining clients will end by January 2019. The contractual arrangements for the provision of IT services to one client are, however, expected to continue throughout FY2019 at minimal cost.

The parcel-shop network is expected to transfer to a leading UK parcel carrier, and a migration plan is underway, completing June 2019. A wider costs removal plan is on track, ensuring other direct and indirectly associated expenses are removed as swiftly as possible.

DAWSON MEDIA DIRECT (DMD)

DMD, our specialist distributor of printed and digital media to airlines and travel points delivered a good result with Adjusted Operating profit of £3.0m up by 30.4% (FY2017: £2.3m) from revenue of £26.5m, (FY2017: £28.8m). Profit growth was driven by a combination of positive net contract changes, and cost efficiencies from internal restructure in the prior year. The business was not impacted by the Group's wider integration activity.

TUFFNELLS

Tuffnells made an Adjusted operating loss of £5.0m compared to an Adjusted operating profit of £12.0m in FY2017. External revenue of £175.2m was down by 4.4% (FY2017: £183.2m) with sales and volumes performance in the second half of the year materially behind expectations.

The market for IDW freight was increasingly competitive, putting pressure on both price and consignment volumes as the year progressed. In this more challenging environment, Tuffnells' performance was materially impacted by the execution of our integration plans leading to service shortfalls that culminated at the seasonal peak. The Group also discovered and rectified an historical misapplication of national minimum wage legislation, impacting Adjusted operating costs by £0.8m this financial year.

In May 2018 the Group reported that the level of change across the business had disrupted service and had given rise to a number of challenges, including increased driver vacancies and a high turnover of depot managers, limiting our ability to respond with sufficient experience and agility. Operational performance had been further undermined by the delivery and collection of Pass My Parcel volumes that also put pressure on core service.

With hindsight, the integration of the Group's operations and sales & marketing functions led to suboptimal service and a weakening of controls at a time when our competitors were more aggressively targeting our customers. The actions we have taken to strengthen management, improving service and accountability were implemented too late in the year to make a meaningful impact on peak trading. Volumes during the third quarter were down by 12.3% with a disproportionate impact on full year operating profits as the seasonal uplift would usually generate an important premium for the business.

In the light of the lessons learned, we have reintroduced dedicated operational and commercial management to Tuffnells. This supports a structured approach to recovery that will continue to address historical under investment in order to introduce a standard operating model, attracting and on-boarding high quality revenue and achieving a more flexible cost to serve. A sustainable recovery will take time to achieve in full but we expect to see a gradual improvement to performance as the actions are implemented over the course of FY2019.

On 1 October 2018 Peter Birks was appointed to role of Chief Executive Officer of Tuffnells. Peter brings a wealth of experience in logistics, having held senior executive roles across a number of successful and innovative UK-based distribution businesses.

DISCONTINUED OPERATIONS

On 14 February 2018, the Group completed the sale of the Books business at a loss of £10.5m, full details are provided in note 12. In the prior year, on 30 June 2017, the Group completed the sale of the Education & Care business at a profit of £19.0m full details are included in the Annual Report.

EXIT OF PASS MY PARCEL

In the light of continued losses the carrying value of Pass My Parcel was written down to £nil in February 2018. A detailed review of the proposition followed, concluding in May 2018 that the business model was unviable with no reasonable prospect of recovery. Trading from 23 May 2018, together with impairment of assets, the expenses of closure and the exiting of remaining agreements, resulted in costs of £6.7m included within Adjusted items.

The Adjusted discontinued profit before tax amounted to £1.7m over the full year compared to £2.0m in FY2017.

CAPITAL MANAGEMENT

In May 2018 the Company announced it would conduct a review of its capital allocation strategy, determining the most appropriate distribution of its surplus free cash flow. The Board's decision not to recommend a final dividend for FY2018 is a reflection of performance in the year, but it was also mindful of the interim dividend paid in July 2018, and our near term priority of strengthening the balance sheet while meeting the investment requirements of business recovery. Looking ahead, the Board is conscious of the importance of a dividend to shareholders and anticipates a dividend in FY2019, based on the earnings and free cash flow achieved in the year. A more detailed capital management policy will accompany our planned strategy announcement in January 2019.

PRIORITIES FOR 2019

The Group's immediate focus is on returning its operations to stability, arresting the decline in profit and establishing a platform for turnaround. The decision to return to two operating units, supported by a suite of central services, is indicative of our plan to recover performance by strengthening the individual businesses. We remain committed to finding efficiencies across the Group and believe that greater standardisation of processes, particularly in Tuffnells, can also deliver material improvements.

Our priorities for FY2019 include:

• 1. Returning Tuffnells to profitability through a reduction of the cost base, a more granular pricing methodology and net new customer wins;

• 2. Renegotiating the remaining Smiths News contracts with key publishers;

• 3. Implementing a standardised operating model in Tuffnells to enhance safety, productivity and customer experience;

• 4. Streamlining head office functions to improve financial reporting, robust business analytics, increased productivity and continuous improvement;

• 5. Maximising the amount of cost savings at Smiths News to diminish the impact of the price adjusted volume decline in the business; and

6. Embedding a new, entrepreneurial culture with a passion for excellence and customer centricity.

These priorities will establish the foundations for a sustainable improvement in profitability. Our strategy for long-term growth, including its relationship to capital allocation, is currently being finalised. We aim to update stakeholders with a detailed strategic plan, including the implications for capital allocation, in January 2019.

FINANCIAL REVIEW

A challenging year for the Group has been reflected in weaker results for Smiths News and a disappointing performance from Tuffnells, however we have continued to deliver a positive free cash flow.

CONTINUING ADJUSTED RESULTS(1) (5)

GROUP

Continuing Adjusted results £m	Change
Revenue	1,534.3	1,594.3	(3.8%)
Operating profit	33.9	54.7	(38.0%)
Net finance costs	(5.5)	(6.7)	(17.9%)
Profit before tax	28.4	48.0	(40.8%)
Taxation	(5.5)	(9.9)	44.4%
Effective tax rate	19.4%	20.6%
Profit after tax	22.9	38.1	(39.9%)

20182017

Continuing adjusted operating profit was £33.9m, down £20.8m (38.0%) on the prior year, and driven by poor performances in both Tuffnells and Smiths News. Smiths News Adjusted operating profit was down by £4.5m to £35.9m, including £5.4m of losses in Pass My Parcel (FY2017: £6.3m loss) for the period up to 23 May 2018, when the Board made the decision to exit the click & collect market. Smiths News benefited from World Cup trading and network savings, but both fell short of expectations. DMD had a good trading year; although revenue was down, operating profit increased by £0.7m to £3.0m, following actions taken to reduce operational expenditure. Tuffnells reported an operating loss of £5.0m, down £17m on the prior year (FY2017: £12m profit). Tuffnells performance suffered from a more competitive trading environment and inconsistent service standards, resulting in lower parcel volumes, and a sub-optimal trunking and distribution network which drove a higher unit cost per consignment. Other factors included incremental wage and cost pressure, changes in depot management, and a one-off charge for a historical misapplication of National Minimum Wage legislation.

Net finance charges of £5.5m (FY2017: £6.7m) were down on prior year. Included within net finance charges are: interest costs on borrowing incurred in the period of £4.1m (FY2017: £4.4m), lower year-on-year as the drawn borrowing facility requirement was favourable from cash flow generation and cash proceeds from the disposal of the Books business; finance lease interest of £0.6m (FY2017: £1.0m); amortisation of bank arrangement fees £0.5m (FY2017: £1.0m); and pension interest costs £0.2m (FY2017: £0.3m).

Adjusted profit before tax was £28.4m, down 40.8% on last year.

Taxation of £5.5m resulted in an effective tax rate of 19.4%, effective tax rate was lower than last year due to the reduction in UK corporation tax rate.

STATUTORY CONTINUING & DISCONTINUED RESULTS

GROUP

Statutory continuing results £m 2018

2018

2017

2017

ChangeRevenue

1,534.3

1,594.3

(3.8%)

Operating (loss)/profit:Smiths News DMD Tuffnells

25.0 2.7 (57.7)

36.1 1.3 4.3

(30.7%)

107.7%

(1,441%)

Operating (loss)/profit Net finance costs (Loss)/Profit before tax Taxation

(30.0) (5.5) (35.5) (2.6)

Effective tax rateProfit after tax

(7.3%)

(38.1)

41.7 (7.5) 34.2 (7.2)21.1%27.0

(171.9%)

26.7%

(203.8%)

63.9%

(241.1%)Statutory continuing loss before tax of £35.5m is lower to prior year by £69.7m (FY2017: £34.2m profit), primarily driven by: impairment charge relating to goodwill at Tuffnells £46.1m (FY2017: £nil); amortisation of acquired intangibles £7.1m (FY2017: £7.3m); Pass My Parcel exit costs of £6.7m (FY2017 £nil); and network and reorganisation costs of £3.1m (FY2017: £8.0m).

At the divisional level Smiths News statutory operating profit was £25.0m, down 30.7% on prior year after £10.9m of adjusted items which included Pass My Parcel exit costs of £6.7m, Tuffnells Statutory operating loss was £57.7m down £62.0m after impairment of goodwill of £46.1m and amortisation of acquired intangibles of £7.1m.

The effective statutory income tax rate for continuing operations was (7.3%) (FY2017: 21.1%), as the tax impact of Adjusted items was £2.9m (FY2017: £2.7m).