Half-year Report

7 March 2017

ST IVES plc

Half Year Results for the 26 weeks ended 27 January 2017

St Ives plc, the international marketing services group, announces half year results for the 26 weeks ended 27 January 2017.

Financial Highlights

* Adjusted Results exclude Adjusting Items to enhance understanding of the financial performance of the Group. Adjusting Items comprise of redundancies, empty property and restructuring costs; impairments, gain or loss on disposal of properties; costs related to the acquisitions or setting up of new subsidiaries; impairment or amortisation charges related to goodwill, tangible and intangible assets; contingent consideration required to be treated as remuneration; movements in deferred consideration and costs related to the St Ives Defined Benefits Pension Scheme.

** Net debt as at 29 July 2016.

Key points

· Very challenging six months, reflected in our financial performance

· Strategic Marketing segment, which lies at the centre of our long term growth strategy, represents 39% of Group revenue and 55% of Adjusted operating profit

· Revenue growth of 5% driven by our Strategic Marketing segment which delivered growth of 9%. Revenue in Books 15% ahead of the previous half year, partially offset by a 3% decline in Marketing Activation

· Further progress made against key strategic priorities - collaboration and internationalisation

- Over 160 of our clients currently working with more than one business across the Group (2016:130) including Unilever, Standard Life Investments, Microsoft and Bosch

- Over 45% of our Strategic Marketing revenue now comes from clients based outside of the UK (2016: 40%). Nine of our Strategic Marketing businesses are servicing clients on an international basis

· Net debt reduced to £70.4 million (29 July 2016: £80.8 million), with further debt reduction initiatives being pursued in H2

· Interim dividend of 0.65 pence (2016: 2.35 pence) recognises the importance of dividends to shareholders whilst reflecting the importance of investing in the further organic growth of the Strategic Marketing segment, and the strengthening of the balance sheet

Matt Armitage, Chief Executive, said:

"While recent months have proved very challenging, these results mask further encouraging underlying progress within our core Strategic Marketing segment, with a number of exciting new projects being won from existing and new clients as we continue to develop our unique offering. We remain confident in the quality and strength of our Strategic Marketing businesses and in the long term growth strategy for this segment.

"However, we recognise the effect that the legacy businesses are having on our overall performance and on our ability to generate value for shareholders. We are reviewing strategic options for both our Marketing Activation and our Books segments whilst taking decisive action to improve efficiencies and reduce costs and to diversify our Marketing Activation sector focus. This is a priority for us in the months ahead and we will continue to report on its progress."

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Chief Executive's Review

Introduction

Recent months have been very challenging for the Group as a whole, and this is reflected in the reported results for the first six months of the current financial year. It has also been a very disappointing period for shareholders, something of which the Board is acutely aware.

The challenges reside primarily within our legacy Marketing Activation and Books segments. In both cases, and despite their strong market positions, competition is becoming ever more intense and is leading to relentless downward pressure on margins. We are taking immediate action to reduce the cost base of both segments to reflect the new market realities and, at the same time, we are reviewing the strategic options for both.

These issues, and their impact on the results, mask further encouraging underlying progress within our core Strategic Marketing segment. This segment lies at the centre of our long term growth strategy and now represents some 39% of Group revenues and 55% of Adjusted operating profit. We have seen important progress in our pursuit of organic growth here, particularly through collaboration between our various businesses.

Group Performance

Group revenue of £195.1 million was 5% higher than the comparable period in the previous year. Our Strategic Marketing segment delivered growth of 9% - primarily acquisition growth. Revenue within our Books Segment was 15% ahead of the previous half year. These performances were partially offset by a 3% decline in our Marketing Activation segment, due to continued pressure within the grocery retail sector. 

The Group's statutory loss before tax of £26.8 million (2016: £2.8 million) includes Adjusting Items of £36.6 million (2016: £19.0 million), of which £35.7 million relates to non-cash items. The non-cash Adjusting Items include an impairment charge of £23.9 million in the Marketing Activation segment and £3.0 million in the Books segment.

The Group's adjusted profit before tax declined to £9.8 million (2016: £16.1 million) and adjusted basic earnings per share decreased by 44% to 5.45 pence (2016: 9.70 pence).

The half year saw further growth in our Strategic Marketing segment although, as previously reported, we experienced a number of project cancellations and deferrals in the last quarter of the previous financial year, which have also impacted revenue growth and operating margin within the first half of the current financial year. We remain encouraged by the progress that has been made to replace the cancelled work. However, this process is taking longer than previously anticipated, and it is unlikely that we will see the full benefit of the new work we have won until the final quarter of the current financial year.

Balance Sheet

Net debt as at 27 January 2017 was £70.4 million, down from the £80.8 million as at 29 July 2016, representing a net debt to adjusted EBITDA ratio of 2.0x (29 July 2016: 2.0x). Further reducing the Group's indebtedness, including a focus on cash generation and the disposal of certain non-core properties currently held for sale, is a priority for the Board.

Dividend

The Board has reviewed the Group's near-term dividend policy to reflect the impact of the issues experienced in the legacy businesses and the costs involved in the ongoing cost-reduction initiatives (more details of which are set out in the Segment Overview below). In doing so it has balanced the importance of dividends to shareholders, the importance of investing in the further organic growth of the core Strategic Marketing segment, and the strengthening of the balance sheet. Against that background the Board has declared an interim dividend of 0.65 pence per share, a decrease of 72% against last year's interim dividend of 2.35 pence. The Board will re-evaluate the Group's longer-term dividend policy in due course.

The interim dividend of 0.65 pence will be paid on 5 May 2017 to the shareholders on the register at 7 April 2017, with an ex-dividend date on 6 April 2017.

Pension Scheme

On an IAS 19 basis the net deficit on the St Ives Defined Benefits Pension Scheme (the "Scheme") has reduced to £18.5 million (29 July 2016: £26.4 million). Scheme assets performed well increasing by £8.9 million over the period. Scheme liabilities increased by £1.0 million to £371.5 million, where an increase in the discount rate used to calculate the liabilities was offset by an increase in the inflation rate.

Strategic Priorities

We are confident in our long term strategy for further growth, which is built around our Strategic Marketing segment and which remains centred around three key priorities:

Collaboration

We continue to make progress with our collaboration agenda with over 160 of our clients currently working with more than one business across the Group (2016: 130). These include Unilever, Standard Life Investments, Microsoft and Bosch.

We are seeing a general increase in demand for integrated solutions from clients within our Strategic Marketing segment, which, while aligning to our collaboration agenda, has lead us to review and evolve our operating model within the segment, and resulted in us bringing a number of our Digital and Data businesses closer together.

Internationalisation

Many of our businesses now deliver international solutions for clients. Over 45% of our Strategic Marketing revenue now comes from clients based outside of the UK (2016: 40%). Nine of our Strategic Marketing businesses are servicing clients on an international basis.

Our strategy for developing our overseas footprint is client-driven; we will open offices in those territories where we can identify client-led opportunities. However, we will be disciplined in our implementation of this strategy; the opportunities must be in large markets or in markets with the potential for significant and sustainable growth, and the offices need to be capable of generating appropriate returns within a reasonable period of time.

Acquisitions

In the longer term, the acquisition of further complementary marketing services businesses, which add value to our existing portfolio and operate in our chosen growth areas of digital, data and insight services, will continue to be an important element of the growth strategy of our Strategic Marketing segment.

Given the recent challenges however, we are currently prioritising organic growth, including leveraging the investments we have made in existing propositions and in new offices.

Segment Overview

Strategic Marketing

Our Strategic Marketing operations represent 39% of Group revenue for the half year (2016: 37%) and 55% of Group Adjusted operating profit.

We have seen further encouraging underlying progress within the Strategic Marketing segment, the core of the Group and of our long term growth strategy.

One of our priorities has been to replace the work lost in the last quarter of the previous financial year, and we have had a number of significant new client wins and contract renewals including long term agreements to be the digital partner of Rockwell Automation and DuPont Pioneer. We are encouraged by these successes although it is taking longer than previously anticipated to replace the lost revenues; revenue growth and operating margin were therefore subdued in the half year.

As a result of an increase in client demand for more integrated solutions, we have continued to drive our collaboration agenda and to evolve our operating model accordingly. We continue to focus on the disciplines of Digital, Data and Insight although the strict distinctions between these disciplines are becoming less relevant as more integrated propositions are provided to clients.

During the half year we announced some senior management changes within our Digital and Data businesses. Our three Digital businesses (Amaze, Realise and Branded3) are now under the management responsibility of a single individual, Tony Murphy, who was previously the CEO of Realise. We have also announced that our two Data businesses (Occam and Response One) will be managed by a single individual, Damian Coverdale (previously MD at Response One). These changes will ensure that we offer a coherent proposition combined with the breadth and scale of services to support our clients' expanding digital and data requirements.

Our Data businesses work increasingly with each other and also with our digital marketing businesses, where numerous joint propositions have been developed. We see further opportunities for collaboration between our Digital and Data businesses as data continues to be the driving force behind successful digital marketing and transformation activities.

Synergies between Solstice, our Chicago-based mobile and emerging technology business, and TAB continue to result in both businesses sharing resources, working practices, growth frameworks and data. The two are working together to develop innovative connected digital experiences using Voice, Virtual Reality and Internet of Things technology for clients. New wins in the half year have included projects for clients including Ford, BMW, Bosch and Electrolux.

Within our research consultancy, Incite, we have seen growth of our UK and US businesses through a significant number of new client wins in the technology, FMCG, finance and pharma sectors, although client spend and sentiment in Asia has been less robust. We continue to support our overseas offices in order to provide an international offering to clients - a growing number of Incite's clients are serviced by more than one Incite office - and to drive long-term growth, although this continues to affect short-term profitability.

Our healthcare consultancy, Hive, has experienced a number of new client wins including Roche, Leo Pharma, Ipsen, Gilead and Almiral. The business has also expanded its offering and client base in the US, delivering significant growth (albeit from a low base) through a number of client wins including Pfizer. We see the US, and further international expansion, as a significant contributor to future growth.

Our retail consultancy, Pragma has undertaken a number of large advisory projects, including strategic reviews and commercial due diligence of multinational consumer businesses. A growing number of such projects involve collaboration with FSP, our specialist property consulting firm, particularly where catchment analysis or location planning forms a key part of the investment decision.

The progress outlined above underscores the quality of our individual Strategic Marketing businesses and the potential for further profitable growth that they offer, both individually and, more importantly, through collaboration. They offer differentiated, value added services to clients and we are confident that the segment's margins can and will return to levels achieved in previous years.

Marketing Activation

Our Marketing Activation segment represented 40% of Group revenue for the half year (2016: 43%) and 17% of Group Adjusted operating profit.

Trading conditions within this segment continue to be very challenged, due in large part to the ongoing pressures within the grocery retail market. Whilst our expertise in grocery retail remains an important strength, diversification of the client base beyond this sector continues to be a priority.

The segment has had a number of new wins and project extensions during the half year for clients including Royal Mail, Innocent, Superdry, AkzoNobel, ESPA and OfficeTeam. While we have been successful in securing this work, the market remains extremely price competitive in all areas.

We will continue to focus on protecting margins through driving efficiency improvements and cost reductions, the benefits of which are expected to come through in the final quarter of the current financial year. A consultation has commenced with employees to reduce employee numbers in SP Group, our point-of-sale business. The cash cost, in addition to other restructuring costs, will be approximately £1.0 million and will be recorded in the second half of the year. In addition a non-cash impairment charge of £23.9 million has been incurred relating to SP Group, which is heavily dependent on the grocery retail market. At the same time, we are focusing on growth opportunities in markets that value service and innovation to further reduce the over-reliance on grocery retail.

Books

Our market-leading Books business represented 21% (2016: 20%) of Group revenue for the half year and 28% of Group Adjusted operating profit.

Revenue was 15% higher than the prior half year at £41.4 million (2016: £36.1 million).

Trading during the first half year was generally positive, particularly during the pre-Christmas period, and this has continued in the new year. Sales of printed books in the UK as reported by Nielsen were up 5% on 2016.

Following the end of the half year and as announced on 8 February, we were informed by HarperCollins that our contract for the production of monochrome books in the UK would not be renewed. The contract ends on 30 June 2017. As a result of the non-renewal, significant re-structuring and cost reductions are underway. We expect the mitigating actions to result in a one-off cash cost of £1.5 million, the majority of which will now impact the second half of this financial year and a £3.0 million non-cash impairment charge that has impacted the first half of the current financial year.

We continue to adapt to suit the evolving needs of clients, leveraging our well-invested digital print technology to provide a broader product range, greater capacity to support fast lead-times, lower stock-holding and with continued focus on extending supply-chain solutions to reduce the overall cost of the books supply-chain.

Outlook

Trading across our Strategic Marketing segment is recovering. We are encouraged by the new projects being won from existing and new clients, and excited by the opportunities that the increased collaboration between our businesses is generating. 

Trading conditions within our Marketing Activation segment continue to be very challenging, due in large part to the ongoing pressures within the grocery retail market, but we are taking decisive action to increase efficiency and reduce costs and remain focused on diversifying into other sectors.

Similarly, within our Books business we are taking decisive action to ensure that the cost base reflects the future level of volumes we now expect.

Overall, we remain confident in the long term growth strategy currently being pursued in Strategic Marketing, and in the quality of the businesses within that segment, as illustrated by the clients and contracts they continue to attract. However, we recognise the need to address, decisively, the effect that the legacy businesses are having on the Group's overall performance and on our ability to generate value for shareholders. This, together with further strengthening of the balance sheet, is a priority for the Board and we will report further to shareholders on this in the months ahead. 

Matt Armitage

Chief Executive

7 March 2017

Condensed Consolidated Income Statement

Adjusting Items comprise of redundancies, empty property and restructuring costs; impairments, gain or loss on disposal of properties; costs related to the acquisitions or setting up of new subsidiaries; impairment or amortisation charges related to goodwill, tangible and intangible assets; contingent consideration required to be treated as remuneration; movements in deferred consideration and costs related to the St Ives Defined Benefits Pension Scheme.

Condensed Consolidated Statement of Comprehensive Income

All income for all periods was attributable to shareholders of the parent company.

Condensed Consolidated Statement of Changes in Equity

^ Additional paid-in capital represents share premium, merger reserve and capital redemption reserve.

Condensed Consolidated Balance Sheet

These financial statements were approved by the Board of Directors on 7 March 2017.

Condensed Consolidated Cash Flow Statement

Notes to the Condensed Consolidated Financial Statements

1. Basis of preparation

The condensed financial statements have been prepared in accordance with IAS 34 "Interim Financial Statements" and in accordance with the Disclosure and Transparency Rules of the UK's Financial Conduct Authority ("FCA").

The financial information contained in these half year financial statements has been prepared in accordance with the accounting policies set out in the Group's Annual Report and Accounts 2016, prepared in accordance with the recognition and measurement principles of International Financial Reporting Standards as adopted by the European Union commission, and those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The half year statements have not been audited or reviewed.

The financial information for the twenty six weeks ended 27 January 2017 and prior half and full year comparatives do not comprise statutory accounts for the purpose of Section 435 of the Companies Act 2006. The abridged information for the fifty two weeks to 29 July 2016 has been extracted from the Group's Annual Report and Accounts 2016 which have been filed with the Registrar of Companies. The Auditor's report on the accounts of the Group for that period was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under Sections 498(2) or (3) of the Companies Act 2006.

Going concern

The Directors, having made appropriate enquiries, consider that adequate resources exist for the Group to continue in operational existence for the foreseeable future and that, therefore, it is appropriate to adopt the going concern basis in preparing the combined financial information for the twenty six weeks ended 27 January 2017.

2. Segment reporting

The Group manages its business on a market segment basis, based on the Group's internal reporting to the Chief Operating Decision Maker ("CODM"). The CODM has been determined to be the Chief Executive Officer and Chief Financial Officer as they are primarily responsible for the allocation of resources to the segments and the assessment of performance of the segments.

The Strategic Marketing segment comprises of the Group's Digital, Data and Insight businesses. The Marketing Activation segment comprises of the Group's Exhibitions and Events, Point-of-Sale, Print Management and Field Marketing businesses. The Books segment comprises Clays.

Corporate costs are allocated to revenue generating segments as this presentation better reflects their profitability.

Business segments

Geographical segments

The Strategic Marketing, Marketing Activation and Books business segments operate primarily in the UK, deriving more than 18% of their revenue and results from operations and customers located in the UK.

3. Adjusting Items

Adjusting Items disclosed on the face of the Condensed Consolidated Income statement are as follows:

Redundancy and restructuring costs of £167,000 and costs relating to Burnley of £19,000 were recorded within the Marketing Activation segment. Redundancy costs of £153,000 were recorded in the Strategic Marketing segment. Restructuring costs of £39,000 were recorded in the Books segment.

As a result of the non-renewal of the HarperCollins contract, the Group recorded an impairment charge of £3,000,000 relating to tangible assets in the Books segment.

A non-cash impairment charge of £23,930,000 was recorded in respect of SP Group's goodwill and tangible assets. This is primarily as a result of the dependency on the grocery retail sector and declining margins.

The gain on disposal of property, plant and equipment of £457,000 relates to the sale of the Group's property at Burnley. This item was recorded in the Marketing Activation segment.

4. Dividends

5. Earnings per share

The calculation of the basic and diluted earnings per share is based on the following:

Number of shares

Basic and diluted earnings per share

Adjusted earnings is calculated by adding back Adjusting Items, as adjusted for tax, to the profit/(loss) for the period.

6. Restatement

Previously the Group reported the employee costs of the Insight businesses, part of Strategic Marketing segment, under administrative expenses. The Group's accounting policy is to include these types of costs within cost of sales and accordingly the half and full year comparatives have been re-stated to ensure consistency.

The impact of the prior period adjustments on the previously reported Consolidated Income Statement are summarised as follows:

There is no impact on Consolidated Comprehensive Income, Consolidated Statement of Changes in Equity, Consolidated Balance Sheet and Consolidated Cashflow for either the half or full year comparatives.

7. Retirement benefits

The net obligation in respect of St Ives plc Retirement Benefits Pension Scheme of £18,469,000 at 27 January 2017 has decreased compared to £26,394,000 as at 29 July 2016. The decrease is primarily due to strong investment performance of the plan assets.

8. Notes to the condensed consolidated cash flow statement

Reconciliation of cash generated from operations

Analysis of net debt

Cash and cash equivalents (which are presented as a single class of assets on the face of the balance sheet) comprise cash at bank and other short-term highly liquid investments with a maturity of three months or less. The effective interest rates on cash and cash equivalents are based on current market rates.

9. Post-balance sheet events

The Group has classified the investment properties at Roche and Peterborough as assets held for sale in the second half of the year.

10. Risks and uncertainties

The Group's principal risks and key mitigating activities in place to address them, as at 29 July 2016, are set out in pages 21 to 23 of the Group's Annual Report and Accounts 2016, a copy of which is available on the Group's website: www.st-ives.co.uk.

The principal risks have been considered by the Board and changes to the risk ratings have been made, since the period ended 29 July 2016, for the following risks.

(i) Legacy Businesses

This risk covers issues arising within the legacy businesses, Marketing Activation and Books which may distract or inhibit the Board's focus on its strategic objective and in the short term, impact the growth within the Strategic Marketing segment if the Board has to address issues that emerge in these segments.

The inherent risk rating associated with legacy businesses has been increased from medium to high, following a further decline in Marketing Activation and the loss of the HarperCollins contract in Books. A consultation has commenced with employees to reduce employee numbers within both Books and Marketing Activation in response to the reduction in revenues. In addition, the Board is considering its strategic options in respect of these businesses. Given the continued uncertainty around these businesses the residual risk rating remains high.

(ii) Clients

The Group has a variety of key clients in each of its three business segments. Long-term relationships have been fostered with many of these clients over a number of years however competitive pressure may result in the loss of a key client.

Whilst the financial impact of these key contracts has not increased, the likelihood has risen since the appetite for clients to carry out tenders has become more apparent (particularly in the Marketing Activation and Books segments), therefore the inherent risk rating associated with this risk has been increased to high. The mitigating activities include encouraging collaborative behaviour across the Group's businesses and creating a commitment to cross-selling that will distinguish the Group's marketing offering from its competitors'; achieving or exceeding service level agreements with clients; broadening the Group's capabilities, providing marketing solutions in support of our clients' marketing strategies; avoiding over reliance on any single client; implementing bespoke propositions for securing the renewal of key client contracts, providing Group support where appropriate and conducting client satisfaction surveys. Notwithstanding these mitigating activities, the residual risk rating has increased from low to medium.

(iii) Financing

The Group's ability to trade may be compromised by lack of cash funds. The ability to finance working capital and carry out operations is fundamental to the Group. In order to monitor this, the Group conducts 'going concern' reviews twice yearly, longer-term viability assessments on a yearly basis and continually monitors the Group's performance against its banking covenants. The Group also undertakes monthly reviews of working capital, cash forecasts and headroom on banking covenants and periodically reviews its financial KPIs with its bankers. This inherent risk is consistent with prior years and continues to be high.

During the period the £125 million revolving credit facility was reduced to £95 million supplemented by a term loan of £30 million and the maximum leverage covenant condition (net debt to Adjusted EBITDA) was increased for the remaining duration of the facility (which expires on 23 March 2019). However, as a result of the challenging trading environment, particularly in the Marketing Activation and Books segments (as detailed in the announcements on 19 January and 8 February 2017), the residual risk rating has increased to medium from low.

11. Related parties

The nature of related party transactions of the Group has not changed from those described in the Group's consolidated financial statements for the fifty two weeks ended 29 July 2016.

12. Responsibility statement

We confirm that, to the best of our knowledge:

· the condensed set of financial statements has been prepared in accordance with IAS34 "Interim Financial Reporting";

· the half year management report includes a fair review of the information required by DTR4.2.7R (indication of important events during the first six months of the year and descriptions of principal risks and uncertainties for the remaining six months of the year); and

· the half year management report includes a fair review of the information required by DTR4.2.8R (disclosure of related parties' transactions and changes therein).

By order of the Board

Matt Armitage

Chief Executive

7 March 2017

The foregoing contains forward looking statements made by the Directors in good faith based on information available to them up to 7 March 2017. Such statements need to be read with caution due to inherent uncertainties, including economic and business risk factors underlying such statements.