Welcome to the IG Design Group Interim Results Webinar. First, we're going to play a prerecorded presentation, and after this, Paul Bal, CEO, and Rohan Cummings, CFO, who are with us, will answer your questions. This webinar is being recorded. We'll now play the presentation.
Hello, everybody. Today, we will provide you with an update on our performance and results for the six months to September 30, 2023, being the first half of our year ending March 31, 2024. Also with me, Rohan Cummings, our Group CFO, who joined us in July and has made a great start. In overall summary, in Slide two, we are reporting a very strong 26% increase in adjusted operating profit to $38.2 million, with our margin in the period rising 270 basis points to 8.6%. We continue to make the group's operating model more efficient, especially in the Americas. The tough consumer environment I referred to when we last reported in June, stays with us and has meant that our revenue has dropped in some markets.
With more stable supply chains, we have also seen some return to more traditional seasonality, which has moved some sales to the second half of the year. Our focus on working capital reduction has meant cash generation was strong, and so Net Debt is significantly lower than last year, as well as being below our expectations. As we have previously said, our first stage strategic aspiration is to restore, by the end of March 2025, margins to at least where they were before the disruption caused by COVID-19. The pro forma Adjusted Operating Profit margin on the acquisition of CSS Industries in March 2020 was 4.5%. We are on track. Looking beyond that, we have made good progress in developing our strategy for future periods, and today, we will also share with you our priorities and our aspirations over that period.
As previously reported in June, we secured new three-year bank facilities to June 2026. That provides some comfort. In some of our markets, the outlook for consumer demand remains uncertain as we enter the all-important Christmas season. Poor sales at retail could also impact customer ordering into the next year. Nevertheless, we remain confident that we will deliver year-on-year margin and absolute profit growth over the full year, even if sales are lower than last year. Our continued strong focus on improving our working capital should mean that cash delivery is above our expectations. On to a summary of the financials on Slide three. The group's reported 15% top-line decline was mainly driven by lower ordering, reflecting the uncertain consumer sentiment in a number of our markets. This was especially felt in the Americas, first, across everyday sales, and then into the seasonal ordering.
There has also been some rephasing to the second half as supply chains were stable, and we didn't see the accelerated ordering that we witnessed last year. In line with our focus on a more profitable business mix, we have also experienced net losses in competitive tenders in the low end of the U.S. market. One of the things that we look to achieve through our new strategy is making us more competitive in such situations. Turning to profitability, it was pleasing to deliver a significantly improved adjusted operating margin and profit, despite the challenging retail environment. This is mirrored in the notably higher adjusted EBITDA delivery, as well as a stronger adjusted profit before tax. Net debt stands well ahead of our expectations as we continue to reduce working capital levels across the group.
Let's now get into more detail on our sales, looking at our performance across our categories on Slide four, starting on the left side table. The mix across the categories has been relatively stable over the period. Some weakness in stationery has been offset by a rise in gifting sales, largely frames in Continental Europe. While craft sales have been stable, creative play saw some softness. Looking at the same performance through the lens of seasonality, the mix between seasonal and everyday sales is also quite stable. The initial drop in demand for everyday products that are reported back in June has been followed by lower ordering in seasonal lines. This was especially felt in the U.K. and the Americas, and more recently in Australia. Our quality and service levels have remained high during the period, and we have now completed shipments for Christmas.
In fact, some of our teams are planning Christmas 2024 with our customers, and some of our designers are already thinking about 2025. Moving on to Slide five and looking at the Americas division. I have already referred to the drivers behind the revenue dynamics. Rohan will provide more granularity shortly. Suffice to say, a general downturn in consumer sentiment has had an impact across most of our product categories as well as our customer base. Last year, we were successful in securing catch-up pricing to recover margins lost in the previous year. The downturn in demand has meant that pricing was not really available to us in this period. What we have done, meanwhile, is invest in strengthening our commercial capabilities to be more competitive in retaining business, as well as bidding for new business and growing profitable sales.
We are reorganizing our category teams away from legacy business structures and old ways of working, and we are developing stronger selling, account management, and category management skills. Walmart, our largest customer across the group, has awarded the Americas Giga-Guru status now for three years in a row, recognizing our collaborative contribution to its Project Gigaton aspiration to reduce its carbon footprint in its supply chain. In terms of the business operations, as I've reported in June, our new divisional CEO and CFO have brought more strength to the division's leadership team, driving the continued turnaround in the business. The turnaround initiatives embarked upon by that team continue to focus on the fundamental aims of bringing more simplification, greater efficiency, and margin growth.
The aim is to drive an improvement in the financial performance of the Americas to an operating margin of around 5% by the end of March 2025. The key initiatives yielding the most return in the period were end-to-end supply chain replanning and closer management to unlock efficiency savings, and a headcount reduction of 50. Another driver of the margin improvement has been more effective sourcing of our bought-in products. This has combined with savings in sea freight costs to bring down input costs. More work is also being passed to our contract manufacturing partners in Mexico, as more of our customers request nearshoring alternatives to better manage their supply chain risks. Finally, inventory and SKU reduction is releasing more cash, as well as providing cost savings. On to Slide six in our international businesses.
Again, I've covered the revenue dynamics already, and Rohan will shortly go into more detail. So far, we are not seeing across Continental Europe the softening in consumer sentiment that we have experienced in the U.K. and now also see in Australia. As in the other division, pricing has not been a lever available to us, meaning the 8% revenue increase in the period is largely volume driven. It is clear that a lot of our success in the period in Continental Europe reflects our customer mix, which is well suited for the tougher economic environment facing consumers. There has been much interest amongst these customers for Smart Wrap, our new innovative shrink-free wrap solution that minimizes damage through fraying and tearing. Available in Continental Europe first, it is now being rolled out in the U.K.
EcoNature, our signature brand, covering a circular economy range of recycled, recyclable, plastic-free gift wrap bags and cards, continues to grow among our U.K. customers. Costco is expressing interest in more sustainable craft paper packaging in place of plastic. In the U.K., our collaborative category development work with Tesco's, following their purchase of the Paperchase brand, is now visible as the range is rolled out. This is a great example of what we do best: working with our customers in delivering well-designed, on-trend products that also offer a point of difference to our customers. Capitalizing on our success in Continental Europe, we are looking to further develop the decor and stationery categories. On the operational side of the business, we continue to strengthen our teams, appointing two managing directors in our businesses, both promoted from within, plus a new FD into one of our Dutch businesses.
All three also strengthen the diversity balance at senior levels. Faithful to our reduce, reuse, recycle philosophy, we continue to develop our EcoNature range in the UK, investing in more vibrant yet sustainable inks, and there is also further investment in Smart Wrap equipment. We continue to invest for future growth. In this period, it has been in more flexible bag-making capacity, as some gift givers prefer the convenience of a bag to the more traditional gift paper wrapping. This is also in response to requests from our customers to nearshore supply as they de-risk their supply chains and look for more sustainable and reliable solutions. Like in the other division, we have seen benefits coming from improved finished good sourcing as well as lower sea freight costs. Back in June, I referred to the need to restructure the U.K. business in the face of tough conditions in that market.
This is well progressed and a more competitive business is emerging. And finally, to support our growth in Continental Europe, we're bringing more warehousing online. Here you can see some pictures illustrating some of our product innovations, like SMARTWRAP, EcoNature, and our work on Paperchase with Tesco. That's the commercial update, and I'm now handing over to Rohan to take us through the financials.
Thank you, Paul, and good morning, everyone. I joined IG Design five months ago, and I'm delighted to be able to present my first set of results for the group. As Paul mentioned, in the first half, we delivered a positive overall performance. We increased operational efficiency and further simplified the business, resulting in increased profit and margin recovery. I will start today's presentation by focusing on group revenue. This slide bridges the main drivers behind the group's revenue performance for the first half, which decreased 15% to $444 million. If we start with the DG Americas division, which represents nearly 64% of the group's revenue, we saw a 24% decline in the period to $282 million, driven by three key factors: firstly, reduced consumer demand.
Initially, this was experienced in the everyday categories and products, but since the summer, it has been felt through reduced ordering by our customers for the coming seasons, especially Christmas 2023. This lower seasonal ordering is anticipation of reduced consumer demand. Secondly, during the year, we focused on profitable re-tendering of business, which resulted in a net loss of revenue, particularly in low end of the U.S. market. Thirdly, the normalization of seasonal ordering, as we have seen customers return to normal ordering patterns versus earlier ordering we saw in the prior year. The DG International division saw strong growth in revenue of over 8% to $161 million. This growth is centered in Continental Europe, where the consumer has thus far been more resilient than in our other markets.
It is also where we are most successfully winning alongside our key customers as we help them gain retail share, especially in celebrations and giftware. The growth in Continental Europe more than offset small decline in the U.K. and, more recently, in Australia, where consumer sentiment has softened following a number of interest rate rises. Foreign exchange had a small positive impact, and on a constant currency basis, group revenue decreased 16% year-on-year. Turning to operating profit, we will bridge the main movements for the first half of the year. Group operating profit was up $7.7 million, or 26%, with an increase in margin of 270 basis points to 8.6%. The first red bar of this bridge is a combined margin impact of the revenue decline covered on the previous revenue slide.
Since 2022, the DG Americas team have been focused on a turnaround of the business to drive simplification and deliver improved operational efficiency. Through this work, they unlocked further synergies of $12.3 million, resulting from the acquisitions of the past decade. The main contribution from these initiatives comes from lower headcount, more efficient sourcing and distribution. With supply chains normalizing, the group has benefited from more efficient sourcing of brought- in product and sea freight cost reductions, which in the period delivered a combined $28 million of savings. While we have benefited from the reduction in costs, such as sourcing products and sea freight, the current cost environment has remained challenging, and we have seen inflationary increases in other costs, such as overheads and labor, which we expect will continue to rise.
Let us now move to the detailed financial review and start by looking at the key P&L lines. I've already covered the key dynamics in revenue and operating profit on the previous two slides. Essentially, in reported revenue terms, DG Americas was down 24% and DG International was up 8%. Through improved input costs and ongoing efficiency improvement, particularly in DG Americas, both divisions were able to increase operating profit and improve margins. Finance costs for the period were $3.4 million and are higher than the prior year, driven by significantly higher interest rates, but largely mitigated by lower average net debt levels. The taxation charge for the half year was $9.5 million, with an effective tax rate of 27.9%.
The tax charge continues to be distorted by a non-recognition of U.K. deferred tax assets, given the projected future results in that jurisdiction. Adjusted earnings per share of $0.25 is up 28% on prior year, driven by increased profits. If we now turn to cash flow on slide 10, the group ended the first half with a net debt balance of $15.1 million, $58 million lower than the same period in the prior year. This is as a result of combination of higher profit delivery, as well as ongoing working capital improvements. A higher profits meant Adjusted EBITDA was up 13.9% on prior year. Looking at working capital, it is normal for working capital levels to increase steadily in the first half of the year as manufacturing of seasonal product builds ahead of distribution.
The second half of the year then sees the borrowing levels of the group decline and typically move to a net cash position as Christmas debtors are collected. Given this backdrop, the working capital outflow in the period was $99.5 million, a $36 million improvement on the prior year due to better working capital management across the group. Pleasingly, the strong cash flow management and cash flow generation has resulted in lower average borrowings than anticipated for the period, which had a positive impact on our interest charge. I will now hand back to Paul to cover the new strategy as well as the outlook for the remainder of the year.
Thanks, Rohan. Turning now to our new growth-focused strategy with slide 11. You saw this one-page summary of our new growth-focused strategy back in June. It is effectively a checklist of what we should aspire to when providing our customers with the best products and service possible in a competitive setting. To be the partner of choice that then wins together with our customers. First, the top two rows is what we consider to be the six key attributes that make us the partner of choice for customers when it comes to generating reliable and sustainable value from our categories. The second part, in the last two boxes, takes these essential attributes and covers how we use them to do our magic. Since June, our teams have translated this strategy into local priorities and initiatives.
To support them in this, we have facilitated more collaborative working across the group, better leveraging our collective experience and expertise, and bringing it to bear for everyone's benefit. This is quite a shift in culture, and our first steps are encouraging. Slide 12 encapsulates, on a page, the strategic priorities and initiatives that have emerged from our work over these recent months. I won't read the slide.
It's very ambitious, and it's about clearer category architecture and product portfolios, widening our customer base, more active collaboration across the group, penetrating better the growing value, discounter and club channels, better segmenting our customers and our service levels to them, continuing to cut costs, continuing to produce cutting-edge, on-trend design, working our brands and licensing arrangements harder, more segmented product lines, utilizing social media and the e-commerce channel more, adapting to our customers where centralized sourcing is on their agenda, nearshoring, continuing to develop more sustainable products and supply chains, strengthening our sales, account management, and category management skills, simplifying our organizations to be more efficient, effective, and competitive, better sharing and exploiting our rich IP, leveraging our scale to improve sourcing, building more technical commercial capabilities to sell more, cleaning up our back office systems, developing more insights that we can bring to bear, fine-tuning our processes to be more efficient, and finally, taking a more joined-up approach to our bigger international customers.
Going forward, we will share case studies highlighting our progress in these areas. Last year's quick pivot to focus on some fundamental areas of the business have enabled a recovery in profitability and stronger cash generation. We are well-placed for the first milestone, the recovery of our past margins and profitability. The 4.5% adjusted operating profit margin comes from the pro forma financials for the financial year to March 31, 2020, the year in which the CSS Industries was acquired in a transformational deal that month. The pro forma financials reflect the annualized contribution from CSS Industries that year. Pretty much immediately after that, the considerably enlarged business was disrupted by the COVID pandemic, and then by the pressure on supply chains as markets recovered. This is evidenced with the low point of financial delivery in the 2022 financial year.
As you can also see from the table, we are on track with our aspiration to restore the margin and profitability by March 31, 2025, even with the tougher consumer conditions that we are experiencing presently. As we look forward to progressing under the new organic growth-focused strategy, we are sharing with you today our aspirations for continued financial delivery. Over the next 3.5-
Sorry, we have just lost sound, but we are working on it. Sorry, just bear with us. Really sorry, everyone. We are working on this. Sorry, we will get this up and running as soon as we can. I'm really sorry, everyone. We've lost the end of the presentation. We have got Paul and Rohan with us at the moment who can take questions. To ask your question, click on the Q&A button and type your question. Again, Paul and Rohan, I'm really sorry, 'cause we can't play the end slide of the video. But hopefully you're okay to take questions. Can you just say hello to both of us?
Yeah. Thank you, Tamsin.
Tremendous. Yeah, we can hear you, and that's great. For anyone listening, please just type in your question by clicking on the Q&A tab. The first question is: What's one of the achievements you're most happy with or proud of during the period?
Thanks, Tamsin, and apologies once more, everybody online, for the loss of sound. Hopefully, we're able to sort of pick up on the key messages that we're left to make. The one thing for me that I'm most proud of in terms of the last six months is really, in a word, collaboration. Collaboration is at the heart of our business model. It's what makes us successful. It's this collaboration with our customers from the very first sort of inception of design work, in putting together a product which is going to have a point of difference, which is going to have traction with the consumer, all the way through to the other end of the supply chain, collaborating in making sure that we're sourcing ethically to quality standards, and that we will deliver on time, in full, to the right quality.
So collaboration is at the heart of what we do with some of our retail customers, like Walmart. We've been working together for over 50 years. For others, like Tesco, it's been a shorter period of 40 years. But collaboration is really, you know, at the heart of what we do. It's what defines us. It's what differentiates us from a lot of our competitors. I'm especially pleased to say that that collaboration is also something that I'm seeing increasingly within our business. As you know, our business has operated quite a fragmented model, which has prevented us from often leveraging the true scale of our business.
I have to say, over the last six months, we've seen an incredible change taking place as groups come together across the organization, leveraging the best of our experience and expertise to really come up with some compelling solutions and offers for our customers. So that is my single biggest sort of point of pride, for the period.
Great, thank you very much. In terms of cost, could you specify how much of freight costs are fixed from last year, and how much is spot right now and for next year?
Yeah, we don't actually have a fixed policy on this. We look at how the market is evolving. There will be periods of volatility where we decide that we will go more fixed, and there are periods where we will sort of float and hope that we will take advantage of something moving more favorably in our, you know, in our favor. In the environment that we've seen over the last six months, we've typically floated more, and that has enabled us to take advantage of declining rates. So right now, I would say we were more floating rather than fixed, but we don't have a fixed policy on this. We will respond to the market, and the market has seen quite a bit of favorable movement, which is obviously benefiting us during this period.
Great. Thank you very much. Could you also comment on transport and labor costs in the U.S., and how this has evolved and where it is right now and where you see it next year?
Yeah. So in terms of labor costs, certainly our own experience internally, we have seen increases ranging from sort of around 4%, up to over 10%, across our organization. Typically, our more senior colleagues have had lower increases than our colleagues at the factory level, and that's in terms of labor. In terms of internal freight, within domestic freight, we have seen a reasonable amount of inflation taking place. It's been in the mid-single digits, so in the last six months.
Paul, we can actually now play out the final two slides, if... Sorry-
Sure, why not?
The final slide. Would you like us to do that?
Sure, sure. Why not, Tamsin?
I'm really sorry, everybody, and to both of you for the chopping and changing. We also have other questions, too. Here we go.
Yep.
Sorry, my error. This is not going to play out, but you can talk to it if that would be helpful.
Yeah, sure. But I think we have concluded, Tamsin, on around slide 13, have we not?
Yes.
Yes, absolutely.
So really, it's sort of. Okay, so I'm turning now to slide 14, which is really the summary and outlook. Apologies for that. That seems to have been some sort of alarm going off in the building that we're in. It's certainly not turning out to be our day. So, coming back to the presentation, slide 14. So in summary, look, it's been a great start to the year, and we're very happy, obviously, with the delivery on the absolute profit and also the considerable rebuild on the margins. That's all moving in the right direction towards our aspiration for fiscal 2025. The cash generation has been incredibly strong, reflective of the huge amount of work that's taken place in managing better our working capital, in particular, our inventory and our SKU proliferation.
Obviously, we are disappointed with the revenue performance, and that is, as we have seen, largely reflective of the environment that we see at retail level, especially in the U.S., in the U.K., and more recently, in Australia. But despite the tough environment of retail, you know, we're very pleased to say that our strong relationships with our customers continue to hold, and we work ever closely with them. I'm very pleased with the performance of the strengthened team in the Americas. As you recall, last June, I shared with you details of some of the new leaders entering into that market, and there is some good progress being made in rebuilding that business on a more secure, resilient footing.
Besides the delivery of the financials, I'm very pleased also that we continue to make good progress and good traction with the consumer in terms of our sustainable products, both those that are on sale and those that are in development. In terms of sort of looking ahead, obviously, it was very pleasing to finalize the refinancing exercise back in June, and that's given us security now for the next three years. I'm very happy with the terms and a very strong relationship with our two banks. Yes, we face continued uncertainty over consumer demand over the coming months, and that is certainly sort of making us err on the side of caution in terms of our outlook. And again, it's particularly the three markets of the U.S., the U.K., and Australia that are sort of more concern to us.
Having said that, we remain very confident that we will be able to grow both our margin and our absolute profits year on year for the full year, and cash delivery will continue to be well above our expectation. We remain on track with our first aspiration of recovering to pre-COVID margins by the end of March 2025, and that's despite the challenges that we see in the market in the near term. The new growth strategy we have articulated in further detail and shared that with yourselves today, and we have shared with you the emerging initiatives and priorities under that.
Alongside that, we're sharing with you our aspirations now, which take us to sort of the end of 2027, and there we expect to deliver not only a return to sales growth, reaching $900 million of sales, but also continuation of higher margins, continuation of higher absolute profits, and responsibly managed balance sheet and leverage. So that sort of concluded the presentation, that we would have otherwise delivered, and, now, happy to go back to questions, Tamsin.
Great. Thank you so much indeed, Paul. Thank you very much. Next question: How important is Continental Europe in the DG International revenue? And can you give an overview of distribution of revenue by region?
It's not something we have done for many years, on the basis of commercial sensitivity. We are one of the few listed businesses in this area, and we're competing predominantly with private businesses that don't offer anywhere near the level of disclosure that we do. So consequently, we're not comfortable in disclosing the sort of market-by-market level of sales. I think previously, I've talked about within the international division, that the U.K. business was representing around sort of 10% of our sales at a sort of a group level. That was a sort of an indication I'd given. The balance is Continental Europe and Australia, but certainly don't feel comfortable sort of providing any more detail than that.
Yes, that's absolutely fine. What are the cash flow figures associated with the 2025 aspiration?
Yeah. Well, I mean, from a cash flow perspective, even this year, we've had very strong cash generation, and obviously, we're expecting to be well ahead of where our management expectations were for this full year. 2025, we expect ongoing benefits coming through and ongoing cash generation, so we do expect very healthy, positive cash positions at the end of FY 2025. I think if we do look back at FY 2024, this has been a very good year in planning, particularly around working capital management, and the way we've managed inventories. I think if we look at inventory in particular, we've done a lot in simplifying the business, reducing our number of SKUs across the business, simplifying our supply chains, simplifying. And that's obviously had a big reduction on working capital that we've seen coming through.
That has also meant that in this year, we've had lower average Net Debt levels throughout the year. We obviously will give us a very solid base going into FY 2025, and we expect ongoing cash generation at a normal level, sort of going on into 2025.
Great. Thank you very much. And you've commented on inflation in the U.S., but can you comment more broadly what you're seeing in terms of cost inflation? And, specifically in the U.K., how does the increase in national living wage impact you?
Okay. Yeah, I mean, I think if we do look at the operating profit bridge we had, we do pick out some of our impacts on inflation. And I think if we look at inflation across the piece, we've obviously spoken about the benefits we've had from freight. I think it's important to note that in that, yes, we've seen cost reductions in the absolute rate of freight, but it's also we've done things within freight through sourcing efficiencies that have also driven down and made us more effective in the way we source freight. So within freight, there's a combination of lower rates and more effective sourcing.
When you look at the $19 million benefit, that's actually driven by our more effective sourcing across the supply chain through the rationalization and a more effective basic device we've set up with the reduced number of SKUs and the way we source those products and brought them in. So within those, we've had some big efficiencies in what we've done with an amount of deflation, say, in freight. Where we have seen inflation has been in headcount, and I think Paul mentioned earlier on, our pay cost inflation has been one of the bigger ones, that you've seen the increase in overheads and pay costs. That's ranged between 4%-14%, depending on the geography and where that is, and we've seen some inflation in some of the raw materials, but not a material amount.
What we expect going forward really is that we have ongoing pressures on overhead inflation. We don't expect the minimum wage to impact us that much going forward. There's very few people that that would impact across the U.K., but we do expect ongoing pressure within some of the pay cost inflation in the inflationary environment.
Great. Thank you very much. And just a reminder to, everyone, if you want to ask a question, click on the Q&A button and type your question. The next question is: What will be the triggers for recommencing the dividend payments?
Yeah, sure.
Recommencing the dividend payment is clearly pretty top on my agenda, and that's something I would like to do as soon as we feel comfortable to do so. So what would make us comfortable are a couple of things. I mean, firstly, I would really like to see a return to top-line sales growth in the Americas business, and therefore, by being to the size of that relative to the group, therefore the group returning to sales growth. And by sales growth, I would emphasize profitable sales growth. So that would be the first thing I'm looking for. And second, secondly, I will be looking for us to sort of navigate through this sort of near-term uncertainty that we're seeing in the consumer environment in specific markets that I mentioned already.
Then finally, I'm looking for a further degree of comfort that we will hit our first aspiration of the margin recovery and the absolute profits, come the end of March 2025. So those would be the three things that are on my sort of checklist, as it were, to enable us to sort of return to dividend. And the reason why I, I'm sort of setting out the sort of the three things is the last thing I would like to do is reinstate dividend and then have to pull it in light of uncertainty. So those are the sort of three things I'm looking for over the coming sort of 12 months.
Great. Tremendous. And that's the end of questions. So thank you both very much indeed, particularly Paul, for picking up on the slide that wasn't played out. Thank you to the audience for being so patient while we've worked with tech issues. You'll now be taken to a web page to give feedback on today's presentation. We acknowledge that there have been issues, so we are aware of that, but it's far more feedback on the actual company and the messages that they're putting over. If you're unable to complete it now, you'll receive a follow-up email. We'd be really grateful if you could take a few minutes to complete. Many thanks for joining us. Again, huge apologies. This is the end of the webinar.