Character Regulatory News (CCT)

The information contained within this announcement

is deemed by the Company to constitute inside information stipulated under the Market Abuse Regulation (EU) No. 596/2014.

Upon the publication of this announcement via the Regulatory Information Service, this inside information is now considered to be in the public domain.

LONDON: Thursday, 10 December 2020

THE CHARACTER GROUP PLC

("Character", "Group" or "Company")

Designers, developers, and international distributor of toys, games, and giftware

PRELIMINARY RESULTS FOR THE YEAR TO 31 AUGUST 2020

"The resilience of Character's performance has arisen from the ability of many of its customers to effectively service demand by migrating sales from bricks and mortar outlets to online shops and marketplaces, when needed. Character's success in preserving profitability in troubled times and positioning itself to take advantage of the current opportunities has been down to the management's ability to read and respond to fast-evolving trends in the Group's markets."

"Trading in the lead up to Christmas 2020, despite the second UK lockdown, has been significantly ahead of the previous year's sales. Sales in Q1 are up by more than 30% over the same period last year and the prospects for the current financial year are looking extremely positive."

"We expect FY 2021 to be the beneficiary of the deferral of the strong trading that we originally anticipated. Whilst we will continue to monitor the position, it is apparent that the Group is ahead of management expectations for the first half to February 2021 and market expectations for the financial year as a whole."

THE CHARACTER GROUP PLC

Designers, developers, and international distributor of toys, games, and giftware

PRELIMINARY RESULTS FOR THE YEAR TO 31 AUGUST 2020

INTRODUCTION

The strong performance that we had originally forecast at this time last year for the second half of the year being reported could not be realised due to the lockdowns and restrictions that subsequently impacted the global economy and our markets since March 2020. Overall, despite the challenges we have faced during the Covid-19 pandemic, we are pleased to be able to report that the Group traded satisfactorily, and we have finished the year with revenue of £105.3m and a profit before tax of £5.0m.

The Group has continued to be strongly cash-generative and, in the year to 31 August 2020, delivered £19.6m of cash from operations. Through our ongoing careful management of working capital, we ended the financial year with a strong net cash balance of £19.1m.

It is also encouraging to report that the performance of the Group since the end of the first lockdown in early July 2020 and in the lead up to this Christmas has been very strong. Consequently, the anticipated strengthening and growth of our business has not been lost, but merely been deferred, and is expected to be realised in the current financial year ending August 2021.

COVID-19

The supply side of the Group's operations in the Far East experienced temporary disruption soon after the Chinese New Year in February. However, full capabilities were rapidly restored, and most factories returned to near normal production capacity within a month. The demand side of the business, particularly in the UK, was adversely impacted in the early part of the first lockdown by closures of non-essential stores, shops and warehousing and distribution centres. At the beginning of this lockdown our online retail customers continued to place modest levels of orders but, as the duration of the initial lockdown was extended, these order levels built, benefiting from the migration of consumer purchasing to internet-based suppliers. From mid-June, when the first lockdown restrictions were eased and the non-essential bricks and mortar stores re-opened, our customer order levels strengthened considerably and this has continued into the new financial year, despite the imposition of the UK's second lockdown through November.

The management team and staff continue to safely maintain operations at all of our facilities, initially in order to preserve the business-critical functions and service the lower levels of demand of the Group and subsequently to fulfil the improving demand for our goods. Clear and firmly applied COVID-19 procedures (in line with government guidelines and other good practice) have been in place at all our sites to ensure the safety and wellbeing of our staff and visitors to our premises. Due to the careful stewardship of our management and the sheer grit and determination of our operational, sales, administrative, product development and support teams in successfully safeguarding the essentials of our operations during the pandemic, the Company has emerged strongly from the effects of the global lockdowns.

OPERATIONAL PERFORMANCE

Group revenue in the year to 31 August 2020 was £105.3m, against a turnover of £120.4m in the comparable 2019 period. Of particular note was the substantial growth in sales in the USA, mainly due the successful launch of Goo Jit Zu.

The gross profit margin for the Group was 28.6% (FY 2019: 34.5%), reflecting the increased proportion of lower-margin, international FOB sales. On an absolute basis, the gross profit was £30.2m compared to £41.6m for the previous year.

A significant proportion of the Group's purchases are made in US dollars; the Group is therefore exposed to foreign currency fluctuations and manages the associated risk through the purchase of forward exchange contracts and derivative financial instruments. Under International Financial Reporting Standards (IFRS), at the end of each reporting period the Group is required to make an adjustment in its financial statements to incorporate a "mark to market" valuation of such financial instruments. The "mark to market" adjustment for this financial period results in a notional loss of £2.0m. This compares to a corresponding notional profit of £0.36m reported in the year to 31 August 2019. These "mark to market" adjustments are non-cash items calculated by reference to unpredictable and sometimes volatile currency spot rates at the relevant balance sheet dates. To present the results on a "normal" basis, these "mark to market" profit adjustments on FX derivative positions are excluded but shown separately as "significant items" to demonstrate the "underlying" profitability highlighted in this Report.

The Group is reporting a profit before tax in the period under review of £5.0m (FY 2019: £11.1m). Underlying earnings before interest, tax, depreciation, and amortisation were £8.2m (FY 2019: £13.7m).

Underlying basic earnings per share before significant items amounted to 18.12p (FY 2019: 43.27p). Underlying diluted earnings per share, on the same basis, were 18.08p (FY 2019: 42.96p).

FINANCIAL POSITION, WORKING CAPITAL & CASH FLOW

We have worked diligently to ensure that we finished the financial year in a position that optimises our potential for future growth.

With the Group's net assets at 31 August 2020 totalling £34.0m (FY 2019: £34.1m), the capital base of the Company has been preserved at last year's level, notwithstanding the payment of dividends totalling £3.2m.

Inventories at the year-end were c.£1.7m lower at £14.7m (FY 2019 £16.4m), reflecting sensitive management of purchases in anticipation of reduced levels of demand in the year as the effects of the pandemic became apparent.

As we highlighted at the start of this Report, the Group generated cash from operations of £19.6m in the period (FY 2019: £10.4m). Interest charges on short-term use of working capital facilities during FY 2020 amounted to £0.34m (FY 2019: £0.47m). Most of this interest charge related to the Group's Danish subsidiary OVG-Proxy A/S ("Proxy").

At the end of the financial year, after making payments for dividends and share buy-backs (referred to in this Report), the Group had a net cash position of £19.1m, compared to £6.5m at 31 August 2019.

DIVIDEND

The Board remains committed to maintaining the final dividend as we believe this reflects our confidence in the Company's ability to grow profits and generate and develop further sustainable cash flow. The Board will be recommending to shareholders a final dividend of 3.0p (2019 H2: 13.0p per share). This constitutes an increase of 1.0p over the interim dividend declared in May 2020 and evinces the Board's commitment to re-establishing a progressive dividend policy. This, together with the interim dividend of 2.0p per share paid in July 2020, makes a total dividend for the year of 5.0p per share (FY 2019: 26.0p).

The 2020 final dividend is covered approximately 3.6 times by underlying annual earnings (2019: 1.66 times). Subject to approval by shareholders at the Annual General Meeting ("AGM") on Friday, 22 January 2021, the final dividend will be paid on 29 January 2021 to members on the register as at the close of business on 15 January 2021; the shares will be marked ex-dividend on 14 January 2021.

PROXY

The Scandinavian markets served by Proxy have also suffered from the effects of the global pandemic and this impacted its ability to achieve management's forecasts in the year under review. During the period, the operating loss sustained by the Group's Scandinavian operations was approximately £0.49m on turnover of approximately £13.6m (FY 2019: loss of £0.75m on turnover of £13.0m). A loan of approximately £1.42m (including accrued interest), made by Vækstfonden (the Danish Growth Fund) to Proxy prior to it becoming a Character Group subsidiary in 2018, was acquired by a Group subsidiary during the year for approximately £0.52m. The gain of £0.9m on the acquisition of this loan is shown as an exceptional item in the Group's Income Statement.

The reorganisation of the Proxy business has been completed. Its product portfolio has now been fully rationalised so that it is largely aligned with that of the rest of the Group, allowing the Proxy business to be operating effectively as a "clone" of Character Options (the Group's principal UK trading subsidiary) in the Scandinavian territories. This coupled with Proxy's adoption and implementation of the sales reporting, forecasting and purchasing systems and processes of Character Options, has led to increased operational efficiencies. The Board believes that, with the restructuring costs being fully absorbed in the year under review, Proxy's prospects are encouraging and that it is on track for a return to profitability in the current financial year.

BREXIT 

The Group assessed the potential impact of Brexit, particularly a "no deal" outcome, on the Group's operations in early 2019 and identified the areas that would need to be addressed to ensure the uninterrupted continuity of the Group's UK operations and its cross-border business with the EU. Proxy serves as the Group's "authorised representative" for the purposes of regulatory compliance with the EU's Toy Safety Directive. Product labelling and packaging changes have been implemented to comply with the requirements in both the UK and the EU.

The mainland UK business will be unaffected by the changes following Brexit, as the imports of its inventories are from the Far East. The FOB business supplying Europe from the Group's Far East operations will similarly not be affected by Brexit.

A small part of the Group's turnover derives from the supply to Irish customers (both sides of the border) from the UK. It is believed that challenges posed by a "hard" Brexit will be overcome and this will not have a material impact on the business.

SHARE BUYBACK PROGRAMME

During FY 2020, the Company acquired for cancellation a total of 46,500 ordinary shares in the Company at an aggregate cost of approximately £162,000 (excluding associated costs), with the average cost being approximately £3.48 per ordinary share (FY 2019: 237,807 ordinary shares were acquired and cancelled at an aggregate cost of approximately £1.27m and an average cost of approximately £5.32 per ordinary share).

The Company currently has an authority to buy-back up to 3,200,000 ordinary shares, which has not been utilised since it was granted at the Annual General Meeting ("AGM") in January 2020 and which authority will expire at the 2021 AGM.

It remains part of the Group's overall strategy to continue to repurchase the Company's own shares, when considered appropriate. However, the restrictions on pricing and on volumes of buybacks imposed by the Market Abuse Regulation have frustrated this objective since January 2020.

The Board believes that it is in the Company's and all investors' interests to provide shareholders who wish to realise part or all of their investment in the Company with an opportunity to access liquidity that is not otherwise available in the market and to return excess capital to shareholders. Accordingly, the Board will be seeking to renew its authority to buy back up to 3,200,000 ordinary shares (constituting approximately 15% of the total voting rights in the Company) at the forthcoming 2021 AGM. In addition to enabling buybacks to be implemented by way of an announced buyback programme for the purpose of reducing the Company's share capital (as in the recent past), this authority will also allow the Company to make or arrange tenders for its issued shares. Whilst there is no current, fixed intention to exercise this share purchase authority, in line with the Board's buyback strategy, the Company will continue to repurchase the Company's own shares. as and when considered appropriate. Details of any intention to exercise this authority will be announced and any tender proposal(s) will be fully communicated to shareholders if and when the Board resolves to implement such arrangements.

TOTAL VOTING RIGHTS

As at today's date, the Company has 23,608,501 ordinary shares in issue, including shares held in treasury. The Company holds 2,228,720 ordinary shares in treasury, representing approximately 10.42 per cent. of the issued share capital (excluding these treasury shares), which do not carry voting or dividend rights. Therefore, the total number of voting rights in the Company is 21,379,781. This figure of 21,379,781 may be used by shareholders as the denominator for the calculations by which they may determine if they are required to notify their interest, or change to their notified interest, in the Company under the Financial Conduct Authority's Disclosure Guidance and Transparency Rules.

OUR PEOPLE

Our dedicated teams are our most important asset and remain the beating heart of our operations at locations in the UK, Scandinavia, and Asia. In total we employ 209 people (FY 2019: 212). The Board has highlighted in the past and continues to acknowledge the enormous debt of gratitude that the Company owes to the unstinting dedication, loyalty, and service of its employees at all levels in the business, particularly in managing and overcoming the challenges faced by the Group in recent months.

The imagination, enthusiasm, and commitment of all our staff has been inspiring and has produced: the diverse and exciting portfolio and pipeline of products detailed below; the new and developing markets for our products; the strong and fond relations with our new and existing brand owners, suppliers, and customers; and the operational efficiency to fulfil demand for our products.

ANNUAL GENERAL MEETING (AGM)

The Company's 2021 AGM will be held on 22 January 2021. Given UK government guidance on social distancing and the restrictions that currently apply, the AGM will be conducted as a closed meeting with the minimum necessary quorum of two shareholders present in person or by proxy. Regretfully, shareholders will not be able to attend or be admitted to the meeting. There will however be an opportunity for shareholders to submit questions to the Board in advance of this meeting and written responses will be published on the Company's website after the AGM. A separate circular letter will be sent to shareholders to convene the AGM, which will further detail arrangements and provide a summary of the business of that meeting. In accordance with established practice, the Company intends to issue a further trading update on the day of the AGM.

OUR PRODUCT PORTFOLIO

The demand for our toys has been sustained since the onset of the Covid-19 pandemic. Our ranges are performing well, with notable increased sales traction since the end of the UK's first lockdown.

We have a wide, diverse and exciting product range which we believe offers something to all our target consumers. Our top performing brands during the year under review and in the lead up to Christmas 2020 are:

We were excited to launch a range of wooden figures, vehicles and play buildings under a new Peppa Pig brand licence last summer and this was very well received in the market. On the back of this successful move into sustainable, environmentally-friendly, wooden toy products, we have secured and are in negotiations to win further licences from well-known brand owners that are keen to increase the "green" credentials of their own brands. These include Batman, Disney Princess, Fireman Sam and Ben and Holly. We aim to develop and bring to market further ranges of wooden toy products over the coming years.

Once again, Character Options featured strongly in the prestigious 12 "Dream Toys" list for Christmas 2020 revealed in October by the Toy Retailers Association (TRA). Three of Character's "hero" toys were selected:

In addition, five further Character toys were named as the most sought after in their categories:

On top of these prestigious awards, two of the Group's toy products - Gotta' Go Flamingo and PenSilly were selected as the "hottest toys on sale" in their categories in ITV's "How to Spend it Well at Christmas" series hosted by Phillip Schofield and aired on television last month.

Apart from our successful core brands and welcome industry recognition for individual products from our portfolio range, we have had many other successes during the year with other products, including Treasure X , My Baby Tumbles, Project X, Tap It and flipside.

The kudos that these products have gained from these honours has been a terrific marketing tool and, as a consequence, demand for them has been further buoyed and we expect many of them to be sold out by Christmas.

Product development, which has been key to our success in broadening and strengthening our portfolio, has continued apace and our continued attention to this important aspect of the business has been instrumental in assuring the Group of a pipeline of additions to and refreshment of our product lines.

The current range and the developments in prospect bode well for an exciting future.

TRADING OUTLOOK

The quality of the Group's current portfolio of products has been endorsed by the strength of customer and consumer demand and further penetration being achieved for our products in the USA and other international markets since the commencement of the current financial year. We believe that the product portfolio is one of the strongest and best performing offerings that the Group has gone to market with in recent years.

The resilience of Character's performance has arisen from the ability of many of its customers to effectively service demand by migrating sales from bricks and mortar outlets to online shops and marketplaces, when needed. Character's success in preserving profitability in troubled times and positioning itself to take advantage of the current opportunities has been down to the management's ability to read and respond to fast evolving trends in the Group's markets.

The first UK lockdown spurred creativity in many aspects of the toy industry. The Group has developed an exciting and innovative line of new products, many of which are already in our current catalogue and others are in the pipeline for launch in the New Year. In recent months, the Group has developed ever closer and productive collaborations with its customers, brand owners and suppliers. As highlighted above, this has led to new and enlarged licencing opportunities with new and existing brand owners as our creative concepts successfully transition to sales of products.

Trading in the lead up to Christmas 2020, despite the second UK lockdown, has been significantly ahead of the previous year's sales. Sales in Q1 are up by more than 30% over the same period last year and the prospects for the current financial year ending August 2021 are looking extremely positive. We expect FY 2021 to be the beneficiary of the deferral of the strong trading that we originally anticipated for the second half of the year just ended. Whilst we will continue to monitor the position, it is apparent that the Group is ahead of management expectations for the first half to February 2021 and market expectations for the financial year as a whole.

The Board looks forward to further updating shareholders on the outcome of the 2020 Christmas trading period and prospects at the forthcoming AGM.

10 December 2020

Cash, cash equivalents and borrowings consist of:

The Group has adopted IFRS 16 "Leases" as at 1 September 2019 using the modified retrospective approach. Previously the Group' leases were classified as operating leases under IAS 17, which were off-balance sheet and charged to the Group income statement on a straight-line basis over the term of the lease. On adoption of IFRS 16 a right of use asset and a lease liability is included on the Group balance sheet and depreciation and interest has been charged to the Group income statement instead of existing rental expenses. The Group has elected on adoption not to recognise right of use assets and lease liabilities for leases with a remaining term of less than one year. The lease payments associated with these agreements is recognised on a straight-line basis over the remaining lease term.

A summary of the impact on the Group income statement and Group balance sheet is as follows:

Impact on the Group balance sheet:

The Directors recommend a final dividend of 3.0 pence per share (2019: 13.00 pence) amounting to £641,000 (2019: £2,773,000).

If approved by shareholders, the final dividend will be paid on 29 January 2021 to shareholders on the register on 15 January 2021.