Design Group Regulatory News (IGR)

EMBARGOED UNTIL 28th NOVEMBER 2023

IG Design Group PLC

(the "Company", the "Group" or "Design Group")

Results for the six months ended 30 September 2023

Improving operational efficiency and simplifying the business results in profits and margin recovery

IG Design Group plc, one of the world's leading designers, innovators and manufacturers of Gift Packaging, Celebrations, Craft & Creative Play, Stationery, Gifting and related product categories announces its unaudited results for the six months ended 30 September 2023 ('the period').

Highlights for the six months ended 30 September 2023

(a) Adjusted results exclude the impact of adjusting items - for further detail see alternative performance measures reconciliation within the detailed financial review

· Improved profit and margin recovery across both of the Group's divisions, ahead of the Board's expectations for the period

· Adjusted operating profit improved by 26% year-on-year, and margin up 270 bps to 8.6%, driven by continued benefits from strategic initiatives in DG Americas, strong trading in DG International and reduced costs

· As previously announced, revenues down nearly 15%, mainly in DG Americas, driven by lower demand across both seasonal and everyday categories, as well as a return to more traditional seasonality and ordering patterns

· Net debt significantly improved year-on-year reflecting strong working capital management and improved underlying profitability

· Appointment of Rohan Cummings as Group CFO in July 2023, with Paul Bal appointed Group CEO in April 2023 

· Senior management team strengthened with the internal promotion of two new MDs within the DG International division

· Continued investment in more sustainable gift packaging solutions

· In line with the Board's previous guidance, no dividend is being declared.

Outlook

· There remains some continued uncertainty over consumer demand, and therefore ordering by our customers, given the current economic climate

· FY2024 orderbook at 86% (prior year: 92%) indicates that although strong relationships with our customers are sustained, the retail environment continues to be challenging

· Full year profits and margins expected to remain in line with the Board's expectations, with good growth year-on-year

· Cash delivery over the year is expected to be above Board expectations

· Remain on track for aspiration of pre-Covid-19 operating profit margin recovery by 31 March 2025

Stewart Gilliland, Chair, commented:

"We are pleased with the progress we have continued to make on our journey of improving operational efficiency and simplifying our business. As a result, at the half year we have delivered significant growth in profit and margin. In addition, net debt is significantly lower than a year ago, reflecting strong cash flow. I would like to thank all of our colleagues for their collaborative efforts and hard work; their commitment has been instrumental in our collective success thus far.

Whilst the challenging external environment, particularly in the US, has impacted our revenue performance, we have seen increased collaboration in navigating the uncertainty together with our customers. Our strategy of winning together with those customers that are succeeding has certainly been evident and we continue to provide a product portfolio that resonates with our customers. Looking ahead, we do detect continued overall caution in our customers' ordering and their outlook. However, our efforts to build a more efficient model, unlocking synergies and trapped value, will continue and we expect to deliver full year profits and margins in line with the Board's expectation. We are becoming increasingly confident that a more resilient business model is taking shape and that we will realise our stated aspiration to return the Group to pre-Covid-19 operating profit margins by 31 March 2025."

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Overview

We are very pleased with what has been delivered in the period, testament to the hard work across the Group with colleagues increasingly working together to achieve our goals. Thanks to this, we are able to report a strong start to delivering continued margin and profit growth this year. Cash delivery during this period has also been beyond our original expectations. Alongside these significant achievements, we are making good progress in realising our stated aspiration to return the Group to pre-Covid-19 adjusted operating profit margins by 31 March 2025. Our achievement over this period is all the more commendable as it has been reached during a time when consumer demand is under pressure from a number of external forces, which is reflected in lower customer orders.

As reported in June, we have experienced lower order quantities since early 2023 in our Everyday categories and products. Since then, as announced in our trading update, we have seen lower quantities being ordered for the forthcoming seasons, especially Christmas. Further, we have experienced some reversal in the seasonality shifts seen last year when customers had accelerated their ordering following the supply chain disruption of mid-2021, meaning that some sales have returned to the second half of our financial year. The combination of these factors, along with tender gains and losses and favourable currency movements has resulted in an almost net 15% reduction in revenue during the period. The decline occurred primarily in the DG Americas division, while our businesses in continental Europe drove the DG International division to overall revenue growth.

Currency exchange rates have only had a small favourable impact on these results.

The Group's adjusted operating margin rose from 5.9% to 8.6%, delivering $38.2 million of adjusted operating profit which represents a growth of over 25%. The half year profit and margin exceed pre-Covid-19 levels and are the highest experienced in the first half of any year since the CSS Industries Inc. ('CSS') acquisition in March 2020. The seasonality of our business cycle means that first-half profit and margin delivery is diluted in the second half of the year. Nevertheless, our delivery in HY2024 is an encouraging milestone in our aspiration for margin growth and recovery on a full-year basis.

This profit and margin delivery comes from concerted efforts to simplify our business models after the multiple acquisitions of the past decade and improve our operational efficiency at the same time. In addition to enhancing our sales mix following the exit from unprofitable arrangements last year, further benefits have come through improved sourcing of bought-in products. This progress is supported by the easing of some of the cost headwinds experienced in recent years, notably sea freight, though other costs such as labour continue to rise in the present inflationary environment.

Board changes

As previously announced, Paul Bal took on the Chief Executive Officer position on 1 April 2023.

Rohan Cummings was appointed Chief Financial Officer (CFO), joining the Board in July 2023. Rohan came to the Group from Devro Limited (formerly Devro plc which was listed on the LSE), a global leader in the supply of collagen casing and films, where he was the group's CFO from 2020. Rohan has extensive experience of operating in a listed environment, as well as significant commercial and strategic capabilities having worked in complex global operations.

Our strategy

In June 2022 our short-term strategic focus shifted to build a stronger management team, reduce working capital and restore margins. Good progress has been made in these areas with the aspiration for the third being to restore the Group's adjusted operating profit margin to pre-Covid-19 levels by 31 March 2025 (namely, at least 4.5%, being the proforma calculated margin including the full year equivalent of CSS following its acquisition in March 2020). We are about half-way through the journey to deliver this, and we remain confident of achieving this outcome. We further anticipate that achieving that overall margin should return the Group to its highest level of profit delivery (which was an adjusted profit before tax of c$35.8 million delivered in FY2019). Our FY2025 aspirations are sales of $825.0 million at a 5.0% adjusted operating margin.

In June this year we set out our new growth-focused strategy that will guide the Group beyond this first milestone of margin recovery. The overall aspiration of our new strategy is to deliver sustained profitable growth that is primarily driven by organic efforts; and that is underpinned by a resilient and less complex business model.

This new strategy is summarised in the chart below, first shared in our FY2023 results:

This new strategy is purposefully articulated as a series of attributes that we believe should differentiate our services from those of our competitors. Demonstrating those attributes day-in-day-out everywhere across the entire Group should be our strategic aspiration. Set out in this way, the strategy provides a check-list for our various Business Units (as well as our customers) to assess their level of service, their competitiveness and the value they bring.

On launching this new strategy some months ago, we committed to sharing more details of our strategic aspirations and plans at our FY2024 interim reporting. In recent months, all of our Units have carried out detailed strategic reviews that apply our new strategic aspirations to their local setting. As expected, these reviews have identified gaps and opportunities which have been translated into initiatives to pursue by the Business Units. Some, being common themes or issues, such as more effective sourcing, will be addressed collectively through cross-Unit functional forums, leveraging the best expertise and experience available in the Group.

Essentially, the initiatives are about driving sustainable and profitable growth, both by building the capabilities required to further develop our various businesses, as well as further simplifying the Group's operations, allowing more leverage of scale.

The following are the key initiatives that are being undertaken over the next three years to 31 March 2027, in line with our new strategy:

· Strategic

o Purposeful

? Adopting clearer category architecture and product portfolios, leveraging opportunities provided through moving into adjacent categories and product-groups to fill gaps in our offers, thereby ending up with fuller assortments in every market we serve

? Widening our customer base, especially across Europe, whilst also further developing our business with our existing customers through presenting a wider range of offerings

? Developing a single-enterprise culture in our more fragmented businesses so that they integrate and simplify further, and so better leverage the full extent of their resources and capabilities

o Providing good value

? Further entry into Value, Discounter and Club channels reflecting their increased weighting in the retail environments in all of our markets

? Improving segmentation of our customers, especially the "long tail" of small accounts; and more appropriately segmenting our service levels and route-to-market

? Cost optimisation in manufacturing through further site rationalisation as well as leveraging best practice followed elsewhere in the Group, combined with seeking lower-cost warehousing and domestic fulfilment opportunities

· Adaptive

o Design-led

? Continuing to invest in the design and development of products that reflect design trends and consumer preferences, creating unique selling propositions for our customers

? Identifying the key brands and further licencing opportunities that best support more premiumisation in our offers

? Improving the segmentation of our offers and service levels to provide more targeted solutions at different value propositions

o Innovative

? Better adoption of social-media and e-commerce to engage, market and sell to a wider audience

? Adapting our structures and processes in response to increased centralised sourcing by some of our global customers

· Dependable

o Resilient supply chain

? Embarking on further near-shoring opportunities to de-risk our current supply chains, finding solutions that offer more sustainable options

o Responsible

? Continue to develop and sell more sustainable products, including full roll-out of SmartwrapTM, and gaining further distribution of our Eco NatureTM range 

? Develop more sustainable transportation solutions for road and sea-freight

· Strong

o Talent-rich

? Strengthening our sales and account management skills to better serve our customers, including the provision of insights

? Developing our category management skills to improve the presentation of our assortments to the consumer at retail, helping them to better navigate our offers

o Flexible footprint

? Re-designing our organisations to simplify operations, improve effectiveness, and enhance efficiency to become more competitive and more sustainable at both a local and overall Group level

· Collaborative

o Open-minded

? Digitise and standardise our intellectual property management processes across the Group to share and exploit the Group's intellectual property more effectively

? Establish a Group-wide approach to sourcing

o Learning

? Improving our level of knowledge in the areas of e-commerce, data-analysis, category management and selling skills

? Investing in the continued development of our teams, especially in the commercial arena, leveraging a variety of tools and approaches

· Informed

o Data-driven

? Consolidating our current fragmented ERP landscapes within each business

? Developing improved, deeper market insights to inform our focus and decision-making

o Seasoned

? Leveraging experience, expertise and best-practice from across the Group to fine-tune our business processes to make them more effective and efficient

? Strengthening our key account contact teams, and better reflect the increasingly globalised approach of our biggest customers

Successful execution and delivery of these initiatives will significantly strengthen our partnership capabilities and enable our teams everywhere across the Group to deliver even more consumer-focused solutions, first to our existing and longstanding customers - helping them to continue winning at retail; and then to potential customers attracted to what we can offer and deliver. The resulting, better presented, product solutions will enhance the value of our categories in the retail-space; and through the development of more sustainable product and packaging solutions, delivered responsibly, the win will extend beyond the shoppers and consumers of our products, to our planet itself.

The Group remains well-capitalised in terms of its installed manufacturing base. Therefore, the prime use of capital investment over this period will be in the deployment of innovation and technology to support growth, especially the pursuit of sustainable products and solutions, and support the widening of our present assortments to better serve changing trends. Selective "bolt-on" M&A opportunities will only be considered where they can accelerate entry into new product groups, new categories, new channels and customers, or new geographies where we can leverage our existing category strengths. Transformative M&A is not on the agenda. This should also mean that the Board can introduce a sustainable dividend policy once the turnaround is assured, thereby reinstating more tangible investor returns.

Initial projections of the financial impact from the successful execution of these initiatives suggest that by 31 March 2027, the Group should have delivered three consecutive years of profitable sales growth, with annual sales exceeding $900 million by that time; whilst delivering an adjusted operating profit margin of over 6%. This translates to an adjusted profit before tax exceeding $50m. We also expect strong cash conversion to continue, with average annual leverage held to no more than 1.0x under normal conditions. These projections will be further defined as we make progress with these initiatives.

In future reporting we shall highlight examples of our progress and achievement against a selection of the initiatives and projects set out above.

Outlook

The current economic climate continues to create an uncertain environment for shoppers and consumers, and therefore in turn, our customers. This has been experienced in several of our markets since the start of 2023, and we expect it to continue to at least the end of our current financial year. Nevertheless, we are pleased to see our strategy of winning together with our customers succeeding in this environment, though we do detect continued overall caution in their ordering and their outlook. It remains a testament to our longstanding relationships with our customers that we see increased collaboration in navigating the uncertainty together. Our orderbook stands at 86% at the end of October 2023, compared to 92% at the end of October 2022, reflecting both these strong relationships as well as the uncertainty in the environment.

Full year profits and margins are expected to remain in line with the Board's expectation, namely good year-on-year growth across both measures, remaining on the path to the 31 March 2025 aspiration of margin recovery to pre-Covid-19 levels of at least 4.5%. Cash flow delivery is now expected to be stronger than in the prior year. As announced in our trading update, revenue is now expected to remain below prior year as a result of the continued pressures on consumers. Offsetting the impact of this, we expect continued contribution from our efforts to build a more efficient model, unlocking synergies and trapped value.

Facing continued uncertainty over consumer demand, the Board wishes to wait before it resumes paying dividends. Greater confidence in achieving the 31 March 2025 margin aspiration, coupled with further progress with the new growth-focused strategic initiatives will bring that important milestone closer. As our strategic aspirations for the years following FY2025 form, we are becoming increasingly assured that a more resilient business model is taking shape. This is reflected in the articulation above of our financial aspirations in the next-stage of our new strategy.

Sustainability

Our approach to sustainability is underpinned by the intention to minimise our impact on the environment by leveraging our global scale, innovation, and people. As a market leader within our industry, we aim to continually evolve and adapt our products and practices into more environmentally sustainable solutions and continue to believe we have a moral as well as a commercial necessity to strive for the highest standards of ethical behaviour. We are not only driven by the aspiration to effect positive change and operate sustainably, to protect and preserve our planet for future generations, but also recognise it as a catalyst for enhancing our competitive edge.

People - Our people are key to the success of the Group, it is therefore paramount they feel valued and supported, whether it be through the recognition of performance, loyalty, or investment in their development. Training opportunities continue to be a focus around the Group to nurture both personal and professional development. Notably, our leadership development programmes for emerging leaders in DG UK and DG Americas have seen another cohort of members enrolled. Internal promotions of two DG International MDs have strengthened the Operating Board, which also improves its gender diversity. Our development and training opportunities extend beyond emerging leaders, with the DG Europe Academy internal training institute striving to develop knowledge and skills of our employees through internal and external trainers across a broad range of subjects. Following the launch of the first Group-wide employee engagement survey last year, areas for improvement have been established and actions have been identified following the feedback of results to all employees. Nonetheless, it was encouraging to see a high participation rate, with 76% of employees recommending the Group as a good employer, and employees on the whole remaining positive about their roles and the company.

Product - We recognise that the nature of our products requires us to be innovative in our design to create more sustainable solutions and collections to promote to our customers and theirs. This, in turn, enables us to support our customers and consumers in minimising the use of single-use products, those containing plastic, and products that are not recyclable. This is necessary to prevent these products from ending up as waste in landfills and thereby mitigating their contribution to global warming. The development of our shrink-free wrapping paper, SmartwrapTM, has fully eliminated plastic waste through the use of recyclable paper labels. Following the successful development and launch in continental Europe, the Group is currently investigating its expansion and investing further in the technology to enable SmartwrapTM to be manufactured and sold in other markets such as the UK. This complements our Eco NatureTM range already established in the UK which has continued to perform well, and is gaining distribution.

Planet - The ambition to reduce our environmental impact is underpinned by the understanding of our carbon footprint. By the end of the year, we will endeavour to report our Group scope 1 and 2 greenhouse gas emissions which will be one of the first steps on this journey and will not only provide more clarity, but also support us in tracking and monitoring our emissions going forward in our aspirational journey to net-zero. Across the Group the local manufacture of giftwrap and bags, supported by our investment in manufacturing and technology, helps to reduce our reliance on freight and therefore our carbon footprint. This is evidenced by the climate neutral status of DG Europe gift wrap and gift bag ranges. As a testament to our efforts in DG Americas, we have achieved Walmart's Giga-Guru status for the third year in a row, recognising our collaboration with our biggest customer in the area of supply chain carbon reduction.

The Group reports our performance and progress against our key performance sustainability indicators (KPIs) which can be seen in the Sustainability report in the Annual Report and Financial Statements for 2023. In the year we will also continue to progress on our journey towards Taskforce for Climate-related Financial Disclosures (TCFD) reporting by the end of FY2024.

Regional highlights

Revenue has continued to be impacted by lower consumer demand, both realised, and anticipated for the seasonal period ahead. More resilience in continental European markets, coupled with foreign currency benefits, meant that the DG International division delivered revenue growth, though not enough to offset the decline in the DG Americas division. Both divisions grew margins as well as profits, whether through higher sales volume and improved mix, or the various initiatives to improve operational efficiency.

Design Group Americas

The DG Americas division represents 64% of the Group's revenue. It experienced more than a 24% decline in revenue in the period, to $282.4 million driven by a number of factors. The largest factor was reduced consumer demand experienced since the start of 2023. Initially this was experienced in the Everyday categories and products, but since the summer it has also been felt through reduced ordering by our customers in anticipation of reduced consumer demand in the coming seasons, especially Christmas 2023. The reduction therefore impacts across all categories, but understandably the most impacted were Celebrations (in particular "trim-a-package", décor and cards), Craft and Creative Play (mainly creative play products, as pure craft lines proved resilient) and Stationery. Given the driver of lower consumer demand, this reduction occurred across almost all customers. Other drivers of the decline were some reversion of the timing of orders to more traditional seasonality, and net losses from competitive tendering.

As previously reported, since early 2022 the DG Americas team have been focused on the turnaround of their business to drive simplification and deliver improved operational efficiency. Through this work they are also unlocking further synergies resulting from the acquisitions of the past decade, for example in this period six sites have been completely vacated. The main contribution from these initiatives comes from lower headcount, more efficient sourcing and distribution, as well as the impact of prior year "catch-up" pricing. The division also benefited from better sourcing of bought-in products as well as some improvement in sea freight in the period. The combination of these factors more than offset the impact of the lower revenue. Therefore, despite the lower revenues, the division delivered solid adjusted operating profit growth, up 9.0% to $16.6 million, representing an adjusted operating margin improvement of 180 basis points to 5.9%.

With a recently strengthened leadership team, the division sees further opportunities for simplification and greater efficiency. It is also reallocating resource to further develop its commercial capabilities, to complement its design and innovation strengths, in order to become more competitive and return the division to profitable revenue growth.

Design Group International

The DG International division experienced an increase in revenue of over 8% to $161.7 million. Growth centred in continental Europe where the consumer has thus far been more resilient than in our other markets. It is also where we are most successfully winning alongside our key customers as we help them gain retail-share, especially in Celebrations (mainly giftwrap) and Giftware (mainly frames). Further benefit was derived from favourable currency movements, which more than offset small continued decline in the UK and, more recently in Australia, where consumer sentiment has softened following a number of interest rate increases.

Adjusted operating profit rose over 37% to $25.3 million. This represents an adjusted operating margin of 15.7%, up an outstanding 340 basis points. Whilst raising our prices has proved extremely challenging in the present environment, and some costs such as labour continue to rise, we have benefited from reduction in other costs such as sea freight, as well as better sourcing of bought-in products. Our product mix also improved.

The DG UK team is making good progress to address the more challenging consumer sentiment in the UK market and its reorganisation is also progressing well. In the period, we have seen a small reduction in revenue, but a rise in absolute profit driven by a focus on increasing both efficiency and effectiveness, to thereby become more competitive in the tough retail environment. A notable achievement in the period is the successful collaboration with a key customer, Tesco, in the development of its Paperchase range of products since its acquisition of the brand earlier this year.

In continental Europe our innovative SmartwrapTM shrink-free giftwrap solution is fast gaining traction, with over half of our customers now stocking it. Besides its obvious sustainability credentials, it offers a more appealing product in-store to consumers. The teams in these markets are also broadening their categories, especially in the areas of home décor and stationery, and expanding warehousing facilities.

Our products, brands and channels

The Group continues to offer a diverse, yet complementary, product portfolio, providing our customers with a one-stop- shop product and service solution. This underpins the Group's strategy to be a partner of choice for our customers.

Celebrations continue to be the leading category for the Group, consisting mostly of gift packaging and seasonal décor. This category has been affected by the fall in seasonal demand this year in DG Americas, yet still makes up 63% of sales in the period. Craft sales have stabilised this year following the normalisation from Covid-19 pandemic lockdown highs, however creative play sales have decreased due to lower order volumes from our customers in the period. Despite the fall in Group sales, our Gifting category remained resilient in the current environment with strong frame sales, which are 30% up in the period, mostly in continental Europe.

Given that the decline in revenue in some of our markets has been in both Everyday products and the seasonal ranges, our mix of revenue by season has broadly stayed in line with the prior period.

Our distribution of revenue by channel has remained consistent with the prior period, with no specific channel experiencing a disproportionately significant impact compared to the others, with all channels apart from Online facing a 15-25% decline in line with the overall pressure on revenue.

The reduction in customer own branded sales reflects the adverse DG Americas seasonal revenue dynamics mainly in the Celebrations category.

Detailed financial review

The Group's financial results for the first six months of the year are summarised below.

Revenue for the period decreased by 15% to $444.1 million (HY2023: $521.2 million) driven by reduced order quantities guided by lower customer expectations, especially of the forthcoming Christmas season, as well as lower consumer demand for Everyday products in some markets, the normalisation of seasonal ordering, and net losses from competitive tendering. The Group revenues, when assessed in constant currency terms, decreased 16% year-on-year with foreign exchange having a small positive impact on the year-on-year perspective.

Adjusted operating profit has improved year-on-year to $38.2 million (HY2023: $30.5 million) with adjusted gross margin at 21.0% (HY2023: 16.6%). This improvement reflects the benefits of efforts to simplify our business models and improving operational efficiency. The improvement is also helped by the better sourcing of bought-in products, the easing of some cost headwinds experienced in recent years, notably sea freight. Adjusted overheads as a percentage of revenue increased to 12.4% (HY2023: 10.8%) reflecting the increased cost of labour offset only in part by the ongoing efforts to manage costs across the Group.

Overall, the Group finished the half year with adjusted profit before tax of $34.8 million (HY2023: $27.4 million), and a reported profit before tax of $34.1 million (HY2023: $32.0 million). Profit before tax is marginally lower than the adjusted profit before tax, reflecting the adjusting items net charge. Further details of the adjusting items are detailed below. Profit after tax is $24.6 million (HY2023: $23.5 million) for the six months to 30 September 2023.

Finance expenses

Finance costs in the year of $3.4 million are higher than prior year (HY2023: $3.1 million) driven by significantly higher interest rates in this half year when compared to the same period last year. The higher finance costs have been largely mitigated by lower average net debt levels.

Adjusting items

Adjusting items are material items of an unusual or non-recurring nature which represent gains or losses which are separately presented by virtue of their nature, size and/or incidence. The Group's adjusting items in the period to 30 September 2023 total a net debit of $0.7 million compared to a net credit of $4.6 million in the prior year. Details of these items can be seen below.

Acquisition integration and restructuring income - $0.2 million

In order to realise synergies, from acquisitions or existing businesses, integration and restructuring projects are respectively undertaken that aim to deliver future savings and efficiencies for the Group. These are projects outside of the normal operations of the business and typically incur one-time costs to ensure successful implementation. As such it is appropriate that costs associated with projects of this nature be included as adjusting items. The costs incurred in HY2024 relate to the reorganisation and business simplification in DG Americas as follows:

Reversal of impairment: Following the integration of some of DG America's sites in FY2021, a portion of a leased site in Budd Lake, New Jersey was exited, and the right-of-use asset was impaired. In the period ended 30 September 2023, the landlord re-acquired a portion of the impaired site resulting in a reversal of impairment of $0.6 million.

DG Americas business reorganisation: In the period ended 30 September 2023 further restructuring costs, relating to staff, of $0.4 million have been recognised in DG Americas. This follows the announcement in March 2023 of further business reorganisation.

Amortisation of acquired intangibles - $0.9 million

Under IFRS, as part of the acquisition of a company, it is necessary to identify intangible assets such as customer lists and brands which form part of the intangible value of the acquired business but which are not part of the acquired balance sheet. These intangible assets are then amortised to the income statement over their useful economic lives. These are not considered operational costs relating to the running of the acquired business and are directly related to the accounting for the acquisition, as such these are included in adjusting items. These include tradenames and brands acquired as part of the acquisitions of Impact, with the tradenames and brands related to CSS fully amortised in the prior year.

Taxation

The taxation charge for the half year on profit before tax is $9.5 million (HY2023: $8.5 million) with the effective tax rate at 27.9% (HY2023: 26.3%). The taxation charge on adjusted profit before tax is $9.7 million (HY2023: $7.3 million) with the effective tax rate at 27.8% (HY2023: 26.5%).

There is a higher effective tax rate in each jurisdiction than the relevant statutory rate due to permanently disallowable items. The effective tax rate in the UK is 0% as deferred tax is not recognised. The changes in profit mix across the various territories, together with the impact of unrecognised deferred tax on assessed losses in the UK territory, are the main drivers that impact the effective tax rate.

Earnings per share

Adjusted diluted earnings per share of 25.0 cents (HY2023: 19.6 cents) is 28% higher year-on-year driven by the increased profits. Diluted earnings per share is 24.4 cents (HY2023: 23.1 cents) which is lower than adjusted diluted earnings per share reflecting the small adjusting items charge in the period. The reconciliation between reported and adjusted diluted earnings per share is shown in the table above.

Dividend

The Board are not recommending an interim dividend.

Cash flow and net debt

The Group ended the period with a net debt balance of $15.1 million (HY2023: $73.7 million), $58.6 million lower than the same period in the prior year. This is particularly significant given the prior year benefited from proceeds from the sale of properties. The year-on-year progress is mainly reflective of both the higher opening net cash position of $50.5 million (HY2023: $30.2 million) as well as improvements in working capital outflows.

Working capital

Working capital levels of the Group increase steadily in the first half of the year as manufacturing of seasonal product builds ahead of distribution. The second half of the year then sees the borrowing levels of the Group decline and typically move to a net cash position as Christmas-related receivables are collected. The working capital outflow in the period was $99.5 million (HY2023: $136.3 million), a $36.8 million improvement on the prior year. This is largely due to better working capital management across the Group as well as the impacts of the lower volumes in DG Americas.

Adjusting items

During the period there was a $1.8 million net cash outflow (HY2023: $7.2 million inflow) in relation to adjusting items, of which $1.4 million outflow related to costs incurred in previous years. Further detail on adjusting items can be seen above.

Capital expenditure

Capital expenditure in the period was higher than the prior year at $5.2 million (HY2023: $3.2 million) reflecting strategic investment in sustainable SmartwrapTM technology, as well as nearshoring and consolidation of our sites.

Foreign exchange exposure management

Our foreign exchange ('FX') exposure is split into two areas:

Translational FX exposure - This exposure is the result of the requirement for the Group to report its results in one currency. This necessitates the translation of our regional business units' local currency financial results into the Group's adopted reported currency. The Group's reporting currency is US dollars in light of the fact that a significant proportion of the Group's revenues and profits are in US dollars. There remains a smaller part of the Group whose functional currency is something other than US dollars. The constant currency results recalculate the prior year based on the exchange rates of the current period to enhance the comparability of information between reporting periods. The revenue decrease would have been $6.3 million more than prior year if a consistent currency was applied. and the increase in adjusted profit before tax would have been $0.6 million lower.

Transactional FX exposure - This FX exposure is managed carefully by the Group as it can result in additional cash outflows if not managed appropriately. In response to this risk the Group adopts an active hedging policy to ensure foreign exchange movements remain mitigated as far as possible. In addition, a reasonable proportion of this hedging is achieved through natural hedges whereby our purchases and sales in US dollars are offset. The balance of our hedging is achieved through forward exchange contracts and similar derivatives.

Financial position and going concern basis

The Group's net assets at 30 September 2023 were $355.6 million which is $15.9 million lower than last year (HY2023: $371.5 million).

As at the 30 September 2023 balance sheet date, the Directors have assessed going concern in preparation of these financial statements and the outlook for FY2024 and beyond. The Directors are of the opinion the Group has adequate liquidity at the half year with a net debt position of $15.1 million ($7.3 million of cash and $24.0 million of asset backed lending reduced by $1.6 million of facility arrangement fees).

The Directors of the Group have performed an assessment of the overall position and future forecasts for the purposes of going concern. Going concern forecasts have been produced using the Group's FY2024 and FY2025 forecasts and plans. These forecasts have been produced and reviewed in detail by the Board and take into account the seasonal working capital cycle of the business. They have been sensitised to reflect severe but plausible adverse downturns in the current assumptions including the potential impact of a significant disruption in one of our major customer's business, as well as continued pressures on demand in the US market, beyond those risks already factored into the budgets and plans. The base forecasts and additional sensitivity analysis have been tested against the facility limits and covenants. The analysis demonstrated to the Directors that the Group has sufficient headroom for the Group to meet its obligations as they fall due for a forecast period of more than twelve months beyond the date of signing these accounts and will also be compliant with all covenants within this time frame. As such, the Directors do not see any practical regulatory or legal restrictions which would limit their ability to fund the different regions of the business as required as the Group has sufficient resources.

Accordingly, the Directors have continued to adopt the going concern basis of accounting in preparing the financial statements.

Risk

The Group operates a decentralised model where risk management is embedded within strategic and operational decision making, with an overarching role played by the Group team and the Board to ensure oversight in the risk management process.

The following risks are no longer recognised as principal risks for the Group: Financing capacity due to the strong cash flows and profit and margin recovery, coupled with the secured financing arrangement; Manufacturing operations as the essence of this risk is now covered in the strategy and supply chain and sourcing risks; Acquisition investment given the reduced M&A agenda. The risk management framework, along with the remaining principal risks and uncertainties faced by the Group, remain in line with those set out on pages 50 to 55 of our annual report and financial statements 2023.

The key risks for the Group at present continue to be: Strategy, macroeconomic uncertainty, and consumers. Given the journey we are on to address the Group strategy, this risk remains more important than ever to ensure sustainable profit growth is achieved. Macroeconomic uncertainty continues to be high following the succession of geopolitical events impacting our business across our suppliers, customers, consumers and workforce. Similarly, the high inflationary environment and cost-of-living crisis is creating a heightened Consumer risk given the risk of depressed consumer sentiment across our markets, despite the Group focus on working together with the winning retailers.

Statement of Directors' responsibilities

The Directors confirm to the best of their knowledge that these condensed interim financial statements have been prepared in accordance with UK adopted International Accounting Standard 34, 'Interim Financial Reporting' and that the interim management report includes a fair review of the information, namely:

? an indication of important events that have occurred during the first six months and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

? material related-party transactions in the first six months and any material changes in the related-party transactions described in the last annual report.

Approved on behalf of the Group Board by Rohan Cummings.

Alternative performance measures

This review includes alternative performance measures (APMs) that are presented in addition to the standard UK IFRS metrics. The Directors believe that these APMs provide important additional information regarding the underlying performance of the business including trends, performance and position of the Group. APMs are used to enhance the comparability of information between reporting periods and segmental business units by adjusting for exceptional or uncontrollable factors which affect UK IFRS measures, to aid the understanding of the Group's performance. Consequently, APMs are used by the Directors and management for strategic and performance analysis, planning, reporting and reward setting. APMs reflect the results of the business excluding adjusting items, which are items that are material or of an unusual or non-recurring nature.

The APMs and the definitions used are listed below:

· Adjusted EBITDA - Profit/(loss) before finance charges, tax, depreciation, amortisation, impairment (EBITDA) and adjusting items

· Adjusted gross profit - Gross profit before adjusting items

· Adjusted operating profit/(loss) - Profit/(loss) before finance charges, tax and adjusting items

· Adjusted profit/(loss) before tax - Profit/(loss) before tax and adjusting items

· Adjusted profit/(loss) after tax - Profit/(loss) after tax before adjusting items and associated tax effect

· Adjusted tax - Tax before adjusting items

· Adjusted diluted earnings/(loss) per share - Diluted earnings/(loss) per share before adjusting items and associated tax effect

· Adjusted overheads - Selling costs, administration expenses, other operating income, profit/(loss) on disposal of property, plant and equipment (overheads) before adjusting items

· Adjusted cash generated from operations - Cash generated from operations before the associated cash impact of those adjusting items

· Net cash - Cash and cash equivalents, bank overdraft and loan arrangement fees

In terms of these APMs, a full reconciliation between our adjusted and reported results is provided in the detailed financial review above, from which the following key performance metrics have been derived:

· Adjusted gross margin - Adjusted gross profit divided by revenue

· Adjusted operating margin - Adjusted operating profit divided by revenue

· Adjusted EBITDA margin - Adjusted EBITDA divided by revenue

· Cash conversion - Adjusted cash generated from operations divided by adjusted EBITDA

Further details of the items categorised as adjusting items are disclosed in more detail in note 3.

CONDENSED CONSOLIDATED INCOME STATEMENT

SIX MONTHS ENDED 30 SEPTEMBER 2023

Earnings/(loss) per ordinary share

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

SIX MONTHS ENDED 30 SEPTEMBER 2023

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

SIX MONTHS ENDED 30 SEPTEMBER 2023

SIX MONTHS ENDED 30 SEPTEMBER 2022

YEAR ENDED 31 MARCH 2023

In line with the Group's accounting policy, share capital, share premium, capital redemption reserve, merger reserve and hedging reserve are translated into US dollars at the rates of exchange at each balance sheet date and the resulting cumulative exchange differences are included in translation reserves.

CONDENSED CONSOLIDATED BALANCE SHEET

AS AT 30 SEPTEMBER 2023

CONDENSED CONSOLIDATED CASH FLOW STATEMENT

SIX MONTHS ENDED 30 SEPTEMBER 2023

NOTES TO THE INTERIM FINANCIAL STATEMENTS

SIX MONTHS ENDED 30 SEPTEMBER 2023

1. Accounting policies

Basis of preparation

The financial information contained in this interim report does not constitute statutory accounts as defined in Section 435 of the Companies Act 2006 and is unaudited. Statutory accounts for the year ended 31 March 2023 were approved by the board of directors on 19 June 2023 and delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 of the Companies Act 2006. These interim financial statements have been reviewed, not audited.