Design Group Regulatory News (IGR)

2 July, 2014

International Greetings PLC

Preliminary Results for the year ended 31 March 2014

International Greetings PLC ('International Greetings' or 'the Group'), one of the world's leading designers, innovators and manufacturers of gift packaging and greetings, social expression giftware, stationery and creative play products, announces its audited Preliminary Results for the year ended 31 March 2014.

Financial Highlights:

Operational Highlights:

Post period end event:

Paul Fineman, CEO commented:

"We are pleased to report a strong year in which all our operating regions traded profitably and delivered excellent cash generation. This was achieved whilst continuing to invest in the Group's infrastructure, to enable us to deliver enhanced future performance. In particular, the transformation of our UK based gift wrap manufacturing operation in Wales marked the completion of the second phase of upgrading our global gift wrap production facilities. This strategic initiative began in Holland in 2012 and has underpinned our strong progress in Continental Europe.

"Our recent acquisition of the trade and certain assets of Enper Gift Wrap, demonstrates our determination to identify new opportunities for profitable incremental growth. As we enter the second year of our new three year plan, we are on plan to deliver double digit cumulative average growth in earnings per share and are ahead of schedule to meet our commitment to reduce debt and leverage below two times debt/EBITDA. We look forward to the future with confidence."

Chief Executive Officer's review

Key achievements

· Focus on cash generation improves leverage by 14% from 2.8 to 2.4 times

· Net debt improved by £5.2 million (12.3%) to £36.9 million despite record capital investment (£8.3 million) in manufacturing efficiency

· On track to meet our three year plan of overall double digit EPS growth

· Profits in Continental Europe up over 100%

· Major capital expenditure project in UK on time and on budget

· Excellent year of production and service levels from recently relocated China factory

· Announced acquisition of trade and certain assets of Enper Giftwrap BV for €1.9 million on 5 June 2014

I am able to report a year in which all regions traded profitably and our objectives, both to meet short term targets and also to create the foundation for incremental profits growth for the future, were met.

Our team was focused on balancing the delivery of cash generative sales and profits, reducing leverage and doing so whilst investing in fast payback opportunities across our global manufacturing activities. This has required the careful management of working capital whilst simultaneously delivering continued excellent standards of customer service.

We are therefore delighted that a year in which sales were £224.5 million and profit before tax, exceptional items and LTIP charges was £7.6 million, net debt reduced by 12% (from £42.1 million in 2013 to £36.9 million in 2014) whilst leverage has reduced from 2.8 times in 2013 to 2.4 times in 2014. This is a particularly satisfactory result when capital expenditure increased by £6.4 million to £8.3 million in 2014 from £1.9 million in 2013. We now look forward to reaping the significant future benefits of this through manufacturing efficiencies and product quality.

In 2012, we commenced the first phase of an upgrade to our global manufacturing facilities with an environmentally friendly, high speed, high definition giftwrap printing capability at our operation in Holland. 2014 has seen the installation of a similar capability within our facility in Wales. This major project has been completed on time and on budget.

We were privileged and absolutely delighted that Her Majesty the Queen together with His Royal Highness Prince Phillip officially opened our new Welsh facilities on 30 April 2014 - an event that captured the transformation of our business, our confidence in the future and the enthusiasm and energy of our team.

Geographical highlights

UK and ASIA

The UK and Asia business accounted for 49% (2013 53%) of the Group's revenue for the year, with the cohesive efforts of our manufacturing, sourcing, operational and commercial teams once again delivering industry leading customer service. We were pleased to receive the Sainsbury's Gold Standard Award acknowledging this exemplary supplier performance.

The ever closer collaboration between our UK and Far East based operations ensures a joined up commercial and strategic approach to the market. Our competitive advantage in the UK was further enhanced by focussed investments at our existing facilities in China this included semi automated processes for cracker manufacturing together with enhanced production capability in gift bags.

Both investments were operational from Spring 2014. This provides our customers with the ability to source a broad portfolio of complementary product categories from one fully compliant and competitive source.

Towards the end of the year, reflecting our strategy to focus on product categories with scope for profitable growth, we withdrew from a small noncore product category in generic books under the Alligator brand. We will continue to grow the larger licensed product segment, consolidating under our Copywrite brand in the UK.

Our broadening customer base showed growth achieved with Internet based retailers, including the introduction of new products through Ocado and Amazon.

Mainland Europe

Our mainland European businesses accounted for 15% (2013: 13%) of the Group's sales.

Although overall market conditions have not improved we are delighted to report an outstanding outcome with strong efficiencies and record volumes.

A first full year of utilising our new state-of-the-art printing facilities based in Holland, together with the creation across all categories of innovative highly customer focused product offerings, resulted in increased market share and the creation of even greater future opportunities.

In June 2014, we were delighted to announce the acquisition of the trade and certain assets of Enper Giftwrap, strengthening our market share in the Benelux and a further demonstration of our commitment to delivering a key strategic objective to be the best and most successful supplier of gift packaging products in the European Union.

Having now established relationships with mainland Europe's ten largest retail Groups who trade in our product categories, scope now exists for our future expansion in existing and new markets, both with core and developing product categories.

USA

The US business accounted for 24% (2013: 22%) of the Group's revenue. Strong sales growth continued, building on recent years of double digit progress with 31% of Group revenues by destination in 2014 (2013: 27%). However the final quarter proved to be very challenging with extreme weather conditions impacting results in what was otherwise on track to be a record trading year. Sales developed well during the year, including to neighbouring markets in Canada, Mexico and to other South American regions, but higher margin sales in the US of Everyday product categories were largely rescheduled and therefore below expectations during the final three months of the trading year.

Nevertheless positive progress was made on several fronts during the year. We completed negotiation of banking facilities with Sun Trust on improved terms, building on improvements achieved with HSBC in April 2013.

To further enhance production efficiencies, we installed new automated case packing equipment in our Savannah operation, which was fully operational from Spring 2014.

It was with a heavy heart that in early June 2014, I announced that Rich Eckman, CEO of International Greetings, USA and our highly respected and capable Board Director, had passed away.

Rich possessed many outstanding qualities, amongst which was the ability to lead and nurture a first class team and an appetite to continually 'raise the bar'. It was our pleasure and privilege to have worked alongside a true gentleman and a very dear colleague.

Australia

Whilst the Australian economy experienced an overall slowdown during the year, our revenues, as in 2013, represented 12% of overall Group sales.

Operational performance was underpinned by the prior year's investment in our logistics facilities, enabling us to provide unprecedented levels of order fulfilment to an ever increasing range of retail customers across the nation.

Revenue by product category, brands and seasons

Our ongoing focus on two main product categories resulted in sales of gift packaging and greetings related products achieving a record 70% of Group revenues, whilst stationery and creative play products delivered 30% of revenues (following our withdrawal from a non-core category and also as a result of the last quarter's extreme weather conditions in the USA).

Sales of IG's generic brands achieved 55% of overall revenues, with customer bespoke brands achieving 45%. The continued success of our Tom Smith brand, which holds the Royal Warrant for the supply to the Her Majesty the Queen of Christmas Crackers, was further enhanced by the granting during the year of an extension of the Royal Warrant to the Tom Smith brand of gift wrapping products.

With sales of Everyday products at 44% and Christmas products at 56% of Group revenues, the Group's products are sold in over 100,000 retail stores worldwide.

Our team

I wish to express my sincere thanks and genuine admiration for our team who have embraced change throughout our Group, whilst combatting ever demanding market conditions with initiative, remarkable energy and commitment.

Our strategy

Our strategic objectives are consistently applied and the foundation for the Group's recent years of ongoing improved performance. These are:

The future

Having successfully completed the first year of a new three-year plan, we are in good shape to deliver against our target of overall double digit cumulative average growth in earnings per share.

We are also very much on course to fulfil our commitment of reduced debt and leverage below two times debt/EBITDA.

Our Group continues to identify opportunities to grow and looks forward to the future with increased confidence built on stronger foundations for improving performance.

Paul Fineman

CEO

Financial review

Key achievements

· Sales steady year on year, after rationalisation of some non core sales in the UK

· Gross margin slightly up on prior year at 18.4% (2013: 18.3%), and overheads under control

· Profit before tax, exceptional items and LTIP charges up 4% at £7.6 million (2013: £7.3 million)

· Fully diluted earnings per share before exceptional items increased 6.4% to 8.3p (2013: 7.8p)

· Cash generated from operations up over 100% at £15.2 million (2013: £7.5 million)

· Net debt down 12.3% to £36.9 million (2013: £42.1 million) and leverage down 0.4 times to 2.4 times despite major capital investment programme of £8.3 million (2013: £1.9 million)

Group performance

The financial position of the Company has improved materially in the period though we still battle with headwinds in the economy at large. The significant investment in Wales in new high-definition printing is all but complete, with the new presses already fully operational and the principle operational risks of change now behind us. Despite this substantial capital investment, which will yield margin improvements in 2014/15 and beyond, net debt actually fell substantially to £36.9 million (2013: £42.1 million), putting us ahead of plan to achieve our reductions in leverage. Our key target of earnings per share (fully diluted and stated before exceptional items) also improved by 6.4% to 8.3p, pleasingly putting us slightly ahead of our plan.

Continuing operations

Revenues for the year to 31 March 2014 were down slightly from £225.2 million in 2013 to £224.5 million in the current year. However, this masks the effect of foreign exchange rates on overseas earnings and if this is adjusted, total revenue is up slightly by 0.4%. Sales in the UK segment fell, partly due to withdrawal from a non-core product category, while sales in every other segment grew well: 5-6% in Australia and USA and 16% in Europe, where it is proving possible to cost effectively add market share despite very competitive pricing, following the investment in 2012 in a new printing technology, identical to that which we have now deployed in the UK.

Gross profit margin before exceptional items at 18.4% is very similar to the prior year (2013: 18.3%). While acceptable, margin was impacted most particularly by the adverse weather conditions in the USA in Q4, as the sales of "everyday upscale" product categories (those most impacted) typically attract a significantly higher gross margin. Margins in the UK and European segments developed well reflecting mainly efficiencies, including those linked to the economies of scale seen in Europe. The Company aims to improve margins commercially by increasing the balance of own brand products and non-Christmas business but efficiencies in sourcing and manufacturing will continue to contribute, especially following the investment in Wales which will start to show an effect in 2014/15.

An important dynamic to margin also continues to be the level of FOB business delivered directly to major customers at ports in China. This type of business continues to grow especially in the USA and Australia with the major value chains.

This typically attracts lower gross margins but it is a means of retaining or winning large volumes of business, in a manner that avoids other costs and risks associated with domestic delivery; winning this business can therefore enhance net margins and return on capital even as gross margins are diluted.

Overheads before exceptional items and LTIP charges have decreased year-on-year by a net of £0.3 million, but are broadly flat at constant exchange rates. Cost control remains tight and opportunities to remove or reduce costs are constantly sought out and new costs are only incurred where actual or prospective value can be demonstrated.

Operating profit before exceptional items and LTIP charges was flat at £10.7 million reflecting the dynamics described above.

Operating profit after exceptional items and LTIP charges was £8.8 million (2013: £9.1 million)

Exceptional items during the year amounted to £2.3 million before tax (2013: £1.6 million). This was entirely in line with plan and as previously announced these relate entirely to the investment programme in high definition printing in Wales and the associated restructuring. Of this charge, £0.2 million flowed out as cash in the year and £0.6 million will be paid out by way of redundancy payments during 2014/15. However, the balance of £1.5 million represents accelerated depreciation on assets that become redundant and superseded bank facility fees written off and there will be no cash effect at all in respect of these items.

Finance expenses before exceptional items in the year were 8.3% lower at £3.2 million (2013: £3.5 million) reflecting the improved margins negotiated with banks earlier in the year and slightly lower average indebtedness. Revised and new bank facilities were put in place to fund the investment in Wales and as noted above some historical fees relating to the superseded facility arrangements were written off as exceptional cost. New but much lower fees were incurred in arranging the revised debt facilities and these are being amortised appropriately over the term of the facilities. Notes 8 and 17 to the financial statements provide further information.

Profit before tax, exceptional items and LTIP charges was up 3.9% to £7.6 million (2013: £7.3 million).

Profit before tax was down 8.6% to £5.2 million (2013: £5.7 million) after charging exceptional items of £2.3 million (2013: £1.6 million) and LTIP charges of £0.1 million (2013: nil).

Taxation

The headline taxation charge has dropped to £1.5 million (2013: £1.6 million) or 28.1%. The effective underlying tax charge on profits before exceptional items is lower at 24.6% (2013: 26.0%) because the exceptional items arising in the UK attract relief at a lower level than the blended rate for the Group as a whole.

Actual taxation paid in cash during the year was minimal at £60k (2013: £0.9 million) as our business in Australia took tax relief against the write off of a material bad debt in the prior year, and profits in other geographies continue to be shielded by tax losses and similar tax assets brought forward.

The current geographical profile of Group profits before exceptional items at current local rates of tax would result in an underlying blended tax rate of just under 29%. However, there are still tax losses in the USA with a current tax value of £2.2 million and in the UK with a current tax value of £0.3 million, not yet recognised in the balance sheet. The opportunity to recognise and utilise these as profitability is sustained and improves, will suppress the actual tax rate for some time to come.

Profit for the year

Net profit for the year was down 8.5% to £3.7 million (2013: £4.1 million). However, this was after charging £1.9 million (2013: £1.3 million) in respect of exceptional items, with the current year element all relating to the investment and consequent restructuring in our manufacturing facilities in Wales and £0.1 million in respect of the new LTIP scheme (2013: nil).

Earnings per share and dividends

Basic earnings per share were 5.2p (2013: 6.0p). After removing the effect of exceptional items, the adjusted earnings per share increased to 8.5p (2013: 8.1p) representing an increase of 4.9%.

Employee share options of 1.8 million had vested but not yet been exercised as at 31 March 2014. As these are exercised, earnings per share will trend towards the fully diluted level and the Company targets growth in this fully diluted metric (before exceptional items) as a primary goal. In addition the Company introduced a new long term incentive plan during the year and this approach of targeting fully diluted earnings per share (before exceptional items) will accommodate that scheme as and when any of the new "performance shares" vest. Details of share plans can be found in note 25 to the financial statements. Fully diluted earnings per share (stated before exceptional items) were 8.3p, up 6.4% on the prior year (2013: 7.8p), and ahead of plan.

No dividend was paid during the year (2013: £nil) and the Board does not propose a final dividend for the year. The other primary focus remains the reduction of leverage from the current level of 2.4 times EBITDA (2013: 2.8 times) to below 2.0 times EBITDA. At this point, the Board will consider whether it is appropriate to resume dividends.

Balance sheet and cash flow

Net debt at 31 March 2014 was much improved at £36.9 million (2013: £42.1 million) and leverage fell accordingly to 2.4 times from 2.8 times in the prior year. Weaker exchange rates helped in this regard and net debt at like for like rates would have been £1.4 million higher. Nonetheless this is a very strong performance and well ahead of our plan in a year in which capital expenditure of £8.3 million (2013: £1.9 million) exceeded depreciation by £3.3 million. Notes 17 and 26 to the financial statements provide further information.

Year-end net debt included amounts denominated in US Dollars of $25.5 million (2013: $22.6 million) and in Euros of €5.8 million (2013: €12.4 million). The year-end exchange rates were $1.67 (2013: $1.52) and €1.21 (2012: €1.19). Allowing for this, debt stated at constant exchange rates would have been £1.4 million higher.

Working capital management continues to be a priority. Outstanding debtors are monitored closely, both to maximise cash but also to reduce our credit risk. Trade debtors reduced to £16.1 million (2013: £18.8 million) at the year end, more than reversing last year's increase, which related to specific customer circumstances but in the 2013/14 year also reflecting lower Q4 sales in the USA following the extraordinarily adverse weather conditions.

The charge for bad and doubtful debts in the year was £0.1 million or less than 0.1% of turnover.

Net stock levels after provisioning for older stock reduced by 3.3% from £50.1 million to £48.5 million. Stock levels only increased in the USA, again related to lower sales as a result of the poor weather conditions in Q4.

Older stock (measured as over 15 months since last purchase) increased slightly from £5.1 million to £5.8 million (at March 2014 exchange rates) but provisioning remains adequate and our businesses consistently achieve in excess of 100% recovery against written down values of old stock.

Group cash generated from operations was more than double that of the prior year at £15.2 million (2013: £7.5 million), reflecting full conversion of operating profits into cash flow and assisted by a small net reduction in working capital of £0.7 million (2013: increase of £5.7 million).

As noted above, investment in capital expenditure was very substantial at £8.3 million (2013: £1.9 million), well above depreciation and the prior year. This reflects the investment in two new state-of-the-art printing presses and associated facilities at our gift wrap manufacturing operation in Wales, matching the equivalent capability installed in Europe in 2012 that is now yielding such strong results. During the year we also invested in further automation at our manufacturing facilities in China and the USA, which mitigates against the twin challenges of availability and cost of labour.

The investment in Wales is consolidating our operations, and we anticipate one of our three current sites will then become available for sale later in the 2014/15 year. The net book value of this site is £1.25 million. In addition the Company is in the second of a five-year period by which a company has the option to purchase part of another under utilised site (net book value £0.8 million) for a price of £2.4 million. This is also generating premium income of £0.1 million p.a. over the option period, recognised within other operating income.

Equity attributable to shareholders has increased to £53.5 million from £51.9 million predominantly reflecting profits generated in the year.

Risks and key performance indicators

Our areas of primary focus are:

Operationally this means a focus on:

Foreign Exchange Impact to Profit and Earnings

Our diverse geographical revenue and profit streams continue to provide us with market resilience but naturally this carries with it the volatility of currency. As noted above in the context of net debt, foreign exchange rates impacted significantly in the year on the translation of our overseas figures relative to prior years with the US dollar rate moving 10% from 1.52 to 1.67 during the year and the Australian dollar rate moving 23% from 1.46 to 1.80. The movement in the Euro rate was more muted at 1.19 to 1.21. This change in rates placed some pressure on profit against planned outcomes although this was manageable within 2013/14. However, if we assume that the significantly weaker rates at the end of the year continue through calendar 2014, the impact will be more material in next year's results through the translation of overseas earnings.

Treasury operations

The Group operates with four supportive bankers, each addressing one of our geographic segments. The Group's principal bank has recently extended additional facilities to support the capital programme in Wales, now almost complete. Current global facilities comprise:

These facilities provide the Group with the operational flexibility it requires in a highly seasonal business on a cost effective basis. As noted above, interest margins have been falling as leverage has improved and the Group has been able to renegotiate favourable terms on the two largest facilities during the year.

There are financial covenants attached to our facilities and the Group comfortably complied with these throughout the year. These covenants include:

The Group has various interest rate swaps denominated in US Dollars, Sterling and Euros to improve certainty over interest charges. The Group adopts hedge accounting for these instruments. No new interest rate contracts were entered into during the year. The Group also actively manages FX transaction exposure in each of its businesses, with advice and support from the central treasury team.

Note 26 to the financial statements provides further information in respect of treasury matters.

Post balance sheet event

On 5 June 2014 the Group announced the acquisition of the trade and certain of the assets of Enper Giftwrap BV, a Dutch company with sales of €5 million, for €1.9 million. This transaction is expected to complete on 30 June 2014. While modest in scale, this acquisition is an ideal step towards consolidation of the very competitive European gift wrap marketplace. The Group's Dutch management team plan to integrate Enper's customer base and selected fixed assets into its own facilities within three months of completion. We have allowed for the loss of some less profitable customers but the synergies that should arise post integration (2015/16 season) from such an integration into our modern printing presses, installed in Hoogeveen in 2012, will more than offset this and the cash payback after all costs of acquisition and integration should be no more than four years.

This is the Group's first acquisition for some years and it is a reflection of the our improving balance sheet and trading position that we are now able to evaluate and execute on such opportunities - albeit highly selectively. We do not anticipate that this investment will impact materially on our debt reduction plans.

Conclusion

In conclusion, delivery has been ahead of plan in the year now completed. Net debt and earnings per share performance was especially pleasing and outperformance in the arena of cash management is providing the Group with additional flexibility and options to create value for shareholders in the future.

Anthony Lawrinson

Director

19 June 2014

Consolidated income statement

year ended 31 March 2014

Consolidated statement of comprehensive income

year ended 31 March 2014

Consolidated statement of changes in equity

year ended 31 March 2014

Merger reserve

The merger reserve comprises premium on shares issued in relation to business combinations.

Capital redemption reserve

The capital redemption reserve comprises amounts transferred from retained earnings in relation to the redemption of preference shares. For ease of presentation, the amount of £1.34 million relating to the capital redemption reserve has been included within the column of share premium and capital redemption reserve in the balances at both the beginning and end of each year, with no movements.

Hedging reserve

The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to hedged transactions that have not yet occurred.

Translation reserve

The translation reserve comprises all foreign currency differences arising from the translation of the financial statements of foreign operations.

Shareholders' equity

Shareholders' equity represents total equity attributable to owners of the Parent Company.

Consolidated balance sheet

as at 31 March 2014

These financial statements were approved by the Board of Directors on 19 June 2014 and were signed on its behalf by:

Consolidated cash flow statement

year ended 31 March 2014

(a) In the current year £3,239,000 of new finance leases have been shown netted off against acquisitions of property, plant and equipment. In the prior year, new finance leases represent proceeds received in respect of £1,764,000 assets purchased in 2011/12 shown in acquisition of property, plant and equipment in that year.

Notes to the financial statements

year ended 31 March 2014

1 Accounting policies

International Greetings plc is a public limited company, incorporated and domiciled in England and Wales. The Company's ordinary shares are listed on AIM.

The Group financial statements consolidate those of the Company and its subsidiaries (together referred to as the "Group"). The Company financial statements present information about the Company as a separate entity and not about its Group.

The Group financial statements have been prepared and approved by the Directors in accordance with EU adopted International Financial Reporting Standards. The Company has elected to prepare its Company financial statements in accordance with UK GAAP;

The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these Group financial statements.

Judgements made by the Directors in the application of these accounting policies that have significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are discussed in the policies below.

Going concern basis

The financial statements have been prepared on the 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 the 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 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.

Measurement convention

The financial statements are prepared on the historical cost basis except that financial instruments used for hedging are stated at their fair value.

Changes in accounting policies

The accounting policies adopted in the preparation of the financial statements are consistent with those followed in the preparation of the Group's annual financial statements for the year ended 31 March 2014, except for the adoption of new standards and interpretations as of 1 April 2014.

Basis of consolidation

Subsidiaries are entities controlled by the Group. Control exists when the Group has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that are currently exercisable or convertible are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.

Foreign currency translation

The consolidated financial statements are presented in pounds Sterling, which is the Company's functional currency and the Group's presentational currency.

Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement.

The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on consolidation, are translated at foreign exchange rates ruling at the balance sheet date. The revenues and expenses of foreign operations are translated at an average rate for the period where this rate approximates to the foreign exchange rates ruling at the dates of the transactions. Exchange differences arising from this translation of foreign operations, and of related qualifying hedges, are taken directly to the translation reserve. They are released into the income statement upon disposal.

Exchange differences arising from a monetary item receivable from or payable to a foreign operation, the settlement of which is neither planned nor likely in the foreseeable future, are considered to form part of a net investment in a foreign operation and are recognised in other comprehensive income in the translation reserve. The cumulative translation differences previously recognised in other comprehensive income (or where the foreign operation is part of a subsidiary, the parent's interest in the cumulative translation differences) are released into the income statement upon disposal of the foreign operation or on loss of control of the subsidiary that includes the foreign operation.

Classification of financial instruments issued by the Group

Financial instruments issued by the Group are treated as equity (i.e. forming part of shareholders' funds) only to the extent that they meet the following two conditions:

(a) they include no contractual obligations upon the Group to deliver cash or other financial assets or to exchange financial assets or financial liabilities with another party under conditions that are potentially unfavourable to the Group; and

(b) where the instrument will or may be settled in the Company's own equity instruments, it is either a non-derivative that includes no obligation to deliver a variable number of the Company's own equity instruments or is a derivative that will be settled by the Company's exchanging a fixed amount of cash or other financial assets for a fixed number of its own equity instruments.

To the extent that this definition is not met, the proceeds of issue are classified as a financial liability. Where the instrument so classified takes the legal form of the Company's own shares, the amounts presented in these financial statements for called up share capital and share premium exclude amounts in relation to those shares.

Trade and other receivables

Where it is likely to be materially different from the nominal value, trade and other receivables are recognised initially at fair value. Subsequent to initial recognition they are measured at amortised cost using the effective interest method, less any impairment losses.

Trade and other payables

Where it is likely to be materially different from the nominal value, trade and other payables are recognised initially at fair value. Subsequent to initial recognition they are measured at amortised cost using the effective interest method.

Cash and cash equivalents

Cash and cash equivalents comprise cash balances and call deposits. Bank overdrafts that are repayable on demand and form an integral part of the Group's cash management are included as a component of cash and cash equivalents for the purposes of the cash flow statement.

Interest-bearing borrowings

Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost using the effective interest method.

Derivative financial instruments and hedging

Derivative financial instruments

Derivative financial instruments are recognised at fair value. The gain or loss on re-measurement to fair value is recognised immediately in the income statement. However, where derivatives qualify for hedge accounting, recognition of any resultant gain or loss depends on the nature of the item being hedged.

Cash flow hedges

Where a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognised asset or liability, or a highly probable forecast transaction, the effective part of any gain or loss on the derivative financial instrument is recognised as other comprehensive income in the hedging reserve. Any ineffective portion of the hedge is recognised immediately in the income statement.

Amounts previously recognised in other comprehensive income are transferred to the income statement in the periods when the hedged item affects profit or loss (for instance when the forecast sale that is hedged takes place). The gain or loss relating to the effective portion of forward foreign exchange contract hedging export sales is recognised in the income statement within "sales". However, when the forecast transaction that is hedged results in the recognition of a non-financial asset (for example, inventory), the gains or losses previously recognised in other comprehensive income are transferred from other comprehensive income and included in the initial measurement of the cost of the asset. The deferred amounts are ultimately recognised in cost of goods sold (in case of inventory).

When a hedging instrument expires or is sold, terminated or exercised, or the entity revokes designation of the hedge relationship but the hedged forecast transaction is still expected to occur, the cumulative gain or loss at that point remains in other comprehensive income and is recognised in accordance with the above policy when the transaction occurs. If the hedged transaction is no longer expected to take place, the cumulative unrealised gain or loss recognised in other comprehensive income is recognised in the income statement immediately.

Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses.

Where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment.

Leases in which the Group assumes substantially all the risks and rewards of ownership of the leased asset are classified as finance leases. Where land and buildings are held under finance leases the accounting treatment of the land is considered separately from that of the buildings. Leased assets acquired by way of a finance lease are stated at an amount equal to the lower of their fair value and the present value of the minimum lease payments at inception of the lease, less accumulated depreciation and impairment losses. Lease payments are accounted for as described below.

Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. The estimated useful lives are as follows:

No depreciation is provided on freehold land.

Included within plant and machinery are assets with a range of depreciation rates. These rates are tailored to the

nature of the assets to reflect their estimated useful lives.

Depreciation methods, useful lives and residual values are reviewed at each balance sheet date.

Intangible assets and goodwill

Subject to the transitional relief in IFRS 1, all business combinations are accounted for by applying the purchase method. Goodwill represents amounts arising on acquisition of subsidiaries. In respect of business acquisitions that have occurred since 1 April 2006, goodwill represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired. Identifiable intangibles are those which can be sold separately or which arise from legal rights regardless of whether those rights are separable.

Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash-generating units and is not amortised but is tested every half year for impairment.

In respect of acquisitions prior to 1 April 2006, goodwill is included on the basis of its deemed cost, which represents the amount recorded under UK GAAP which was broadly comparable save that only separable intangibles were recognised and goodwill was amortised. Goodwill written off to reserves under UK GAAP prior to 1998 has not been reinstated.

If the cost of an acquisition is less than the fair value of the Group's share of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement.

Other intangible assets

Expenditure on internally generated goodwill and brands is recognised in the income statement as an expense as incurred.

Other intangible assets that are acquired by the Group are stated at cost less accumulated amortisation and impairment losses.

The main classes of intangible assets are computer software and publishing imprints.

Amortisation

Amortisation is charged to the income statement on a straight-line basis over the estimated useful lives of intangible assets unless such lives are indefinite. The estimated useful life of computer software ranges between three and five years. Other intangible assets are amortised from the date they are available for use. The estimated useful lives are three to five years.

Amortisation charges are included under "administrative expenses" in the income statement.

Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is based on a combination of weighted average and the first-in first-out principle and includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition. In the case of manufactured inventories and work in progress, cost includes an appropriate share of overheads based on normal operating capacity.

Impairment

The carrying amounts of the Group's assets other than inventories and deferred tax assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset's recoverable amount is estimated.

For goodwill, the recoverable amount is estimated at each half-year.

An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in the income statement.

Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to cash-generating units and then to reduce the carrying amount of the other assets in the unit on a pro rata basis. A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.

The recoverable amount of the Group's assets is the greater of their fair value less costs to sell and value in use.

In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time, value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs.

An impairment in respect of goodwill is not reversed. In respect of other assets, an impairment is reversed when there is an indication that the impairment may no longer exist and there has been a change in the estimates used to determine the recoverable amount. An impairment is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment had been recognised.

Provisions

A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event and it is probable that an outflow of economic benefits will be required to settle the obligation. A provision for restructuring is recognised when the Group has approved a detailed and formal restructuring plan and announced its main provisions. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as borrowing costs.

Deferred consideration

Where considered material, the Group calculates deferred consideration by discounting it to its fair value.

This fair value is used to calculate the total purchase consideration and hence the goodwill figure. As the discount unwinds it is charged as a finance expense within the income statement and added to the deferred consideration creditor.

Revenue recognition

Revenue represents the amounts, net of discounts, allowances for volume and promotional rebates and other payments to customers (excluding value added tax) derived from the provision of goods and services to customers during the year. Sales of goods are recognised when a Group entity has despatched products to the customer, legal title has passed and the collectability of the related receivable is reasonably assured.

Exceptional items

Exceptional items are those items of financial performance which, because of size or incidence, require separate disclosure to enable underlying performance to be assessed.

Discontinued operations

A discontinued operation is a component of the Group's business that represents a separate major line of business or geographical area that has been disposed of or is held for sale, or is a subsidiary acquired exclusively with a view to resale. Classification as discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held for sale, if earlier.

When an operation is classified as a discontinued operation, the comparative income statement is represented as if the operation had been discontinued from the start of the comparative period.

Government grants

Capital-based government grants are included within other financial liabilities in the balance sheet and credited to operating profit over the estimated useful economic lives of the assets to which they relate.

Expenses

Operating lease payments

Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives received are recognised in the income statement as an integral part of the total lease expense.

Finance lease payments

Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability.

Finance income and expenses

Finance expenses comprise interest payable, finance charges on finance leases and unwinding of the discount on provisions and deferred consideration. Finance income comprises interest receivable on funds invested and dividend income.

Net movements in the fair value of derivatives are also included within finance income or expense.

Interest income and interest payable is recognised in profit or loss as it accrues, using the effective interest method. Dividend income is recognised in the income statement on the date the entity's right to receive payments is established. Foreign currency gains and losses are reported on a net basis.

Taxation

Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the income statement except to the extent that it relates to items recognised in other comprehensive income or directly in equity, in which case it is recognised in other comprehensive income or equity respectively.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date and any adjustment to tax payable in respect of previous years.

Deferred tax is provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: the initial recognition of goodwill; the initial recognition of assets or liabilities that affect neither accounting nor taxable profit other than in a business combination; and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date.

A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised.

Dividend distribution

Final dividends to shareholders of International Greetings plc are recognised as a liability in the period that they are approved by shareholders.

Employee benefits

Pensions

The Group operates a defined contribution personal pension scheme. The assets of this scheme are held separately from those of the Group in an independently administered fund. The pension charge represents contributions payable by the Group to the fund.

The Netherlands subsidiary operates an industrial defined benefit fund, based on average wages, that has an agreed maximum contribution. The pension fund is a multi-employer fund and there is no contractual or constructive obligation for charging the net defined benefit cost of the plan to participating entities other than an agreed maximum contribution for the period, that is shared between employer (4/7) and employees (3/7). The Dutch Government is not planning to make employers fund any deficits in industrial pension funds; accordingly the Group treats the scheme as a defined contribution scheme for disclosure purposes. The Group recognises a cost equal to its contributions payable for the period.

Share-based payment transactions

The cost of equity-settled transactions with employees is measured by reference to the fair value at the date on which they are granted and is recognised as an expense over the vesting period, which ends on the date on which the relevant employees become fully entitled to the award. Fair value is determined by using an appropriate pricing model. In valuing equity-settled transactions, no account is taken of any service and performance (vesting conditions), other than performance conditions linked to the price of the shares of the Company (market conditions). Any other conditions which are required to be met in order for an employee to become fully entitled to an award are considered to be non-vesting conditions. Like market performance conditions, non-vesting conditions are taken into account in determining the grant date fair value.

No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market vesting condition or a non-vesting condition, which are treated as vesting irrespective of whether or not the market vesting condition or non-vesting condition is satisfied, provided that all other non-market vesting conditions are satisfied.

At each balance sheet date before vesting, the cumulative expense is calculated, representing the extent to which the vesting period has expired and management's best estimate of the achievement or otherwise of non-market vesting conditions and of the number of equity instruments that will ultimately vest or, in the case of an instrument subject to a market condition or a non-vesting condition, be treated as vesting as described above. The movement in cumulative expense since the previous balance sheet date is recognised in the income statement, with a corresponding entry in equity.

Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the cost of the respective assets. All other borrowing costs are expensed in the period they occur. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds.

New standards adopted early

The Group has elected to adopt early the amendments to IAS 36 Recoverable Amounts Disclosure for Non-Financial Assets.

New standards and interpretations not applied

Management continually reviews the impact of newly published standards and amendments and considers, where applicable, disclosure of their impact on the Group.

The following standards, interpretations and amendments issued by the IASB have an effective date after the date of these financial statements:

* Not yet endorsed by EFRAG.

† IFRS 9 does not yet have a mandatory effective date. The IASB have tentatively agreed an effective date of 1 January 2018.

None of the above standards are anticipated to significantly impact the Group's results or assets and liabilities and are not expected to require significant disclosure.

The new standards, interpretations and amendments which are considered most relevant to the Group are as follows:

IFRS 9: the first phase of IFRS 9, which addressed classification and measurement of financial assets was published in November 2009, and was subsequently amended in October 2010 and November 2013, to include classification and measurement requirements for financial liabilities and hedge accounting requirements. IFRS 9 does not currently have a mandatory effective date. A mandatory effective date will be set when the IASB completes the impairment phase of the project. However, the IASB has tentatively decided that the mandatory effective date of IFRS 9 will be for annual periods beginning on or after 1 January 2018. The Group will quantify the impact of IFRS 9 when the final standard, including all phases, is issued.

IFRS 10: IFRS 10 replaces the portion of IAS 27 that addresses the accounting for consolidated financial statements. IFRS 10 does not change consolidation procedures (i.e. how to consolidate an entity). Rather, IFRS 10 changes whether an entity is consolidated by revising the definition of control. IFRS 10 also provides a number of clarifications on applying the new definition of control.

IFRS 12: IFRS 12 includes all the disclosure requirements for subsidiaries, joint ventures, associates and "structured entities".

IFRS 15: IFRS 15 replaces existing IFRS revenue recognition requirements in IAS 18 Revenue. The standard applies to all revenue contracts and provides a model for the recognition and measurement of sales of some non-financial assets (e.g. disposals of property, plant and equipment). The core principle of IFRS 15 is that revenue is recognised to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Application is required for annual periods beginning on or after 1 January 2017. The Group are currently assessing the impact of IFRS 15.

2 Critical accounting judgements and key sources of estimation uncertainty

In the application of the Group's accounting policies, which are described in note 1, the Directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these 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 if the revision only affects that period or in the period of revision and future periods if the revision affects both current and future periods.

In addition to the forward operating profit and cash flow projections, the estimates and assumptions that have had a significant bearing on the financial statements in the current year or could have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below:

Critical judgements in applying the Group's accounting policies

The following are the critical judgements, apart from those involving estimations (which are dealt with separately below), that the Directors have made in the process of applying the Group's accounting policies and that have the most significant effect on the amounts recognised in the financial statements.

Exceptional items

The Directors have chosen to separate certain items of financial performance which they believe, because of size or incidence, require separate disclosure to enable underlying performance to be assessed. These items are fully described in note 10.

Key sources of estimation uncertainty

The key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year, are discussed in the strategic report and below.

Impairment of goodwill and property, plant and equipment

Determining whether goodwill and property, plant and equipment are impaired requires an estimation of the value in use of the cash generating units to which goodwill has been allocated or to which property, plant and equipment belong. The value in use calculation requires the entity to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate present value. The carrying amount of goodwill at the balance sheet date was £31.2 million (2013: £31.5 million). No impairment (2013: £nil) was required. The carrying amount of property, plant and equipment was £32.0 million (2013: £30.0 million). No impairment loss (2013: £nil) was required.

Provision for slow moving inventory

The Group has guidelines for providing for inventory which may be sold below cost due to its age or condition. Directors assess the inventory at each location and in some cases decide that there are specific reasons to provide more than the guideline levels, or less if there are specific action plans in place which mean the guideline provision level is not required. Determining the level of inventory provision requires an estimation of likely future realisable value of the inventory in various time frames and comparing with the cost of holding stock for those time frames. Regular monitoring of stock levels, the ageing of stock and the level of the provision is carried out by the Directors. Details of inventory carrying values are provided in note 14. At the year end, stock purchased more than 15 months previously had increased from £5.1 million to £5.8 million (at March 2014 exchange rates) and the Group has provisions of £3.3 million (2013: £3.7 million) over the total inventory value.

Share-based payments

The Directors are required to estimate the fair value of services received in return for share options granted to employees that are measured by reference to the fair value of share options granted. For the share options scheme the estimate of the fair value of the services received is based on a Black Scholes model (with the contractual life of the option and expectations of early exercise incorporated into the model). For the long term incentive plan the estimate of the fair value is based on the share price on the date the scheme was approved and the proportion of shares expected to vest. Details of the key assumptions made in the measurement of share-based payments are provided in note 25.

Taxation

There are many transactions and calculations for which the ultimate tax determination is uncertain. Significant judgement is required in determining the Group's tax assets and liabilities. Deferred tax assets have been recognised to the extent they are recoverable based on profit projections for future years. Income tax liabilities for anticipated issues have been recognised based on estimates of whether additional tax will be due. Notwithstanding the above, the Group believes that it will recover tax assets and has adequate provision to cover all risks across all business operations. See note 13 for more details.

3 Financial risk management

Risk management is discussed in the strategic report and a discussion of risks and uncertainties can be found further on in the report, along with the Group's key risks. See note 26 for additional information about the Group's exposure to each of these risks and the ways in which they are managed. Below are key financial risk management areas:

4 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.

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. The Chief Operating Decision Maker is the Board.

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 expense or revenue 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 receivable. Where cash is shown in one segment, which nets under the Group's banking facilities, against overdrafts in other segments, the elimination is shown in the eliminations column. Similarly inter-segment receivables and payables are eliminated.

(a) Capital expenditure consists of additions of property, plant and equipment, intangible assets and goodwill.

(b) No single customer accounts for over 10% of total sales.

(c) The assets and liabilities that have not been allocated to segments consist of deferred tax assets £3,665,000 (2013: £4,250,000) and income tax payable of £2,052,000 (2013: £904,000). In addition, the assets and liabilities have been grossed up for VAT of £335,000 (2013: £475,000) to reflect the net position of the Group.

(d) No operating segment has been aggregated in determining reportable segments.

(e) Central recharges are included within the result of the segment that takes the recharge. The balance of the central costs are not allocated to segments.

Geographical information

The Group's information about its segmental assets (non-current assets excluding deferred tax assets and other financial assets) and turnover by customer destination and product are detailed below:

Turnover by customer destination

Turnover by product

5 Expenses and auditor's remuneration

Included in profit are the following charges/(credits):

Auditor's remuneration:

6 Staff numbers and costs

The average number of persons employed by the Group (including Directors) during the year, analysed by category, was as follows:

The aggregate payroll costs of these persons were as follows

For information on Directors' remuneration please refer to the sections titled "Executive share options" and "Directors' remuneration" within the Directors' remuneration report.

7 Other operating income

8 Finance expenses

9 Taxation

Recognised in the income statement

Reconciliation of effective tax rate

10 Exceptional items

(a) Costs associated with major upgrade to manufacturing facilities in Wales and restructuring of UK operations. Other operating income relates to accelerated release of a grant.

(b) Accelerated amortisation of bank arrangement fees as a result of renegotiating banking facilities to fund the investment in Wales.

(c) Bad debt arising from major customer entering administration.

(d) Costs associated with disruption caused by a strike in the China factory.

(e) Redundancy costs arising from restructuring of management at a UK subsidiary.

Impact of exceptional items on cash flow

In 2013 the total exceptional items of £1,603,000 was included in that year's cash flow.

11 Property, plant and equipment