Design Group Regulatory News (IGR)

EMBARGOED UNTIL 30th November at 7.00am

IG Design Group PLC

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

Results for the six months ended 30 September 2022

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 results for the six months ended 30 September 2022.

Highlights for the six months ended 30 September 2022

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

(b) All prior year adjusted results have been represented to exclude share-based payment credits/charges from adjusting items

· Group revenue increased 8% to $521.2 million, with both of the Group's divisions, DG Americas and DG International, performing ahead of last year reflecting an acceleration of orders as customers seek to de-risk supply chains as well as catch-up pricing.

· Improved profits and margin recovery across both of the Group's divisions, with Group adjusted operating profit up 35%, and margin up 120 bps to 5.9%, reflecting cost-savings achieved.

· The Group has operated well within its banking covenants, with working capital requirements tightly managed and net debt lower than expected throughout the period.

· The Group appointed Paul Bal as Chief Executive Officer effective from 1 April 2023.

· Good progress with the DG Americas turnaround and recruiting a new DG Americas CEO.

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

Outlook

· A strong orderbook for FY2023, which at the end of October 2022 was at 93% of budgeted revenues (end October 2021: 91%), indicating customer relationships have been sustained and there is strong ongoing demand for the Group's products.

· The cost environment remains challenging, but where possible cost inflation is being mitigated, resulting in an operating margin improvement expected in FY2023.

· Improved working capital and cash performance is expected to mitigate the impact of higher interest base rates.

· The Group aims to complete a full refinancing in the second half of FY2023, and work on this has started.

· The Group saw an acceleration of customer orders related to Christmas trade, during the first half of the financial year, leading the Board to conclude that there will be a strong first half weighting to the financial results for the full year to 31 March 2023.

· The Group has also seen stronger trading in certain Everyday categories than previously had been anticipated. Due to this, the Board believes that the financial results for the full year to 31 March 2023 will be ahead of expectations, delivering a small full year adjusted profit before tax. As previously communicated the Board remains cautious on its outlook due to uncertainties relating to the current macroeconomic environment.

· With the senior team being reassembled and a turnaround commenced, the Board will shortly initiate the development of a growth-focused strategy.

· Risk around deteriorating consumer sentiment in some markets causes the Board to remain cautious as to the outlook beyond FY2023.

Stewart Gilliland, Interim Executive Chair, commented:

"Our strong performance during this period has undoubtedly benefitted from customers seeking to avoid last year's supply chain issues by ordering earlier, but also from recognising our high level of service and commitment to them. Pleasingly, the restructuring and simplification of the DG Americas business is progressing well. The turnaround of the Group has commenced and is expected to now gather momentum following the recently announced senior leadership appointments. Looking forward, the development of a growth-focused strategy alongside the establishment of a more resilient business model will benefit shareholders.

While the challenging external backdrop and the uncertain impact of sustained cost inflation on consumer sentiment in some markets does temper our optimism notwithstanding the strong start to this year, the Group has once again proved that it has extremely strong relationships with its customers and there is ongoing demand for our products."

OVERVIEW

The Group has had a strong start in FY2023, contrasting with the challenges faced through much of FY2022. Revenue increased across both the DG Americas and DG International divisions. Wishing to de-risk their supply chains and ensure product availability, many of our customers accelerated their seasonal ordering. Through our 'catch-up' pricing they also recognised our consistent, high service-levels in the face of significant inflation and supply chain uncertainties. As a consequence of this, as well as product redevelopments, we have delivered increased revenue of 8% over the equivalent period last year. The Group's adjusted operating margin recovered from 4.7% to 5.9% year-on-year. It is further pleasing to deliver Group results that are now ahead of HY2020 and before the disruption of the Covid-19 pandemic. Furthermore, good progress has been made in the turnaround of the DG Americas division.

Currency exchange rates have not been favourable during this period, especially with the strength of the US dollar versus most other currencies. This has impacted reported sales levels and profitability versus underlying results.

Since the summer of 2021, the Group has experienced significant cost increases, particularly in relation to freight, raw materials and labour. Freight presented the most significant challenge across the Group with the scarce availability of sea containers significantly increasing the freight rates paid. Freight rates in FY2023 so far, though stabilising, have remained higher than the prior period on a number of our key shipping routes. Raw material costs have increased significantly during this year, especially where higher energy costs are a factor. The average prices paid for paper, the Group's major category of material purchases, increased around 50% compared to the prior period.

On 1 June 2022, the Company signed an amendment to the existing banking facilities to extend the agreement to March 2024 and replace the existing covenants with two new covenants which run to March 2023, and as a result the Directors believe the Group has sufficient facilities to support the working capital requirements of the business through the current financial year. During the current period, the Group has operated comfortably within the covenants, with overall working capital levels managed to well below expected levels notwithstanding the accelerated trading. Consequently, net debt was below expectation throughout the period. As previously announced, the Group aims to complete a full refinancing in the second half of FY2023, and work on this has started.

BOARD CHANGES

On 3 November 2022, the Board announced the appointment of Paul Bal as CEO Designate, ahead of his appointment as CEO with effect from 1 April 2023. This followed an extensive search and selection process involving both external and internal candidates. From that date Stewart Gilliland will revert to the role of Non-Executive Chair. The search for a replacement Chief Financial Officer is underway. Lance Burn has agreed to remain in role as Interim Chief Operating Officer through to 31 October 2023 to continue to lead the transformation of the DG Americas business and assist Group transition.

INCENTIVE SCHEME

A new Long-Term Incentive Plan ("2022-2025 LTIP") was granted on 11 August 2022, following the cancellation of grants made under the Long-Term Incentive Value Creation Scheme (the "VCS") on 28 June 2022. The 2022-2025 LTIP is subject to certain performance criteria being achieved during a three year period: relative Total Shareholder Return ("TSR") versus FTSE SmallCap (excluding Investment Trusts) constituents; and EPS growth, with an 'underpin' condition to reduce vesting levels if unwarranted 'windfall gains' from share price movements arise. The Remuneration Committee believe the 2022-2025 LTIP is a more appropriate incentive scheme and aligns to the interests of employees and shareholders.

OUTLOOK

Looking ahead, a high inflationary environment is expected to continue, with the challenge transferring from freight and labour to energy and raw materials. This is expected to translate into depressed consumer sentiment in our main markets to varying degrees, meaning continued uncertainty. However, the Board are encouraged by the ongoing strength of the Group's customer relationships with the resultant 'catch-up' pricing and accelerated ordering, with a strong orderbook at over 93% at the end of October 2022, compared to 91% at October 2021. The Group's core strategic pillar of 'working with the winners' continues to resonate as working with the winning retailers of now and the future is key to driving revenue growth and delivering profits. Full year operating margins are expected to improve year-on-year across the Group. These margins are not expected to be as impacted by higher finance charges as initially thought, despite increased borrowing rates, as working capital and average net debt are now expected to remain below previous expectations. Average net debt across the Group is expected to be below $40 million for FY2023, which although better than originally indicated, is higher than the prior year average net debt of $17.2 million, reflecting a lower opening net cash position at the start of the year.

Consequently, the Board expects greater profit improvement in FY2023, mainly reflecting progress being made in DG Americas and stronger trading in certain Everyday categories, now expecting to deliver a small adjusted profit before tax versus a loss last year. The Board aspires to return to paying dividends but based on the current outlook for the Group, the Board still does not expect to be in a position to pay a dividend in relation to FY2023. Risk around deteriorating consumer sentiment in some markets causes the Board to remain cautious as to the outlook beyond FY2023.

The Board's short-term focus remains on building a strong senior management team, repairing margins lost last year, reducing working capital levels, securing longer-term financing, and simplifying the business, particularly in DG Americas. Following the appointment of a CEO, the Board will now also initiate the development of a growth-focused strategy with the objective to explore opportunities to grow the business in a sustainable manner. 

SUMMARY HY2023 FINANCIAL RESULTS 

Revenue increased by 8% to $521.2 million (HY2022: $483.9 million) mainly driven by customers bringing seasonal orders forward compared to last year to mitigate against supply chain risk experienced in the second half of last year. During the period, the Group has also benefitted from redeveloping product ranges and negotiated price increases with our customers reflecting the significant increase in freight and raw material costs. The Group's responses to effectively counter the cost headwinds through sales price increases, in addition to the restructuring of DG Americas, has resulted in an increased adjusted operating margin of 5.9% (HY2022: 4.7%). Adjusted profit before tax of $27.4 million is up on the prior half year profit of $20.3 million resulting in an adjusted diluted earnings per share of 19.6 cents (HY2022: 14.2 cents) reflecting the strong first six months of trading. Foreign exchange, particularly the weakening pound versus the strengthening dollar, is having a significant impact on Group performance versus prior year. At constant currency, revenue would have increased by 12% ($54.8 million) compared to the 8% ($37.3 million) increase. Similarly, adjusted operating profit would have increased by 44% ($9.3 million) compared to 35% ($7.9 million).

The Group ended the half year with a net debt balance of $73.7 million (HY2022: $58.8 million), $14.9 million higher than prior year. The opening net cash position was $46.3 million lower than prior year and the improvement in cash flow during the period is reflective of a lower working capital requirement at half year, net proceeds of $6.7 million from the sale of the property in Manhattan, Kansas, offset in part by the purchase of the remaining 49% share of Anker Play Products, LLC ("APP").

Adjusting items in the first half of the year are a net credit of $4.6 million (HY2022: net charge $1.4 million) which includes insurance income received of $1.5 million from the settlement of the Impact Innovations, Inc ('Impact') Representations and Warranties insurance claim due to accounting and tax issues present at acquisition. As part of the ongoing DG Americas integration and restructuring, $4.6 million of profit on the sale of the property in Manhattan, Kansas has also been recognised as an adjusting item. Alongside these credits, there are also additional integration costs relating to the restructure of the DG Americas business, as well as amortisation of acquired intangibles. 

The Group ended the half year with a profit before tax of $32.0 million (HY2022: $18.9 million), an improvement of $13.1 million. Consequently, diluted earnings per share is 23.1 cents (HY2022: 12.3 cents).

Given we are in the early stages of a turnaround, and the uncertain wider economic backdrop, the Board are not recommending an interim dividend (HY2022: 1.7 cents).

OUR STRATEGY

The experiences of the prior year highlighted aspects of our business model that need to be addressed and strengthened. Our immediate priorities are building a strong senior management team, repairing margins lost last year, reducing working capital levels, securing longer-term financing, and simplifying the business, particularly in DG Americas.

As we are making good progress with the senior appointments, the Board will shortly initiate the development of a growth-focused strategy. Whilst the current focus has been on ensuring the Group emerges more resilient to the types of challenges encountered in FY2022, some of the impacts of which persist into FY2023, the objective of that exercise is to look beyond this and will explore opportunities to grow the business in a sustainable manner. 

SUSTAINABILITY

Progressing our environmental, social and governance (ESG) journey remains a priority. Not only do we have ambition to drive positive change and act sustainably, we also feel it is a driver of competitive advantage. As a market leader in our industry, we aim to leverage our design and innovation skills to create and manufacture sustainable products and packaging.

We continue to develop and explore new solutions, evidenced by investment in technology to enable the manufacture of shrink-free gift wrap in two of our key markets. Shrink-free gift wrap eliminates the use of plastic from the product and packaging, which reduces the volume of waste sent to landfills, aiming to reduce the pollution of our ecosystems. The manufacture of recyclable gift bag ranges is another sustainable solution, with increasing support from our customers. The local manufacture of giftwrap and bags supports local economies and helps to reduce our carbon footprint. The development of these sustainable product offerings is facilitated by investment in both capital equipment and our people.

We recognise our employees are key to the success of the Group and value both the talent and commitment of our teams, and so strive for an environment where our employees feel supported. Whilst the macroeconomic environment is challenging for the Group, we recognise that it is also challenging for our employees, we are therefore monitoring, and responding where appropriate to the impact of the cost-of-living crisis on our employees across the Group.

Our partnership with our customers also plays a significant role in progressing our ESG agenda. We aim to promote our sustainability principles to all our customers and pride ourselves on working with the winning retailers of now and the future. Many of our customers are already calling for sustainable solutions and recognise our achievements as a Group in providing these. Walmart have awarded us Giga-Guru status this year in their supply chain carbon reduction strategy project, Project Gigaton 2021.

Our sustainability framework, 'helping design a better future', launched in FY2021, is helping the Group to monitor, improve and demonstrate our performance as we continue to drive forward our approach to ESG.

REGIONAL HIGHLIGHTS

Overall, revenue and adjusted operating profit have increased across Group segments as the first half results benefit from earlier shipments and the Group mitigates margin risk seen as a result of significant cost headwinds.

Design Group Americas

The DG Americas business represents over 70% of revenue and increased 7% year-on-year to $373.4 million (HY2022: $347.5 million), driven by the acceleration of seasonal sales which are 12% ahead of prior year. It is particularly décor sales, as well as greeting cards and the 'trim a package' ranges, all within our Celebrations product category, which are ahead with customers aiming to ensure product availability ahead of Christmas. Craft and creative play sales are also recovering. DG Americas delivered an adjusted operating profit of $15.2 million, a strong rise compared to the previous period of $12.9 million. This reflects the better pricing achieved to mitigate the significant cost headwinds in freight, labour and raw materials experienced, as well as the cost mitigating actions taken as part of the business restructuring.

The DG Americas leadership team have been focused on the restructuring and simplification of the DG Americas business. This is progressing well, with a variety of initiatives beginning to deliver improved margins and cash from cost-cutting initiatives as the business is simplified, integrated and consolidated. Examples include more efficient supply scheduling and sourcing, as well as headcount optimisation. The journey to becoming more commercially driven around core product categories continues, and will help to drive the business forward in pursuit of our strategy. As a notable example, consolidation of our pattern-printing facilities led to the closure of the Manhattan, Kansas site. The fully owned site was sold in April 2022 for net proceeds of $6.7 million, delivering a profit on disposal of $4.6 million, which is included within adjusting items. The selection process for recruiting the DG Americas CEO is also well advanced.

DG Americas' commitment to design and innovation has resulted in the award this year of Giga-Guru status in 'Project Gigaton 2021', demonstrating we have been a key supplier and contributor to the Walmart supply chain carbon reduction strategy. Once again, this is testament to our strong working relationships with our valued customers.

On 23 May 2022, the Group purchased the remaining 49% interest in APP, effective 1 April 2022, bringing its total ownership to 100%. This was completed pursuant to the exercise of a put option by Maxwell Summers, Inc., the holder of the remaining 49% interest, which the Group was legally obliged to purchase under the APP Limited Liability Company agreement dated 30 March 2017. APP develops and sources crafts, toys and games for the US retail market. The transaction, made through DG Americas, was satisfied with a cash payment of $3.0 million. The consideration was satisfied from existing Group banking facilities.

Design Group International

The DG International business saw an increase in revenue in HY2023 across all key markets. Strong revenue growth was experienced across the European markets we serve, as well as in the UK and Australia as we reflect the success of our customers through our "working with the winners" approach. Overall revenue is up 9% on the prior period at $149.4 million (HY2022: $136.9 million) and up 16% on HY2020 pre-Covid-19 sales. Adjusted operating profit at $18.4 million (HY2022: $11.7 million) is up $6.7 million, as a result of accelerated customer orders of higher margin seasonal products, the re-development of some of our product offers, and a pricing 'catch-up' to mitigate the inflationary cost headwinds. Seasonal products which have been particularly affected by this acceleration are: giftwrap, which makes up over 40% of revenue, and crackers (8%), which combined have grown 21% year-on-year, and are both in the celebrations product category.

The design, production and roll-out of sustainable products remains a key focus for DG International. Following investment over recent years in updated machinery and technology in the UK and Europe, we are improving our sustainable product offering. The success of shrink-free gift wrap is growing in both the UK and Europe which has minimal packaging and eliminates plastic from the process, resulting in less waste and pollution. The UK business is also manufacturing ranges of recyclable gift bags as another sustainable solution, with the number of units sold up 40% year-on-year reflecting an increasing number of customers supporting the sustainable ranges. The growth in these ranges not only shows innovation, but also demonstrates our ability to work with our key customers to create successful ranges. This year Costco has recognised DG UK for our success in reducing the packaging of the Christmas gift wrap ranges, showing our commitment to sustainability.

OUR PRODUCTS AND CHANNELS

The Group has a diverse, yet complimentary, product portfolio which underpins our 'working with the winners' strategy.

The increased Group revenue is spread across all product categories demonstrating the strong relationships that have been sustained with customers and our success in aiming to be our retail partners' supplier of choice. Celebrations are a core product category for the Group, of which giftwrap represents a third. Most of our giftwrap is manufactured locally across a number of our businesses in the USA, UK and Netherlands, which supports local economies and helps to reduce our carbon footprint.

Our revenue by season at this point in the year is skewed towards Christmas sales and this year this is exacerbated by our customers accelerating their seasonal orders to mitigate against supply chain risks.

The Group's strategy is underpinned by 'working with the winners'; a key channel for the Group is value and mass-market, which includes some of the world's biggest retailers such as Walmart, Costco and Target. This positions us well for any potential downturn in consumer sentiment. A lot of our products carry a low price point which will help to sustain consumer demand for them, thereby protecting our revenues from the worst of the current cost-of-living crisis.

DETAILED FINANCIAL REVIEW

The Group's financial results for the first six months of the year are summarised below. As detailed in the FY2022 results, the Group results now include the credit/charge associated with share-based payments within both the adjusted and reported results, as they are no longer treated as an adjusting Item. The prior year adjusted results have therefore been represented to include the impact of this change in accounting presentation.

Revenue for the period increased by 8% to $521.2 million (HY2022: $483.9 million) driven by customers bringing forward their seasonal ordering to avoid the supply chain challenges experienced from the second half of calendar year 2021. The Group has also negotiated price increases with customers to adjust for the increase in supply chain cost headwinds experienced in the last twelve months. Foreign exchange, notably the weakening pound versus the strengthening dollar, is also having a significant impact on the results in the year. The constant currency Group revenues increased 12% year-on-year. Adjusted operating profit has improved year-on-year to $30.5 million (HY2022: $22.6 million) reflecting the strong trading in the period. Adjusted gross margin at 16.6% (HY2022: 16.2%) is marginally improved on prior year partly due to the price increases negotiated with customers to mitigate where possible against the unprecedented cost headwinds. Adjusted overheads as a percentage of revenue reduced to 10.8% (HY2022: 11.5%) reflecting the ongoing efforts to manage costs across the Group. Adjusted operating profit growth at constant currency is 44%, implying a $1.5 million foreign exchange drag compared to prior year.

Overall, the Group finished the half year with adjusted profit before tax of $27.4 million (HY2022: $20.3 million), and a reported profit before tax of $32.0 million (HY2022: $18.9 million). Profit before tax is higher than the adjusted profit before tax, reflecting the adjusting items net credit. Further details of the adjusting items are detailed below. Profit after tax is $23.5 million (HY2022: $13.7 million) for the six months to 30 September 2022.

Finance expenses

Finance costs in the year of $3.1 million are higher than prior year driven by rising interest rates, as well as higher net debt levels. The IFRS 16 related lease liability interest charge of $1.5 million (HY2022: $1.6 million) is marginally lower than prior year. In the prior year there was an additional $0.2 million of lease liability interest recognised within adjusting items relating to impaired, exited leases as part of the DG Americas restructuring and integration projects. This has not been treated as an adjusting item in the current year given the immaterial and recurring nature of these ongoing costs.

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 2022 total a net credit of $4.6 million compared to a net charge of $1.4 million in the prior year. Details of these items can be seen below. The treatment of share-based payment credits/charges was changed in the FY2022 results, such that they no longer form part of adjusting items, with the comparatives represented.

(Gains)/losses and transaction costs relating to acquisitions and disposals of businesses - credit $1.5 million (HY2022: $3.6 million cost)

In the six months ended 30 September 2022, $1.5 million of insurance income was received relating to the Impact Representations and Warranties insurance settlement in connection with accounting and tax issues present at acquisition.

Acquisition integration and restructuring (income)/costs - credit $4.4 million (HY2022: credit $2.0 million)

In order to realise synergies from acquisitions, integration projects are 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 adjusting items in the half year relate to the integration of CSS Industries, Inc ('CSS') into the enlarged DG Americas business. As part of this integration, a number of properties have been exited or sold. In April 2022, the Manhattan, Kansas property was sold for proceeds of $6.7 million resulting in a profit on disposal of $4.6 million recognised as an adjusting item. An additional $0.2 million of costs have been incurred in relation to the relocation and closure of Manhattan, Kansas and consolidation of other sites.

IT security incident (income)/costs - credit $0.1 million (HY2022: credit $0.7 million)

Following the IT security incident which occurred in DG Americas in October/November 2020, further insurance income of $0.1 million was received in the half year.

Amortisation of acquired intangibles - $1.4 million (HY2022: $1.4 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. These include tradenames and brands acquired as part of the acquisitions of Impact and CSS. As such these are included in adjusting items.

Taxation

The taxation charge for the half year on profit before tax is $8.5 million (HY2022: $5.2 million) with the effective tax rate at 26.3% (HY2022: 27.5%). The taxation charge on adjusted profit before tax is $7.3 million (HY2022: $4.8 million) with the effective tax rate at 26.5% (HY2022: 23.5%).

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.

Earnings per share

Adjusted diluted earnings per share of 19.6 cents (HY2022: 14.2 cents) is 38% higher year-on-year driven by the increased profits. Diluted earnings per share is 23.1 cents (HY2022: 12.3 cents) which is higher than adjusted diluted earnings per share reflecting the adjusting items credit in the period. The reconciliation between reported and adjusted diluted earnings per share is shown below:

Dividend

The Board are not recommending an interim dividend.

Cash flow and net debt

The Group ended the half year with a net debt balance of $73.7 million (HY2022: $58.8 million). Net debt is $14.9 million higher than prior year, despite a lower opening net cash position of $30.2 million (HY2022: $76.5 million). This improvement in cash flow during the period is reflective of a lower working capital requirement at half year, net proceeds of $6.7 million from the sale of the property in Manhattan, Kansas, offset partially by the purchase of the remaining 49% share of subsidiary APP. Adjusted cash utilised by operations is $23.4 million favourable compared to prior year due to a combination of a higher adjusted EBITDA and working capital requirements.

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 of the Group decline and typically move to a net cash position as Christmas debtors are collected. The working capital outflow in the period was $136.3 million (HY2022: $152.4 million) reflecting the settlement of the accelerated seasonal orders by customers.

Adjusting items

During the period there was a $7.2 million net cash inflow (HY2022: $4.4 million outflow) in relation to adjusting items, of which $0.9 million outflow related to costs incurred in previous years. Further detail on adjusting items can be seen above.

Capital expenditure

Capital expenditure in the year remained in line with the prior year at $3.2 million (HY2022: $3.1 million), with no significant capital projects.

Acquisition of non-controlling interest

The Group purchased the remaining 49% share of APP, following the exercise of a put option by the holder of the 49% interest. The transaction was settled with a $3.0 million cash payment.

Purchase of own shares

In the year there was an outflow of $0.9 million due to the trustee of the IG Design Group Plc Employee Benefit Trust (the "EBT") purchasing 1 million ordinary shares in the Company. These ordinary shares are to be held in the EBT and are intended to be used to satisfy the exercise of share options by employees. The purchase of ordinary shares by the EBT has been funded by a loan provided by the Company from its existing financing facilities.

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 increase would have been $17.6 million higher than prior year if a consistent currency was applied and the increase in adjusted profit before tax would have been $1.4 million higher.

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 2022 were $371.5 million which is $29.0 million lower than last year (HY2022: $400.5 million) in large part due to foreign exchange revaluations as well as the distribution of dividends to shareholders in the second half of FY2022.

As at the 30 September 2022 balance sheet date, the Directors have assessed going concern in preparation of these financial statements and the outlook for FY2023 and beyond. The Group has adequate liquidity at the half year with a net debt position of $73.7 million ($14.3 million of cash and $88.9 million of bank overdraft reduced by $0.9 million of loan arrangement fees).

Going concern forecasts have been produced using the Group's FY2023 and FY2024 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 downturns in the current assumptions as well as separately considering the impact of any consumer spending squeeze, beyond those risks already factored into the forecasts and plans. The base forecasts and additional sensitivity analysis have been tested against the amended banking covenants to March 2023, as well as beyond this time when the covenants revert to the original covenants. The analysis demonstrates that the Group has sufficient facilities in place 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 and beyond. The Group's current financing arrangements expire in March 2024. The Group intends to complete a full refinancing in the second half of FY2023 which is now underway. As such, after making appropriate enquiries, 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.

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 required by DTR 4.2.7 and DTR 4.2.8, 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.

Alternative performance measures

This review includes alternative performance measures (APMs) that are presented in addition to the standard 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 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 and of an unusual or non-recurring nature.

The APMs and the definitions used are listed below:

· Adjusted EBITDA - EBITDA 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 diluted earnings per share - Diluted earnings per share before adjusting items and associated tax effect

In addition, the Group uses APMs in order to calculate other key performance metrics including:

· Adjusted operating margin - Adjusted operating profit divided by revenue

Adjusting items

Further details of the items categorised as adjusting items are disclosed in more detail in note 3. Note that all prior year comparatives have been represented to include the share-based payments credit/charge within adjusted metrics.

A full reconciliation between our adjusted and reported results is provided below:

CONDENSED CONSOLIDATED INCOME STATEMENT

SIX MONTHS ENDED 30 SEPTEMBER 2022

Earnings/(loss) per ordinary share

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

SIX MONTHS ENDED 30 SEPTEMBER 2022

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

SIX MONTHS ENDED 30 SEPTEMBER 2022

SIX MONTHS ENDED 30 SEPTEMBER 2021

YEAR ENDED 31 MARCH 2022

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 other reserves.

CONDENSED CONSOLIDATED BALANCE SHEET

AS AT 30 SEPTEMBER 2022

CONDENSED CONSOLIDATED CASH FLOW STATEMENT

SIX MONTHS ENDED 30 SEPTEMBER 2022

NOTES TO THE INTERIM FINANCIAL STATEMENTS

SIX MONTHS ENDED 30 SEPTEMBER 2022

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.

On 31 December 2020, IFRS as adopted by the European Union at that date was brought into UK law and became UK-adopted International Accounting Standards (UK IFRS), with future changes being subject to endorsement by the UK Endorsement Board. The Group transitioned to UK IFRS in its consolidated financial statements on 1 April 2021. This change constitutes a change in accounting framework. However, there is no impact on recognition, measurement or disclosure in the period reported as a result of the change in framework. This condensed consolidated interim financial report for the half-year reporting period ended 30 September 2022 has been prepared in accordance with the UK-adopted International Accounting Standard 34, 'Interim Financial Reporting' and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority. The interim report does not include all of the notes of the type normally included in an annual financial report. Accordingly, this report is to be read in conjunction with the annual report for the year ended 31 March 2022, which has been prepared in accordance with UK-adopted international accounting standards and the requirements of the Companies Act 2006, and any public announcements made by IG Design Group plc during the interim reporting period.

The preparation of financial statements that conform with adopted UK IFRS requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expense during the reporting period. Although these estimates are based on management's best knowledge of the amount, event or actions, actual results may ultimately differ from those estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and future periods if relevant.

For the purposes of these financial statements, 'Design Group' or 'the Group' means IG Design Group plc ('the Company') and its subsidiaries. The Company's ordinary shares are listed on the Alternative Investment Market (AIM).

Seasonality of the business

The business of the Group is seasonal and although revenues generally accrue relatively evenly in both halves of the year, working capital requirements, including inventory levels, increase steadily in the first half from July and peak in October as manufacturing of Christmas products builds ahead of distribution. The second half of the year sees the borrowing of the Group decline and move to typically a cash positive position as the Group collects its receivables through January to March.

Re-presentation of adjusting items

The treatment of share-based payment credits/charges was changed in the year ended 31 March 2022 such that they no longer formed part of adjusting items in line with best practice guidance. The comparative figures relating to adjusting items have been restated to exclude share-based payments where necessary in these financial statements.

Presentation currency

The presentation currency of the Group is US dollars. The functional currency of the Parent Company remains as pound sterling as it is located in the United Kingdom and substantially all of its cash flows, assets and liabilities are denominated in pound sterling, as well as its share capital. As such, the Parent Company's functional currency differs to that of the Group's reporting currency.

Going concern

Information regarding the financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the detailed financial review above. Cash balances and borrowings are detailed in notes 7 and 8.

On 5 June 2019, to meet the funding requirements of the Group, the business refinanced with a banking group comprising HSBC, NatWest, Citigroup (who replaced BNP Paribas), Truist Bank (as successor by merger to SunTrust Bank) and PNC Bank as part of a three-year deal.

This facility was then subsequently amended and extended on 17 January 2020 with the same banking group to accommodate the acquisition of CSS Industries, Inc. (CSS). The facilities were then further extended in May 2021.

In June 2022, the facilities were amended and extended through to March 2024. The amendment to the terms of the banking agreement comprise of a revolving credit facility (RCF) of $90.0 million (reduced from $95.0 million) and a further flexible RCF of up to £92.0 million (reduced from a maximum level of £130.0 million) to meet the Group's working capital requirements during the peak manufacturing and selling season. The financial covenants were also amended - see note 8 for more details on these. The Group's current financing arrangements expire in March 2024. The Group aims to complete a full refinancing in the second half of FY2023 which is now underway. As such, after making appropriate enquires, 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.

We also have access to supplier financing arrangements from certain customers which we utilise at certain times of the year. The largest of these supplier financing arrangements are subject to the continuing support of the customers' banking partners and therefore could be withdrawn at short notice.

The Group financial statements have been prepared on a going concern basis as the Directors have a reasonable expectation that the Group has adequate resources to continue trading for a period of at least twelve months from the date of this report based on an assessment of the overall position and future forecasts for the going concern period. This assessment has also considered the overall level of Group borrowings and covenant requirements, the flexibility of the Group to react to changing market conditions and ability to appropriately manage any business risks.

The Directors have prepared detailed plans and forecasts up to 31 March 2024. These forecasts reflect the fact that the Group continues to generate strong sales this year but that cost pressures continue in the supply chain impacting profitability. They also reflect the seasonal operating cycle of the business and a recovery associated with the DG Americas plan.

These forecasts have been sensitised to reflect severe but plausible adverse downturns in the current assumptions. Specifically, the severe but plausible downside scenario has taken account of the following risks:

· a range of pressures which could affect the attainment of the DG Americas plan, including inflation in various parts of the business, sales shortfalls, sales timing and a disruption event such as a short‑term manufacturing disruption leading to increased temporary labour costs; and

· the impact of inflation on disposable incomes and demand for products in the DG International business, noting that the potential risks in a severe but plausible downside scenario are not considered to be as significant as in the DG Americas business.

In the severe but plausible scenario modelled, there remains significant headroom in our forecast liquidity and sufficient headroom under the covenant requirements for both the amended covenants to March 2023 and the reverted covenants from June 2023 onwards.

Based on this assessment, the Directors have formed a judgement that there is a reasonable expectation the Group will have adequate resources to continue in operational existence for the foreseeable future.

Significant accounting policies

The accounting policies adopted in the preparation of the interim report are consistent with those of the previous financial year and corresponding interim reporting period, except for the estimation of income tax (see note 6) and the adoption of new and amended standards. A number of new or amended standards became applicate for the current reporting period. The Group did not have to change its accounting policies or make retrospective adjustments as a result of adopting these standards.

2. Segmental information

The Group has one material business activity, being the design, manufacture and distribution of Celebrations, Craft & creative play, Stationery, Gifting and 'Not-for-resale' consumable products.

The business operates under two reporting segments which are reported to, and evaluated by, the Chief Operating Decision Makers for the Group. The DG Americas segment includes overseas operations in Asia, Australia, the UK, India and Mexico, being the overseas entities of US companies. The DG International segment comprises the consolidation of the separately owned business in the UK, Asia, Europe and Australia.

Inter‑segment pricing is determined on an arm's length basis. Segment results include items directly attributable to a segment as well as those that can be allocated on a reasonable basis.

Financial performance of each segment is measured on adjusted operating profit before management recharges. Interest and tax are managed on a Group basis and not split between reportable segments. However, the related financial liabilities and cash have been allocated out into the reportable segments as this is how they are managed by the Group.

Segment assets are all non-current and current assets, excluding deferred tax and income tax, which are shown in the eliminations column. Inter‑segment receivables and payables are not included within segmental assets and liabilities as they eliminate on consolidation.

(a) Including overseas entities for the DG Americas operating segment.

(b) Includes $4.6 million relating to the profit on sale of a property owned by the Group in Manhattan, Kansas see note 3.

(a) Including overseas entities for the DG Americas operating segment.

(b) The prior year amounts above have been re-presented. For more detail please refer to note 1.

(a) Including overseas entities for the DG Americas operating segment.

3. Operating profit and adjusting items

(a) The prior year comparatives above have been re-presented. For more detail please refer to note 1.

Adjusting items

(a) The prior year comparatives above have been re-presented. For more detail please refer to note 1.