REG - Restore PLC - Full year 2023 results
14/03/2024 07:00
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RNS Number : 7808G Restore PLC 14 March 2024
14 March 2024
Restore plc
("Restore" or the "Group" or the "Company")
Full year 2023 results
Restore plc (AIM: RST), the UK's leading provider of digital and information
management and secure lifecycle services, today announces its results for the
year ended 31 December 2023.
SUMMARY OF RESULTS
2023 2022 Change
Revenue (£m) 277.1 279.0 (1%)
Adjusted operating profit(1) (£m) 44.3 51.9 (15%)
Adjusted operating margin(2) (%) 15.9% 18.6% (270bps)
Adjusted profit before tax(3) (£m) 30.3 41.0 (26%)
Statutory (loss)/profit before tax (£m) (29.0) 23.3 (224%)
Net debt(4) (£m) 97.8 103.5 6%
Adjusted basic earnings per share(5) (pence) 17.0p 24.3p (30%)
Statutory basic (loss)/earnings per share (pence) (22.5p) 12.3p (283%)
Dividend per share (pence) 5.2p 7.4p (30%)
STRATEGY
· New Chair, Chief Executive Officer and Chief Financial Officer
appointed in H2.
· New strategy announced in November 2023, focused on improving
operational performance, margins and maintaining high levels of cash
generation.
· Initial actions include reduction in head office functions with
devolution of responsibilities to businesses and the appointment of new
management teams.
TRADING PERFORMANCE
· Group revenue broadly flat at £277.1m (2022: £279.0m):
o Digital and Information Management revenue £170.1m (2022: £168.2m);
strong growth in Records Management storage revenues, Digital impacted by
fewer major scanning projects than 2022.
o Secure Lifecycle Services revenue £107.0m (2022: £110.8m); record
revenue at Harrow Green, Technology and Datashred impacted by slower IT
replacement market and lower recycled paper prices respectively.
· Significant contract awards and projects in the year included HM
Revenue & Customs, the BBC and the largest pharmaceutical company move in
the UK.
· Adjusted profit before tax down 26% to £30.3m, reflecting weak
trading in Technology, Digital and Datashred, and higher interest costs.
· Proposed final dividend of 3.35 pence (2022: 4.8 pence); total
dividend for the year of 5.2 pence (2022: 7.4 pence).
CHARLES SKINNER, CEO, commented:
"While the 2023 results were disappointing given the calibre of Restore's
market positions and recurring income streams, the core strengths of the Group
remain intact.
Restore has undergone considerable change over the last six months, including
a change in operating style and approach to certain of our markets, a
reduction in head office functions to give power and responsibility back to
the businesses, and management changes which have brought new energy,
enthusiasm, and entrepreneurial spirit to the Group. Encouragingly, the Group
is already showing strong signs of improved financial performance and given
the strength of our market positions in attractive sectors and our highly
contracted and recurring income streams, we believe Restore should be
targeting an adjusted operating margin of no less than 20% in the medium term.
Trading since the start of the year has been in line with the Board's
expectations, and we anticipate all of our businesses, with the possible
exception of Harrow Green, to deliver an improvement in adjusted operating
margins in the current year."
1) Calculated as statutory operating profit before adjusting items
(reconciled below Consolidated statement of comprehensive income).
2) Calculated as adjusted operating profit divided by revenue.
3) Calculated as statutory profit before tax and adjusting items
(reconciled below Consolidated statement of comprehensive income).
4) Calculated as external borrowings less cash, excluding the effects
of lease obligations under IFRS16 (reconciled in note 9).
5) Calculated as adjusted profit before tax with a standard tax charge
applied, divided by the weighted average number of shares in issue (reconciled
in note 5).
Cautionary Statement: This announcement contains certain statements,
statistics and projections that are or may be forward-looking. The accuracy
and completeness of all such statements, including, without limitation,
statements regarding the future financial position, strategy, projected costs,
plans and objectives for the management of future operations of Restore and
its subsidiaries is not warranted or guaranteed. These statements typically
contain words such as 'intends', 'expects', 'anticipated', 'estimates' and
words of similar import. By their nature, forward-looking statements involve
risk and uncertainty because they relate to events and depend on circumstances
that will occur in the future. Although Restore believes that the
expectations will prove to be correct. There are a number of factors, many of
which are beyond the control of Restore, which could cause actual results and
developments to differ materially from those expressed or implied by such
forward-looking statements.
For further information please contact:
Restore plc www.restoreplc.com (http://www.restoreplc.com)
Charles Skinner, CEO +44 (0) 207 409 2420
Dan Baker, CFO
Chris Fussell, Company Secretary
Investec (Nominated Adviser and Joint Broker) www.investec.com
Carlton Nelson +44 (0) 207 597 5970
James Rudd
Canaccord Genuity (Joint Broker) www.canaccordgenuity.com (http://www.canaccordgenuity.com)
Max Hartley +44 (0) 207 523 8000
Alex Aylen
FTI Consulting (PR Enquiries) www.fticonsulting.com/uk (http://www.fticonsulting.com/uk)
Nick Hasell +44 (0) 203 727 1340
Alex Le May
CHAIR'S INTRODUCTION
This is my first annual statement as Chair of Restore, and my time to date,
together with my previous positions on the Board, confirm my view not only of
the Group's resilience, but also of its excellent fundamentals and potential
for growth. The business has seen a new Chair, CEO and CFO all within a short
period of time in the year - a very significant amount of change for any
organisation. Additionally, this has been against a backdrop of challenging
macroeconomics and cost increases driven by inflationary pressures,
particularly in labour costs. Despite these disruptions and challenges, the
core strengths of the business remain unchanged; high levels of contracted and
recurring revenues and strong cash generation are qualities of Restore that
endure and have
underpinned delivery of a solid revenue performance. Specific challenges in
Technology, Digital and Datashred, combined with a higher cost base together
with increased interest costs, have impacted profits. The full year profit
performance is significantly lower than the Board's expectations at the start
of the year and we rebased our financial guidance during 2023 as a result.
2023 performance
Although the Group's performance in 2023 was not as the Board expected or
hoped, our highly contracted and recurring income streams delivered solid
revenue of £277.1m, broadly flat on 2022.
Within our Digital and Information Management division, revenue was £170.1m
(2022: £168.2m) driven by a mix of a continued strong performance from our
Records Management business - delivering its highest ever revenues - offset by
significant drop offs in bulk scanning activity negatively impacting our
Digital business. Revenue in our Secure Lifecycle Services division was
£107.0m (2022: £110.8m), a result of reduced levels of quality IT assets for
resale offsetting record revenues in our commercial relocation business,
Harrow Green.
Inflationary cost pressures continued to be a significant drag on profits,
compounded by lower recycled paper pricing and interest rate increases. These
factors were also present for the wider market. Therefore, adjusted profit
before tax decreased significantly to £30.3m, down 26.1% from adjusted profit
before tax of £41.0m in 2022. As a result of the reduced profits of the
Group, adjusted basic earnings per share decreased to 17.0 pence for the year,
a fall of 30.0% compared to the 24.3 pence achieved for 2022.
Leadership changes in the year
The Board was pleased to welcome the return of Charles Skinner as Chief
Executive Officer in September, bringing over thirty years of senior
management experience in listed companies, twenty of which were as Chief
Executive. Charles was CEO of Restore between 2009 and 2019, and that
extensive knowledge of the Group has meant he has hit the ground running.
Since his appointment he has made a large number of changes in the team and
operational structure, principally with the objective of giving the divisions
and business units the power and responsibility to run their businesses,
drawing on their extensive knowledge of their customer base. That has led to
the scaling back of the Head Office functions, a rebased focus for the
leadership team on improving margin, and a pause on strategic acquisitions.
After a nine-year non-executive tenure, Sharon Baylay-Bell stood down as Chair
in October. In that period, she has served as Risk Committee Chair, Senior
Independent Director, and has been Chair since 2021. During her tenure as
Chair, she has successfully managed the evolution of the Board and over the
second half of 2023 had led the transition to a new executive leadership team.
The Board would like to thank Sharon for her contributions during her nine
years at Restore.
The new executive team was completed with the appointment of Dan Baker as CFO
in November. Dan brings considerable commercial and technical accounting
knowledge as well as a strong understanding of listed company and growth
environments. Dan succeeded Mike Killick, who was interim CFO from August;
again, the
Board would like to thank Mike for his efforts in that time.
I would like to thank Charles Bligh and Neil Ritchie for the contributions
they have made over the last four years, and we wish them both well for the
future.
Our colleagues
As a result of our weaker trading, we had to reduce our workforce by c7% to
around 2,700 at the end of the year. Whilst this was necessary to ensure our
future competitiveness, it has not been easy to say goodbye to so many
colleagues and I recognise this has been difficult for our people. I would
like to thank all of our team for their dedication and perseverance throughout
the past financial year, during which I know for many of them the changes will
have been unsettling. Having made these changes, I believe we are now well
positioned to look to the future with strength and resilience. I look forward
to working together with them to rebuild value in 2024 and beyond.
Health and safety
Health and safety has always been the first item for Board discussion with
Sharon as Chair, and remains so today, and I am pleased with the sustained
focus across the business on ensuring Restore remains a safe place to work.
The Group Health & Safety Non-Executive committee has maintained a high
level of focus throughout the year and has been further reconstituted and
strengthened following the changes in leadership. We have continued to work on
enhancing culture, communications, systems and training during 2023.
Management's relentless approach to continuous improvement is commended and I
extend my gratitude to the health and safety, and management team for their
diligence and evolution of focus, especially against a backdrop of change.
During the year the Board and I visited several sites across our divisions
where we were pleased to see the business operating effectively and safely.
Dividends
Your Board is recommending a final dividend of 3.35 pence, payable on 9 July
2024 to shareholders on the register at close of business on 7 June 2024. This
brings the total dividend for the year to 5.2 pence (2022: 7.4 pence).
Stakeholder engagement
Engagement with our key stakeholders enables the Board to understand their
needs and priorities in order to deliver value and build a better business.
During my role as interim CEO, and now as Chair, I met with several of our
major institutional investors. These interactions have remained insightful and
instructive in shaping the changes we have made to the business and provided
valuable feedback for the Board.
Strategic progress
During the year we have simplified our strategy and message, and are now
focused on improving operational performance, enhancing margins and
maintaining high levels of cash generation. We do not plan to undertake any
strategic acquisitions, although to the extent an immediate return on capital
can be made, we will deploy capital where it makes sense to do so.
The changes in leadership, particularly Charles and Dan, have underlined this
strategy and they have already made changes to drive improved margins. We have
strong market positions which give us scale and opportunities for further
efficiencies over the next two years. Once we have demonstrated our ability to
deliver on this strong platform, we will be able to consider larger scale
expansion.
I am very proud of the high levels of customer service we deliver, which is
showcased in the case studies included in the 2023 annual report. We pride
ourselves in providing critical solutions and services to our customers, and
it is especially pleasing when we receive such strong feedback.
In this context, I am very pleased to say that the business is well set for
the future; we are extremely focused on our direction, and I am confident we
have the right strategy and right people to deliver.
CHIEF EXECUTIVE OFFICER'S STATEMENT
Introduction
I was CEO of Restore plc from June 2009 to March 2019 and was re-appointed as
CEO in September 2023. Since my return, I have been pleased to note that the
core strengths of the Group remain intact. All the businesses in each of our
divisions retain a deep understanding that excellence at the point of service
delivery to
the customer is what underpins long-term success and personal job
satisfaction.
The Group is comprised of two divisions, Digital and Information Management
and Secure Lifecycle Services, with five businesses within them: Records
Management, Digital, Technology, Datashred and Harrow Green. The businesses
all hold market-leading positions, being either the largest or second largest
operator in their UK markets. Having said that, they are at different stages
of maturity and require different styles of management. The core driver of the
Group is the Records Management business within our Digital and Information
Management division. It operates in a mature market in which it has strong
recurring revenues and can command highly attractive margins, based on its
long history of excellent delivery and continuous cost minimisation. Records
Management still has opportunities to enhance margins, particularly through
rationalisation of its extensive and fragmented property portfolio, but volume
growth is unlikely to be material in the long term.
In contrast, our other businesses all have organic growth opportunities in
front of them. Digital's recent digital mailroom contract wins with HMRC (the
Group's largest ever contract) and HM Land Registry highlight its unique
strengths in digitisation. Technology similarly has significant growth
opportunities as the largest and most disciplined IT lifecycle manager,
offering the secure service increasingly required by blue-chip and government
customers. Datashred has the opportunity over time to establish itself as the
key player in what remains a less
consolidated market than might be expected. Harrow Green, having established
itself by some distance as the pre-eminent UK office mover, now has specialist
platforms in fast-growing sectors such as life sciences to build on.
Both of our divisions, and in particular three of our businesses, faced
industry-specific headwinds in 2023. A dearth of major bulk scanning contracts
impacted Digital's revenues, weak global IT sales meant low levels of IT
recycling for Technology, and a steep decline in recycled paper prices during
the year translated into reduced profitability at Datashred. Nonetheless,
these factors highlighted the need for business model changes to these three
businesses which are now underway.
Both of our divisions have a similar customer base, with most enterprises of
any scale needing some or all of our services. There are a multitude of areas
in which the businesses collaborate. Nevertheless, the excellent specialists
running our business know what will deliver the best results for our
stakeholders and they need to have the power and responsibility to execute as
they see appropriate. To facilitate this, head office functions were reduced
during the second half of the year.
Health and safety
Health and safety is the first priority across the Group. 2023 saw a 7%
reduction in accidents, with a 35% decrease in lost time. We attribute this
reduction to the focus placed on amplifying colleague voice, through safety
observation schemes and developing competency in our workforce. Over 11,000
Royal Society for the
Prevention of Accidents ("ROSPA") assured mandatory training courses have been
delivered to colleagues, in key risk areas such as manual handling, fire
safety and slips, trips and falls.
Manual handling remains the biggest contributor to accident statistics (26%),
with collisions (20%) and slips trips and falls (18%) as other areas of
significance. As we look ahead, we will target these key areas of risk for
reduction by improving the two-way conversation with our people, which will be
evidenced with an increase in safety observation reporting and perpetuating
structured risk consultation and participation.
2024 will also see us focus on our ability to benchmark ourselves internally
and externally. Internally we will utilise ISO 45001 and ISO 45003 as critical
frameworks to prioritise the health and happiness of our people and to create
a more resilient organisation. Externally we will partner with NatWest Mentor
to create a bespoke
audit programme, which will enable the Group to receive an impartial,
competent review of our practices and with feedback strive for continuous
improvement.
To ensure simple lines of responsibility and facilitate best practice across
the Group, we have streamlined our health and safety governance structure. Of
our nine dedicated health and safety officers, the most senior in each
division comprise our Health & Safety Best Practice committee. This
committee has standardised divisional reporting and provides key performance
indicator data monthly, so trend and risk analysis can be undertaken
dynamically.
The Health & Safety Best Practice committee reports to the Group Health
& Safety Non-Executive committee which comprises our Chair, CEO and
Non-Executive Director responsible for ESG. Also in attendance is one
divisional health and safety lead and a variety of divisional senior leaders,
each a specialist in critical areas such as operations, logistics, people and
facilities. Our health and safety auditor reports to this committee, which in
turn reports to the Board.
Trading performance
Revenue for 2023 was broadly flat at £277.1m. Records Management achieved
record revenues of £124.1m (2022: £113.7m) driving the Digital and
Information division's total revenues to £170.1m (2022: £168.2m) despite
Digital's revenues decreasing from £54.5m to £46.0m. A similar pattern was
seen in the Secure Lifecycle Services division where revenues declined from
£110.8m to £107.0m. Harrow Green's record revenues of £40.0m (2022:
£37.6m) were offset by declines in revenue in both Technology (from £35.8m
to £31.1m) and Datashred (from £37.4m to £35.9m).
Adjusted profit before tax declined from £41.0m to £30.3m, despite Records
Management and Harrow Green achieving strong profits. Both Digital and
Datashred recorded lower profits year-on-year while Technology recorded an
adjusted operating loss. Interest costs increased from £10.9m to £14.0m.
These results were disappointing, given the strength of the Group's market
positions in all its markets and the recurring nature of the bulk of the
Group's revenues. As noted earlier, the three underperforming businesses faced
market-specific headwinds, but it is our firm view that the strength of the
Records Management business should not be expected to subsidise
underperformance elsewhere.
Actions undertaken
Between my appointment in September and the year-end, the Group has undergone
considerable change. The most obvious of these has been the reduction in Head
Office functions. This was no reflection on the capabilities of those at Head
Office but that the divisions lacked the power and responsibility to use their
deep knowledge and understanding of their businesses to manage them on a
day-to-day basis.
Accordingly, the central marketing, sales, customer relationship management,
risk management, and mergers and acquisitions teams were scaled back to ensure
that these functions were the right size and fit for the future direction of
the Group.
In November, Dan Baker was appointed as our CFO. His experience as a senior
divisional financial director in two blue-chip companies, together with an
enthusiasm for maintaining an entrepreneurial spirit in our divisions, has had
a swift impact, not least on recognising how Head Office can add value to the
divisions rather than controlling them.
In addition, we have changed the management structure in Technology to a
leadership team that fully understands the business market dynamics. Natalie
Matthews, who has overseen several business transformations across the Group,
has been appointed Managing Director of Datashred. There has been a new energy
in both businesses as the Technology management team focus on its core
activity of servicing the IT recycling and lifecycle needs of larger customers
and Natalie drives through our achievable ambition of being the lowest cost
operator in the UK shredding industry.
Core business narrative
Given the strength of our market positions in attractive sectors and our
recurring revenue streams, I believe the Group should be targeting an adjusted
operating margin of no less than 20% in the medium term.
Within the Digital and Information Management division, Records Management had
previously been charged with achieving appreciable net box growth. This goal
has been removed with the new focus being on driving up profits, primarily
through increasing margins.
If Records Management can increase profits further, the remainder of the Group
(excluding Harrow Green) will still need to achieve adjusted operating margins
of at least 15%, to get the Group adjusted operating margin to 20%. Therefore,
these businesses' goal over the next two years is to show that they have the
capability of delivering adjusted operating margins of 15%.
Harrow Green, which has steadily increased revenues and adjusted operating
margins since its acquisition in 2012, has a capital-light business model such
that lower adjusted operating margins than 15% are acceptable.
While we focus on driving up margins, we do not intend to undertake strategic
acquisitions. But we will deploy capital on add-on acquisitions to our
existing operations where we can achieve a strong immediate return on invested
capital. We will also undertake capital investment where the long-term returns
are attractive, particularly around the consolidation of our Records
Management estate, steadily moving out of smaller, inefficient legacy sites.
We expect to be able to show the cash-generative capabilities of the Group
over the next two years. Once we have demonstrated this and our capability of
achieving adjusted operating margins of 20%, we expect to have a strong
platform to consider a more expansive strategy.
Digital and Information Management
Our Digital and Information Management division comprises Records Management
and Digital. For 2023 revenue was £170.1m, up 1% on 2022 with adjusted
operating profit of £40.9m, down 9.5% on 2022 due to a disappointing result
in the Digital business. Statutory operating profit was £35.2m, a reduction
of 15.4% from 2022.
Records Management
Records Management increased revenues by 9.1% to £124.1m. There was a
marginal increase in net box growth with price changes accounting for most of
the revenue increase. Despite price changes, adjusted operating margins
declined slightly as the cost base increases of the last two years,
particularly in labour and property costs, were not fully recovered.
Over several decades, Records Management has continuously reduced its costs
through more efficient operations and finding ways to store boxes more
cheaply. This resulted in many customers rarely receiving price rises. This
helped increase the cost benefits to customers but resulted in poor mechanisms
to adjust prices and under-recovery of cost increases in the recent
inflationary environment. This has now been resolved with most contracts
having inflation-related pricing structures and prices reflecting more closely
historic and prospective cost increases.
The pattern of increasing rates of destructions being offset by growth from
existing customers continued. The vended market (customers who have an
existing supplier) remained steady across the industry as the cost of
switching suppliers made it unattractive for storers to switch suppliers. We
are focusing our sales function on
the unvended market, particularly in the public sector where there remains a
significant opportunity for institutions and government to save considerable
cost by outsourcing their in-house facilities. This has been the area of
greatest growth for us in recent years as illustrated by the recently
completed move of the BBC archives from Perivale to our site in the South-East
of England. The move itself was undertaken by Harrow Green, taking just under
a year to complete. The result is greater storage efficiency for the BBC. A
similar but smaller exercise was undertaken for the Department for Work and
Pensions.
We are currently operating at 95% of box storage capacity (utilisation of the
available capacity). Since the year-end, we have signed a long-term lease on a
103,000 square foot facility in the East Midlands which has a capacity of well
in excess of 1m boxes. Over the next year, we will be decanting boxes from two
of our most expensive legacy sites into this facility where storage costs per
box are far cheaper, resulting in an improvement in margins. After this
exercise, there will still be surplus space enabling us to decant boxes from
other more expensive sites.
We intend to continue this steady transfer of boxes from smaller, more
expensive sites into larger, cheaper sites over the coming years. We view this
as an excellent opportunity to drive margins upwards. For many of our smaller
competitors, this option is not available, and I expect our cost advantages to
strengthen our long-term market position.
Digital
Digital revenue experienced a steep drop from £54.5m to £46.0m. This decline
reflected both a spike in 2022 revenues on the back of a one-off government
project and an absence of major digitisation projects particularly from NHS
Trusts. The impact was felt in margins which also fell significantly.
The majority of Digital's revenues are recurring, particularly from digital
mailrooms, scanning exam papers, online storage and a long-term onsite
government agency contract. We have no genuine competitors of scale in these
areas although some competitors manage large single-contract sites. There is
however a significant overhead to support these activities meaning that
low-margin bulk scanning activities are undertaken which are
underpinned by major contracts typically lasting for between three months and
two years. The fluctuation in such major one-off contracts accounts for the
swing between the 2022 and 2023 revenues.
During the course of the year, we responded to the lower levels of bulk
scanning activities by closing our general scanning bureaus in Hanworth, South
West London, and Redditch in the West Midlands, transferring ongoing work to
our larger facilities in Manchester and Wolverhampton. We also closed our
microfiche facility in Inverness. Consolidating these facilities is expected
to reduce surplus capacity across Digital as a start to
increasing margins towards the level appropriate to a dominant operator with
unique skillsets and capabilities.
Several significant contracts were won in the year reflecting our pre-eminence
in the digitisation sector. The most notable of these was with HMRC. The
contract, valued at up to £140m (dependent on transactional volumes), spans a
duration of five to seven years and started in September 2023. Under this
contract, Digital is responsible for outbound print and messaging services
(SMS, email, rich messaging) which are sub-contracted to two strategic
partners, as well as the inbound mailroom and scanning services which Restore
already provides to HMRC under its existing contract. Within this service,
Digital is delivering a communications platform, working with its strategic
partners to move HMRC's customers to digital communications.
Other significant contracts won in the year included a digital mailroom for HM
Land Registry, multiple digitisation projects for the Ministry of Defence and
two significant contracts in the private healthcare sector. During 2023 we
renewed 14 of our largest 25 contracts for at least two years. Given our
undoubted strengths as market leader in this attractive sector, the short-term
challenge is to increase margins to reflect this pre-eminence by focusing on
high-margin activities, reducing overheads and being less reliant on one-off
bulk scanning contracts, particularly those with limited visibility.
Secure Lifecycle Services
Our Secure Lifecycle Services division comprises Technology, Datashred and
Harrow Green. For 2023 revenue was £107.0m, down 3.4% on 2022 with adjusted
operating profit of £6.2m, down 43.6% on 2022. Statutory operating profit was
£5.0m, a reduction of 49.5% from 2022.
Technology
Technology recorded an adjusted operating loss on revenues which declined from
£35.8m to £31.1m. There were considerable sector-specific headwinds,
primarily the low level of IT purchases globally and therefore a significant
decline in recycled IT equipment, but the weak performance also reflected
misapprehension of the commercial opportunities available to Technology.
The primary service which Technology currently supplies is the secure and
responsible recycling of IT equipment, known by the acronym ITAD or IT Asset
Disposal. In this field, our key relationships are with large companies and
government departments looking to ensure that their IT equipment carries no
trace of its former content and that it is disposed of ethically with minimal
damage to the environment. There are typically two charging models: one where
all related costs are charged to the customer and the customer receives a
higher proportion of any
equipment resold and another where the customer receives the services for free
and has limited interest in the sale proceeds on any sales of the recycled
equipment. Under both of these models, we wish to receive IT equipment from
responsible customers who value our expertise and generally recycle their
equipment at a
comparatively young age.
The key element in securing the right customers for ITAD is building long-term
relationships with large customers who want the highest standard in the
disposal of their IT equipment. Such customers will share information about
the timing of prospective IT disposals and will value the thoroughness and
breadth of the services we provide. Technology had through acquisition
established a presence in the lower end of the ITAD market where customers
simply wanted their old equipment taken away - that is not the market for
Technology.
The highest-growth area in which Technology operates is in managing the IT
lifecycle. This means being responsible for a customer's IT equipment from its
purchase to its disposal, often including loading programmes on a new machine
and delivering it to the end user, monitoring its location during its lifetime
and finally arranging for its collection and disposal. Increasingly IT
equipment vendors look to partner with us on a high-volume sale with the
vendor providing the equipment to the customer and Technology managing the
lifecycle of the equipment. An example of this is Technology's agreement with
the vendor CDW and their customer, a large government organisation, under
which Technology is currently managing the lifecycle of a significant number
of their laptops.
Technology has three purpose-built IT recycling sites together with a
specialist destruction site, which also offers onsite destruction of IT
equipment. It also provides engineering services for the connection and
disconnection of IT equipment.
Our Ultratec operation is a market leader in the wiping of hard drives which
can then be sold. As part of its operations, Ultratec has developed a platform
called Genesis that can recover hard drives that have failed during industry
standard software wiping of data. This offers a unique opportunity for
Technology as approximately 30% of hard drives fail when being wiped.
Historically, these are then destroyed (to make safe the data they are
storing) with minimal value but using the Ultratec Genesis platform, there is
the opportunity to further recover over 80% of these failed drives, wipe them
and then resell at the relevant market price. Ultratec also provides this
Genesis platform on a rental model (SaaS model) to a number of international
partners, and this highly contracted service offering provides further growth
opportunities.
Given the scale, breadth and market leadership of Technology, its financial
performance in 2023 was very disappointing, even allowing for the low volume
of activity in the industry. The new management team is addressing this
through simple pragmatic measures:
· moving out of the low-end IT recycling market where the customer
simply wants to surrender end-of-life equipment;
· prioritising close customer relationships with blue-chip high-end
recycling customers;
· creating a specialist sales team to work with the large IT
vendors who need a lifecycle management partner; and
· upskilling the production floor with enthusiasts who can
recognise the potential value of individual types of recycled equipment.
It is likely that the IT equipment sales market will pick up in 2024 which
will be helpful in ensuring a return to profitability for Technology. However,
the greater commercial potential over the medium term lies in leveraging our
technical and market skills to capitalise fully on the range of opportunities
available to Technology.
Datashred
Datashred recorded a decline in revenues in 2023 from £37.4m to £35.9m,
despite service revenues increasing to £27.1m. The reduction in revenues was
attributable to a decline in the price of recycled paper during the year. As a
business recycling c50,000 tonnes of paper annually, the drop in the average
recycled paper price from an average of £238 per tonne in 2022 to £185 per
tonne in 2023 had an impact on revenues of £2.8m, which fell straight through
to profit. Without conventional hedging instruments available, swings in
recycled paper prices can lead to volatile earnings.
Nevertheless, being one of the two major operators in this dynamic market
means that there are also many long-term opportunities. The main feature is
that, while the use of paper is expected to show a slow decline over the very
long term, paper will continue to be used for the foreseeable future, and the
proportion of that paper which needs to be shredded is likely to increase. So,
there will be a need to shred paper for a very long time to come. The
attractions to Datashred of this market are manifold: a consistent, albeit
slightly declining, market attracts few, if any, new entrants; smaller,
long-established operators, particularly those impacted by higher interest
costs in a capital-intensive business, feel the pinch of a sharp decrease in
the paper price far more, and will be inclined to look for an exit - this is
not a sector in which you would want to hand on a business to the next
generation; benefits of scale in a mature market become overwhelming; service
charges eventually reflect the risk that a supplier is assuming around the
value of the recycled paper value; a strong Group balance sheet enables
Datashred to cope with swings in the paper price; and volume and quality
guarantees to regular buyers of recycled paper, typically UK mills, facilitate
hedging capability.
Datashred has unique advantages in its market: a captive client in Records
Management who supplied c10,800 tonnes of paper to Datashred in 2023; the
attractions of "chain of custody" to Group customers knowing that documents
can be stored, scanned and shredded by one trusted supplier; and the
opportunity to reduce rent costs by sharing paper collection sites with other
Group businesses, typically Records Management sites where many of its sites
have ample yard space to accommodate a Datashred collection site as is in
place already at Southampton and Coventry.
Under the new MD, Natalie Matthews, the Datashred management team is targeting
many actions to ensure Datashred fully exploits its strong market position.
These include a reduction in central costs, a review of profitability and
pricing by category of customer which spans partners (typically the facilities
management agents), large customers and SMEs, building closer long-term
relationships with established buyers of recycled paper and reviewing
opportunities to share sites with Group businesses.
There are also significant growth opportunities in providing additional
services which utilise our powerful infrastructure such as collecting,
bundling and reselling non-secure wastepaper and shredding non-paper
materials. Since the year-end, appreciable price increases have been achieved,
reflecting historic under-pricing
of our services to certain customer sectors. A re-jig of customer relationship
allocations has reduced the number of accounts held by business development
managers who can now focus on new business.
Operationally, we have made good progress on improving efficiencies with
average number of visits per day increasing from around eight to around
eleven. This has enabled an increase in margins in the field and gives us an
excellent bedrock for achieving market-leading margins. This is particularly
true when combined with a focus on more intelligent sales and customer
relationship management. The logic of supplying paper shredding alongside
paper storage and scanning is ineluctable.
Similarly, secure destruction of paper sits alongside the secure destruction
of IT hardware and software as undertaken by Technology. I am confident that
Datashred will be the best-placed shredding operator in the UK market and that
adjusted operating margins in excess of 15% are achievable in due course.
Harrow Green
Harrow Green increased revenues by 6.4% to a record £40.0m leading to an
improved adjusted operating profit. This reflected a total of 413,400 desk
moves, delivered by c400 full-time employees. The increase in moving activity
resulted in an increase in storage revenues of 33%.
Major moves were undertaken for the British Library, Credit Agricole and the
University of Glasgow. Many of the largest moves were undertaken in
conjunction with other Group businesses. Most notable was the move of the BBC
archive from Perivale to Records Management's bespoke site in the South-East
of England with ongoing contracts including the reorganisation of BT's sites
across the UK in partnership with both Technology and Datashred.
Harrow Green has leveraged its pre-eminence in complex large-scale office
relocations into establishing a market-leading presence in specialist sectors
such as life sciences and heritage. On the former, the massive relocation of
one of the world's leading pharmaceutical companies' facilities in Cambridge
bore testimony
to our ability to execute a complex move in this highly demanding sector. We
have recently commissioned a biobank at our branch storage facility in
Cambridge, which enhances our capability to service this sector and is
expected to generate an excellent return on invested capital. We are also
opening a new branch in the Oxford area which will further develop our service
offering to the life sciences sector.
As part of our Group-wide commitment to environmental progress, we
significantly increased our Harrow Green fully electric vehicle fleet. Across
the Group, we are aware that such a commitment can be costly, and customers
will often not be prepared to contribute to the sharply increased costs.
Nevertheless, where the limited range of EVs is not a handicap in terms of
customer service, we look to deploy EVs in appropriate geographies such as the
City of London where distances travelled are small and range anxiety is not a
concern.
Harrow Green's Net Promoter Score of 87 is higher than it ever has been and is
testimony to our service levels in a sector where good customer experience and
trust is the key to both generating ongoing business and commanding premium
pricing.
Harrow Green is not expected to achieve as high a margin as other Group
activities given its variable cost structure, but it requires very little
capital and thus generates an excellent return on invested capital.
Furthermore, it enhances the Group's offering to its customer base in many
areas. This ranges from sourcing IT equipment for Technology's recycling
capability to assisting Records Management on box relocation, both in terms of
executing
the move and providing a total package for the customer.
Our People
As a result of weaker trading, we unfortunately had to reduce our workforce by
nearly 7% during the course of the year to c2,700 at the end of 2023. There
were redundancies in all businesses, together with a reduction in headcount at
Head Office and in our central HR department over the second half of the year.
This rightsizing was necessary to ensure we can be fully competitive in the
markets in which we operate. Our people are by far the most important element
in our Group, and we are wholly reliant on their ability to ensure excellent
service delivery at the point of contact with our customers. I am confident
that the steps we have taken will not impair this and that, as a result of
these changes, the future of our employees is more secure and their
opportunities for personal development are greater.
I would like to thank our people for their resilience in what has been a
difficult year and look forward to their sharing in the future success of the
Group.
Our planet
The Group has made great progress in putting our "Restoring our world"
strategy into action throughout 2023. We have reestablished our net zero
commitments, as well as articulating the journey we will take to meet these
commitments in the short, medium and long-term. With the majority of our
carbon emissions generated from our fleet, it is very encouraging to see an
increase in our EV/ hybrid fleet from 3% to 17% of our total fleet throughout
the year, with 91% of our company cars now EV or hybrid. Our estate now has
86% of our directly procured electricity backed by REGO-certified contracts
and we expect to see this increase in 2024.
Outlook
The Group has undergone a significant change in management over the last six
months. There has been a change in operating style and approach to certain of
our markets over that period, and the Group is already showing strong signs of
improved financial performance.
Trading since the start of the year has been in line with the Board's
expectations, and we anticipate all of our businesses, with the possible
exception of Harrow Green, to deliver an improvement in adjusted operating
margins in the current year.
CHIEF FINANCIAL OFFICER'S STATEMENT
Financial highlights
£m 2023 2022 %
Revenue 277.1 279.0 (1%)
Adjusted operating profit 44.3 51.9 (15%)
Adjusted profit before tax 30.3 41.0 (26%)
Statutory (loss)/profit before tax (29.0) 23.3 (224%)
Free cashflow(6) 37.3 34.6 8%
Net debt 97.8 103.5 6%
6 Calculated as cash generated from operations less income taxes paid, capital
expenditure and lease payments, but before the cash impact of adjusting items
(reconciled below Consolidated statement of cash flows).
Overview
Revenue for the year ended 31 December 2023 was broadly flat at £277.1m.
Revenue and adjusted profit before tax have been largely underpinned by a
continuing high proportion of recurring storage income and services in our
Records Management business, part of our Digital and Information Management
division, together with highly contracted services across the rest of the
Group. However, the headwinds of less non-recurring bulk scanning in Digital,
weak volumes of IT assets translating to lower recycling volumes for resale in
Technology, and reduced paper prices in Datashred have resulted in a lower
adjusted operating profit of £44.3m (2022: £51.9m). These challenges,
combined with higher interest charges, have resulted in a lower adjusted
profit before tax of £30.3m (2022: £41.0m).
On a statutory basis, the Group made a loss before tax of £29.0m (2022:
profit of £23.3m). This loss was driven by £59.3m of adjusting items, the
largest component of which is £36.3m relating to asset impairments, primarily
in the Datashred cash generating unit, due to reduced expectations of future
growth and an increase in the Group's cost of capital.
Good cash generation endures as a key quality of the Group with cash
conversion(7) of 110% for 2023 (2022: 82%) and a free cashflow of £37.3m
(2022: £34.6m). As a result, net debt decreased to £97.8m as at 31 December
2023 (2022: £103.5m). Due to the Group's lower profitability, the leverage
ratio increased to 1.9x (2022: 1.7x), although this is still well within the
Group's target range and covenant levels.
7 Calculated as free cashflow divided by net operating profit after tax
(reconciled below Consolidated statement of cash flows).
Revenue
£m 2023 2022 Variance
Records Management 124.1 113.7 10.4
Digital 46.0 54.5 (8.5)
Digital and Information management 170.1 168.2 1.9
Technology 31.1 35.8 (4.7)
Datashred 35.9 37.4 (1.5)
Harrow Green 40.0 37.6 2.4
Secure Lifecycle Services 107.0 110.8 (3.8)
Total 277.1 279.0 (1.9)
Income statement
Digital and Information Management
Records Management had another year of strong revenue growth, achieving record
revenues of £124.1m. This was driven from a base of highly recurring
revenues, primarily from quality blue-chip and government customers, and
further benefited from a major contract win with the BBC alongside structured
price increases across most contracts. This business continues to provide a
resilient income stream for the Group and underpins the overall
revenue and profit performance of the Group.
Fewer non-recurring contracts, particularly in bulk scanning, has led to a
more challenging year for Digital against a strong comparator with revenue
decreasing by £8.5m to £46.0m. This was partially offset by major contract
wins with HMRC and HM Land Registry for digital mailroom services, both of
which commenced in 2023 and will continue into 2024.
Secure Lifecycle Services
The global slowdown in the IT sector has seen many companies cutting back
spending on new hardware. That has adversely impacted Technology due to the
knock-on impact of lower volumes and a reduced quality of IT assets for
recycling and has therefore resulted in a lower revenue of £31.1m.
Datashred's service activity increased during the year, but the business was
negatively impacted by significantly lower global recycled paper prices.
Prices continued to be depressed in the second half of 2023, giving rise to a
lower revenue of £35.9m.
Harrow Green had a very strong 2023, in particular winning and delivering a
significant contract for a large multinational pharmaceutical firm. This led
to revenue growth of £2.4m and strong revenues of £40.0m.
Adjusted profit
Despite revenue in the Group being broadly flat, the impact of lower
non-recurring contract work, reduced recycled paper prices and significant
cost inflation noted throughout the year has resulted in lower Group
profitability. Although the headwinds noted were partially mitigated by cost
control actions implemented in the
second half of the year, adjusted operating profit for the year was
significantly lower than 2022 at £44.3m.
Additionally, progressively rapid increases in the Bank of England base rate
during 2023 significantly increased the interest burden, resulting in finance
costs of £14.0m (2022: £10.9m). Consequently, the Group's adjusted profit
before tax decreased to £30.3m for the year (2022: £41.0m), a reduction of
26.1%.
Adjusting items
Due to the nature of certain income or costs, the Directors believe that an
alternative measure of profit before tax and earnings per share provides
readers of the annual report with a useful representation of the Group's
performance that should be considered together with statutory profit and
earnings per share.
The adjusting items in arriving at adjusted profit before tax are as follows:
£m 2023 2022
Asset impairments 36.3 -
Amortisation 12.2 12.1
Acquisition transaction costs 0.2 1.4
Restructuring and redundancy 5.9 2.6
Property related costs 3.1 0.9
Strategic IT organisation 1.6 0.7
Total 59.3 17.7
The largest component of adjusting items in 2023 relates to asset impairments
of £36.3m. This primarily comprises a £32.5m non-cash impairment of the
goodwill in the Datashred cash generating unit following a reassessment of
future growth expectations, and £3.6m impairment of assets relating to a
business
exit in the Technology business.
There was a slight increase in amortisation to £12.2m in 2023 as a result of
acquisitions made in 2022, no material acquisitions have been made in 2023.
This lack of M&A activity has also driven a reduction in the acquisition
transaction costs incurred during the year.
The second half of 2023 saw a new Chair, new CEO, new CFO, new management
teams in the Technology and Datashred businesses, and a reduction in the head
office team. Additionally restructuring has been taking place within the
businesses to right size the Group and drive margins. This activity has
resulted in restructuring and
redundancy charges of £5.9m.
Following the changes in the senior leadership team, a strategic review of the
Group's property estate was conducted. This led to a reassessment of sites in
the Group, categorising them into those that were considered to be strategic
to the Group and would be unlikely to be exited until the end of their useful
life and those which were not considered to be strategic to the Group and
would be exited before the end of their useful life. This reassessment has
driven a review of the dilapidation provision needed to be held by the Group
as we are now expecting to exit more sites in the short and medium term than
was previously expected and we therefore need to recognise the associated
increase in dilapidations provision that we expect to crystallise in the
future. This reassessment and subsequent review of the dilapidations provision
has led to an additional charge of £3.1m being recognised in the income
statement.
Investment has continued in the Group's strategic IT programmes, with new
finance systems implemented in Digital and Technology in 2023. Due to the
nature of cloud-based accounting, these costs are expensed as they are
incurred.
Following these adjusting items, the Group made a statutory loss before tax of
£29.0m (2022: statutory profit before tax of £23.3m).
Earnings per share
2023 2022
Weighted average number of shares in issues 136,580,425 136,761,738
Weighted average fully diluted number of shares in issue 137,302,753 138,025,803
Adjusted profit before tax (£m) 30.3 41.0
Tax at 23.5% (2022: 19%) (£'m) (7.1) (7.8)
Adjusted profit after tax (£m) 23.2 33.2
Adjusted basic earnings per share 17.0p 24.3p
Adjusted fully diluted earnings per share 16.9p 24.1p
Adjusted basic earnings per share is calculated by reference to the adjusted
profit before tax for the year with a standard tax charge applied, divided by
the weighted average number of shares in issue during the year.
Adjusted fully diluted earnings per share is calculated by reference to the
adjusted profit before tax for the year with a standard tax charge applied,
divided by the weighted average fully diluted number of shares in issue.
The 30.0% decrease in adjusted basic earnings per share to 17.0 pence (2022:
24.3 pence) resulted primarily from a 30.1% decrease in adjusted profit after
tax plus a slight decrease in the weighted average number of shares.
Statutory basic loss and diluted loss per share was 22.5 pence, primarily as a
result of profit decline in the year.
Financing and interest expense
Net debt closed the year at £97.8m (2022: £103.5m) with leverage increasing
from 1.7x to 1.9x.
2020 2021 2022 2023
Net debt (£m) 66.1 100.8 103.5 97.8
Leverage 1.8x 1.8x 1.7x 1.9x
Interest expense relating to bank and other secured borrowings increased to
£8.9m following the increase in interest rates during the year, which is
linked to the Bank of England base rate. Non-cash interest on finance lease
liabilities, primarily property, reduced by £0.6m as a result of the lease
liability reducing from £114.9m at 31 December 2022 to £103.5m at 31
December 2023.
£m 2023 2022
Interest on borrowings 8.9 5.0
Interest on finance lease liabilities 4.4 5.0
Amortisation of deferred finance costs 0.6 0.9
Other finance costs 0.1 -
Total finance costs 14.0 10.9
In the first half of 2023 the Group entered into US Private Placements
("USPP") of £25m with a fixed term and rate. Together with a £200m Rolling
Credit Facility ("RCF"), this increased the total facilities available to the
Group to £225m from £200m at 31 December 2023 alongside a £1.5m undrawn
overdraft facility. The Group also developed relationships with financing
providers to introduce a variety of fixed interest rate instruments to create
greater certainty over the cost of debt.
Subsequent to the year-end, following the change in the Group's strategy to
move away from acquisitions and instead focus on improving operational
performance and maintaining good cash generation, the Group has made the
following changes to its financing arrangements in order to more appropriately
match the facilities to the Group's needs:
· voluntarily cancelled £75m of the RCF, decreasing the RCF from
£200m to £125m;
· extended the RCF to 30 April 2027; and
· entered into a £10m overdraft facility with Barclays Bank plc to
accommodate short-term cash requirements and free-up excess cash at bank and
in-hand.
After the changes the Group has £150m of available facilities, which Restore
believes is ample given its revised strategy. Should it be needed, the RCF
includes an accordion which the Group can exercise to increase the facility by
up to a further £25m.
Taxation
The tax charge for the period is £1.7m (2022: £6.5m).
Cashflow
Cash generation endures as a key quality of Restore and in 2023 the Group
generated free cashflow before financing costs of £37.3m (2022: £34.6m).
Net cash generated from operating activities was in line with 2022 at £47.8m
with cash conversion within target range at 110% (2022: 82%).
Capital allocation
Our near-term focus is to improve operational performance, deleverage the
balance sheet and maintain shareholder returns. The Group therefore has the
following priorities on capital allocation:
· specific targeted investments will be made where they make
business sense, with the emphasis on organic growth;
· pay down debt, decreasing leverage whilst keeping the range
1.5-2x adjusted EBITDA;
· maintain dividends, increasing relative to our profits albeit at
a measured and sustainable rate; and
· a limited purchase of shares, of at least sufficient shares to
satisfy employee incentive schemes to eliminate the otherwise dilutive effect,
whilst staying within our target leverage range.
Statement of Financial Position
The Group's Statement of Financial Position continues to be in good health.
Working capital management remains a strength of the business with debt ageing
broadly consistent at 57 days and key working capital ratios in line with
previous years. Whilst total equity has decreased to £232.1m (2022: £273.2m)
due primarily to
the asset impairments recorded in the year, the current asset to current
liability ratio is consistent at 1.3x.
The strength of the Statement of Financial Position is indicative of the
overall good health of the business and provides substantial capacity to
support future growth and investment requirements.
PRINCIPAL RISKS AND UNCERTAINTIES
The Group considers the following risks to be their principal risks; each are
aligned to our strategy. They are regularly reviewed and mitigated through
targeted investment, proactive actions and continuous improvement.
Risk Mitigation
Organic growth · We have realigned the Group's strategy to empower the businesses
to unlock their potential and to ensure a focus on profitable growth from
target sectors.
Failure of the business to achieve organic growth in line with expectations, · We have restructured and refreshed the Group's sales functions to
particularly in the Digital, Datashred and Technology businesses which have align with the revised strategy, with a mandate to improve cross-selling and
high fixed cost bases. referral opportunities.
· We have overhauled the Group's budgeting process to ensure that
the targets in place are
stretching but realistic and have incentivised based on these accordingly.
· Costs and headcount at the Group's head office have been
re-evaluated with significant cost savings implemented to support the Group's
new strategy.
Systems, technology, data and cyber defence failure · A Group IT strategy is in place with appropriate investment plans
to mitigate material operational and cyber risk. This includes significant
approved budget spend in 2024 for investment in hardware along with platforms
to further improve resilience and disaster recovery performance.
Failure or loss of systems, operational technology or
· The Group IT strategy is in line with NCSC Cyber Security
cyber defences results in business interruption, loss of service and potential Guidelines with Cyber Essential Plus certifications achieved across all
data breaches, impacting customers as well as revenues and business reputation businesses.
for the Group.
· Key cyber threats are continuously assessed and managed through
the implementation of industry standard methodologies with external advisory
support as well as managed services contracts with market leading providers.
· Disaster recovery and business continuity plans are in place and
tested for each site and as required for the Group's IT platforms.
· There is comprehensive cyber insurance in place in the Group's
Digital and Technology businesses, where the risk is deemed to be the most
prevalent.
Workforce health, safety and wellbeing · The health, safety and wellbeing governance structure was
reviewed and changed in the
year to promote clear communication from the front line to the board. This
Any loss of life, injury or wellbeing issues are of serious concern to the governance
Group and have the potential to impact the Group's reputation, workforce
morale and financial performance. has rationalised KPI reporting within the businesses as well as dynamically
sharing
information at Group and Board level.
· There are clear policies in place across the Group covering a
wide range of key health,
safety and wellbeing risks; health and safety, fire prevention, wellbeing,
stress, safe driving,
drugs and alcohol.
· There was the creation of a Group-wide initiative "A Safe Place
To Work", governed by the
Group Safety and Wellbeing Committee and developed by dedicated health and
safety
leaders from each business.
· The Group refreshed the focus on a strong safety culture and the
reporting of
occupational risk, focusing on a two-way conversation with the organisation.
· There continues to be a holistic approach to driver and vehicle
risk management. There
is a well-maintained fleet that is fit for purpose, with driving risk
management systems
conducting licence checks, driver assessments, training, and telematics.
· There was an ongoing review and audit of compliance with the
Group's fire prevention
policy and framework.
Environment - impact of climate-related matters · The net zero commitments made by the Group are subject to annual
review by the ESG
Committee, in conjunction with external advisors. Changes will be made where
Our climate-related commitments are challenging required, in line with SBTi Corporate Net Zero Standard, to ensure the Group's
journey to net zero is credible.
and will require the appropriate decarbonisation of our fleet and the ability
to work with our value chain to reduce emissions both upstream and downstream. · The Group has already moved its company car policy to one of
There is a reputational, and potentially commercial, risk to the Group from "hybrid or electric only" with 91% of all cars currently using this
not meeting these stated technology. 17% of our overall fleet is now EV/hybrid.
commitments. · EV chargers have been installed at 14% of all sites and a further
network of charging infrastructure is being assessed for deployment over the
coming years along with the potential for solar panels on our sites.
· 86% of our directly procured electricity is now REGO backed with
the remainder of the directly procured electricity moving onto these contracts
in 2024.
Staff recruitment and retention resulting in insufficient resources to meet · We have insourced the recruitment function into the Group which
objectives has resulted in control of the hiring process along with associated
improvements to the overall recruitment and onboarding process performance. We
have also committed to additional investment to enhance the Group's careers
website in 2024.
Potential difficulties in expansion of resources or loss of operational staff
or management makes it harder to deliver an effective and efficient business · We have seen strong improvements in our Glassdoor ratings, which
and maintain customer service expectations. are reflective of the focus in our people agenda to date. We now have a 4.0
rating on Glassdoor against a UK
average of 3.49.
· The people leadership programme is on-going to further augment
leadership talent and support succession planning.
· We have invested in people management learning content and tools
for c500 people
leaders within the Group.
· A full review of the people-related policies was completed to
ensure our policies and
procedures are colleague friendly and support our plans.
· We are continuing our partnership with The Happiness Index
(neuro-science based
engagement provider). This will embed our ongoing focus on improving
engagement and retention.
Property - extent, complexity, and suitability of the Group's property · The focus and governance surrounding our property risk has been
portfolio enhanced going into
2024 with the introduction of a monthly Property Committee meeting with the
Chair, (who has real estate expertise), CEO; CFO; Group Facilities and Mines
Property is the Group's second largest cost and the property network is a key Director and the Group Property Director. There has been strategic
enabler of business efficiency. Damage to property or inefficient utilisation consideration and progress with the execution of site consolidation
impacts customer service, whilst headwinds of unforeseen dilapidation, rents opportunities to support the Group's strategy of margin optimisation (to
and rates counter cost headwinds) and expansion strategies.
increase costs. · Property Working Group Meetings (formerly the Property Committee
in 2023) continue with representation from Operations Directors across all
businesses, finance and Group Facilities Director, chaired by the Group
Property Director and sponsored by the CFO.
Financial · The Group's RCF is provided by a broad and supportive banking
syndicate with a
credit facility of up to £125m in place and extended until April 2027.
Ongoing macro-economic instability could lead to pressure on our financial
covenants through volatile interest rates, increasing level of inflationary · We have introduced a portion of fixed rate debt into our debt
costs, restricted access to future liquidity and enhanced credit risk as profile with £25m of US private placement debt in place until 2028 at a fixed
customers face their own challenges to the instability. term and rate. We also opted to hedge a portion of our debt with an interest
rate swap to fix the interest paid.
· The Group operates well within borrowing covenants with monthly
reviews of the Group's cashflow forecasts and forecast covenant compliance.
· Credit risk is assessed by the businesses at the time of
onboarding customers and then subsequently on a monthly basis.
Consolidated statement of comprehensive income
For the year ended 31 December 2023
Year ended Year ended
31 December 31 December
2023 2022
£'m £'m
Revenue - continuing operations 277.1 279.0
Cost of sales (160.7) (155.4)
Gross profit 116.4 123.6
Administrative expenses (94.4) (89.2)
Movement in trade receivables loss allowance (0.7) (0.2)
Impairment of non-current assets (36.3) -
Operating (loss)/profit (15.0) 34.2
Finance costs (14.0) (10.9)
(Loss)/profit before tax (29.0) 23.3
Taxation (1.7) (6.5)
(Loss)/profit after tax (30.7) 16.8
Other comprehensive loss (0.1) -
Total comprehensive (loss)/income for the year from continuing operations and (30.8) 16.8
(loss)/profit attributable to owners of the parent
(Loss)/earnings per share attributable to owners of the parent (pence)
Total - basic (22.5)p 12.3p
Total - diluted (22.5)p 12.2p
The reconciliation between the statutory results shown above and the non-GAAP
adjusted measures are shown below:
Year ended Year ended
31 December 31 December
2023 2022
£'m £'m
Operating (loss)/profit (15.0) 34.2
Adjusting items - Administrative expenses 10.8 5.6
Adjusting items - Amortisation of intangible assets 12.2 12.1
Adjusting items - Impairment 36.3 -
Total adjusting items 59.3 17.7
Adjusted operating profit 44.3 51.9
44.3 51.9
Adjusted operating profit
Tax at 23.5% (2022: 19.0%) (10.4) (9.9)
NOPAT (Net operating profit after tax) 33.9 42.0
(29.0) 23.3
(Loss)/profit before tax
Adjusting items (as stated above) 59.3 17.7
Adjusted profit before tax 30.3 41.0
Consolidated statement of financial position
At 31 December 2023
Company registered no. 05169780
31 December 31 December
2023 2022
Restated*
£'m £'m
ASSETS
Non-current assets
Intangible assets 284.7 331.9
Property, plant and equipment 79.4 79.7
Right of use assets 91.6 106.8
Other receivables 5.2 5.1
460.9 523.5
Current assets
Inventories 1.5 2.0
Trade and other receivables 63.1 64.9
Cash and cash equivalents 22.7 30.2
Current tax assets 1.2 -
88.5 97.1
Total assets 549.4 620.6
LIABILITIES
Current liabilities
Trade and other payables (44.9) (49.1)
Financial liabilities - lease liabilities (18.6) (19.2)
Derivative liability (0.1) -
Current tax liabilities - (1.6)
Provisions (4.4) (1.7)
(68.0) (71.6)
Non-current liabilities
Financial liabilities - borrowings (120.5) (133.7)
Financial liabilities - lease liabilities (84.9) (95.7)
Deferred tax liability (29.3) (30.9)
Provisions (14.2) (15.4)
Other payables (0.4) (0.1)
(249.3) (275.8)
Total liabilities (317.3) (347.4)
Net assets 232.1 273.2
EQUITY
Share capital 6.8 6.8
Share premium 187.9 187.9
Other reserves 3.7 6.9
Retained earnings 33.7 71.6
Total equity 232.1 273.2
*Refer to Note 1 for details of the restatement
Consolidated statement of changes in equity
For the year ended 31 December 2023
Attributable to owners of the parent
Share Share premium Other reserves Retained Total
capital £'m £'m earnings equity
£'m £'m £'m
Balance at 1 January 2022 6.8 187.9 7.0 63.5 265.2
Profit for the year - - - 16.8 16.8
Total comprehensive income for the year - - - 16.8 16.8
Transactions with owners:
Dividends - - - (9.9) (9.9)
Share-based payments - - 1.7 - 1.7
Deferred tax on share-based payments - - (0.7) - (0.7)
Transfer* - - (2.1) 2.1 -
Purchase of treasury shares - - (1.1) - (1.1)
Disposal of treasury shares - - 2.1 (0.9) 1.2
Balance at 31 December 2022 6.8 187.9 6.9 71.6 273.2
Balance at 1 January 2023 6.8 187.9 6.9 71.6 273.2
Loss for the year - - - (30.7) (30.7)
Other comprehensive loss for the year - - (0.1) - (0.1)
Total comprehensive loss for the year - - (0.1) (30.7) (30.8)
Transactions with owners:
Dividends - - - (9.1) (9.1)
Share-based payments - - (0.5) - (0.5)
Deferred tax on share-based payments - - (0.2) - (0.2)
Transfer* - - (3.3) 3.3 -
Purchase of treasury shares - - (0.6) - (0.6)
Disposal of treasury shares - - 1.5 (1.4) 0.1
Balance at 31 December 2023 6.8 187.9 3.7 33.7 232.1
* In 2023 a net amount of £3.3m (2022: £2.1m) was reclassified from the
share-based payments reserve to retained earnings in respect of lapsed and
exercised options.
Consolidated statement of cash flows
For the year ended 31 December 2023
Year ended Year ended
31 December 31 December
2023 2022
£'m £'m
Cash generated from operating activities 66.9 65.2
Net finance costs (12.8) (11.4)
Income taxes paid (6.3) (6.0)
Net cash generated from operating activities 47.8 47.8
Cash flows from investing activities
Purchase of property, plant and equipment and applications software IT (10.3) (11.0)
Purchase of subsidiary undertakings, net of cash acquired (1.3) (10.8)
Purchase of trade and assets (0.4) (0.7)
Net cash used in investing activities (12.0) (22.5)
Cash flows from financing activities
Dividends paid (9.1) (9.9)
Purchase of treasury shares (0.6) (1.1)
Proceeds from disposal of treasury shares 0.1 1.2
Repayment of revolving credit facility (48.0) (145.8)
Drawdown of revolving credit facility 10.0 146.8
Drawdown of US Private Placement notes facility 25.0 -
Lease principal repayments (20.7) (19.2)
Net cash used in financing activities (43.3) (28.0)
Net decrease in cash and cash equivalents (7.5) (2.7)
Cash and cash equivalents at start of year 30.2 32.9
Cash and cash equivalents at end of year 22.7 30.2
A reconciliation between the statutory results above and the non-GAAP cashflow
measures is shown below:
Year ended Year ended
31 December 31 December
2023 2022
£'m £'m
Cash generated from operating activities 66.9 65.2
Income taxes paid (6.3) (6.0)
Purchase of property, plant and equipment and applications software IT (10.3) (11.0)
Lease principal repayments (20.7) (19.2)
Add back: Cash impact of adjusting items - administrative expenses 7.7 5.6
Free cashflow 37.3 34.6
NOPAT (Net operating profit after tax) 33.9 42.0
Cash conversion 110% 82%
Notes to the preliminary financial information
For the year ended 31 December 2023
1. Basis of preparation
The financial information in this preliminary announcement has been extracted
from the audited consolidated financial statements for the year ended 31
December 2023 and does not constitute the Group's statutory accounts for the
years ended 31 December 2023 or 2022 within the meaning of s435 of the
Companies Act 2006.
The Group's statutory accounts for the year ended 31 December 2022 have been
filed with the Registrar of Companies, and those for 2023 will be delivered
following the Company's Annual General Meeting. The Auditor has reported on
the statutory accounts for 2023 and 2022. Their report for 2023 and 2022 was
(i) unqualified, (ii) included no matters to which the auditor drew attention
by way of emphasis and (iii) did not contain statements under Sections 498 (2)
or 498 (3) of the Companies Act 2006 in relation to the financial statements.
The consolidated financial statements of the Group have been prepared in
accordance with UK-adopted International Accounting Standards and with the
requirements of the Companies Act 2006.
The consolidated financial statements have been prepared on a historical cost
basis, except for certain financial assets and liabilities and share options
which are held at fair value. The accounting policies have been consistently
applied, other than where new policies have been adopted. The preparation of
financial statements in conformity with IFRS requires the use of certain
accounting estimates. It also requires management to exercise its judgement in
the process of applying the Group's accounting policies. The consolidated
financial statements are presented in pounds sterling and, unless stated
otherwise, shown in pounds million to one decimal place.
The Directors are satisfied that climate change does not have a material
impact on either individual assets or cash-generating units in the
consolidated financial statements.
Going concern
The Group meets its day-to-day working capital requirements through its
financing facilities. Details of the Group's borrowing facilities are given in
note 9. The Directors have a reasonable expectation that the Group has
adequate resources to continue in operational existence for a period of at
least 12 months from the approval date of the consolidated financial
statements, having taken into consideration the downturn in trading during
2023 and the current economic climate. Thus, they continue to adopt the going
concern basis of accounting in preparing the consolidated financial
statements. In making this assessment, the Directors have considered the
financing arrangements available to the Group and the Group's cashflow
forecasts through to 30 June 2025, taking into account reasonably possible
downside trading scenarios involving a reduction to non-recurring income
streams. The Directors' assessment includes reviewing the level of liquidity
headroom and financial covenant compliance headroom over the period in review,
including in the downside scenarios modelled. The Group's budget for 2024 and
forecasts for 2025 show that the Group is expected to operate within the level
of its current facilities.
Prior year restatement
During the year the Group reviewed the classification and presentation of
contract assets within trade and other receivables and contract liabilities
within trade and other payables. It was determined, following this review,
that these balances should be re-presented based on the expected timing of the
realisations of these assets and liabilities. In addition, right of use assets
and lease liabilities have been restated to correct an error in the recording
of a legacy lease.
As a result, the Consolidated statement of financial position as at 31
December 2022 has been restated as follows:
As reported Impact of restatement Restated
2022 2022 2022
£m £m £m
Non-current assets
Right of use assets 101.4 5.4 106.8
Other receivables - 5.1 5.1
Current assets
Trade and other receivables 70.0 (5.1) 64.9
Non-current liabilities
Lease liabilities (90.3) (5.4) (95.7)
Other payables - (0.1) (0.1)
Current liabilities
Trade and other payables (49.2) 0.1 (49.1)
The restatement did not result in any change to reported profit, earnings per
share, net assets or cash flows reported in 2022.
2. Segmental analysis
The vast majority of the trading of the Group is undertaken within the United
Kingdom. Segment assets include intangible assets, property, plant and
equipment, right of use assets, inventories, receivables and operating cash.
Central assets include deferred tax and head office assets. Segment
liabilities comprise operating liabilities. Central liabilities include income
tax and deferred tax, corporate borrowings and head office liabilities.
Capital expenditure comprises additions to computer software, property, plant
and equipment and includes additions resulting from acquisitions through
business combinations. Segment assets and liabilities are allocated between
segments on an actual basis.
Revenue
The revenue from external customers was derived from the Group's principal
activities primarily in the UK (where the Company is domiciled) as follows:
Revenue - continuing operations 2023 2022
£'m £'m
Records Management 124.1 113.7
Digital 46.0 54.5
Digital & Information Management 170.1 168.2
Technology 31.1 35.8
Datashred 35.9 37.4
Harrow Green 40.0 37.6
Secure Lifecycle Services 107.0 110.8
Total Revenue 277.1 279.0
For the year ended 31 December 2023 no customers individually accounted for
more than 3% (2022: 3%) of the Group's total revenue.
The Group had sales of goods of £27.4m (2022: £33.8m) relating to the sale
of recycled paper and recycled IT assets. The remainder of revenue relates
to the sales of services.
Segmental information
(Loss)/profit before tax 2023 2022
£'m Restated
£'m
Digital & Information Management 36.1 42.6
Secure Lifecycle Services 5.4 10.2
Central (8.0) (6.5)
Adjusting items - amortisation and impairment of non-current assets (48.5) (12.1)
Operating (loss)/profit (15.0) 34.2
Finance costs (14.0) (10.9)
(Loss)/profit before tax (29.0) 23.3
The impairment of goodwill and customer relationships and the amortisation of
acquired intangible assets have been recorded centrally.
Digital & Information Management 2023 2022
£'m Restated
£'m
Operating profit 35.2 41.6
Adjusting items 5.7 3.6
Adjusted operating profit 40.9 45.2
Revenue 170.1 168.2
Adjusted operating margin 24% 27%
Secure Lifecycle Services 2023 2022
£'m Restated
£'m
Operating profit 5.0 9.9
Adjusting items 1.2 1.1
Adjusted operating profit 6.2 11.0
Revenue 107.0 110.8
Adjusted operating margin 6% 10%
The prior year balances in the segmental information tables above have been
restated to ensure consistent presentation with the disclosures in 2023.
2023 Digital & Information Management Secure Lifecycle Central 31 December 2023
£'m
£'m
Total
Services
£'m
£'m
Segment assets 428.4 116.5 34.5 549.4
Segment liabilities 116.0 45.3 156.0 317.3
Capital expenditure 8.4 1.8 0.1 10.3
Depreciation and amortisation 32.2 12.3 0.5 45.0
Impairment 0.1 0.1 36.1 36.3
2022 (restated) Digital & Information Management Secure Lifecycle Central 31 December 2022
£'m
£'m
Total
Services
£'m
£'m
Segment assets 451.7 158.3 10.6 620.6
Segment liabilities 120.8 63.7 162.9 347.4
Capital expenditure 8.4 2.2 0.4 11.0
Depreciation and amortisation 29.2 11.9 0.6 41.7
3. Adjusting items
Management believe it is useful to provide readers of the financial statements
with alternative performance measures ("APMs") that describe the performance
of the Group before the effects of significant costs or income that are
considered to be distorting due to their nature, and non-cash amortisation
primarily arising from acquired intangible assets.
Adjustments made from statutory measures to adjusted measures are referred to
as adjusting items within the financial statements and include impairments,
amortisation, expenses associated with acquisitions and subsequent integration
costs, costs associated with major restructuring programmes, and other
significant costs and credits that are considered to be distorting due to
their nature when assessing the performance of the business. The Group's
adjusting items are set out below:
2023 2022
£'m £'m
Impairments 36.3 -
Amortisation 12.2 12.1
Acquisition transaction costs 0.2 1.4
Restructuring and redundancy 5.9 2.6
Property related costs 3.1 0.9
Strategic IT reorganisation 1.6 0.7
Total 59.3 17.7
Impairment
The non-cash impairment charge relates primarily to an impairment of goodwill
in the Datashred CGU (£32.5m) resulting from reduced expectations on service
activity, paper volumes and recycled paper pricing. In addition to this, there
is a £3.6m impairment in the Technology CGU following a business exit, this
comprises the impairment of customer relationship related intangible assets
(£3.4m) and right-of-use assets (£0.2m). Given the overall quantum of the
impairment charge and its non-cash nature, this cost is adjusted for in
deriving the Group's alternative performance measures.
Amortisation
The amortisation charge primarily relates to acquired intangible assets
arising from business combinations in prior years alongside a charge relating
to the amortisation of software. Given the overall quantum of the amortisation
charge and its non-cash nature, this cost is adjusted for in deriving the
Group's alternative performance measures. For transparency, we note that the
Group does not similarly adjust for the related revenue and profits generated
from its business combinations in its alternative profit measures.
Acquisition transaction costs
Acquisition related transaction adjustments primarily relate to legal, due
diligence, financing and advisory costs incurred in association with business
acquisition activity. The lower level of acquisition related costs incurred
during the year were as a result of less acquisition activity. For
transparency, we note that the Group does not similarly adjust for the related
revenue and profits generated from its acquisitions in its alternative profit
measures.
Restructuring and redundancy
Restructuring and redundancy adjustments relate primarily to the Group-wide
organisational restructuring and "right-sizing" programme which has been
ongoing across the Group throughout 2023 (£4.7m) and will continue into 2024.
£1.2m also relates to the incremental costs that have been incurred from the
senior management changes ongoing during the year. For 2022, restructuring and
redundancy costs were classified as adjusting and principally arose from
acquisition related restructuring and integration activity (£2.1m), with the
remaining cost in connection with other Group-wide restructuring programmes
(£0.5m). Future cost savings are expected from some of the restructuring
activity during the year, however, for transparency we note that these cost
savings will not be adjusted for in deriving the Group's alternative
performance measures.
Property related costs
Following the changes in the senior leadership team, a strategic review of the
Group's property estate was conducted. This led to a reassessment of sites in
the Group, categorising them into those that were considered to be strategic
to the Group and would be unlikely to be exited until the end of their useful
life and those which were not considered to be strategic to the Group and
would be exited before the end of their useful life. This reassessment has
driven a review of the dilapidation provision needed to be held by the Group
as we are now
expecting to exit more sites in the short and medium term than was previously
expected and we therefore need to recognise the associated increase in
dilapidations provision that we expect to crystallise in the future. This
reassessment and subsequent review of the dilapidations provision has led to
an additional charge of £3.1m being recognised in the income statement.
During 2022, property related adjustments related to a significant property
dilapidation settlement on one site (£0.9m) which crystalised in excess of
amounts provided for within
the financial statements. The dilapidation provision is a critical accounting
estimate, and any individual small under or over provision of a property
dilapidation is not separately identified within alternative performance
measures, however given the quantum of the incremental costs incurred across
over the last 2 years and the strategic nature of the review in 2023, the
resultant additional charge is considered to be appropriately adjusted for in
deriving the Group's alternative performance measures.
Strategic IT reorganisation
The Group is undertaking a multi-year programme to deliver cloud-based
strategic IT programmes, particularly in relation to its financial systems.
The implementation costs associated with these systems transformations are to
be expensed to the income statement as incurred, with the in-year cost of
these programmes being £1.6m for 2023 (2022: £0.7m). Future cost savings are
expected from these systems implementations, however, for transparency we note
that these cost savings will not be adjusted for in deriving the Group's
alternative performance measures.
4. Taxation
2023 2022
£'m £'m
Current tax:
UK corporation tax on (loss)/profit for the year 3.7 6.0
Adjustment in respect of previous years (0.2) 0.1
Total current tax 3.5 6.1
Deferred tax:
Current year (decrease)/increase in deferred tax (1.7) 0.3
Adjustment in respect of previous years (0.1) 0.1
Total deferred tax (1.8) 0.4
Total tax charge 1.7 6.5
The charge for the year can be reconciled to the (loss)/profit in the
Consolidated statement of comprehensive income as follows:
2023 2022
£'m £'m
(Loss)/profit before tax (29.0) 23.3
(Loss)/profit before tax multiplied by the rate of corporation tax of 23.5% (6.8) 4.4
(2022:19.0%)
Effects of:
Expenses not deductible 0.4 1.3
Adjustment in respect of corporation tax for previous years (0.1) 0.1
Adjustment in respect of deferred tax for previous years (0.2) 0.1
Goodwill impairment 7.7 -
Share-based payments 0.7 0.3
Effect of change in rate used for deferred tax - 0.3
Tax charge 1.7 6.5
5. (Loss)/earnings per share attributable to owners of the parent
Basic (loss)/earnings per share have been calculated on the (loss)/profit for
the year after taxation and the weighted average number of ordinary shares in
issue during the year.
2023 2022
Total (loss)/profit for the year (£'m) (30.7) 16.8
Total basic (loss)/earnings per share (pence) (22.5) 12.3
Weighted average number of shares in issue 136,580,425 136,761,738
Dilutive options (number) 722,328 1,264,065
Weighted average fully diluted number of shares in issue 137,302,753 138,025,803
Total fully diluted (loss)/earnings per share (pence) (22.5) 12.2
Adjusted earnings per share
The Directors believe that adjusted earnings per share provides a more
appropriate representation of the underlying earnings derived from the Group's
business. The adjusting items are shown in the table below:
2022 2021
£'m £'m
(Loss)/profit before tax (29.0) 23.3
Adjusting items - administrative expenses 10.8 5.6
Adjusting items - amortisation of intangible assets 12.2 12.1
Adjusting items - impairment 36.3 -
Adjusted profit before tax 30.3 41.0
The adjusted earnings per share and adjusted fully diluted earnings per share,
based on the weighted average number of shares in issue during the year of
136.6m (2022:136.8m) and weighted average fully diluted number of shares in
issue during the year of 137.3m (2022: 138.0m) respectively, are calculated
below using a standard tax charge:
2023 2022
Adjusted profit before tax (£'m) 30.3 41.0
Tax at 23.5% (2022: 19.0%) (£'m) (7.1) (7.8)
Adjusted profit after tax (£'m) 23.2 33.2
Adjusted basic earnings per share (pence) 17.0 24.3
Adjusted fully diluted earnings per share (pence) 16.9 24.1
6. Dividends
The Directors recommend a final dividend of 3.35p per share for the year ended
31 December 2023 (2022: 4.8p per share) to give a full year dividend of 5.2p
per share (2022: 7.4p). The aggregate amount of the proposed dividend expected
to be paid on 9 July 2024 out of retained earnings at 31 December 2023, but
not recognised as a liability at year end is £4.6m. An interim dividend of
1.85p was paid during the year (2022: 2.6p).
7. Intangible Assets
Goodwill £'m Customer relationships Trade Applications software IT Total
£'m
names
£'m
£'m
£'m
Cost
1 January 2022 212.5 168.8 4.3 10.3 395.9
Arising on acquisition of subsidiaries 4.7 8.4 - 0.2 13.3
Arising on acquisition of trade and assets 0.2 0.7 - - 0.9
Fair value adjustment 1.7 - - - 1.7
Additions - - - 0.9 0.9
Disposals - - - (0.7) (0.7)
31 December 2022 219.1 177.9 4.3 10.7 412.0
Additions - 0.4 - 0.6 1.0
Disposals - - - (0.2) (0.2)
31 December 2023 219.1 178.3 4.3 11.1 412.8
Accumulation amortisation and impairment
1 January 2022 17.6 42.6 2.8 5.7 68.7
Charge for the year - 10.4 0.2 1.5 12.1
Disposals - - - (0.7) (0.7)
31 December 2022 17.6 53.0 3.0 6.5 80.1
Charge for the year - 10.8 0.2 1.2 12.2
Disposals - - - (0.2) (0.2)
Impairment 32.5 3.5 - - 36.0
31 December 2023 50.1 67.3 3.2 7.5 128.1
Carrying amount
31 December 2023 169.0 111.0 1.1 3.6 284.7
31 December 2022 201.5 124.9 1.3 4.2 331.9
Annual test for impairment
Goodwill is tested annually for impairment, or more frequently if there are
indicators that an impairment may be required. For the purpose of impairment
testing, goodwill, other intangible assets and property, plant and equipment
are allocated to cash-generating units ("CGU's") which represent the smallest
identifiable group of assets that generate cash inflows from continuing use,
in the case of Restore this is considered to be the Business Unit level. The
recoverable amount of each CGU is determined from value-in-use calculations.
The calculations use pre-tax cash flow projections based on financial budgets
and forecasts approved by the Directors.
At the half year, an impairment to goodwill of £32.5m was recognised in
Datashred. This impairment resulted principally from reduced expectations on
service activity, paper volumes and recycled paper pricing, as well as an
increase in the discount rate partly driven by the change in the interest
rate.
At the year-end, an impairment of customer relationship related intangible
assets and right-of-use assets amounting to £3.6m was recognised in the
Technology CGU in relation to a business exit.
After the recognition of these impairments, an impairment review was conducted
over the residual carrying values including downside scenario modelling, which
indicated that no further impairment was required. The year-end model utilises
forecasts based upon the Group's FY24 Budget and 5 Year-Plan through to FY28.
Terminal cash flows are based on the Group's FY28 projections assumed to grow
perpetually at 2%. In accordance with IAS 36, the growth rates for beyond the
initially forecast years do not exceed the long-term average growth rate for
the industry. The forecasts have been discounted using a pre-tax discount rate
specific to each CGU ranging from 11.9%-12.5% (2022: 9.5%).
A summary of management's base case value-in-use calculation, including key
assumptions is set out below:
Base case value in use calculation summary
NPV of
terminal
FY23 to FY28 year
FY23 to FY28 EBIT FY23 to FY28 cashflows
revenue cumulative EBIT margin into
cumulative annual growth (bps) Headroom perpetuity
annual growth Carrying as % as % of
growth rate rate value of of asset value-in-use
(%) (%) Discount assets Headroom carrying calculation
rate (%) (£'m) (£'m) value (%) (%)
Records Management 3.2% 5.0% 280 11.9% 319.8 193.6 60.5% 58.7%
Digital 2.9% 18.6% 800 12.1% 52.9 17.3 32.8% 64.8%
Technology 6.2% (240.1%) 1790 12.5% 37.8 8.0 21.2% 69.0%
Datashred 3.3% 9.0% 220 12.4% 26.3 17.5 66.4% 52.5%
Harrow Green 4.6% 6.4% 100 12.1% 19.5 43.4 222.7% 56.6%
Climate related matters
The Group monitors climate-related risks and opportunities and has considered
the potential impact of climate change on the impairment review conducted.
Based on our assessment of climate-related risks likely to emerge, we do not
expect these risks to drive a significant downturn in cashflows across the
Group. Therefore, there are no overriding changes to key assumptions built
into the forecasts and no specific sensitivities relating to climate change
are considered necessary over and above the sensitivities performed below.
Sensitivity
A number of sensitivities have been modelled to highlight the way in which
changes in trading and/or market conditions affect the value-in-use
calculation. The table below highlights the sensitivity of the value-in-use
calculation to changes in forecast cashflows and the discount rate.
In the Records Management and Harrow Green CGUs, the Group have not identified
any reasonably possible changes that would result in an impairment. Across the
remaining CGUs, there are considered to be some reasonably possible scenarios
which could result in an impairment.
A summary of the sensitivity analysis performed covering Digital, Technology
and Datashred is summarised below:
Revenue FY23 to FY28
reduction revenue Headroom/ FY23 to FY28 Headroom/
assuming cumulative (Impairment) EBIT margin (impairment)
gross margin annual growth as % of growth (bps) as % of
in line with rate (%) Headroom/ carrying EBIT Headroom/ carrying value
plan (%) (impairment) value reduction (impairment) (%)
(£'m) (%) (%) (£'m)
Digital (7%) 1.4% 0.4 0.8% (24%) 420 0.3 0.6%
(8%) 1.2% (2.1) (4.0%) (25%) 410 (0.4) (0.8%)
(9%) 1.0% (4.5) (8.5%) (26%) 390 (1.1) (2.1%)
Technology (5%) 5.1% 0.6 1.6% (17%) 1,550 0.3 0.8%
(6%) 4.9% (0.8) (2.1%) (18%) 1,530 (0.1) (0.3%)
(7%) 4.7% (2.3) (6.1%) (19%) 1,520 (0.6) (1.6%)
Datashred (9%) 1.4% 1.4 5.3% (55%) (300) 0.1 0.4%
(10%) 1.1% (0.4) (1.5%) (56%) (310) (0.2) (0.8%)
(11%) 0.9% (2.2) (8.4%) (57%) (320) (0.5) (1.9%)
Revenue
reduction
dropping FY23 to FY28
Headroom/ down to EBIT revenue Headroom/
(impairment) at 100% cumulative (impairment)
as % of reflecting annual as % of
Discount rate Headroom/ carrying paper growth Headroom/ carrying
increase (impairment) value income (%) rate (% (impairment) value
(£'m) (%) (£'m) (%)
Digital 1% 10.8 20.4%
2% 5.3 10.0%
3% 0.7 1.3%
Technology 1% 3.6 9.5%
2% (0.1) (0.3%)
3% (3.3) (8.7%)
Datashred 1% 14.0 53.2% (4%) 2.4% 2.6 9.9%
2% 11.1 42.2% (5%) 2.2% (1.1) (4.2%)
3% 8.6 32.7% (6%) 2.0% (4.8) (18.3%)
Digital
The drop in Digital's revenue and profitability in FY23 was driven by
non-recurring contracts from FY22 benefiting the comparative. Given that c25%
of Digital's revenue is non-recurring, there is a reasonably possible scenario
in which non-delivery of revenue and profit in line with the base plan could
result in a potential impairment. A revenue reduction of 8% in each of the
forecast years dropping down to profit with gross margin in line with the plan
would trigger an impairment of £2.1m. A 25% reduction to EBIT in each of the
forecast years would drive an of £0.4m.
Technology
At the year-end, an impairment of £3.6m was recognised in the Technology CGU
in relation to a business exit. The goodwill impairment review which was
conducted at the year-end was based on the carrying value of assets after the
recognition of this impairment.
The reduced level of profitability in Technology during FY23 is considered to
be cyclical. Given that Technology's revenue is subject to cyclical market
dynamics, there is a reasonably possible scenario in which non-delivery of
revenue and profit in line with the base plan could result in a potential
impairment. A revenue reduction of 6% in in each of the forecast years
dropping down to profit with gross margin in line with the plan would trigger
an additional impairment of £0.8m. A 18% reduction to EBIT in each of the
forecast years would drive an additional impairment of £0.1m.
Datashred
At the half year, following a sharp decline in the paper price and a
re-assessment of long-term volume in Datashred, an impairment of £32.5m was
recognised to goodwill. The goodwill impairment review which was conducted at
the year-end was based on the carrying value of assets after the recognition
of this impairment.
While no further impairment has been recognised at the year-end, given that
the recycled paper price is driven by market conditions and there is some
uncertainty around the long-term volumes within the sector, there is a
reasonably possible scenario in which non-delivery of revenue and profit in
line with the base plan could result in a potential additional impairment. The
scenario which forms the basis of management's base case assumes paper pricing
of £183 per tonne, steady growth in paper tonnages and service visits of
1.0%, and 3.0% growth in service income per visit. The quoted growth rates
have been applied to the FY24 budget. Were the average paper prices seen in
the second half of 2023 to continue, a potential impairment of c£1.6m would
be recognised. A revenue reduction of 10% in each of the forecast years
dropping down to profit with gross margin in line with the plan would trigger
an additional impairment of £0.4m. A revenue reduction of 5% in each of the
forecast years dropping down to profit at 100%, to reflect a drop in paper
income, would trigger an additional impairment of £1.1m. A 56% reduction to
EBIT in each of the forecast years would drive an additional impairment of
£0.2m.
The scenario which formed the basis of the impairment at the half-year assumed
paper pricing of £170-£175 per tonne, steady compound average growth in
paper tonnages of 1.0%, and 4.5% compound average growth in service revenue,
using a pretax discount rate of 12.8%. There is additional headroom in the
impairment model at the year-end for Datashred compared to the half-year as a
result of a reduction in the pre-tax discount rate and the removal of H2 2023
from the model which was replaced by an additional more profitable year of
trading in FY28.
8. Cash generated from operating activities
Cash generated from operations 2023 2022
£'m
£'m
(Loss)/profit before tax (29.0) 23.3
Depreciation of property, plant and equipment and right-of-use assets 32.8 29.6
Amortisation of intangible assets 12.2 12.1
Impairment charge 36.3 -
Net finance costs 14.0 10.9
Share-based payments charge (including related NI) - 1.9
Share-based payment settlement (0.7) -
Profit on sale of fixed assets 0.2 -
Decrease / (increase) in inventories 0.5 (0.3)
Decrease / (increase) in trade and other receivables 1.8 (11.9)
Decrease in trade and other payables (1.2) (0.4)
Cash generated from operating activities 66.9 65.2
9. Financial liabilities - borrowings
2023 2022
£'m
£'m
Non-current
Bank loans - secured 97.0 135.0
Other loans - secured 25.0 -
Deferred financing costs (1.5) (1.3)
120.5 133.7
At 31 December 2022 the Group's financing arrangements comprised of a six
lender syndicated £200m Revolving Credit Facility ("RCF") (due 30 April
2025). The RCF included an additional £50m uncommitted accordion and an
overdraft facility of £1.5m with Barclays Bank plc. The RCF borrowings were
subject to a floating interest rate, at SONIA, plus credit adjusted spread and
a margin of 1.80% which can vary depending on the leverage the Group.
On the 27 January 2023, the Group extended the RCF maturity through to 30
April 2026. On the 28 March 2023, the Group entered into US Private Placements
("USPP") to raise £25m through the issue of secured notes at a fixed rate of
6.30% due 28 March 2028. This reduced the uncommitted accordion to £25m.
At 31 December 2023 the Group's financing arrangements therefore comprise a
£200m RCF (due 30 April 2026) and £25m of USPP fixed rate secured notes (due
28 March 2028). £97m of drawn RCF debt and £25m of USPP fixed rate secured
notes was outstanding at year-end. Committed but undrawn borrowings at 31
December 2023 amounted to £103.0m (2022: £65.0m). £1.5m of the overdraft
facility was unutilised (2022: £1.5m).
Subsequent to the year-end, the Group has made the following changes to its
financing arrangements. There was no material financial cost involved in
executing these transactions.
· voluntarily cancelled £75m of the RCF, decreasing the RCF from
£200m to £125m;
· extended the RCF to 30 April 2027; and
· entered into a £10m overdraft facility with Barclays Bank plc.
Under the borrowings facilities the Group was required to meet quarterly
covenant tests in respect of interest cover and leverage. All covenant tests
were met during the year.
Analysis of net debt 2023 2022
£'m
£'m
Cash at bank and in hand 22.7 30.2
Borrowings due within one year - -
Borrowings due after one year (120.5) (133.7)
Net debt (97.8) (103.5)
10. Provisions
2023 2022
£'m
£'m
1 January 17.1 8.8
Additional provision 6.2 8.6
Acquired provision - 0.2
Utilised - (0.3)
Released (4.7) (0.2)
31 December 18.6 17.1
The balance above represents dilapidation provisions which relate to the
future anticipated costs to restore leased properties into their original
state at the end of the lease term. Estimates are stated at nominal value and
therefore the impact of discounting is not material. An increase in costs of
5% per square foot across the portfolio would result in an increase in the
provision of £0.7m.
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