05-06-2007 - Preliminary Results for year ended 2 April 2007
| 2007 | 2006 | Change | |
|---|---|---|---|
| Total Retail Sales | £21.28m | £18.22m | +16.8% |
| Turnover | £12.14m | £11.88m | +2.2% |
| Operating Profit | £2.20m | £1.83m | +20.2% |
| Profit Before Tax | Tax £2.33m | £2.24m | +4.0% |
| Earnings Per Share – Basic | 3.60p | 3.58p | +0.6% |
| EPS – Fully Diluted | 3.43p | 3.40p | +1.0% |
| Dividend | 2.50p | 1.75p | +42.9% |
| Capital expenditure | £3.94m | £0.97m | +306.2% |
| Net cash | £2.86m | £3.45m | -17.1% |
- Record network sales and profit
- Number of stores up from 166 to 205
- Manchester Hub capacity increased from £20-£25 million to £40-45 million
- New Zealand licence owner operational, expanding and generating royalties
- Expect to see material growth across UK and Irish network
- Successful launch of ‘Websites by Printing.com’
- French initiative about to be launched to boost Hub volume
- Significant acceleration of dividend reflects continued confidence
For further information:
Printing.com plc
Tony Rafferty (Chief Executive) – 07966 517 336
Alan Roberts (Finance Director) – 0161 848 5713
Cubitt Consulting
Brian Coleman-Smith / Leanne Denman / James Verstringhe 020 7367 5100
Background note:
Printing.com
Printing.com offers a broad product range including leaflets, booklets, postcards, promotional cards, invitations, letterheads and business cards to consumers and small and medium sized companies. Unlike its competitors, Printing.com Stores and Franchises do not depend on any printing equipment on location. The Company’s printing and ancillary equipment is based at the centralised Production Hub with the head office in Manchester. All work is produced in full four colour rather than two colour. Delivery to the customer is usually within three days. The printing sector has traditionally been served by smaller printing companies or other On Demand Printers and is estimated to be worth some £1 billion.
Printing.com has three routes to market: Franchise Stores, Bolt-on Franchises and Company owned Stores.
Chairman’s Statement
Trading Results
At first glance the pre-tax profit of £2.3m (2006 restated: £2.2m) could be interpreted as indicating just a year of consolidation. However we believe that more careful scrutiny indicates that momentum is continuing to build in your Company, albeit the rate of growth is marginally below what we had expected. Nevertheless the year exhibited growth in terms of Total Retail Sales (‘TRS’) through the network to £21.3m (2006: £18.2m), an increase of 17%.
Additionally, Operating Profit showed a material increase to £2.2m (2006: £1.8m). The increase in TRS is not reflected in the turnover of £12.1m (2006: £11.9m), due to the increased number of stores now under franchised ownership whereby only the ‘wholesale’ component of each printing order is counted towards your Company’s turnover.
Cash
Your Company finished the year with cash reserves of £2.9m against £3.5m the previous year, reflecting the timing of corporation tax which now requires us to make advance payments on account whilst also, in this instance, being required to make payment for the previous year. We also paid dividends of £828,000 (2006: £469,000) and invested £3.9m in plant, equipment and infrastructure, of which £2.9m was funded by a finance lease.
Dividend
Shareholders will recall that when your Company went onto the AIM market, the Board set out its aspiration to follow a progressive dividend policy. In line with this strategy, and taking into account our strong cash reserves, your board is proposing a final dividend of 1.9p per ordinary share to be paid on 9 August 2007 to shareholders on the register at the close of business on 29 June 2007. Making a total dividend for the year of 2.5p per ordinary share (2006: 1.75p).
People At printing.com
Across the Printing.com network, it is the hard work and endeavours of our franchisees, the people who work alongside them, and our direct employees that ensures your Company delivers an excellent front line service to Printing.com’s clients. On your behalf, I thank them all for their hard work and would pay particular tribute to those in the production department at our Manchester Hub for the way they have risen to numerous challenges during the Hub expansion programme.
Outlook
Importantly, in the year under review, significant infrastructure was put in place that should position your Company for further growth over the coming years. At the Manchester Hub, capacity was increased from £20-25m to £40-45m and the first International Master Licence was granted for New Zealand. This allows a printer operating in that marketplace to utilise Printing.com’s, Flyerlink® software, its systems and collateral in return for royalty payments.
Over the coming year we expect to see material growth across our UK and Irish franchise network that feeds our Manchester Hub. Having invested £3.9m in the year under review, we once again have an abundance of unutilised capacity. Looking ahead, as volumes increase we would expect to see a proportionate net increase in your Company’s EBITDA. As a rule of thumb, assuming we are able to maintain or improve current operational metrics, we would expect EBITDA to increase by around £1m for each £5m of additional TRS.
In the UK, we have launched our first “new media offering”, “Websites by Printing.com”. Following significant development over the past year, the majority of franchises are now trained in the service and the first websites are now live. We believe there is great scope for this offering to further assist our clients to better promote their own businesses, and for our franchisees and your Company to generate incremental profits.
In 2003 we commenced shipping to the Republic of Ireland to test our systems within the Euro zone, and this has proved very successful. In September this year we will begin a similar operation in France. Over the past 18 months we have invested in this new initiative and firmly believe that, by distributing via Bolt-on Franchise partners, a great opportunity exists without the need to directly invest in stores.
The gestation period for the granting of international Master Licences appears longer than we would have hoped and its launch more costly than anticipated. However, the success that has been achieved to date in New Zealand, coupled with the granting of the second such agreement and the progressed negotiations in the US, gives us confidence that in the years to come we will be able to exploit your Company’s intellectual property.
Collectively, we believe these initiatives herald an exciting time ahead for your Company, reflected by our confidence in the acceleration of the dividend. In the current year, we are cautiously optimistic that the International Master Licence programme will make a material contribution to your Company’s profits.
George Hardie
Chairman
5 June 2007
Chief Executive’s Statement
Estate Development
| 1 June 2007 | 31 March 2007 | 31 March 2006 | |
|---|---|---|---|
| Company Owned Stores | 2 | 2 | 6 |
| Franchise Stores (Open & Pending) | 47 | 47 | 42 |
| Bolt-on Franchises | 156 | 149 | 118 |
| 205 | 198 | 166 |
As you will see from the table above, once again, the Printing.com estate has exhibited material growth and, indeed, during the year became the UK’s largest printing network, measured by the number of outlets. In terms of network revenue we estimate that today Printing.com is still only a third of the size of the largest competitor, reflecting the scope for ongoing growth. Our objective for the UK and Ireland remains the establishment of a network of circa 50 Territory and over 350 Bolt-on Franchises.
We favour this approach, as it enables your Company to leverage the endeavours of established entrepreneurs, who in most instances, would not consider a traditional franchise format. Of note, during the year, three established and successful Bolt-on Franchisees, elected to also establish Territory Franchises. We believe this reflects a most positive endorsement of our business model.
The increase in the number of Territory Franchises includes the transfer of the Birmingham Centre and Luton/Hertfordshire Territory Franchises via Management Buy Outs, and the Oxfordshire Territory via a Management Buy In. Indeed, the Oxford and Luton outlets, having previously been bought back, were once again returned to franchise ownership.
Across the United Kingdom we now have only a handful of empty Territory Franchises. Accordingly, our expenditure on marketing this franchise format, at national exhibitions and the like, has been scaled back. Previously we reported that we had enlarged the geographic area of certain Territory Franchises to provide more scope for successful exponents to establish additional Bolt-on Franchises. We have continued to apply this strategy in an additional five instances.
The Bolt-on Franchise, in which an established printing business or graphic/web designer utilises the Printing.com brand and offering in tandem with their existing business, continues to go from strength to strength. Whilst individually a typical Bolt-on Franchise contributes less revenue than a stand-alone store, this format allows the propagation of Printing.com into smaller towns and districts than would otherwise be possible.
As the Printing.com offering is only a component of the Bolt-on Franchisee’s business, inevitably from time to time we experience some ‘churn’ in the Bolt-on Franchise estate where, for instance, the franchisee elects to follow an alternative overall strategy. Where this occurs we endeavour to seek a commercial resolution and to appoint an alternative local Bolt-on. Notwithstanding this inherent churn, during the year under review we saw a net increase of 31 Bolt-on Franchises.
During the current year our objective is to further increase the net Bolt-on estate by a minimum of 50 outlets. We believe that this is realistic as our Territory Franchisees’ experience of marketing the Bolt-on franchise opportunity continues to develop.
The Production Hub And Infrastructure
The year under review saw the Manchester Hub change beyond recognition as capacity was increased from £20-25m to £40-45m.
The addition of a sizeable mezzanine floor added a further 745 sq. m. of production area. A swimming pool sized recess was also constructed to accommodate the new ‘double-decker’ printing press. Building these structures whilst maintaining an undisrupted supply to our franchisees and customers represented a significant challenge that your Company overcame.
During the year we also developed and commissioned Smartpack, a bespoke job logistics/sortation system. Smartpack is driven by Printing.com’s proprietary software Flyerlink and groups together the discrete Ã~C«bundles’ of product that comprise each order. Previously this manual process was not only labour intensive but also one of the most fallible stages of production.
With Smartpack, the individual product bundles are routed automatically from the ‘Guillotines’ to a designated packing chute, allowing all components of the given order to be consolidated. From there, they can be rapidly packed, and automatically labelled, weighed and sealed before shipping. Last minute changes to information such as delivery instructions are again routed directly, via Flyerlink, to the Smartpack chutes
Introducing this infrastructure is an important step in ensuring the scalability of the Manchester Hub and its ability to suitably support our franchises as we grow.
Internal Expansion
In November 2005, we set out our plans to expand Printing.com beyond the UK and Republic of Ireland by licencing our systems, software, brand and reputation to printers in other countries wishing to pursue a similar business model. We also set out the potential revenue streams for the Master Licence Agreement (‘MLA’) comprising of an initial licence fee and ongoing royalties.
During the year under review we granted our first MLA, for New Zealand. This licence was granted to a commercial printer in the country’s capital, Wellington. This business, aside from its general printing activities, had established a network of 14 outlets supplying a service similar to Printing.com. We believe that the rationale for them entering into the MLA is centred on the access that it gives to the Flyerlink software and other extensive Printing.com collateral.
Following extensive training in the UK, Printing.com supported the launch of the system in New Zealand. Since then the New Zealand network has expanded to 23 (open or pending). The estate development has centred on the successful launch of the New Zealand Bolt-on Franchise initiative. The company is optimistic that, moving forward, the estate will continue to grow.
It was previously reported that MLA Options had been granted for both Poland and Australia. The Polish Option has since lapsed. The New Zealand MLA owners, the previous grantee of the Australian Option, have elected to focus their strategy on their domestic market – accordingly the Option did not progress. However, a new Option has been granted over Australia to a company with whom we previously held extensive discussions.
During February 2007, a second MLA was granted. In this respect, a programme of extensive UK based training has now been completed, with the delivery of the local component scheduled for late summer 2007. As the MLA is granted to a relatively small country in terms of population (but with an affluent economy), at this juncture we are reserving its identity so as not to detract from the forthcoming launch.
In October 2006, Printing.com attended the Graph Expo printing exhibition in Chicago, US. Following on from this, a number of potential partners have made visits to the UK and vice versa. Since then we have entered into a period of exclusive discussions with one prospective partner which may or may not result in the grant of a formal Option or MLA.
Discussions continue to progress with prospective partners in other countries.
‘Websites By Printing.com’
The Printing.com structure essentially provides the architecture to vend services, in addition to printing, to the highly fragmented SME marketplace.
The essence of ‘Websites by Printing.com’ is a design, build and hosting service positioned between the numerous DIY offerings on the web and the entry-level service available via a typical small business website designer. It is expected that most websites will be offered in the range of £400 to £600.
The service differentiates itself for the franchisee, in that no specific knowledge of HTML or other website development languages is required. For the end user client the differentiation is the inclusion of an ‘Update Centre’ allowing the end user to update their websites without the delay, expense or inconvenience of involving a website designer.
The launch of ‘Websites by Printing.com’ follows the acquisition in July 2006 of certain intellectual property from Website World Limited for a nominal sum with an earn-out provision. Website World had previously offered a similar service from retail premises in Sheffield.
During the past four months we have delivered hundreds of classroom training days to our Franchisees. This classroom training has been augmented with an extensive programme of field support by your Company’s Development Managers.
The service and the functionality that it offers has been well received by the Printing.com franchise community and, whilst at an early stage, the first paid-for websites have now been produced with early indications showing them to be well-received by the clients.
Moving forward, we believe that this service will offer a useful additional revenue stream for our franchisees. In common with printing, they pay a transfer price for each website. We believe that not only will this service add to the appeal of a Printing.com franchise, but will become a material incremental revenue stream for your Company.
Printing.com In France
Whilst we intend to develop most international territories via the grant of an International Master Licence, the proximity of France, coupled with the advent of Flyerlink’s multi-lingual capabilities will enable us to enter this market in September 2007.
Over the past year our research into the marketplace, an exploration of potential Master Licence opportunities has provided a good insight. We intend to exploit this opportunity by granting Bolt-on Franchises in a similar manner to the UK. At this stage, we do not intend to open either directly owned stores or territory franchises but believe that many proprietors of Graphic/Web Designers would benefit from the Printing.com offering. To exploit this opportunity we assembled a team in December 2006 including a seasoned Printing.com Development Manager who is fluent in French, and a Manager from a French competitor.
Having been thorough in our appraisal of the market and by partnering with established French businesses, we are optimistic that this initiative will prove successful and drive more volume through your Company’s Manchester Hub. Moving forward, we expect that the business will be bought out, production moved to the new owner’s facility in France and operate in a similar manner to the New Zealand Master Licence, with your Company receiving royalties.
Current Trading
Post the start of the current financial year we are pleased to report that trading volumes are ahead of the same period in the previous year and broadly speaking in line with the Company’s internal budget. During the same period an additional 8 Bolt-on Franchise agreements have been completed with the pipeline providing encouragement moving forward.
Tony Rafferty
Chief Executive
5 June 2007
Financial Review
Total Retail Sales (TRS)
TRS is the Company’s key metric, being the retail price paid by the client, and provides the clearest indication of the growth of the network. The ongoing development of Printing.com is clearly illustrated with TRS increasing by 16.8% to £21.28m (2006: £18.22m). In the period under review Franchised Outlets accounted for 95% of TRS sales (2006: 84%).
Like For Like TRS
This metric reports on the like for like progress of our Territory Franchisees (or equivalent Company owned operations) that have operated for a minimum of three years. Therefore, the earliest figures that would be reported for a Territory Franchise are it’s third year versus it’s second year. In presenting these figures we believe that it is essential to consider both the performance of the Store within the Territory Franchise and the growth in revenues from its associated Bolt-On Franchises. On this basis like for like growth during the year under review was 13.4% (2006:17.6%) with 20 (2006:14) Territory Franchises (or Company owned equivalents) contributing to this metric.
Accounting Policy Changes
Accounting standard developments have given rise to three changes in accounting policies which have resulted in a restatement of the accounts for year ended 31 March 2006: each is covered separately in the report. They are revenue recognition where, firstly, the policy for deferring licence income has been adopted. Secondly, the net income from selling Company owned Stores has been taken out of turnover and is now reported as other income. The adoption of FRS20, the expensing of share based payments, has also resulted in a restatement of the 2006 report.
In addition, the tax charge for 2006 has been amended to account for the tax computation error reported in January 2007.
In the 2008 financial year the Group’s internal reporting will be on a calendar month basis as opposed to the thirteen four week periods used in the past. This will result in this year’s interim report being for six months rather than for twenty eight weeks.
Turnover
Overall turnover increased by 2.2% from £11.88m (restated) to £12.14m. At the end of 2006 three Company owned Stores and the Agency business were franchised which had a negative effect on Company turnover, due to the loss of the retail margin. However, this was compensated for through lower Company overheads. Network growth is essentially derived from adding Franchised outlets with additional turnover being at ‘wholesale’ value.
Gross Profit
The Company’s simple definition of Gross Profit is turnover less direct materials (including the cost of distribution, when made direct to customers).
Gross Profit decreased by 2.5% from £8.34m (restated) to £8.14m. In percentage terms it reduced from 70.2% to 67.1% of turnover as more sales moved through the franchise channels, at wholesale prices, where the retail margin is passed over to Franchisees who then, of course, incur the corresponding retail overheads.
Pre-Tax Profit
The Company recorded a pre tax profit of £2.33m (2006 restated: £2.24m) being 19.2% (2006 restated: 18.8%) of Company turnover and 10.9% (2006 restated: 12.3%) of TRS. We believe this sustained level of pre tax profitability, in both absolute terms and on these key metrics, validates our franchise centred strategy. Through the period the Company’s costs increased as the discrete items in the Hub expansion project came online. By the end of the year all of the major items of plant had been commissioned and were operational.
The effect of franchising Company operations in 2006 meant that overall staff costs decreased in the year from £3.31m (restated) to £3.01m and fell as a percentage of turnover from 27.9% to 24.8%. The depreciation charge for the year was £1.08m (2006 restated: £0.79m) which rose through the year as new plant, associated with the major capital expenditure project, was brought on line.
Those overheads directly related to Company owned retail operations, including payroll and depreciation, reduced from £1.78m to £0.78m or 15.0% of turnover down to 6.4%. This was essentially due to retail outlets previously owned by the Company becoming franchised units.
FRS 20 Share Based Payments
FRS20 was adopted when presenting the un-audited 2007 Interim financial statements using a Black Scholes model to measure the fair value of share option awards. Subsequent review of the complex nature of the schemes resulted in the development of a Monte Carlo model which, giving a more appropriate fair value, has been used to arrive at the charge for these options in the financial year ended 2 April 2007.
The total FRS20 charge for 2007 is £114,000 (2006: £101,000 and 2005: £63,000) and is included in staff costs and other operating charges. See note 6 to the financial statements.
Other Income / Interest Received and Charged
Other income, £141,000 for the year (2006 restated:£400,000) is the net income derived from Franchising previously Company owned Stores after deducting the net book value of assets, licence fees and any other charges relating to the transactions. See note 7 to the financial statements.
Interest received of £194,000 (2006:£141,000) reflects interest on the cash balances held and interest charged to Franchisees on loans to them from Printing.com. Interest paid of £207,000 (2006:£134,000) increased because of through the lease finance costs of elements associated with the Hub expansion project.
Taxation
The standard rate for tax remains at 30%. The charge for the current year is £0.72m or 31% of PBT (2006 restated: £0.66m or 29.2%). As reported in January 2007 a tax computation error notified to the company by Baker Tilly, its then auditors and tax advisers, has had to be accounted for in this report. The error caused the Group’s taxation charge for the two years ended 31 March 2005 and 2006 to be understated by an aggregate of £205,000.
The treatment in these financial statements in respect of this tax adjustment is a prior year adjustment. The impact of the prior year adjustment is to increase the tax charge in the year ended 31 March 2006 by £113,000 and to decrease opening profit and loss account reserves at 1 April 2005 by £92,000.
Earnings Per Share (EPS)
Basic EPS improved to 3.60p (2006 restated:3.58p), the weighted average number of shares used was 44,730,883. Diluted EPS improved to 3.43p (2006 restated:3.40p), the weighted average number of shares used was 46,904,112. The year closed with 44,746,500 ordinary shares in issue.
Cash Flow
At the year end the Company had cash balances of £2.86m (2006: £3.45m) and Net Debt of £0.23m (Net Funds 2006:£2.51m).
Operational cash inflow increased to £2.99m (2006: £2.47m). Significant cash outflow included the payment of £1.04m in corporation tax and an increase in dividends paid to £0.83m from £0.44m.
Capital Expenditure
The total expenditure for the year was £3.94m (2006: £0.97m). The major items were Software development and computing infrastructure £0.54m; and the Production Hub expansion project £3.32m. Of the capital expenditure £2.96m was finance leased.
Share Capital and Share Options
Employees’ options over 69,608 shares and Franchisee options over 10,000 shares were exercised during the year.
Treasury Policies And Financial Risk
Surplus funds are intended to support the Group’s short term working capital requirements. These funds are invested through the use of short term deposits and the policy is to maximise returns as well as provide the flexibility required to fund on-going operations. It is not the Group’s policy to enter into financial derivatives for speculative or trading purposes. Interest rate risk, liquidity risk and currency risk
Interest rate risks are limited to the fixed element of finance lease or hire purchase agreements. The Group uses leasing or hire purchase at periods of up to 5 years to finance purchases of some of its assets where it is considered to be a more effective use of funds.
Surplus funds are invested on a short term basis at money market rates and, therefore, such funds are available at very short notice.
The Group has no overseas assets or liabilities, apart from minor trade related debtors and creditors, and thus any currency movements have no material impact
International Financial Reporting Standards (IFRS)
As a company listed on the UK Alternative Investment Market (AIM), the Group will be required to comply with IFRS in the interim financial statements for the six months ended 30 September 2007 and thereafter. The Board intends to issue a ‘restatement report’ in advance of the interim financial statements in line with best practice.
Alan Q. Roberts
Finance Director
5 June 2007