Inkjet & Digital Printing

Domino Printing Sciences 2013 preliminary financial results

Wednesday 18. December 2013 - Highlights • New products driving sales growth • Early success with the full colour digital label press • Aftermarket sales have been robust • Double digit sales growth in our largest territories: USA, China, Germany • Strong cash flow • Dividend increased by 5 per cent

Peter Byrom, Chairman, commented “The Group has made good progress in sales in 2013 delivering revenue growth of 8 per cent. Significant investment has been made in Research and Development and in building capability in our digital printing business and this has meant profits have remained broadly at prior year levels. Underlying pre-tax profits were £53.0 million compared to £53.7 million last year. Action has been taken to direct investment to areas of the business with the strongest growth potential. Strong cash flow has been maintained throughout the year. Net cash inflow from operating activities before tax was £54.9 million. The Board has declared an increase in the annual dividend of 5 per cent.
“Our businesses in the USA, Germany and China, the largest markets for the Group, all reported double digit sales growth. Market conditions in these territories were improved during 2013 when compared to the previous year but in some parts of the world we still see reduced investment and a more cautious attitude among customers. We have been pleased with the performance of our new products, and in particular the achievement of our target of ten digital label press installations over the course of the year. Digital printing is an area in which we are investing and we expect to see further progress during 2014.
“Investment in Research and Development was increased to £19.5 million. In addition to the introduction of a new colour digital label press in September 2013, the N610i, we launched a number of other printers and fluids products over the course of the year. We continue to progress the development of a new generation of printers based upon common technology architecture.
“In our interim results published in June we reported that progress in TEN Media with its compliance systems was not proceeding as anticipated and we had written down the value of our holding in the company to $5 million. There has been no significant progress over the past six months and we have therefore written the value down to nil, bringing the total impact on profit for the year to £30.3 million. Domino retains exclusive supply rights under contracts held with TEN Media, but there is no indication of when or whether the company will commence roll-out of its systems.
“Our recent order intake provides tentative signs that market conditions are improving. While we remain cautious about the prospects for a full recovery to historic levels of global GDP growth, we are optimistic that our investments in new products and capabilities coupled with emerging market opportunities will fuel stronger organic sales growth in 2014. We are continuing to invest in the business, improving our prospects for the future.”
Cautionary statement
This Preliminary Statement in its entirety has been prepared solely to provide additional information to shareholders. It contains statements that are forward looking. These statements are made by the Directors in good faith based on the information available to them up to the time of approval. Such statements should be treated with caution due to the inherent uncertainties and risks associated with forward looking information.
Our business
The Group operates across global markets, providing manufacturers and printers with the ability to code, mark or print data, information or graphical images on to their products or packaging at high speed, typically in line in the manufacturing or printing process.
We design, manufacture and sell a wide range of printing equipment and associated consumables and support services that encompass ink jet, thermal and laser technologies. Our products are capable of printing on a broad spectrum of materials and substrates and offer full variability for personalisation, customisation or unique identification of products.
Demand for our products and services is created through legislation and mandate, typically meeting the need to inform consumers, and through providing manufacturers and printers with an economic means of decorating, identifying, tracing, protecting or authenticating their products for commercial or regulatory purposes.
In 2013 our revenue split by location of customer was 25 per cent in the Americas, 41 per cent in Europe and 34 per cent in Asia/Rest of World. We have an installed base well in excess of 200,000 printers operating worldwide.
Typical customers are manufacturers, multinational, regional and national companies, spread across a wide range of market sectors. We also supply printers of labels, mail and other web based materials to meet their short run and variable printing needs.
Food, beverage, pharmaceutical and commercial printing are the largest segments; combined they represent approximately 67 per cent of total sales. Our breadth of industry coverage and lack of reliance on any one or small group of customers provides a natural hedge against sector specific market risk.
Chairman’s Statement
‘Further progress and an increase in dividends’
I am pleased to report further progress of the Group during 2013. Sales have increased by 8 per cent to £335.7 million, underlying pre-tax profits were £53.0 million and net cash inflow from operating activities before tax was £54.9 million.
We have continued to invest in people, in particular expanding our capabilities in the digital printing business, and in our product range. Research and Development expenditure was increased to £19.5 million and we successfully introduced a number of new products including the N-Series digital label press.
The performance of TEN Media has been a major disappointment to us. Delays in the business coupled with uncertainty about its future have led us to the view that our investment has been permanently impaired. This has been treated as a one-off cost in the year.
The strong balance sheet and cash generation of the Group has allowed us to sustain the progressive improvement in dividends. This year the Board is proposing a final dividend of 14.06 pence per share which when added to the interim dividend of 7.60 pence represents an increase of 5 per cent for the year as a whole.
Over the course of the year the Board and its committees have addressed the corporate governance requirements arising from changes to regulations. In our 2013 Annual Report we will present our first Strategic Report on the business and increased disclosures on matters affecting audit and remuneration.
Earlier this year Garry Havens announced his retirement from the Group and will step down from the Board in December 2013. I would like to thank Garry for his contribution to the Group.
Phil Ruffles has announced that he does not intend to stand for re-election at the next Annual General Meeting on 19 March 2014. Phil has served as a Non-Executive Director for 11 years and I have appreciated his considerable contribution to the Group over this period.
Our recent order intake provides tentative signs that market conditions are improving. While we remain cautious about the prospects for a full recovery to historical levels of global GDP growth, we are optimistic that our investments in new products and capabilities coupled with emerging market opportunities will fuel stronger organic sales growth in 2014. We are continuing to invest in the business, improving our prospects for the future.
Peter Byrom
Chairman
Group Managing Director’s Overview
‘The momentum from sales growth in 2013 coupled with the investments we have made in support of key strategies, places the Group in a strong position to maintain performance improvements in 2014 and beyond’
My aspiration is to see sustained growth of our business several percentage points above global GDP growth. I believe this can be achieved by capitalising on new market and sector opportunities, by introducing new products to retain and attract customers and by taking advantage of legislation requiring increased variable data solutions on packaging. These drivers will vary year on year but, in combination with growing output levels as global consumption increases, my belief is that this should position the Group to deliver sales growth in excess of global GDP growth.
For the year to 31 October 2013 the business grew by 8 per cent. We experienced difficult economic conditions in our core sectors across Europe for most of the year, although as we closed the year short-term order intake was beginning to show more encouraging signs. In Asia, it was pleasing to see improving economic data emerging from China where our sales increased by 11 per cent over the year as a whole. Our recent trend of improving results in the USA continued with another year of double digit growth.
Evidence suggests that there are signs of improvement in many world economies, and confidence is starting to pick up. While some customers remain cautious, we are optimistic that we go into 2014 with a more positive economic outlook than in the past two years.
Our profit in the year to 31 October 2013 was broadly at the same level as the previous year. We have executed our plans to invest in a number of business initiatives, building a greater portfolio of opportunities to help drive growth. In combination, these investments have absorbed the additional gross margin generated from sales growth in the year but have established a number of platforms from which we will benefit in the future.
The major disappointment of the year has been the absence of revenue and profits from TEN Media, a significant investment for the Group in 2011, which was expected to generate positive returns during 2013. However, on-going delays and now a shortage of funds in TEN Media have frustrated progress in that business. This has held back our profit growth. Uncertainty around the future of the business has also caused us to consider the value of the investment the Group holds in TEN Media to be permanently impaired, and we have written down the value of that investment to nil. The potential for the TEN Media business in the future remains uncertain.
During 2013, we maintained a high level of Research and Development expenditure in our core business, continuing our programme of product harmonisation and development of common platforms. The goal is to build our product range on a common platform, delivering a consistently high user experience across the range while helping reduce complexity in the business, simplifying and streamlining our manufacturing and marketing operations. This is a key item in our strategy to sustain gross margins.
In addition to the platform work in Research and Development we invested in development of new products to meet the Falsified Medicines Directive, which is likely to be the most significant legislation driver requiring coding in the next three years and a significant growth opportunity for the Group. We identified the need to build additional capability into our printers and to develop new inks to meet the mandated requirements and I am pleased that we have completed the necessary work.
For a number of years we have been developing our digital label press business. This enables our expansion into a new and fast growing market as high-speed digital ink jet is adopted for the production of full colour labels applied to product packaging. This is adjacent to our core business and, we believe, will eventually overlap with it.
In 2013, we accelerated investment to build our digital print capability. Following on from the launch of the N600i full colour digital press in October 2012, we introduced the N610i in September 2013. This product introduces a wider colour range including white and significantly increases the size of available market. Our goal in 2013 was to install ten full colour presses. This was achieved (nine recognised in revenue in the year) and we hope to follow this up in 2014 with a further 25 digital press installations. Each digital press attracts considerable fluids revenues.
In addition to the investment made in technology and product development in the year, we also expanded our sales and marketing resources across Europe and North America and have built a strong team through which we expect to deliver our 2014 goals.
In November 2013, we launched our new F-series fibre laser to complement our industry leading successful range of CO2 lasers. This is an example of an investment we made to expand our product portfolio to both retain our position with existing customers in new applications and to position ourselves to attract new customers who have requirements we could not previously meet.
Over the past five years we have undertaken a major programme in our manufacturing operations to improve productivity and efficiency in the Group. This has included investment in IT systems to build out a more integrated global network, which although not yet complete, has yielded substantial performance improvements. In combination with this, we have made excellent progress in our efforts to consolidate our global supply network.
I am pleased with the progress we made with the execution of our strategy in 2013 in most areas. We end the year with a broad and strong product range, able to meet the opportunities available to us and an expanded sales and marketing network, with next steps defined to develop the infrastructure and operational performance of the Group. I am disappointed with the progress made in TEN Media and while I am satisfied that Domino has done all it can to support the programme, matters beyond our control have continued to frustrate progress.
In addition to our revenue growth aspirations, our goal is to further improve the bottom line return on sales of the business with a longer-term target of getting back to and then ahead of the 19% we achieved in 2011. We have indicated over the past two years that investment was needed to achieve this and this would erode the return in the short-term, but once we start to see sustained economic improvement, I am confident we are now in a position to start to move forwards on an upward trajectory.
Nigel Bond
Group Managing Director
Financial review
Trading results
Sales in the year were £335.7 million, 7.6 per cent ahead of 2012. Movements in exchange rates contributed 1.4 per cent to growth, sales made in companies acquired during 2012 contributed 1.4 per cent and growth in the core business was 4.8 per cent.
Capital equipment revenues, which represented 43 per cent of total sales in 2013 (2012: 42 per cent), increased by 8 per cent in the year. Digital printing products represented 6 per cent of the total 8 per cent equipment growth, primarily a result of the introduction of the N-Series full colour digital label press. Ten N-Series full colour presses were shipped in the year of which revenue was recognised for nine. One installation had not completed its full acceptance test at 31 October 2013 and so revenue was deferred. Revenue growth from coding and marking equipment was 2 per cent.
Consumables revenues, including fluids, increased by 6 per cent on prior year, in line with the increase in installed base. Spares and service revenues grew by 9 per cent.
The rate of gross margin was 48.1 per cent compared to 49.7 per cent in the prior year. The strengthening of sterling has had the effect of reducing the gross margin rate by 0.5 percentage points and a combination of investment in manufacturing capacity in our digital printing operation and reduced average selling prices primarily in developing markets has reduced the rate by 1.1 percentage points.
Selling and distribution costs and administrative expenses before one-off costs were £89.3 million, an increase of 5 per cent on prior year. Increased investment in sales and support resources, notably in the digital printing business, coupled with the impact of a full year of costs in Graph-Tech and PostJet (both acquired part way through 2012) was offset to some extent by savings in administration, in particular reduced share scheme charges.
Investment in Research and Development was increased to £19.5 million, 17 per cent ahead of prior year. In addition to the impact of Research and Development costs in Graph-Tech, we increased our expenditure on the development of a new core printer range based on common platform architecture, and invested further in longer-term technology development work.
Operating profit before the impact of one-off exceptional costs, reassessment of contingent consideration and amortisation of acquired intangible assets was £52.7 million, 1.5 per cent below prior year (2012: £53.5 million).
One-off costs
The Group incurred one-off costs of £33.9 million in the year comprised of £30.3 million in respect of the write down in value (to nil) of the investment held in TEN Media and £3.6 million in respect of restructuring and redundancy costs. In October 2013, organisational changes were made to improve efficiency and to re-direct investment towards areas of greater opportunity. Changes made in our North American and European businesses led to £3.6 million of redundancy and other related one-off costs. The first year benefits are estimated to be £4.4 million. These are being directed towards further investment in sales and marketing resources in the digital printing business and our Asian operations. Provisions for deferred consideration in respect of the acquisitions of Graph-Tech and PostJet were adjusted in the year based on the latest view of likely outcomes, resulting in a credit to the Income Statement of £1.9 million. IFRS 3 requires these adjustments to be taken to the income statement for all acquisitions arising since 1 November 2010.
Interest and financing costs
The Group has remained in a net cash positive position throughout the year. In managing cash resources we have utilised a combination of interest bearing deposits and short term debt facilities. Investment income was £1.1 million (2012: £0.8 million) and interest paid on debt was £0.8 million (2012: £0.6 million).
Profit before tax
The Group continues to report on both statutory and underlying measures of performance. Profit before tax was £17.7 million. Underlying profit before tax which is stated before the effects of one-off exceptional items, amortisation of acquired intangible assets, adjustments to provisions for contingent consideration arising on acquisitions and non-cash interest charges derived from the accounting for discounted contingent consideration arising on acquisitions was £53.0 million (2012: £53.7 million).
Provisions for contingent consideration in respect of the acquisitions of Graph-Tech and PostJet were adjusted in the year based on the latest view of likely outcomes. This resulted in a net income of £1.9 million.
Taxation
The tax charge of £11.8 million reflects an underlying effective tax rate excluding the impact of non-taxable one-off items of 25.7 per cent (2012: 25.9 per cent). This rate reflects the range of jurisdictions in which the Group earns profit and pays tax.
Earnings per share
Basic earnings per share were 5.22 pence (2012: 36.90 pence). Underlying earnings per share were 35.30 pence (2012: 36.02 pence). Fully diluted earnings per share were 5.18 pence (2012: 36.57 pence) on a weighted average number of shares in issue of 111,586,441.
Dividends
The Board is recommending a final dividend of 14.06 pence which when added to the interim dividend of 7.60 pence represents a total dividend of 21.66 pence per share for the year as a whole. Dividend cover is 1.6 times underlying earnings per share. The value of dividends paid during the year represented 55 per cent of net cash inflow from operating activities (2012: 54 per cent).
Cash
Net cash inflow from operating activities before taxation was £54.9 million (2012: £56.4 million). There was a small net increase in working capital: inventories increased by £1.4 million and trade receivables increased by £7.2 million reflecting growth in sales. These were offset by an increase in trade and other payables of £8.0 million, as a result of movements in restructuring provisions (£3.1 million), bonus accruals (£1.7 million), deferred income (£1.6 million) and trade payables and other accruals (£1.6 million).
We invested £9.4 million (2012: £6.7 million) in fixed assets in the year including £0.5 million on the completion of our new factory near Delhi in India and £1.6 million in fitting out a new leasehold demonstration and offices facility for our digital printing business at Bar Hill near Cambridge, UK. We have planning permission to build a new factory and office facility adjacent to the site of our headquarters in Bar Hill, Cambridge but that project remains on hold.
A small amount of cash (£0.2 million) was paid out in respect of deferred consideration on acquisitions made in prior years. Other cash outflows included payment of taxation of £12.0 million, purchase of shares for the employee benefit trust of £0.9 million and reduction in short term debt of £0.4 million.
Net cash at year end was £25.5 million.
Net assets
Net assets at year end totalled £198.4 million, a decrease of £14.1 million (2012: £212.5 million). Profit for the period after one-off items was £5.8 million, other comprehensive income was £2.0 million, share related and other equity movements were £1.6 million and dividends distributed to shareholders were £23.5 million.
Treasury
The Group is exposed to interest rate movements and to changes in the value of sterling relative to a number of foreign currencies. It is our policy to manage these exposures in a manner that provides certainty in the short-term while guarding against any level of speculation. Surplus cash is placed on short-term deposit with approved banks. The amount of cash held overseas is £45.0 million, of which £27.0 million is held in China. Limits are placed on the amount of exposure with any individual bank. Bank debt is primarily short-term in nature with drawdown renewed as required. This has proven to be a cost effective option given the low level of LIBOR and competitive borrowing costs.
The Group has a £50 million revolving credit facility with the Royal Bank of Scotland committed until 30 November 2016. This is adequate to meet anticipated working capital requirements.
The Group continues to make sales and receive income in a range of currencies. We manage transactional exposure where possible through the use of plain forward contracts, selling or buying currency based on the expected net cash inflows or outflows on a rolling three or 12 month basis. Principal exposures are to the US dollar and euro, both of which we sell forward aiming to cover 90 per cent of our exposure over a rolling 12 month period. Other material exposures where we do not presently have forward contract cover in place include the Chinese renminbi and the Indian rupee. Changes in the foreign exchange markets are creating opportunities for simple derivatives and we anticipate being able to cover at least a portion of renminbi exposure during 2014.
Forward contracts in place and maturing during the year had the effect of reducing net sterling receipts by £0.7 million when compared to the prevailing rate in the prior year. Losses as a result of a weaker euro offset gains from a stronger US dollar. Contracts in place covering expected cash flows in 2014 will realise net gains of £0.3 million when compared to 2013 rates.
No action is taken to hedge translation effects on reported profits in the income statement. In 2013, the impact from movement of exchange rates on translation of short-term balances held by Group subsidiaries in non-functional currencies and consolidation of overseas profits was to reduce reported profit by £0.1 million. Similarly no action is taken to hedge Group investments denominated in foreign currencies in the balance sheet. In 2013, this resulted in an increase in value of reserves of £2.8 million.
Going concern
The Group’s business activities together with its financial position and factors likely to affect its future development and performance are described in the Strategic Report. The Group has considerable financial resources and a broad customer base across many geographies and market sectors. As a consequence the directors believe that the Group is well placed to manage its business risks successfully. In considering the financial position of the Group and forecasts of future performance the Directors have a reasonable expectation that the Company and Group have adequate resources to continue in operation for the foreseeable future. Accordingly, the Group continues to adopt the going concern basis in preparing its accounts.