International Greetings PLC Preliminary Results -2-

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:

 
 
        *    nurturing the mutually valuable relationships we 
             enjoy with our customers, suppliers and stakeholders; 
 
        *    creating a toolbox of marketing, design, product and 
             brand category expertise; 
 
        *    providing best quality, value and service through 
             optimum product development, manufacturing, sourcing 
             and supply; 
 
        *    giving our teams across the world the knowledge and 
             tools needed to achieve their goals; and 
 
        *    balancing our business, through sustainable and 
             growing sales across geographic regions, seasons, 
             product categories and brands 
 

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 GBP7.6 million (2013: GBP7.3 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 GBP15.2 million (2013: GBP7.5 million) 

-- Net debt down 12.3% to GBP36.9 million (2013: GBP42.1 million) and leverage down 0.4 times to 2.4 times despite major capital investment programme of GBP8.3 million (2013: GBP1.9 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 GBP36.9 million (2013: GBP42.1 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 GBP225.2 million in 2013 to GBP224.5 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 GBP0.3 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 GBP10.7 million reflecting the dynamics described above.

Operating profit after exceptional items and LTIP charges was GBP8.8 million (2013: GBP9.1 million)

Exceptional items during the year amounted to GBP2.3 million before tax (2013: GBP1.6 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, GBP0.2 million flowed out as cash in the year and GBP0.6 million will be paid out by way of redundancy payments during 2014/15. However, the balance of GBP1.5 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 GBP3.2 million (2013: GBP3.5 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 GBP7.6 million (2013: GBP7.3 million).

Profit before tax was down 8.6% to GBP5.2 million (2013: GBP5.7 million) after charging exceptional items of GBP2.3 million (2013: GBP1.6 million) and LTIP charges of GBP0.1 million (2013: nil).

Taxation

The headline taxation charge has dropped to GBP1.5 million (2013: GBP1.6 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 GBP60k (2013: GBP0.9 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.