Interim Results

30 July 2015

Communisis plc

("Communisis" or the "Group")

Interim Results for the six months ended 30 June 2015

Leading provider of personalised customer communication services Communisis plc (LSE:CMS), reports interim results for the six months ended 30 June 2015.

Financial Highlights

§ Strong growth in profitability, operating margin and earnings per share, driven by enduring client relationships and higher margin services

§ Improved free cash flow and reduced bank debt

§ Dividend increase for the fifth consecutive year, in line with progressive dividend policy

* Constant currency: the reported numbers excluding the effects of changes in exchange rates on the translation into sterling of results denominated in foreign currencies.

** Adjusted operating profit and operating margin (excluding pass through): before exceptional items and the amortisation of acquired intangibles.

*** Adjusted earnings per share: fully diluted and excluding the after tax effects of exceptional items and the amortisation of acquired intangibles.

Operational Highlights

Continued Growth

§  Integrated agency model developed and launched as PSONA

- Life Marketing Consultancy (Life), an insight-led shopper marketing agency, acquired in January 2015.

§ Significant new multi-year contractual relationships secured or retained

- AXA UK for incoming and outgoing marketing and customer communication services. Awarded in February 2015 for a six-year term.

- EE for marketing communications. Extended for two years until March 2017.

- A long-standing client in the utility sector for outgoing transactional communication services. Selected for a five-year extension until October 2020.

§ Overseas expansion

- Three new locations in Bucharest, Milan and Warsaw.

- New consumer goods clients have scaled up activities through the main European hubs.

- A strong pipeline of opportunities with blue-chip consumer goods clients across Europe.

Innovation

§ New digital services platform developed

- Provides multi-channel customer messaging services.

- Successfully used by Nationwide Building Society for messages associated with its enabling of Apple Pay.

§ Won gold and bronze POPAI awards for innovative point-of-purchase and in-store communications.

Commenting on the results Communisis Chief Executive, Andy Blundell, said:

"The growth momentum at Communisis continues, driven by our focus on enduring client relationships and higher margin services.

Looking ahead, supported by a strong pipeline of opportunities, the Board is confident about the Group's prospects for the remainder of the year."

For further information please contact:

About Communisis

Communisis is a UK leading provider of personalised customer communication services that specialises in helping clients communicate with their customers more effectively and more profitably in fast-changing markets.

Communisis has a reputation for production excellence and innovation and is trusted by many leading, consumer-facing brands to design, produce and deploy multi-channel personalised customer communications accurately, securely, reliably and at scale.

Strategy and Implementation

Performance Review

The Group's aspiration and strategic initiatives, set out below, were described in the Strategic Report within the 2014 Annual Report. This review summarises the performance against those strategic initiatives and the key financial targets during the first half of 2015.

Aspiration

The Group's aspiration is to be a market leader in providing personalised customer communication services both in the UK and internationally.

The key financial targets for the medium term are to deliver a double-digit margin on sales (excluding pass through) and to derive more than 20% of total revenues from overseas sources whilst continuing to grow UK sales. The new longer-term goal is for overseas revenues to account for one third of the total.

Strategic initiatives

The Group's aspiration is pursued through a number of strategic initiatives including:

§ growing sales both organically and through niche acquisitions;

§ extending activities to broaden and deepen the service offering;

§ further diversifying the client portfolio beyond the financial services sector;

§ following international clients into overseas markets;

§ investing in specialist, market-leading technologies; and

§ continuing to optimise the direct cost and overhead base.

Improvement in margins is delivered through the combined effect of better capacity utilisation, the benefit of cost reduction programmes, synergies from acquisitions and a focus on growing volumes of high margin services.

Improving the capital structure and managing the exposure to the pension deficit are also priorities as is the adoption of a progressive dividend policy that is important for most investor categories.

Summary financial performance

Communisis continued to deliver profitable growth with an improved operating margin in the first half of 2015. The results were on target and considerably ahead of the same period last year, enabling the Group to maintain its progressive dividend policy. The interim dividend for the first six months of 2015 has consequently been increased by 9%.

Additional profitability and tight working capital control with the benefit of a tax repayment, delivered strong operating cash flow during the period. With capital expenditure falling toward a normal maintenance level, the Group generated significantly more free cash; a trend that is expected to continue for the next few years.

Further details are included in the segmental results and cash and net debt sections below.

Growth

New business development included the award of a six-year contract with AXA UK (AXA) for the provision of incoming and outgoing marketing and operational customer communication services including creative, print, digital and postal distribution and document management services. The contract covers all AXA's brands including SunLife, Wealth, Insurance and PPP healthcare.

Under the outsourcing arrangements, the Group has assumed responsibility for a number of AXA's existing UK inbound and print centres including those at Lytham St Anne's, Ipswich, Bristol and Basingstoke with around 115 staff transferring to Communisis under TUPE regulations.

The initial transition phase was successfully completed and the contract went live at the end of April 2015 as planned.

After competitive tendering processes, EE extended its marketing communications contract for two years until March 2017 and a long-standing client in the utility sector selected Communisis for the provision of outgoing transactional communication services for a further five years until October 2020.

Overseas expansion

Overseas expansion of the Group's brand activation services has continued in 2015. Three new locations have been added in Bucharest, Milan and Warsaw and activities have been scaled up through the main European hubs with new clients in the drinks, food, pharmaceutical and technology sectors. These market share gains will help to offset a fall in demand from lower margin UK print sourcing clients.

The pipeline of opportunities with blue-chip consumer goods groups across Europe is strong, offering good potential for profitable growth.

Acquisition

Communisis continued to develop its differentiated and integrated agency model during the period with the launch of PSONA as a new agency brand and the acquisition of Life Marketing Consultancy (Life), an insight-led shopper marketing agency that was completed in January 2015.

Innovation

The Group has developed a new digital services platform that provides multi-channel customer messaging services. This allows clients to improve their customers' experience by delivering communications where, when and how they want to receive them. It was used successfully by Nationwide Building Society, one of the first Building Societies in the UK to enable Apple Pay, to send messages associated with this new payment system.

Communisis has won gold and bronze POPAI awards in recognition of its innovative and effective in-store and point-of-purchase displays for its Lacoste and Duracell/Furby (Hasbro) clients. The POPAI Awards represent the best that the retail marketing industry has to offer in all areas of in-store communication.

Segmental results

Revenue, operating profit and margins before exceptional items are reported in three segments, being Design, Produce and Deploy. Pass through revenue, being those purchased materials that are passed on to clients at cost with no added value, are reported separately, as are unallocated central costs that support integrated service offerings.

The translation of foreign currency results into sterling has had a material impact on the reported numbers for the first time in 2015 due, principally, to the weakening of the euro. To illustrate the underlying performance, these currency effects have been eliminated when referring to a constant currency comparison in the commentary below.

Profitability

The table below is an extract from the Group's segmental Income Statement.

Total revenue was 3% ahead at £174.6m (H1 2014 £169.3m), 6% on a constant currency basis. The proportion derived from overseas was 18% (H1 2014 19%) still close to the medium-term target of 20% but adversely affected by the currency translation effects.

Adjusted operating profit increased 18% to £7.2m (H1 2014 £6.1m), 25% on a constant currency basis. The operating margin, a key financial metric, improved to 6.0% (H1 2014 5.2%) with further enhancements expected in the second half of the year, as higher seasonal revenues are generated from a comparable cost base, taking the margin further toward the double-digit target in the full year.

All segments contributed to the overall increase in revenue on a constant currency basis but Deploy and the associated pass through revenue were broadly flat on a reported basis, as about half of the transactions were euro denominated and therefore of lower value when translated into sterling. The mix of Deploy revenues varies between periods reflecting changing patterns of geographic demand coupled with a diversification and expansion of the client portfolio. Design revenue was substantially higher, reflecting a full six months' contribution from the agencies acquired during 2014 and in early 2015 together with a recovery in the data services business following its repositioning in analytics and to appeal to broader market sectors than its historic focus on insurance. The overall increase in Produce revenue was the net effect of a number of offsetting factors. Volumes eroded faster than expected in chequebooks but more slowly in transactional activities as customers appeared to show some reluctance to migrate from paper to digital formats at the rate anticipated. These reductions were offset by the benefit of a full six months' contribution from incoming customer communications services, (acquired under a contract with Lloyds Banking Group (LBG) in February 2014) and growth in digital distribution, both of which are higher margin services, together with better than expected demand for direct mail.

The changing mix of activities toward higher margin services, coupled with the benefit of process improvement and cost reduction within the Produce segment, resulted in a substantial improvement in the adjusted operating profit and margin despite the adverse foreign currency translation effect. Segmental margins were also better within the Produce and Deploy segments but somewhat lower than the prior period in Design. This reflected some price pressure from larger clients but also the effect of a seasonal trading pattern in shopper marketing. With this activity, which is new in 2015, revenues and profits tend to be weighted toward the second half of the year whilst the cost base is more evenly spread. The full year margin should therefore be higher with the benefit of these later revenues.

The exceptional charge of £1.4m includes further restructuring costs principally associated with the ongoing integration of the LBG activities and professional fees incurred in connection with the acquisition of Life. A further £0.5m of exceptional integration charges is anticipated in the second half of the year.

The 2015 tax charge is based on the estimated effective rate for the year of 22.9% which is higher than the UK standard rate of 21.25% as it includes the taxation of certain overseas profits in higher-rate jurisdictions.

Profit after tax increased by 15% to £2.5m (H1 2014 £2.2m), 29% on a constant currency basis. Basic earnings per share were 8% higher at 1.20p (H1 2014 1.11p), 22% on a constant currency basis, which is lower than the growth rate for profit after tax due to the dilutive effect of new shares issued in connection with acquisitions.

Dividends of 1.33p per share were paid in the first half of 2015 in respect of 2014 and an interim dividend of 0.73p per share will be paid for 2015, an increase of 9% on the prior year. The dividend will be paid on 8 October 2015 to shareholders on the register at the close of business on 11 September 2015.

Cash and net debt

The table below summarises the cash flows for the period and the closing net debt position.

Net operating cash flow was £2.7m better than in the corresponding period of 2014 due to increased profitability, working capital management and a tax repayment. Lower capital expenditure at a more normal maintenance level, following a period of significant investment in new capacity, resulted in a £4.9m improvement in free cash flow, a trend that is expected to continue.

There was no net cash payment for the acquisition of Life as the initial consideration was satisfied by the issue of promissory loan notes and new shares.

The dividend payments represented the final dividend for 2014 with the higher amount reflecting both the 11% increase in the dividend per share for that year and the greater number of shares in issue.

The net cash inflow of £1.4m was used to reduce bank debt at the period end to £32.1m, a level that was less than 50% of the Group's facilities of £70m. Intra-period fluctuations in working capital increased the level of indebtedness between reporting periods so that average bank debt during the period was £44.5m. Bank debt at the period end and average bank debt during the period were respectively 1.1 times and 1.6 times EBITDA for the twelve months to June 2015. Interest cover from adjusted operating profit for the period was 4 times. Both measures reflect the Group's disciplined approach to debt management.

The promissory loan notes associated with the Life acquisition of £9.3m increased net debt at 30 June 2015 to £43.4m.

Board appointments

In May 2015, non-executive Director Peter Harris was appointed as Senior Independent Director in addition to his role as Audit Committee Chairman.

Outlook

The Group's continued success in winning and retaining multi-year contracts for customer communication services, together with it's growing reputation for delivering brand activation services across Europe, is building a strong pipeline of work and opportunities with an increasing number of blue-chip clients.

With the prospect of ongoing revenue growth, improving profitability and cash generation, the Board is confident about the Group's prospects for the remainder of the year.

Consolidated Income Statement

for the half year ended 30 June 2015

Dividends paid and proposed during the period were £2.8 million and £1.5 million respectively (30 June 2014 £2.3 million and £1.3 million respectively, 31 December 2014 £3.7 million and £2.8 million respectively).

The accompanying notes are an integral part of these Consolidated Financial Statements.

All income and expenses relate to continuing operations.

Consolidated Statement of Comprehensive Income

for the half year ended 30 June 2015

The accompanying notes are an integral part of these Consolidated Financial Statements.

Consolidated Balance Sheet

30 June 2015

The accompanying notes are an integral part of these Consolidated Financial Statements.

Consolidated Cash Flow Statement

for the half year ended 30 June 2015

The accompanying notes are an integral part of these Consolidated Financial Statements.

Consolidated Statement of Changes in Equity

for the half year ended 30 June 2015

The accompanying notes are an integral part of these Consolidated Financial Statements.

Notes to the Consolidated Financial Statements

for the half year ended 30 June 2015

1 Segmental information

Business segments

The segment results for the half year ended 30 June 2015 are as follows:

The segment results for the half year ended 30 June 2014 were as follows:

The segment results for the year ended 31 December 2014 were as follows:

Notes to the Consolidated Financial Statements

for the half year ended 30 June 2015

2 Amortisation of acquired intangibles and exceptional items

Acquisition and set up costs relate to non-recurring professional fees for acquisition related activities.

During the first half of 2015 the Group incurred £780,000 (30 June 2014 £939,000, 31 December 2014 £3,258,000) in respect of organisational restructuring which included ongoing integration costs relating to the new Design agency PSONA, and LBG activities. Of the £780,000, £338,000 is unpaid at 30 June 2015.

The pension deficit reduction costs relate to legal and consultancy expenses of £47,000 (30 June 2014 £70,000, 31 December 2014 £164,000) for projects undertaken during 2015. These have been fully paid at 30 June 2015.

3 Net finance costs

4 Income tax

The tax charge on continuing operations for the period is based upon an effective rate of 22.9%.

The provision for deferred tax has been made at 20% reflecting the legislation included in Finance Act 2014 reducing the rate of Corporation Tax to 20% from 1 April 2015.

5 Earnings per share

18,722 (30 June 2014 134,675, 31 December 2014 134,675) shares were held in trust at 30 June 2015.

Notes to the Consolidated Financial Statements

for the half year ended 30 June 2015

5 Earnings per share (continued)

Earnings per share from continuing operations before exceptional items and amortisation of acquired intangibles

Net profit from continuing operations before exceptional items and amortisation of acquired intangibles, attributable to equity holders of the parent is derived as follows:

The basis of measurement of adjusted EPS is to reflect more accurately the measure of EPS used by the market. Adjusted earnings per share uses the same weighted average number of ordinary shares as reported above.

6 Dividends paid and proposed

Notes to the Consolidated Financial Statements

for the half year ended 30 June 2015

7 Cash generated from operations

8 Acquisitions

On 5 January 2015, the Group acquired the entire share capital of Life Marketing Consultancy Limited ("Life"). Life is an award-wining, research and insight-led shopper marketing agency. Life's clients are leading consumer goods groups especially in the food, drinks, technology and pharmaceutical sectors.

The acquisition was at an enterprise value (on a debt free, cash free basis) of £22,600,000, including Life's net assets at completion of £1,400,000. The consideration payable by Communisis amounted to a maximum of £23,300,000, including acquired cash of £743,000.

Communisis has acquired Life for an initial consideration of £14,000,000. The initial consideration was satisfied by the issue of a two-year, bank guaranteed promissory note of £9,300,000, £700,000 in cash, and through the issue to the vendors of 7,988,015 new ordinary shares of 25p each in the share capital of Communisis (the "Initial Consideration Shares") to the value of £4,000,000, based on an average middle market closing price of 50.1 pence per ordinary share. The Initial Consideration Shares will rank equally in all respects with Communisis' existing ordinary shares. The Initial Consideration Shares are subject to an absolute lock-in for one year after the acquisition. After the first anniversary of the acquisition the Initial Consideration Shares will only be tradable in an orderly market basis through the Group's brokers.

As part of the purchase agreement two contingent consideration mechanisms have been agreed. An amount of up to a maximum of £6,000,000 (the "Earn Out Consideration") will be payable to the sellers at the end of the earn-out period (being the two years ended 31 December 2016) subject to the company generating an average adjusted EBITDA of £3,000,000. If the company fails to generate an average adjusted EBITDA of £3,000,000, but generates an average adjusted EBITDA greater than £1,900,000, contingent consideration of 5.4545 times the excess over £1,900,000 will be paid. If the company fails to generate an average adjusted EBITDA of greater than £1,900,000 no contingent consideration will be payable under this mechanism. Two-thirds of the Earn Out Consideration will be satisfied in cash and will therefore total a maximum of £4,000,000, and one-third will be satisfied by the issue of new ordinary shares of 25p each in the share capital of Communisis (the "Earn Out Consideration Shares"). As at the date of acquisition, the fair value of the Earn Out Consideration has been estimated at £4,640,000, determined using a probability-weighted payout approach.

Notes to the Consolidated Financial Statements

for the half year ended 30 June 2015

8 Acquisitions (continued)

An amount up to a maximum of £3,300,000 (the "Additional Consideration") will be payable to the sellers based on the achievement of defined synergies over Life's three financial years ended 31 December 2017. The Additional Consideration is payable in cash. As at the date of acquisition, the fair value of the Additional Consideration has been estimated at £2,517,000, determined using a probability-weighted payout approach. As at the acquisition date, the fair value of all contingent consideration was estimated to be £7,157,000. Significant unobservable valuation inputs are provided below:

Probability-adjusted EBITDA of Life during the earn-out period £2,800,000 - £3,200,000

Synergies generated over the 3 years ended 31 December 2017 £3,000,000 - £3,600,000

Discount rate 8.3%

Significant decrease in the EBITDA or synergies of Life would result in lower fair value of the contingent consideration liability, while significant increase (decrease) in the discount rate would result in lower (higher) fair value of the liability.

As at 30 June 2015, there have been no changes to the valuation inputs in determining the fair value of the contingent consideration.

Details of the consideration paid and fair values of assets and liabilities acquired are set out below. This transaction has been accounted for by the purchase method of accounting.