Restore (AIM: RST), the UK's leading provider of digital and information management and secure lifecycle services, provides the following trading and business update.
The Group continues to deliver revenue growth in its core Records Management business but notes the continued weakness in its Technology business, a reduction in demand for certain service lines since the last update, particularly in bulk digital scanning, and that the price of recycled shredded paper has significantly fallen in the past month with this trend anticipated to continue into H2.
As a result of these factors, whilst the Group continues to demonstrate its cash generative characteristics, the Board anticipates that the adjusted profit before tax will be lower than previously expected and will be £31 million for the full year.
Digital and Information Management Division
Records Management, which represents 70% of Group profits, is seeing expansion in storage revenues and good cost control with the new contract wins for the Department for Work and Pensions and BBC commencing successfully.
These positive effects are offsetting the anticipated year to year fall in revenues in the Digital business due to the non-repeating large public sector contract delivered in H1 2022 of £5.2 million. However, the Digital business has additionally experienced a slow down in order conversion and demand for bulk scanning services, reducing profit expectation from this business for the year.
The other services (Cloud, Digital Mailrooms, BPO, Records Preservation) in Digital, which represent over 40% of the business unit revenues and contain a large proportion of longer term contracts, are trading in line with management expectations.
Despite these headwinds, Records Management continues to make progress and in Digital, win rates are consistent YoY and the overall size of the opportunity pipeline is slightly larger versus the start of the year.
As a result, the division continues to take significant actions to reduce costs whilst preserving the operational capabilities of the business to respond when demand improves.
Secure Lifecycle Services Division
As previously reported, Restore Technology IT Recycling (ITAD) revenues are declining year to year due to the contraction of IT hardware investment by customers following their unique and significant increase in procurement in 2021 driven by the pandemic. Demand remains weak despite quoting activity improving in June and we are now assuming volumes and resale values remain consistent H2 vs H1 and therefore are lowering expectations from this business for the year.
A number of strategic and tactical actions are in hand including the closure of one processing site with a number of further actions planned to reduce costs across the business, whilst ensuring capacity and skills are maintained for future recovery in demand.
IT Relocation and Mid Life services growth continues and is in line with our expectations for FY23 driven by data centre relocations and office moves.
Restore Datashred is delivering consistent volume of service visits YoY and we expect this to continue into H2. Service visits contribute c.70% of the revenues with the remaining c.30% from the sale of shredded/recycled paper.
Paper pricing has shown a sharp decline in recent weeks due to an over-supply of paper (particularly from Europe) and weaker overall activity in the UK/EU economies. Whilst profit is likely to be in line with expectation for H1, the lower recycled paper pricing will impact H2 profitability significantly. The overall impact is partly mitigated by continued strong cost control.
Restore Harrow Green is performing well and is expected to grow in FY23 with committed larger projects already started and the overall activity driven by significant customer organisational restructuring and office moves across the UK. In addition, storage revenues are also expected to grow in FY23.
With the recent changes in the UK base rate and in anticipation of further increases in Q3 and Q4, we have assumed higher interest cost for the year notwithstanding lower net debt. Total interest cost, excluding the impact of IFRS16, is now assumed to be c£9.6million for 2023 (2022: £5.9m, 2021: £2.9m).
As a result of the weaker outlook for the business, an assessment of potential non-cash impairment on intangible assets will be performed as part of the H1 close.
We continue to focus on structural cost savings in staff and supplier input costs, and these programmes are delivering the targeted results.
With actions already taken and further planned steps in early Q3 we expect to reduce permanent staff by 230. These roles are across senior managers, sales, support functions and operations. The total savings in FY23 are £4.5m with H1 savings of £1.1m and H2 savings of £3.4m.
The Board anticipates that the Group will deliver revenue growth for the year underpinned by the core storage and long term contract income that are a central feature of the Group's strength.
Cash generation remains good and net debt for H1 is in line with management expectations.
Whilst the near-term economic outlook remains uncertain, the fundamentals of the business remain strong, with the core long term contracted and storage revenues underpinning the profitability of the business, strong cash generation and the ability to implement inflation indexed price increases and structural cost savings.
The Group's half year results will be announced on August 16th 2023.