Grafenia plc – Half-year Report

Financial highlights

		Six months to 30 September 2019	Six months to 30 September 2018
Turnover	£8.41m		£8.31m
EBITDA*	£0.02m		£(0.44)m
Operating Loss	£(1.01)m		£(1.36)m
Loss before Tax	£(1.20)m		£(1.44)m
Tax	£0.12m		£0.18m
Total Comprehensive Loss	£(1.08)m		£(1.26)m
EPS	(1.17)p		(1.75)p
Capital Expenditure (excluding acquisitions and IFRS 16 adjustments)	£0.65m		£0.22m
Bank Cash	£2.54m		£1.62m
Net Debt**	£(0.25)m		£(1.06)m

 

*Earnings before interest, tax, depreciation and amortisation

**Net debt is the net of cash and cash equivalents less other interest-bearing loans and borrowings, excluding the impact of IFRS 16 on finance lease liabilities of £2.18m

 

Operational highlights

●              Nettl network reaches 235 locations around the world

●              Nettl Company Stores revenue grows by 20%

●              Successful consolidation of two factories into one

●              New printing press generating operational savings

●              Placing of £4.01m completed to support sign roll-up strategy

 

 

For further information:

 

Grafenia plc
Peter Gunning (CEO)	+44 7973 191 632
Jan Mohr (Chairman)	+49 175 734 2740
Simon Barrell (Interim Finance Director)	+44 7850 934 204
Allenby Capital Limited (Nominated Adviser and broker)	+44 203 328 5656
David Hart / Liz Kirchner / Nicholas Chambers

 

 

 

 

Interim Statement

It’s been three brief months since we published our annual report. In that time, we’ve continued to execute the strategy we said we would. To build, buy and licence.

 

We’re rolling-up sign businesses and building performance in our company-owned Nettl stores. We’re launching new services, developing new products and licencing our brands and systems to others. During the interim period, revenues have grown in all of those parts of our business and our confidence increases that we have the right strategy. It’s far from an easy time to be in business. We sell B2B and it’s difficult to think of a more uncertain time for our clients, particularly how the current political environment is messing with their day-to-day decision-making.

 

Nevertheless, we’ve continued to invest in the future. During the first half we’ve completed significant heavy-lifting in our main production hub. That’s an investment in future cost-savings and available capacity. Whilst it’s had some positive impact in the first half, we expect to see the bulk of the benefit in the second half and in future years.

 

Trading Results and Cash

Turnover during the six-month period increased to £8.41m (2018: £8.31m). Gross profit was flat at £4.35m (2018: £4.35m). Whilst this slightly decreased as a percentage of sales to 51.8% (2018: 52.4%), it doesn’t tell the full story. Print margins continue to erode, as input costs have risen and trade prices pursue their race to the bottom. However, services, subscription and licence income has increased, which masks a greater fall in other parts of the business.

 

EBITDA, which is profit before interest, tax, depreciation and amortisation, increased. It was just above breakeven at £0.02m (2018: loss £0.44m). We’ve got IFRS 16 to thank for some of that, as £0.22m of lease payments moved out of operational costs and were replaced with £0.19m of depreciation and £0.07m of interest charges. Our loss after tax reduced to £1.08m compared with £1.26m for the same period last year.

 

Our overheads decreased to £4.32m compared to £4.76m in the same period last year. Within overheads, staff costs increased to £2.92m (2018: £2.70m) as they now include a full six months of salaries for the three businesses we acquired part-way through the comparative period.

 

Non-recurring income was £0.29m. This included a gain on disposal of a legacy printing press, which we sold in April 2019. It also includes the reversal of a provision against deferred consideration for the purchase of Image Group. As previously announced, we no longer made a payment of £0.22m to one of the vendors of Image Group.

 

At 30 September 2019, the Company had cash of £2.54m (2018: £1.62m) and debt of £4.97m (2018: £2.67m), consisting of £2.39m of asset finance, £2.18m of lease liabilities related to assets capitalised under IFRS 16, and £0.40m of other borrowings. Our operating activities utilised £0.79m of cash (2018: utilised £0.71m) and, during the period, working capital decreased by £0.38m (2018: decreased by £0.28m).

 

Capital expenditure was £0.65m (2018: £0.39m), including building works to consolidate two factories into one. The total also includes £0.33m (2018: £0.35m) which was invested in the ongoing development of our platform which underpins our operations and is licensed to our Partners.

 

It’s worth repeating that some of our investments might show as costs in our profit and loss statement. Others show as capital expenditure or M&A consideration in our cash-flow statement. To the Board, they are all compared on the same basis. It doesn’t matter if we invest in opening a new country operation for Nettl, buying a machine or increasing our sales teams. We focus on what we hope will get us an attractive cash-payback. This may distort our earnings figures temporarily. For example, the launch of a new Nettl country (as discussed in “Nettl of America” below) creates substantial start-up costs. However, we clearly view this as an investment for the future – but one that has to be booked in our profit and loss statement as a cost.

 

We previously announced in July 2019 that we had raised £4.01m, after expenses, at 14p per share to execute our signs roll-up strategy and develop Nettl of America.

 

Trading Review

We manufacture signs, printing and displays in our own factories. We sell services like website design, search engine optimisation and graphics installation. The kind of things that businesses need to help them grow. We also print banners, business cards, fabric stands, window and vehicle graphics, and other types of marketing, those same businesses use every day. 

 

Our clients come in all sizes, from cafes to castles (yes, that big one). Stadiums to solicitors. Fitness instructors to financial consultants. We love them all equally. We have different sales channels and ways of reaching clients. Through our company-owned Nettl stores and key account managers. Indirectly via resellers, who buy online. And via third party Nettl and printing.com partners, who co-brand their business with ours. They pay us subscription and licence fees to use our brands and systems.

 

Shareholders recently asked what’s included in each of our revenue segments, so we thought it useful to explain each in a little more detail than usual.

 

Building our Nettl Company Stores

We own and operate Nettl stores in Manchester, Birmingham, Liverpool, Exeter and Dublin. We interact with our clients in a way that suits them. That could be online, offline or more commonly a mixture of the two. These stores are our beacons. They range from 2,000 sq ft to 7,500 sq ft. They’re a place to show off displays, signs and printing. A place for clients to be inspired. For them to gather and meet with other businesses. And a place for partners and team members to learn and be trained in new skills. Some stores even have dragon taps in the bathrooms. Why? Because little things like that provoke clients’ imagination. It helps them think about ways to make their own workspaces, shops and places, better. The water comes out of the dragon’s mouth.

 

Our Superstores in Liverpool and Exeter also manufacture signs and our charming installation teams are based there. Both Superstores were born by acquiring sign businesses, combining them with local Nettl partners and relocating the blended families to new trade counter type premises. They’re on trading estates, where white-van-person picks up their screws and timber. And might just be tempted to become multi-colour-wrapped-van-person. We’re looking for more superstore locations, as well as opportunities to roll-in other businesses to current Nettl stores. More about that later.

 

In our Company Stores segment, we include sales of printing, signs, displays, design, branding, websites, hosting, domain names and search engine optimisation subscriptions. In fact, everything a Nettl store invoices to end clients.

 

Sales in our Company Stores grew by 20% to £1.44m (2018: £1.20m) in the half year. Over the past two years, a lot has changed across our store network. We rolled in three other businesses during part of the prior year and closed a loss-making ‘first generation’ store this year. So, if like-for-likes are your thing, we should exclude any stores or parts of the businesses which weren’t trading in both years, and like-for-like would have increased by 3%.

 

Licencing Nettl and our brands

As well as our own company stores, we licence Nettl to other graphic professionals. People like print shops, graphic designers, sign businesses, marketing agencies and web designers. They ‘bolt-on’ a Nettl licence to their existing business. We only partner with established businesses, famous in their neighbourhood. We call them “Brand Partners” because our brands are exposed to their own clients.

 

Partners pay an initial licence fee of typically £2,000. Then they pay a monthly subscription fee. The fee is scaled based on the size of the exclusive territory they’d like. That starts at £299 per month for a Neighbourhood tier, rising to £999 for a larger postcode with higher business density. Their subscription grants them access to a library of marketing collateral. There’s a wide range of digital campaigns, brochures, point-of-sale and marketing available. It’s all intended to help explain web, print and signs to new and existing clients. Partners join Nettl “Because more customers, old bean” as we like to say. Every business needs new customers to grow. And Nettl partners don’t have to think up new campaigns for themselves each month. We do it for them.

 

After classroom training and graduation, they become “Nettl of Their-town”. They’re listed on nettl.com and use our back-office software system, called ‘w3p’, to manage efficiently their studio. The Nettl Method makes it easy to handle multiple print, sign and display orders at once. And juggle the demands of building websites, ecommerce shops and online booking systems. To begin with, they co-brand Nettl with their existing name. Over time, as they are slowly seduced by the breadth, depth and frequency of Nettl marketing, many fully adopt Nettl as their sole brand. How much Nettl marketing a partner uses is a critical success factor. The more they use centralised mailing and digital marketing we organise on their behalf, the more likely they are to win new business. And the more value they get from their Nettl partnership. And the less likely they are to leave. Marketing engagement makes up part of a partner’s Metascore, which we automatically track. Our performance team uses that to focus and prioritise support.

 

In the early days of Nettl, partners would commit for a minimum 12-month term. Now, the minimum term is five years with an option to break on the 24th month. As partners reach their minimum term, we’ve been encouraging them to lock-in their rate and territory for longer contracts. We’re pleased many do and some have committed for as long as ten years. Retaining partners is clearly important.

 

There are 235 Nettl locations in the world (2018: 210). 177 in the UK and Ireland, 22 in the Netherlands, 12 in France, 10 in the USA, 7 in Belgium, 4 in New Zealand and 3 in Australia. In Europe and America, we support and acquire partners directly. New Zealand and Australia operate under master licence and partners are supported locally.

 

We also licence our printing.com brand in the UK and Ireland. There are currently 77 printing.com subscribers (2018: 100). We have experienced a greater churn from printing.com partners than in previous years. It’s getting tougher for businesses to survive by reselling print alone and we continue to encourage partners to follow the trail others have done, to diversify and upgrade to Nettl.

 

Income from Subscriptions and licence fees increased to £1.04m (2018: £0.90m). This segment includes initial licence fees, system usage fees, click charges and monthly licence fees. It also includes the wholesale value of search engine optimisation subscriptions, website hosting, website deployment royalties and stock photography licences where the end client paid one of our partners.

 

Nettl and printing.com partners are hooked into our supply chain. They buy print, displays and signage under a service level agreement. In Europe, we manufacture and distribute product from our Manchester Hub. In other countries, product is mostly manufactured locally under licence.   

 

Sales of print and products to Brand Partners was £1.90m (2018: £2.08m). This segment includes the wholesale price of printing, fabric displays, signage and similar physical products. Trade print prices continue downward, as sector overcapacity results in heavy discounting. Whilst volume from Nettl partners has held steady, revenue from printing.com partners has decreased over time.

 

Nettl of America

Just before the start of the half year we launched Nettl of America. Federal law required us to licence Nettl as a franchise. In other countries, partners sign a simple licence agreement. In the US, prospective franchisees have to agree to read a 200+ page franchise disclosure document and sign to say they received it. And then there are strict waiting times before they can sign a franchise agreement. We expected this would slow down the gestation period, which it has. However, we think the opportunity is worth the effort.

 

Our original franchise acquisition approach didn’t behave quite like it has in other countries. Although we’ve added 10 franchisees so far, we’ve been testing alternative marketing methods. We’ve also reset our ‘boots on the ground’ and trained new acquisition executives. With recent marketing activity completed, we’re pleased with our pipeline of potential franchisees and expect to add more founding franchisees in the second half.

 

Other channels

As smaller sign businesses are converted into Nettl Business Superstores, they move to our Company Stores segment. Businesses yet to be rebranded, or those which retain their identity, appear in our Signs revenue segment. In the half year, that segment features just Image Group. Sales were broadly flat at £2.60m (2018: £2.68m). Now we’ve completed the relocation, we have reorganised the sales teams to focus on growth.

 

Finally, we sell to graphic professionals via online websites. This is a very competitive sector, serviced by much larger players. We redeployed people to other areas last year and sales in our Online and Trade segment have held steady at £1.43m (2018: £1.45m). In the half year, our Marqetspace.com channel was the first printer in the world to offer interest-free ‘Buy Now, Pay Later’ credit facilities, provided by Klarna Bank. Marqetspace remains an important part of our partner acquisition funnel. We get to meet potential partners this way and build their trust. Then we explain Nettl. And then we invite them to become Nettl. And many have. And we expect more will.

 

Our factory move and press investment

In December 2018, we began the process of decommissioning three old printing presses. As we waved them proshchay to their new lives in Russia, we also said konnichi wa to a new high-end press, delivered from Japan just in time for Christmas. One old press remained until April, just as we switched full production to the new one. As with most technology, there’s a learning curve, while operators figure out how to harness their new beast.

 

We talked about our reasons for investing in a new press in the annual report. Six months in, it’s worth explaining one of the important metrics in our decision. With each batch of jobs, our team needs to perform a press changeover. This involves the press running with paper to measure and adjust ink settings, to reach the right colour. Our legacy presses took around 400 sheets to ‘make-ready’, to produce as few as 500 ‘good’ sellable sheets. That paper would be recycled, but truly was a waste of money. When making our press investment decision, we expected to substantially reduce the amount of paper wasted. That’s turned out to be the case and now we use less than 100 sheets per change. The team is working on reducing that further. Tweak by tweak, week by week. 

 

With those old presses gone, they freed up quite a bit of space in our Manchester hub. Ice rink. Basketball court. Dance classroom. All ideas we discounted. Instead, we decided to relocate Image Group’s main factory. Despite much eye-squinting, lip-pursing and tutting, we realised there wasn’t quite enough space to fit the whole factory in. So, during the summer of 2019 we did some building work to make the impossible, possible. By the end of July, we’d relocated machines and teams. The old factory was vacated and property leases ended in October 2019, so no benefit in H1. We’ll feel the full financial benefits in the second half. As well as significant savings on rent, rates and other occupation costs, we are enjoying operational improvements of having everyone in the same building.

 

Acquiring other businesses

As we said in our Annual Report, we continue to look for businesses to roll into Grafenia. In the signs sector, we’re looking for larger businesses to convert into regional hubs, or Nettl Works. That’s our priority. We’re also talking to smaller businesses, with the aim of rolling them into an existing store or converting them into Nettl Business Superstores, like Liverpool and Exeter.

 

In the first half we’ve met lots of potential acquisition candidates. Some we have quickly discounted as poor cultural fits (the ones who don’t like dragon taps). Some have price expectations well beyond our investment criteria (the cheeky, greedy ones). We’ve started due diligence on some and discovered things that made us walk away (the mysterious, enigmatic ones). And, finally, there are others whom we’re getting to know better (the ones we like).

 

Outlook

After the interim period ended, trading has been mostly positive. Some parts of our business have set new sales records. Other legacy parts are performing behind last year. The efforts our team have made to reduce overheads and increase profitability are expected to be weighted to the second half and beyond. And this isn’t a finished project. We’re relentlessly automating things done manually, or stupidly. And looking for new ways to help clients to get more for their budget.

 

We’re still looking for M&A opportunities in our sector. They’d change the size and structure of the Group materially, if they were to progress. But we’re not rushing to do deals, so we can say we’ve done a deal. No deal is… well, you’ve heard that before.

 

Which is a suitable note to end on. Given the political and economic situation, we still remain cautious on quantifying the outlook. But our goal for the second half is EBITDA breakeven on a monthly run-rate basis and our mid-term goal remains to reach an EBITDA margin of 10-15%.