Design Group Regulatory News (IGR)

28 November 2017

IG Design Group PLC

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

IG Design Group plc, one of the world's leading designers, innovators and manufacturers of gift packaging, greetings, stationery, creative play products and giftware, announces its Interim Results for the six months ended 30 September 2017.

Financial Highlights

· Sales up 14% to £166.5m from £145.5m

Ø 10% organic growth at like for like FX rates, with the full effect of Lang (acquired mid H1 2016) adding a further 2%

· Gross profit up 15% to £35.4m from £30.8m

Ø 8% organic growth at like for like FX rates, with the synergies in Lang adding a further 5%

· Operating profit* up 20% to £11.1m from £9.3m

Ø 11% organic growth at like for like FX rates, with Lang adding 8%

· PBT* up 27% to £10.5m from £8.2m

Ø 22% organic growth at like for like FX rates, 9% Lang

· Underlying Earnings Per Share up 14% to 10.9p from 9.6p

Ø 9% organic at like for like FX rates, 7% Lang

· Net Debt reduced by £6.2m to £70.2m

· Interim Dividend declared of 2p

* before exceptional items and LTIP charges

Operational Highlights

Group

· Continued to drive profitable overall organic growth

· Identified and delivered further commercial, operational and purchasing synergies to enhance profitability

UK

· Sales up 4% at £57.5m with profit* stable, following the integration of our three UK operating businesses

· State-of-the-art manufacturing equipment producing retailer branded bags is now fully operational on time and on budget

Continental Europe

· Sales in local currency up 19% to €23.6m with growth in profit* of 26%

· Second high speed, highly efficient and environmentally friendly printing press is on track and on budget for installation early in 2018

· Strong order book in place for the balance of the financial year

Australia (JV)

· Sales in local currency up 13% to A$30.9m with growth in profit* of 17%

· Growth mainly driven in the robust Independents Channel

· Completion of the acquisition of Biscay Greetings Pty Limited on track

USA

· Excellent trading performance with overall sales up 18% to $91.3m and profit* up 45%

· Organic sales and profits* growth of 13% and 27% respectively

· Synergies following the integration of Lang Companies (acquired July 2016) are being achieved as planned, resulting in H1 sales up 46% to $16.2m and H1 profit* up 124%

· Planned investment to upgrade our IT systems in the USA is proceeding on time and on budget and is due for installation during FY19

* before exceptional items and LTIP charges

Outlook

Whilst cost headwinds are undoubtedly stronger than ever, our businesses are well positioned to combat these. A full order book and a strong performance in the first half of the year provides confidence that the Group is fully on track to meet full year market expectations for profit and other key underlying metrics.

Paul Fineman, Chief Executive said:

"We are once again delighted to be reporting a robust performance during the first half of the year, with all regions trading profitably and growth being achieved both organically and through acquisition.

Our business is diversified by product category, regional activity and by customer channel, all with a common theme of adding value through potent and commercial design, efficient manufacturing, sourcing and excellent customer service.

Building on our established track record, we are pleased to be identifying still further compelling investment opportunities to continuously improve efficiency and enhance capability across all territories.

We look forward to providing a further update during January and remain committed to creating sustainable value for our shareholders through both organic growth and, when the opportunity arises, through carefully considered acquisitions."

- ENDS -

This announcement contains inside information.

IG Design Group PLC Tel: 01525 887310

Paul Fineman, Chief Executive

Anthony Lawrinson, Chief Financial Officer

Cenkos Securities Tel: 020 7397 8900

Bobbie Hilliam

Harry Hargreaves

Alma PR Tel: 020 3865 9668

Rebecca Sanders-Hewett

Susie Hudson

Helena Bogle

Executive summary

Overview

The first half of FY18 has seen a very pleasing performance with growth achieved both organically and through acquisition.

Overall, sales and profit before tax, exceptional items and LTIP charges are up 14% and 27% respectively. Underlying, fully diluted earnings per share is up 14% whilst net debt is lower than at the previous half-year period, despite funding the seasonal working capital at the recently acquired Lang business.

Performance by region

We are pleased to report that all regions have again traded profitably during the period.

Americas

· An excellent trading performance with sales up 18% to $91.3 million and underlying profit(a) up 45% to $7.1 million

· This includes organic growth of sales up 13% and profits up 27%

· The integration of The Lang Companies (Lang) acquired in July 2016 has progressed very well resulting in sales in the first half up 46% to $16.2 million and profit up 124% to $2.1 million

· The planned investment to upgrade our IT systems in the USA is proceeding on time and on budget and is due for installation during FY19

Europe

· Sales in local currency up 19% to €23.6 million with growth in underlying profit(a) of 26% to €2.0 million

· A second high speed, highly efficient, printing press is on track for delivery and on budget for installation early in 2018

· A strong order book is in place for the balance of the financial year

Australia

· Sales in local currency up 13% to AUD30.9 million with growth in underlying profit(a) of 17% to AUD2.0 million

· Growth mainly driven by the robust Independents channel

· The completion of the acquisition of Biscay Greetings Pty Limited is on track to take place in January 2018

UK

· Sales up 4% at £57.5 million with underlying profit(a) remaining stable at £4.2 million, reflecting the initial impact of the integration of our three UK operating businesses

· Our UK business continues to work hand‑in‑hand with our manufacturing facility in China, which continues to efficiently supply record volumes of gift bags and greetings cards, as well as high volumes of crackers

· State‑of‑the‑art manufacturing equipment producing retailer branded bags to be given to consumers is now fully operational, having been installed on time and on budget in our manufacturing facility in Wales

(a) Underlying profit is stated before exceptional items and LTIP charges.

Central costs

Reflect investment to broaden and strengthen our ability to support growth both organically and through M&A activity.

Financial review

Reported sales are up 14% to £166.5 million on the prior period (2016 H1: £145.5 million) with some favourable timing differences in the USA assisting. Organic growth (excluding Lang) represents 10% of this growth with foreign exchange translation effects accounting for 2% and the acquisition in 2016 of Lang a further 2%. Lang was only owned for half of the period in H1 last year. As usual, there are geographical variations but overall phasing of delivery to customers appears to be slightly ahead of prior years.

Gross margins increased from £30.8 million to £35.4 million which was stable as a percentage of sales at 21.2%.

Overhead costs are higher at £25.3 million (2016 H1: £22.5 million). This is largely driven by a) the impact of Lang ownership for the full period (£0.8 million); b) the effect of overseas costs translated at current exchange rates; and c) our recent investments in people, rebranding and growth opportunities.

The LTIP charge is a largely non-cash accounting charge and we exclude the effect of this when measuring underlying trends in profitability. As a percentage of sales, and after removing the effect of the LTIP charge, overhead costs were flat at 15%.

Operating profit before exceptional costs and LTIP charges again improved strongly by 20% to £11.1 million (2016 H1: £9.3 million) while profit before tax, exceptional items and LTIP charges was up 27% to £10.5 million from £8.2 million in the equivalent period last year. This strong trading position at the end of the first half of the year is firmly underpinning management's expectations for the full year.

The exceptional cost during the period was £0.1 million (2016 H1: £0.6 million credit) mainly reflecting costs associated with the acquisition of Biscay.

After allowing for exceptional items in the period, profit before tax and after exceptional items and LTIP charges was £9.5 million, up 20% on the prior year (2016 H1: £7.9 million).

Reconciliation to underlying measures

Finance expenses in the period were again substantially lower on the prior year period at £0.6 million (2016 H1: £1.1 million) reflecting the continued effect of improved borrowing costs, efficient use of our lower cost asset-based lending working capital facilities and lower average indebtedness. We also agreed to extend the term of our global facilities in May 2017 by a further year to June 2020. The facility is capable of extension for one further year on the same terms should the parties agree.

The effective underlying tax rate (before exceptional items and LTIP charges) was 28% (2016 H1: 24%), slightly below the blended prevailing rate which based upon the current mix of Group profits would be 28.5%. We now anticipate by the year end that all US losses will have been used with only £3.4 million of tax losses unutilised in the UK. If growth is heavily fuelled by our US business as is our expectation, the blended tax rate could continue to rise; however, should US tax rates be significantly reduced as is currently under review, this could provide a material additional advantage to the Group's earnings after tax. Cash tax is increasingly becoming payable at the prevailing rate in most of our geographic regions of operation as historical losses are fully utilised although this will be not be evident in the US or UK until 2018/19.

Stated before exceptional items and LTIP charges, basic earnings per share were ahead of expectations and much improved at 11.3p (2016 H1: 9.8p). The equivalent statutory outcome was 10.2p (2016 H1: 9.7p) after exceptional items and LTIP charges. Our primary measure of performance is underlying fully diluted earnings per share (stated before exceptional items and LTIP charges) and this was up 14% to 10.9p (2016 H1: 9.6p). The half year EPS outcome benefits slightly from the timing of profitability for reasons explained above.

Capital expenditure in the six months was £3.8 million (2016 H1: £3.0 million), somewhat higher than the prior period as we seek out opportunities to invest in efficiency. Notably we have taken delivery of new machinery in Wales to manufacture retail branded bags ("Not‑for‑sale" consumables) as part of our diversification into new adjacent product categories. This equipment was already fully operational at 30 September 2017 with a strong order book in place. Orders have also been confirmed and deposits placed for a second high definition, high speed, printing press in Europe and to implement a new ERP system in our US business. Both are expected to yield attractive paybacks.

Cash used by operations was £64.5 million (2016 H1: £54.2 million) reflecting the growing scale of the business and the seasonal funding of the newly acquired Lang business. The underlying cash dynamic reflects the usual phasing of production, geared heavily towards H1. As always this is impacted by the high variability year to year of the exact timing of customer delivery requirements.

Cash flows associated with interest, tax and dividends in aggregate were up from £2.9 million in 2016 H1 to £4.5 million, with increases in dividend payments (including a modest amount to our joint venture partner) and taxation accounting for £1 million each while interest payments continue to decline.

Despite the increasing working capital need, net debt at 30 September 2017 was lower than the prior year at £70.2 million (2016 H1: £76.4 million). This results from strong underlying trading cash flows and tight disciplines around working capital control.

Recent exchange rate translation effects have depressed underlying profits by a modest £0.1 million compared with the prior year.

Our focus on reduction of average leverage has not wavered and having achieved our long term target last year, two years ahead of schedule, we will now continue to target a level of average debt of between 1.5 and 2.5 times EBITDA.

Dividend

A final dividend for the year ended 31 March 2017 of 2.75p per share was paid in September 2017 making the total for the year 4.5p. The Board is pleased to declare an interim dividend of 2p per share in respect of H1 2017/18 (2017 H1: 1.75p) in line with our intention to steadily increase total dividends. This will be paid on 18 January 2018 to shareholders on the register on 8 December 2017.

Directorate changes

As previously announced in July, Anthony Lawrinson indicated his intention to retire from his role as Chief Financial Officer for family reasons, after six years with the Group. The Board is pleased to have announced alongside these financial results that it intends to appoint Giles Willits as its new Chief Financial Officer effective from 2nd January 2018. Anthony is continuing in his role until early January 2018 and he has agreed to provide additional transitional support in order to ensure an orderly handover.  

The Board would like to thank Anthony for the diligence, commitment and dedication he has shown over the past six years. He has made a significant contribution to the Group, supporting its turnaround, global diversification and subsequent stellar growth, executing its M&A strategy and creating a robust finance function which will serve the Group well over the coming years. We wish him well for the future.

Current trading outlook

We are once again delighted to be reporting a robust performance during the first half of the year, with all regions trading profitably and growth being achieved both organically and through the successful integration of Lang which we acquired in July 2016.

Our business is diversified by product category, regional and seasonal activity as well as by customer channel, all with a common theme of adding value through creating products with potent and highly commercial designs, efficient manufacturing and sourcing and excellent customer service.

Whilst we have delivered fast payback through investment in capital equipment, we are really pleased to be identifying further compelling investment opportunities to continuously improve efficiency and enhance capability across all territories.

We look forward to providing a further update during January 2018 and creating sustainable value for our shareholders through both organic growth and, when the opportunity arises, through carefully considered acquisitions.

Paul Fineman

Chief Executive Officer

28 November 2017

Anthony Lawrinson

Chief Financial Officer

28 November 2017

Consolidated income statement

six months ended 30 September 2017

Earnings per ordinary share

Consolidated statement of comprehensive income

six months ended 30 September 2017

Consolidated statement of changes in equity

six months ended 30 September 2017

six months ended 30 September 2016

year ended 31 March 2017

Consolidated balance sheet

as at 30 September 2017

Consolidated cash flow statement

six months ended 30 September 2017

Notes to the interim financial statements

1 Accounting policies

Basis of preparation

The financial information contained in this interim report does not constitute statutory accounts as defined in Section 434 of the Companies Act 2006 and is unaudited.

The Group interim report has been prepared and approved by the Directors in accordance with International Financial Reporting Standards as adopted by the EU ("Adopted IFRS"). The financial information for the year ended 31 March 2017 is extracted from the statutory accounts of the Group for that financial year and does not constitute statutory accounts as defined in Section 434 of the Companies Act 2006. The auditor's report was (i) unqualified; (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report; and (iii) did not contain a statement under Section 498 (2) of the Companies Act 2006.

The interim report does not include all the information and disclosures required in the annual financial statements and should be read in conjunction with the Group's annual financial statements for the year ended 31 March 2017.

Going concern basis

The borrowing requirement of the Group increases steadily over the period from July and peaks in October, due to the seasonality of the business, as sales of wrap and crackers are mainly for the Christmas market, before then reducing.

As with any company placing reliance on external entities for financial support, the Directors acknowledge that there can be no certainty that this support will continue, although, at the date of approval of this interim report, they have no reason to believe that it will not do so.

After making enquiries, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Thus, they continue to adopt the going concern basis of accounting in preparing the financial statements.

Significant accounting policies

The accounting policies adopted in the preparation of the interim report are consistent with those followed in the preparation of the Group's annual financial statements for the year ended 31 March 2017.

2 Segmental information

The Group has one material business activity being the design, manufacture and distribution of gift packaging and greetings, stationery and creative play products, and design‑led giftware.

For management purposes the Group is organised into four geographic business units.

The results below are allocated based on the region in which the businesses are located; this reflects the Group's management and internal reporting structure. The decision was made during 2011 to focus Asia as a service provider of manufacturing and procurement operations, whose main customers are our UK businesses.

Both the China factory and the majority of the Hong Kong procurement operations are now overseen by our UK operational management team and we therefore continue to include Asia within the internal reporting of the UK operations, such that UK and Asia comprise an operating segment.

Intra‑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 operating profit. Interest income or expense and tax are managed on a Group basis and not split between reportable segments.

Segment assets are all non‑current and current assets, excluding deferred tax and income tax, which are shown in the eliminations column. Where cash shown in one segment, nets under the Group's banking facilities against overdrafts in other segments, the elimination is shown in the eliminations column. Inter‑segment receivables and payables are eliminated similarly.

3 Exceptional items

(a) Transaction costs relating to the acquisition of the Biscay business.

(b) Transaction and restructuring costs relating to the acquisition of the Lang business.

(c) Gain on the bargain purchase on the acquisition of the Lang business (see note 7 for further details).

(d) Restructuring of American printing platform.

4 Cash, loans and borrowings

Net debt

Split between current and non‑current

Finance leases of £30,000 (2016: £2,200,000) are included within other financial liabilities and are split £1,000 (2016: £1,703,000) non‑current and £29,000 (2016: £497,000) current.

Loan arrangement fees represent the unamortised costs in arranging the three‑year Group facilities which commenced in June 2016 and the unamortised costs relating to a one‑year extension.

5 Taxation

Taxation for the six months to 30 September 2017 is based on the effective rate of taxation, which is estimated to apply in each country for the year ended 31 March 2018.

6 Earnings per share

The basic earnings per share is based on the profit attributable to equity holders of the Parent Company of £6,432,000 (2016: £5,865,000) and the weighted average number of ordinary shares in issue of 62,868,000 (2016: 60,442,000) calculated as follows:

Total number of executive share options, over 5p ordinary shares, in issue at 30 September 2017 was 710,000 (2016: 710,000).

Total number of Long Term Incentive Plan ("LTIP") options, over 5p ordinary shares, in issue at 30 September 2017 was 1,213,013 (2016: 500,000).

Underlying basic earnings per share excludes exceptional items and LTIP charges of £924,000 (2016: £307,000) and tax relief attributable to those items of £196,000 (2016: £209,000) to give underlying profits of £7,160,000 (2016: 5,963,000).

7 Acquisitions of businesses

Biscay Greetings Pty Limited

On 21 September 2017 IG Design Group plc announced that it had signed a contract to acquire the trade and certain assets of Biscay Greetings Pty Limited, a leading greetings card and paper products business based in Australia. Completion will take place in January 2018.

The acquisition, to be made through Design Group's Australian joint venture Artwrap, will be satisfied by a cash consideration of AUD9.0 million (£5.5 million) using local debt facilities. Stock and fixed assets acquired are estimated at a market value of AUD5.0 million (£3.1 million) with the balance of the consideration to be treated as intangible assets and goodwill. The consideration represents 2.7x EBITDA for the year ended 30 June 2017 although an injection of working capital of up to AUD3.0 million (£1.8 million) will also be required.

Biscay provides greetings cards and related products to an extensive base of almost 2,000 customers through regional, wholesale, and independent retail channels across Australia and New Zealand.

The Lang Companies Inc.

On 11 July 2016, the Group acquired all of the shares capital of The Lang Companies Inc, ("Lang") for a cash consideration of £2,669,000 ($3,443,000). Acquisition costs of £260,000 were incurred during the period and expensed in the income statement as an exceptional item. Lang is a design‑led supplier of high‑quality branded consumer home décor and lifestyle products, based in the USA. Lang is a natural fit with the Group, being a design‑led company with complementary products and markets. There are natural synergy opportunities with the Group in sourcing and cross selling. In the period from acquisition to 31 March 2017, Lang contributed net profit of £528,000 to the consolidated Group net profit for the year ended 31 March 2017. If the acquisition had occurred on 1 April 2016, Group revenue would have been £316,160,000 and net profit would have been £9,224,000. In determining these amounts, management has assumed that the fair value adjustments that arose on the date of acquisition would have been the same if the acquisition occurred on 1 April 2016.

Effect of acquisition

The acquisition had the following effect on the Group's assets and liabilities:

The gain on bargain purchase arose as a result of the sum of the net assets acquired being greater than the amount paid. This was possible due to the low number of potential acquirers for the business.

Directors and advisers

John Charlton

Non‑Executive Chairman

Anders Hedlund

Founder and Non‑Executive Deputy Chairman

Paul Fineman

Chief Executive Officer

Anthony Lawrinson

Chief Financial Officer and Company Secretary

Lance Burn

Executive Director

Elaine Bond

Non‑Executive Director

Mark Tentori

Non‑Executive Director

Financial and nominated adviser and broker

Cenkos Securities Plc

6, 7, 8, Tokenhouse Yard

London EC2R 7AS

Auditor

KPMG LLP

Altius House

One North Fourth Street

Milton Keynes MK9 1NE

Public Relations

Alma PR

Aldwych House

71-91 Aldwych

London WC2B 4HN

Legal Adviser

Bird & Bird LLP

12 New Fetter Lane

London EC4A 1JP

Registered office

No 7, Water End Barns

Water End

Eversholt MK17 9EA

IG Design Group plc is registered in England and Wales, number 1401155

Share registrar

Link Asset Services

The Registry

34 Beckenham Road

Beckenham BR3 4TU

By phone - UK - 0871 664 0300, from overseas call +44 (0) 371 664 0300 calls cost 12p per minute plus your phone company's access charge. Calls outside the United Kingdom will be charged at the applicable international rate. We are open between 09:00 - 17:30, Monday to Friday excluding public holidays in England and Wales.

By email - enquiries@linkgroup.co.uk

Visit us online at

thedesigngroup.com