Restore lowers expectations amid technology division struggles

4th Jul 2023 09:16

(Sharecast News) - Restore reported ongoing growth in its core records management division in a trading update on Tuesday, but flagged weaknesses in its technology business.

The AIM-traded firm noted a reduction in demand for certain services, particularly in bulk digital scanning, and a significant decrease in the price of recycled shredded paper.

As a result, Restore said it expected that adjusted profit before tax for the full year would be lower than previously anticipated, at £31m.

The board said the records management division, which makes up 70% of Restore's profits, still saw expansion in storage revenues and effective cost control.

Successful contract wins for the Department for Work and Pensions (DWP) and the BBC contributed positively to the division's performance.

Those gains were contrasted by an anticipated decline in digital revenues due to the absence of a non-repeating large public sector contract from the first half of 2022, valued at £5.2m.

Additionally, the digital business experienced a slowdown in order conversion and demand for bulk scanning services, resulting in the downward revision of profit expectations.

Meanwhile, other services within the digital division, including cloud, digital mailrooms, BPO, and records preservation, were performing as expected and aligning with management forecasts.

Those services contribute more than 40% of the division's revenues and encompass a substantial proportion of longer-term contracts.

In the secure lifecycle services division, meanwhile, Restore's technology IT recycling (ITAD) revenues were continuing to decline year-on-year due to reduced customer investment in IT hardware following a surge in procurement during 2021 driven by the pandemic.

Although quoting activity improved in June, demand remained weak, prompting a revision of expectations for the year.

The company said it was implementing strategic and tactical actions to reduce costs across the operation, including the closure of one processing site, while ensuring capacity and skills were maintained for future demand recovery.

On the financial front, Restore said it expected higher interest costs for the year due to recent changes in the UK base rate and anticipated further increases in the third and fourth quarters.

The company said it had assumed a total interest cost of around £9.6m for 2023, on a pre-IFRS16 basis.

That represented an increase from £5.9m in 2022, and £2.9m in 2021.

In line with its ongoing cost reduction efforts, Restore said it was focusing on structural cost savings in staff and supplier input costs.

The company said it had already implemented various measures, and was planning to reduce permanent staff by 230 early in the third quarter.

Those reductions would affect senior managers, sales, support functions and operations, resulting in total savings of £4.5m for 2023.

Of that amount, £1.1m in savings was anticipated for the first half, with an additional £3.4m expected in the latter six months.

"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," Restore said in its statement.

"Cash generation remains good, and net debt for the first half 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."

Restore said it would announce its half-year results on 16 August.

At 0903 BST, shares in Restore were down 30.1% at 160.76p.

Reporting by Josh White for Sharecast.com.