Half-year Report

30 November 2016

Findel plc ("Findel" or "the Group")

Interim Results for the 27 weeks ended 30 September 2016

Findel, the online value retail and Education business, today announces its Interim Results for the 27 week period ended 30 September 2016.

Financial Summary

* before exceptional items and revaluation of forward foreign exchange contracts (refer to Group Financial Results section for analysis)

** net debt excluding the securitisation facility relating to Express Gifts receivables and finance leases (see note 9 for details)

Highlights

· Good sales performance in the first-half with Group like-for-like† revenue up 6.5% on prior year (reported revenue up 11.3%)

· Continued strong performance from Express Gifts, our largest business, with first-half like-for-like product revenue up 12.0% (reported revenue up 18.7%)

o Full-year recruitment target of 100,000 additional customers already achieved; with 12% increase in active customer base

o Sales from new and established customers continuing to generate strong growth during the peak Christmas trading period; orders during Black Friday week up 36%, a record week for the business

o Full FCA licence approval received in October

· Findel Education seeing improving trends in overall sales as the year progresses

o Total revenue for first-half on a like-for-like basis down by 5.4% (on a reported basis down by 4.2%); Q2 like-for-like revenue down by 3%

o Classroom and Specialist brands showing year-on-year growth in Q2 and market share growth

o Market pricing conditions for our School brands remain challenging, with first-half revenue decline of 10%

o Warehouse consolidation successfully completed; will provide significant uplift to the profitability of the division for FY2018 and beyond

· Further modest reduction in core net debt** despite strong growth at Express Gifts

o Express Gifts securitisation facility increased to £155m, up from £145m, to accommodate future sales and receivables growth

Outlook

· FY2017: On track to deliver a full year performance in line with expectations

o Express Gifts: Sales in Christmas trading period in line with first-half rate of growth

o Education: Classroom and Specialist brands continue to show year-on-year growth

· FY2018:

o Further progress in sales and customer recruitment by Express Gifts expected to broadly offset the impact of currency movements and increase in marketing investment

o Education anticipated to deliver an increase in profitability as a result of initiatives already undertaken

David Sugden, Executive Chairman, commented:

"We are pleased to report a half of significant progress across the Group. The strong trading performance of Express Gifts is extremely encouraging. It represents continued delivery against our digital strategy and gives us confidence to further increase investment in marketing and customer recruitment. The new management team in Education are also making good progress against a challenging market backdrop. Looking ahead, we remain confident that the ongoing investment in both our businesses will deliver improved returns for shareholders."

* before exceptional items and revaluation of forward foreign exchange contracts (refer to Group Financial Results section for analysis)

** net debt excluding the securitisation facility relating to Express Gifts receivables and finance leases (see note 9 for details)

† References to "like-for-like" mean a comparison between adjusted figures showing equivalent 26-week calendar periods from each reporting period. A reconciliation to reported figures is presented on page 6. The current financial year will be a 53-week period ending on 31 March 2017.

Enquiries

Findel plc 0161 303 3465

David Sugden, Executive Chairman

Tim Kowalski, Group Finance Director

Tulchan Communications 020 7353 4200

Stephen Malthouse

Will Smith

Notes to Editors

The Findel Group contains market leading businesses in the UK home shopping and education supplies markets. It is primarily a retailer and distributor, handling and supplying specialist products manufactured by third parties.

The group's continuing activities are focused in two main operating segments, together with a small overseas sourcing operation:

· Express Gifts - one of the largest direct mail order businesses in the UK; and

· Findel Education - the largest listed independent supplier of resources and equipment (excluding information technology and publishing) to schools in the UK.

INTERIM MANAGEMENT REPORT

Summary

We are pleased with the overall performance of the group in the first-half of the year. Revenue for the period was strongly ahead, up by 6.5%† on a like-for-like basis (up 11.3% on a reported basis). Pre-tax profit* was £1.9m, lower than the prior year result of £3.4m, reflecting an increase in profits from Express Gifts and market conditions for Findel Education remaining challenging.

The performance during the peak trading periods for each business has been very encouraging and underpins our confidence in the group's ability to deliver full-year results in line with expectations.

Express Gifts

Express Gifts is our core online value retail business. With over 1.5m customers, it is one of the largest direct mail order businesses in the UK, offering a broad range of home and leisure items, clothing, toys and gifts via catalogue and online, together with a leading personalisation offer. In order to build upon Express Gifts' market leading position, the business has been successfully focusing on accelerating sales growth and growing its customer base through a number of strategic initiatives.

At the start of the calendar year, the business set out with the aim of recruiting 100,000 additional customers for the year by focusing its core value proposition. Much of the additional recruitment activity has been based around new TV and digital campaigns that highlight particularly good-value products and direct customers towards the www.studio.co.uk website. We are therefore very pleased to report that the recruitment objective has already been passed, and that retention levels from existing customers have also increased throughout the year.

This investment together with the ongoing improvements in our online offering has generated product revenue growth in H1 on a like-for-like basis of 12.0%† (reported basis: 18.7%), a rate which has been sustained as the business has moved into its peak trading period ahead of Christmas.

Financial services revenues increased by 11.3%† on a like-for like basis (reported basis: 17.9%) in the first-half of the year, driven by the growth in balances resulting from increased product sales and the roll-out of risk-based pricing. The higher level of customer recruitment seen during the early months of the year, together with refinements to the management of the credit book and changes to the timing and extent of debt sales, has increased bad debt charges compared to the first half of last year. The project to introduce a new financial services operating platform is ongoing and is expected to be completed next summer, ahead of the peak trading season.

Placing the customer at the heart of the business is key to its long-term success. Therefore, in addition to a series of new features on the websites that were launched at the start of the year, we have established our own call centre operation in the Philippines to ensure that the business has sufficient capacity to manage customer enquiries throughout the peak trading season. This facility, which was opened at the start of the year, is operating well and is contributing to a significant reduction in lost sales compared to previous years.

A significant level of work has been undertaken over the last two years to improve the governance and effectiveness of controls and risk management in the business. We were therefore very pleased to receive confirmation from the FCA that our application for full consumer credit authorisation was approved in October.

Overall, the business produced an operating profit* for H1 of £5.3m, 7.2% ahead of the prior year, and is well positioned for the remainder of the year.

With the response to our investment activity exceeding our expectations, we have decided to increase the investment in both customer recruitment and customer-facing systems throughout the remainder of this year and next to support further sustainable sales growth.

Looking ahead to FY2018, sales growth, together with initiatives on pricing, sourcing, and efficiencies, will help to mitigate against adverse currency movements.

Findel Education 

Findel Education, one of the leading suppliers of resources/equipment to schools in the UK and overseas, has performed well in the first-half of the year increasing its market share in a very challenging market.

The focus for the business over the last 18 months has been to arrest the decline in market share and return the business to market share growth. This objective has been achieved for our Classroom and Specialist brands with both recording sales increases in the second quarter, which is the business' peak period. The more commodity based School brands are still recording declining sales and further actions are underway to help these brands return to market share growth.

Whilst overall first-half revenue declined year-on-year, the rate of decline narrowed as the period progressed. Overall, adjusting for the revised timing of sales under the Sainsbury's Active Kids contract most of which will now occur in Q3 and the additional week, total revenues in the first-half are down by 5.4%† (on a reported basis down by 4.2%) with revenues in the second quarter down by c.3%.

The operating profit* for H1 was £2.1m lower than prior year at £1.6m. Around half of this decline is attributable to the reduction in revenue and the timing of Sainsbury's revenues with the balance reflecting the investments that we are making in repositioning the business.

The warehouse consolidation project has now been successfully completed and is performing to plan. It will provide a significant uplift to the profitability of the division for FY2018 and beyond. Expectations for the division for the current year remain unchanged.

Exceptional items

As highlighted in our 2016 Annual Report, we had set aside a provision of £14.4m for customer redress and refunds in respect of flawed financial services products, based upon estimates and assumptions that were subject to change. Since then we have undertaken a pilot-scale contact programme for affected customers. Based on the findings from that programme a revised scheme of redress has now been proposed to and accepted by the FCA. A more informed analysis of the likely cost of this scheme indicates that an additional £3.3m charge will be required, although this remains an estimate ahead of rolling out the contact programme in the coming months.

The Board announced in July 2016 that it had received a proposal from Schroders plc, on behalf of Sports Direct International plc (SDI), to seek to appoint Mr Michael Ashley as Chairman of the Company in succession to David Sugden, who had indicated his intention to step down. Exceptional advisory costs totalling £0.7m have been incurred in the period to 30 September 2016 in dealing with this proposal and other related matters. 

A credit of £0.1m has also been recorded in respect of the recovery of amounts due from the group's former subsidiary Kleeneze Limited, which were previously written off as unrecoverable.

Update on leadership

Further to the announcement last month, the process to appoint an independent Executive Chairman to replace David Sugden continues and an update will be provided early in the New Year.

Outlook

The Group remains on track to deliver a full year performance in line with expectations.

Looking ahead to FY2018, the success of the marketing campaigns in Express Gifts, together with the strength of its offer, underpins our confidence to invest in promoting continued strong sales growth. We will be increasing our investment in this area as we look to further grow the customer base. Whilst this, together with currency headwinds, is expected to lead to profits remaining broadly unchanged next year, it will strengthen the medium-term prospects for Express Gifts.

The successful completion of the warehouse consolidation project for Findel Education will provide a strong increase to its profitability in future years. Market conditions are unlikely to become easier in the near term and the business will therefore continue to focus on its increasingly successful actions to increase market share to provide profit growth in FY2018 and beyond.

* before exceptional items and revaluation of forward foreign exchange contracts (refer to Group Financial Results section for analysis)

** net debt excluding the securitisation facility relating to Express Gifts receivables and finance leases (see note 9 for details)

† References to "like-for-like" mean a comparison between adjusted figures showing equivalent 26-week calendar periods from each reporting period. A reconciliation to reported figures is presented on page 6. The current financial year will be a 53-week period ending on 31 March 2017.

GROUP FINANCIAL RESULTS

The nature of the businesses within the Findel Group mean that profits have shown, and will continue to show, a significant seasonal bias with the majority of profit being earned in the second half.

Revenue

The current financial year will be a 53-week period ending on 31 March 2017. The first-half of the year is therefore a 27-week period that ended on 30 September 2016. Revenues from the Sainsbury's Active Kids scheme in Findel Education are normally received during the first-half of the year. However, due to one-time operational changes, most of these revenues will be seen in the second half of this year.

In order to provide a reasonable method of comparison between equivalent 26-week calendar periods from each reporting period ("like-for-like"), the reported figures for both the periods ended 30 September 2016 and 25 September 2015 have been adjusted. The adjustments made to reported figures for the period ended 30 September 2016 have the effect of removing the first week of the 27 week reporting period, whilst the adjustment made to the reported figures for the period ended 25 September 2015 has the effect of removing the first week of the 26 week reporting period and adding the impact of the first week of trading in H2 of FY2016. The adjustments made to the prior year figures also remove the impact of the timing of sales in respect of the Sainsbury's "Active Kids" scheme. The adjustments are summarised as follows:

Period ended 30 September 2016

^includes rendering of services and fees and interest.

Period ended 25 September 2015

^includes rendering of services and fees and interest.

The group's revenue performance vs. the equivalent period in the prior year on both a like-for-like and reported basis is as follows:

^includes rendering of services and fees and interest.

^includes rendering of services and fees and interest.

Summary income statement

* before exceptional items and revaluation of forward foreign exchange contracts

Borrowings and finance costs

The seasonality in the group's businesses mean that core net debt** is at its peak at the half-year point. The core net debt** at September 2016 stood at £94.5m, £1.1m lower than at September 2015 despite the strong growth in working capital requirements for Express Gifts additional recruitment.

Total net debt at the end of September 2016 was £226.7m (September 2015: £217.6m) with securitisation borrowings £8.3m higher at £130.3m (2015: £122.0m) due to Express Gifts strong receivables growth and new finance leases totalling £1.9m relating to the warehouse consolidation project for Findel Education.

Finance costs totalling £4.6m were incurred in the first-half of the year, some £0.5m lower than the equivalent period in FY2016 despite the higher total borrowings.

Foreign exchange contracts

The group amended its policy on foreign exchange risk management at the start of 2016 by moving away from an approach that only covered exposures occurring within the current financial year, instead moving to securing exposures on a rolling 12-month basis.

This new approach has led to a mark to market gain of £1.4m on forward contracts outstanding at 30 September 2016, which has been presented separately in the consolidated income statement. At the end of September 2016, derivative assets of £1.4m were recorded in the consolidated balance sheet in relation to forward foreign exchange contracts.

Exceptional items

As highlighted in our 2016 Annual Report, we had set aside a provision of £14.4m for customer redress and refunds in respect of flawed financial services products, based upon estimates and assumptions that were subject to change. Since then we have undertaken a pilot-scale contact programme for affected customers. Based on the findings from that programme a revised scheme of redress has now been proposed to and accepted by the FCA. A more informed analysis of the likely cost of this scheme indicates that an additional £3.3m charge will be required, although this remains an estimate ahead of rolling out the contact programme in the coming months.

The Board announced in July 2016 that it had received a proposal from Schroders plc, on behalf of Sports Direct International plc (SDI), to seek to appoint Mr Michael Ashley as Chairman of the Company in succession to David Sugden, who had indicated his intention to step down. Exceptional advisory costs totalling £0.7m have been incurred in the period to 30 September 2016 in dealing with this proposal and other related matters. 

A credit of £0.1m has also been recorded in respect of the recovery of amounts due from the group's former subsidiary Kleeneze Limited, which were previously written off as unrecoverable.

Taxation

The group recognised an income tax charge in respect of continuing operations in the first-half of £0.7m (September 2015: £ 0.7m). The estimated effective tax rate for the full year, excluding the impact of exceptional items is 21.1% (September 2015: 20.8%), which is slightly higher than the prevailing corporation tax rate of 20%, owing to items of non-taxable expenditure and a reduction in the rate at which deferred tax assets are recognised from 18% to 17%.

Balance sheet

Net assets at September 2016 stood at £68.7m, compared to £80.4m at September 2015.

The group's pension deficit measured under IAS 19 has increased from a low of £2.3m at March 2016 to £12.8m primarily due to a decrease in bond yields.

Findel plc

Group Financial Information

Condensed Consolidated Income Statement

27 week period ended 30 September 2016

*Earnings before interest, taxation, depreciation, amortisation and fair value movements on derivative financial instruments.

Condensed Consolidated Income Statement

26 week period ended 25 September 2015

*Earnings before interest, taxation, depreciation, amortisation and fair value movements on derivative financial instruments.

Condensed Consolidated Income Statement

52 week period ended 25 March 2016

*Earnings before interest, taxation, depreciation, amortisation and fair value movements on derivative financial instruments.

Condensed Consolidated Statement of Comprehensive Income

27 week period ended 30 September 2016

The total comprehensive loss for the period is attributable to the equity shareholders of the parent company Findel plc.

Condensed Consolidated Balance Sheet

At 30 September 2016

Condensed Consolidated Cash Flow Statement

27 week period ended 30 September 2016

*Includes an overdraft balance of £8,263,000 in Kitbag Limited, disclosed within liabilities held for sale at 25 September 2015.

Condensed Consolidated Statement of Changes in Equity

27 week period ended 30 September 2016

The total equity is attributable to the equity shareholders of the parent company Findel plc.

Notes to the Condensed Consolidated Financial Statements

1. General Information

The condensed consolidated financial statements have been approved by the board on 29 November 2016.

Statement of compliance

These condensed consolidated interim financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union ("EU") and the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority. As required by the latter, the interim financial statements have been prepared applying the accounting policies and presentation that were applied in the company's published consolidated financial statements for the 52 weeks ended 25 March 2016. They do not include all the information required for full annual financial statements, and should be read in conjunction with the group's consolidated financial statements as at and for the 52 weeks ended 25 March 2016.

The financial information for the period ended 25 March 2016 is not the company's statutory accounts for that financial year. Those accounts which were prepared under IFRS as adopted by the EU ("adopted IFRS") have been reported on by the company's auditor and delivered to the Registrar of Companies. The report of the auditor was (i) unqualified, (ii) did not include a reference to any matters to which the auditor draws attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under sections 498(2) or (3) of the Companies Act 2006.

Going concern basis

In determining whether the group's interim financial statements for the period ended 30 September 2016 can be prepared on a going concern basis, the directors considered all factors likely to affect its future development, performance and its financial position, including cash flows, liquidity position and borrowing facilities and the risks and uncertainties relating to its business activities in the current economic climate. The financial position of the group, its cash flows, liquidity position and borrowing facilities and the key risks and uncertainties are set out in further detail above in the Finance Director's Review on pages 20 to 24 of the group's annual report and accounts for the 52 week period ended 25 March 2016.

The directors have reviewed the trading and cash flow forecasts for the period to December 2017 as part of their going concern assessment, including reasonable downside sensitivities which take into account the uncertainties in the current operating environment including amongst other matters demand for the group's products, its available financing facilities, and regulatory licensing and compliance. Although at certain times the level of headroom reduces to a level which is less than the directors would regard as desirable in the long term, the directors believe it to be sufficient and have identified controllable mitigating actions that could be implemented if required. The group's banking facilities mature in December 2019.

Taking into account the above uncertainties and circumstances, the directors formed a judgement that there is a reasonable expectation that the group has adequate resources to continue in operational existence for a period of at least 12 months.

Accordingly, they continue to adopt the going concern basis in preparing the group's interim consolidated financial statements.

Risks and uncertainties

The principal risks and uncertainties which could impact the group's long-term performance remain those detailed on pages 22 to 23 of the group's annual report and accounts for the 52 week period ended 25 March 2016, a copy of which is available on the group's website, www.findel.co.uk. No new risks have been identified.

The risks detailed in the annual report and accounts remain valid as regards their potential to impact the group during the second half of the current financial year. The group has a comprehensive system of risk management installed within all parts of its business to mitigate these risks as far as is possible.

Seasonality

The nature of the businesses within the Findel group mean that profits have shown, and will continue to show, a significant seasonal bias with the majority of profit being earned in the second half.

2. Accounting Policies

As required by the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority, this condensed set of financial statements has been prepared applying the same accounting policies and computation methods that were applied in the preparation of the company's published consolidated financial statements for the year ended 25 March 2016.

Estimates

The preparation of interim financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.

In preparing the interim financial statements, the significant judgements made by management in applying the group's accounting policies and key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements for the year ended 25 March 2016 with the exception of the following:

Provision for financial services redress and refunds

As required by IAS 37 Provisions, Contingent Liabilities and Contingent Assets, management has reviewed the provision created at 25 March 2016 in respect of customer redress and refunds in respect of flawed financial services products. On the basis of the results of a pilot-scale contact programme for affected customers conducted during the current financial reporting period, management has revised its best estimate of the expenditure required to settle the present obligation and has therefore recorded an increase in the amount provided of £3.3m.

3. Trading costs

An analysis of the group's trading costs is as follows:

4. Segmental analysis

52 weeks ended 25 March 2016

5. Exceptional items

The directors consider that all items recorded within exceptional items warrant separate presentation in the income statement in order to fairly reflect the underlying performance of the group.

As highlighted in our 2016 Annual Report, we had set aside a provision of £14.4m for customer redress and refunds in respect of flawed financial services products, based upon estimates and assumptions that were subject to change. Since then we have undertaken a pilot-scale contact programme for affected customers. Based on the findings from that programme a revised scheme of redress has now been proposed to and accepted by the FCA. A more informed analysis of the likely cost of this scheme indicates that an additional £3.3m charge will be required, although this remains an estimate ahead of rolling out the contact programme in the coming months.

The Board announced in July 2016 that it had received a proposal from Schroders plc, on behalf of Sports Direct International plc (SDI), to seek to appoint Mr Michael Ashley as Chairman of the Company in succession to David Sugden, who had indicated his intention to step down. Exceptional advisory costs totalling £0.7m have been incurred in the period to 30 September 2016 in dealing with this proposal and other related matters.

In the 52 week period ended 25 March 2016, costs of £367,000 (26 weeks ended 25 September 2015: £1,018,000) were incurred in respect of the write-off of amounts due to Express Gifts from Findel plc's former subsidiary Kleeneze Limited, which were assessed as irrecoverable. £133,000 has been recovered during in the 27 week period ended 30 September 2016 which has been credited to income statement.

A charge of £4,300,000 was recorded in respect of receivables provisioning in Express Gifts in the 52 week period ended 25 March 2016. Please refer to note 2 in the 2016 annual report and accounts for further details.

In the 52 week period ended 25 March 2016 restructuring costs of £1,649,000 (26 weeks ended 25 September: 2015: £853,000) related to management changes, redundancies and costs associated with the disposal of Kitbag Limited and the consolidation of Findel Education's warehousing operations from two sites to one, as well as organisational changes made within Express Gifts in relation to compliance with new FCA requirements.

Costs of £4,754,000 were provided in the 52 week period ended 25 March 2016 in respect of an onerous lease provision arising as a result of the consolidation of Findel Education's warehousing operations from two sites to one.

Following the refinancing of the group's bank and securitisation facilities in November 2015, costs of £998,000 were recognised in the 52 week period ended 25 March 2016 (26 weeks ended 25 September: 2015: £68,000) in respect of the write-off of the unamortised fees that were paid in respect of previous refinancing exercises in May 2014 and January 2015.

6. Taxation

Income tax for the 27 week period ended 30 September 2016 is based on an estimated effective tax rate for the full year of 21.3% (26 week period ended 25 September 2015: 20.9% from continuing operations), giving rise to a tax credit of £120,000 in the period (26 week period ended 25 September 2015: £116,000 from continuing operations). The estimated effective tax rate for the full year, excluding the impact of exceptional items is 21.1% (26 week period ended 25 September 2015: 20.8% from continuing operations).

7. (Loss)/earnings per share

* Adjusted to remove the impact of exceptional items.

The (loss)/earnings per share attributable to convertible ordinary shareholders is £nil.

8. Derivative financial instruments

At 30 September 2016 the group has outstanding derivative financial instruments as follows:

Forward foreign exchange contracts

At 30 September 2016, the group was committed to forward foreign exchange contracts with a notional sterling contract value of £14,452,000. The fair value of the derivative asset recognised in the balance sheet at 30 September 2016 in this regard was £1,390,000. Changes in fair value of forward foreign exchange contracts amounted to a credit of £1,390,000 in the period and has been recorded within administrative expenses.

Interest rate cap contract

On 4 May 2016, the group entered into an interest rate cap contract in order to restrict the LIBOR element of its interest cost as follows

The £100,000,000 cap was designated as a cash flow hedge from inception in accordance with IAS 39. The movement in the fair value of these instruments during the period was as follows: