IG Design Share Blog – Interim Results Year Ending 2019

IG Design Group have now released their interim results for the year ending 2019.

Revenues increased when compared to the first half of last year due to a £31M growth in US revenue, a £5.1M increase in European revenue and a £2M growth in Australian revenue.  After an increase in cost of sales the gross profit was £8.1M higher.  Selling expenses were up £1M, transaction costs increased by £1.6M and share based payments were £628K higher, although other admin expenses saw a small decline to give an operating profit £4.7M higher.  Transaction finance costs were up £280K but other finance expenses fell by £113K before a £1M increase in tax charges meant the profit for the period came in at £10.3M, a growth of £3.5M year on year.

When compared to the end point of last year, total assets increased by £158.2M driven by a £63.1M growth in receivables, a £45.3M increase in intangible assets, a £40M growth in inventories and a £12M increase in property, plant and equipment, partially offset by a £1.7M decline in deferred tax assets.  Total liabilities also grew during the period as the £3.9M decrease in the bank overdraft was more than offset by a £33.1M growth in other loans and borrowings, a £45.7M increase in payables and a £3M growth in other financial liabilities.  The end result was a net tangible asset level of £93.4M, a growth of £32.7M over the past six months.

Before movements in working capital cash profits increased by £6.1M to £19.6M.  As usual for this time of year, there was a huge cash outflow from working capital, and this was higher than last time so that after tax payments increased by £735K the net cash outflow from operations came in at £79.4M, an increase of £12.6M year on year.  The group also spent £67.1M on acquisitions, £2.5M on property, plant and equipment, and £1M on intangible assets to give a cash outflow of £150M before financing.  The group received £48.3M from the issue of new shares and £94.9M from new bank loans so after £2.6M was paid out in dividends there was a cash outflow of £9.4M in the half year which left a negative £907K of cash at the period-end.

The most significant factor driving the profit improvement was an increase in group margins from 6.7% to 9.3%.  This was driven in part by the timing of the Impact acquisition during its peak trading period.

The profit in the UK and Asian division was £4.9M, a growth of £266K year on year.  Sales increased by 2.3% despite the volatility of the UK retail market.  Margin increases have started to flow through following the unification of the previously separately managed businesses.  The not for resale bags initiative has performed strongly with brands such as Superdry and Joules using their facilities for production, leading to the business committing to investing in a second bag line to go live late in 2019.

The effects of Brexit are currently expected to be limited to its impact on movements in sterling and the operational effects it might have on the UK business.  They have developed a number of contingency strategies which include moving to UK based suppliers, re-routing imports to western ports and limited stock build in relation to ram material paper supplies. 

The profit in the European division was £3.4M, an increase of £1.5M when compared to the first half of last year.  An increase in margins is reflective of an improved sales mix into higher margin product categories and the new printing press in the Netherlands.  Furthermore the bespoke gift product offering in Europe continues to achieve record sales levels and strong year on year growth.

The profit in the US division was £10.6M, an increase of £5M when compared to the first half of last year which was entirely due to the acquisition of Impact with organic growth flat.  The subdued performance in organic sales was due to the timing of shipments of customers’ orders which are later in the peak season this year.  As customer orders are now due to be fulfilled in the second half, the business is set to achieve strong year on year growth.

Already, Impact has contributed considerable profits.  This reflects the success of the business during its peak sales period.  The first significant step in the integration process is the consolidation of manufacturing facilities in the US into the Memphis facility with the closure of the operations in Georgia which will pave the way for the sale of the freehold property there which is now under offer ahead of expectations.  In addition the US business launched a new enterprise IT system which will provide the capacity for further growth.  

In October the US government introduced a tariff on certain product imports from China but this is expected to have no material impact to the 2019 buying cycle.  There are a number of product categories that are affected by these tariffs, however, and the team in the US is developing plans to mitigate the impact on the business.  As they enter the 2020 buying season they are confident that these actions will ensure the group is able to continue to deliver its plans in line with expectations.

The profit in the Australian division was £2.1M, a growth of £889K year on year reflecting the acquisition of Biscay in January and the strong market position the business has secured in the higher margin category of greetings cards, along with the synergies achieved from the integration of the acquisition. 

Investment in the new printing press in the Netherlands which was installed in March is already supporting record levels of production and increased efficiencies.  Innovation in product design and the introduction of new licenses continues across the group, highlighted by the recent launch of the new Ferrero Rocher cracker range and augmented reality creative play products. 

In August the group acquired Impact Innovations, a supplier of gift packaging and seasonal décor products in the US, for a total consideration of £82.4M, of which £67M was paid in cash with the rest in shares.  The acquisition should create the world’s largest consumer gift packaging business, deliver significant earnings accretion in each of the next three years, deliver annual synergies in excess of $5M by year three and enable expansion into the seasonal décor product category.  In the month since the acquisition, the business generated net profits of £3.2M and the acquisition generated goodwill of £22.1M. 

Transaction costs of £2M related primarily to the acquisition of Impact Innovations and include the charge relating to the unwind of inventory fair value adjustment.  Restructuring costs of £960K are also linked to the acquisition of Impact, along with the final charges in relation to the Lang integration.  As the group focuses on delivering the synergies targeted at the time of the Impact acquisition, it is expected that between £7M and £8M of exceptional costs will be incurred by the end of the integration with the majority incurred this year. 

Going forward, the order book for the group is ahead of last year.  The board expect all regions to achieve year on year growth (they should given the first half performance).  Underpinned by organic growth and stronger performance from Impact, the board now expect full year earnings to be ahead of management expectations. 

At the current share price the shares are trading on a PE ratio of 29.1 which falls to 21.3 on the full year forecast.  After a 25% increase in the interim dividend the shares are yielding 1.1% which increases to 1.3% on the full year forecast.  Net debt increased from £70.2M at the same point of last year to £100M at the period-end, reflecting the acquisitions. 

On the 11th December the group announced that non-executive director Mark Tentori purchased 3,707 shares at a value of £20K.  As a result of this purchase he now holds 11,111 shares. 

On the 22nd January the group released a trading update covering the first nine months of the year.  Reported revenues were up 36% and like for like revenues increased by 9%.  They have seen growth in profit across all regions. 

The integration of Impact is progressing ahead of expectations and is on schedule to deliver the expected $5M of annual synergies by the end of 2021.  The US manufacturing operations are now fully consolidated and the proposed sale of the Midway site has now been completed ahead of schedule with gross proceeds of $7M.

Overall they are on track to deliver EPS in line with current marker expectations with year on year growth expected to be in excess of 20%.  The UK-based not for resale bags business continues to grow ahead of expectations with the order book now consisting of over 30 million bags, including having won contracts with new retail brands.  In addition, they have already secured new business in everyday cards in the UK, renewed card contracts in Australia and have concluded new licensing deals such as Disney’s Frozen 2 and Toy Story 4 in the UK and Australia. 

On the 30th January the group announced that CEO Paul Fineman sold 2,084,200 shares at a value of £11.5M.  He now owns 2,369,334 shares in the company.  This is quite a hefty sale by any standards!

Overall then this has been another good period for the group.  Profits were up, net assets increased and although the operating cash outflow deteriorated, this was due to working capital movements and cash profits increased.  The good performance is mainly down to the acquisition of Impact, which was acquired during its busy period.  There was organic growth too, aided by the new printing press in the Netherlands.  This good performance is reflected in the share price which is not cheap with a forward PE ratio of 21.3 and yield of 1.3%.  Also of concern is the CEO share sale.  Despite this, I continue to hold.

There are a lot of potential pitfalls coming up but these shares are starting look a bit cheap again. 

On the 21st February the group announced that non-executive director Elaine Bond purchased 3,485 shares at a value of £20K.  She bow owns 19,301 shares.

On the 15th April the group released a trading update covering the year as a whole.  Their strong trading performance continued into Q4 delivering revenue and profit growth across all regions in the year.  As a result the board expect the performance to be in line with expectations and significantly up year on year.

Revenue is expected to increase 37% driven by the acquisition of Impact with organic revenue up 9.8%.  Operating profit is expected to be significantly ahead of last year as a result of the acquisition and improved operating margins.  Net cash at the end of the year was significantly ahead of last year and exceptional costs remain in line with expectations at £8-9M. 

In the US the business continues to deliver strong organic growth alongside increase sales from the Impact acquisition.  The integration of the business has proceeded on plan with giftwrap manufacturing operations now fully integrated into one facility in Memphis.  As such, the delivery of the $5M of operational synergies from 2021 is being delivered in line with expectations.  A new ERP system has gone live and is currently being rolled out across the region, driving further efficiencies and providing a platform for significant growth. 

In the UK, although faced with a challenging market environment, the business continued to grow both revenues and profits benefiting from the success of their recently developed not for resale bags initiatives and the unification of their businesses under one leadership team. 

In Europe a record overall performance was achieved as a result of strong sales, increased margins and improved efficiencies, driven by an increase in the mix of revenue towards higher margin product and the operational benefits delivered following the installation of their new high speed printing press in March 2018.

In Australia, despite market headwinds, growth in sales and profits has been achieved, driven from existing and new customers.  The fully integrated Biscay acquisition, completed in January 2018, is delivering the planned synergies.

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