IG Design Group plc (IGR.L) Earnings Call Transcript & Summary

Welcome to the 2025 year-end results presentation for IG Design Group. I'm Stewart Gilliland, Interim Executive Chair, and I'm pleased to be joined today by our Group CFO, Rohan Cummings. As I'm sure you will have seen. I assumed the role of Interim Executive Chair after Paul Bal stepped down from his role as CEO following the very successful disposal of DG Americas. And I'd like to take this opportunity to thank Paul for his outstanding contribution and hard work during his tenure. Full year '25 has been dominated by numerous external challenges, felt mostly by DG Americas, which impacted group revenue and profit. However, post period, there was a turning point for our group as we took the decisive step to exit DG Americas in order to protect the wider group and further risk. This successful divestment enables us to streamline our operations and focus on the more resilient, profitable and cash-generative part of our business, DG International. DG International has a strong heritage, long established and stable relationships and well-structured categories and product ranges. We are now better placed to pursue future growth over the coming years. What must not get lost in the challenges that the business has faced is that we have long-term relationships with major retailers around the world. We work closely with our partners and pride ourselves on the level of service we deliver and at the heart of what we do is a focus on innovation, whether that's creating new products, improving design or finding smarter solutions. We never let go of what makes -- what we deliver truly exceptional for our customers. In terms of today's presentation, we'll begin with a summary of the year ending 31st of March 2025, highlighting the key financial headlines. Following this, we'll discuss the DGA 2025 performance and the recent DGA divestment. We'll then review the group's 2025 full year performance, delving into the financials in more detail, sales, profit and the key drivers behind that. as well as our cash performance. Then we look ahead at the future and discuss what the group now looks like, the future strategy as well as restating our guidance for the next 3 years before wrapping up. In full year 2025, group revenue declined by 9%, reflecting a combination of macroeconomic and operational headwinds. Soft consumer demand across the key markets namely U.S., the U.K. and Australia, alongside a number of customer bankruptcies in the U.S. and supply chain disruptions affecting a major retail partner in Europe. Adjusted operating profit was down year-on-year, with adjusted operating profit margins declining by 320 basis points. This was primarily due to lower volumes, elevated freight costs and competitive pricing pressures in the European market. Despite these challenges, we continue to see strong momentum in our SMARTWRAP product line, which now accounts for 35% of our app sales, and we maintained our strategic focus on growing license sales. Our average cash position strengthened over the year. This was supported by the sale of the U.S. property, which released additional liquidity. We also completed the closure of our inefficient manufacturing facility in China, aligning with our broader simplification strategy. Then post year-end, we successfully divested DG Americas, which marks a pivotal step in reshaping the group into a leaner, more profitable and cash-generative business going forward. I'll now hand over to Rohan to cover the 2025 financial performance.

Thanks, Stewart, and good morning, everyone. Turning to DG Americas before we focus on the continuing group. DGA, which represented 60% of group revenue in FY '25 saw a 12% decline to $439 million, reflecting ongoing market challenges. As communicated over previous periods, the U.S. retail environment remained highly competitive, with cautious consumer spending driving lower order volumes and increased pricing pressure. This was compounded by a series of customer bankruptcies including the division's fourth largest customer, which entered Chapter 11 and subsequently went into liquidation. Insolvencies accounted for roughly 20% of the revenue decline. While new business wins were secured, they were not sufficient to offset the lost revenue with consumers prioritizing essentials amid economic and geopolitical uncertainty, especially in the run-up to and following the results of the U.S. presidential election, the impact was felt across all categories with gift packaging and stationary hit hardest. The revenue decline, combined with the rising input and freight costs lead to an adjusted operating loss of $15.5 million, down from a $6.8 million profit in FY 2024. Lower volumes and adverse category and channel mix reduced this year's operating leverage and margin recovery by a total of $24 million. Despite proactive credit risk management and disciplined approach to exposure, the impact of bankruptcies, particularly where inventory was held on consignment was significant, and the group suffered a $12 million write-off including provisioning requirements. This would have been far higher if it wasn't for the credit risk management work undertaken. In response, the division implemented cost-saving measures, operational savings, redundancies and further consolidation of sites, which delivered $18 million to partially offset some of the impact of market conditions. Strong working capital discipline, helped unlock value and support cash flow. As investors will know, in recent years, we have taken significant steps to stabilize and strengthen DG Americas amidst a persistent challenging market environment. The prolonged period of reduced consumer demand led to a decline in order volumes, putting pressure on the business. These pressures were further compounded in the last quarter of FY 2025 by a series of customer bankruptcies, most notably the collapse of the division's fourth largest customer. This triggered a significant noncash impairment charge of $54 million of DG Americas assets. Additionally, this compelled the Board to initiate an end-to-end review of the business, including the categories we operated in with the objective of arriving at a smaller, more profitable and resilient business. In April 2025, the situation deteriorated further with the introduction of new U.S. import tariffs, which considering the fact that over half of the purchases made by DG Americas were sourced from China significantly increase the cost of doing business and added further uncertainty to an already fragile market. The Board widened its review of strategic options. And against this backdrop, concluded that the continued ownership of DG Americas was no longer in the best interest of the group. The disposal marks a decisive step to safeguard the group's future and reduce exposure to ongoing risk. The Board acted swiftly to protect the wider group from further financial exposure at a critical time of the group's working capital cycle and to mitigate the escalating risks of prolonged underperformance. As part of the deal, the group is entitled to 75% of any future potential net proceeds realized by the buyer. This marks a key turning point for our business, enabling us to streamline our operations and focus on the more resilient, profitable and cash-generative DG International. With a clear strategic direction and focus, we are now better placed to pursue future growth and can look ahead with renewed optimism. Now let's look at 2025 results. Looking at DG International, which now forms the remaining group going forward. Notwithstanding the market challenges, the business remained profitable and cash generative in FY 2025. Revenue declined by 3%, impacted by competitive pricing in Europe of $9.8 million, a volume decline due to market softness in the U.K. and Australia of $4.2 million and supply chain disruptions from one of our major retail partners in Europe. There was also an FX benefit of $3.7 million. Adjusted operating profit margin stood at 10%, with freight costs increasing by approximately $9 million due to higher sea freight rates at the start of FY 2025 and increased labor costs in Europe. These costs were partially offset by savings from U.K. and China restructurings where we successfully closed the inefficient manufacturing facility in China as planned and consolidated sourcing teams. We are pleased with the rollout of SMARTWRAP across U.K. and European markets, one of the division's key product lines. This accounts for approximately 35% of giftwrap sales with over 300% year-on-year growth and is a testament to our ability to innovate and find smarter solutions for our customers. Alongside this, we invested in strengthening our commercial teams across multiple markets to support our growth ambitions. This slide bridges the main drivers behind the group's revenue performance for the year, which decreased by 9% to $729 million. As you will see, the significant driver of the decline was DG Americas, which we have previously covered, which declined 12% or $61 million for the year to $440 million. DG International's revenue declined by 3% or 5% on a constant currency basis. This decline was primarily driven due to heightened competitive pressures, reduced consumer demand and supply chain disruptions at a major customer. Pricing reductions amounted to $9.8 million as tenders became more competitive within the retail environment in Europe. The volume reduction of $4.2 million was due to market softness in U.K. and Australia and the supply chain disruptions at one of our major retail partners in Europe. Foreign exchange had a positive impact for the year, driven by the strengthening of underlying currencies to the U.S. dollar. Turning to operating profit, we will bridge the main movements for the year. Adjusted operating profit decreased by 83% or $25.9 million, mostly driven by DG Americas, which declined $22.3 million. Our turnaround strategy initiatives delivered $18 million benefit, but these were more than offset by lost sales volume, customer insolvency provisions and freight. Within DGI, we saw a favorable sales margin growth due to improved operational leverage from higher manufacturing rack volumes as well as the closure of the China manufacturing facility and favorable mix. This was partially offset by unfavorable pricing impact and lower consumer demand in the U.K. and Australia. But overall, net positive $5.7 million. The large negative impact was associated with the Red Sea disruptions, which impacted freight costs by $8.7 million, particularly during the first half of the year. Let's now move to the detailed financial review and start by looking at the key P&L lines and at the areas I've not highlighted already. Gross margin decreased 310 basis points to 14.7%. Mainly driven by DG Americas performance. This led to a 25% reduction in gross profit year-on-year. Overheads decreased 8%, driven by head count reductions and restructuring initiatives in DGA, DG U.K. and China. Financing costs for the year were $3.3 million and are lower than the prior year, driven by average net cash levels being higher than previous year. The tax charge for the year was $6.5 million with most of the tax being paid in Europe and Australia. This skews the effective tax rate due to the large losses in DGA and the unrealized deferred tax asset in the U.K. This resulted in diluted loss per share of $0.056. When looking at the reported numbers, the biggest impact was the noncash impairment charge of $54.2 million relating to DG Americas. This charge was triggered by the Chapter 11 bankruptcy filing of DG Americas' fourth largest customer coupled with the broader decline in the business' trading performance. Considering these developments, the group revised its long-term cash flow projections for DG Americas to reflect the anticipated impact on future operations. As a result, the recoverable amount of the assets was reassessed using a fair value less cost to sell methodology, leading to a write-down to the revised recoverable value. In addition to this impairment charge, we also wrote off the DGA deferred tax asset of $37.4 million. If we now turn to the cash flow, the group ended the year with a net cash balance of $85 million, $10 million lower than the prior year. The group recorded a working capital absorption of $7.6 million for the year in contrast to the significant release achieved at the end of FY 2024. This was primarily driven by challenges in the European operations where a key retail partner faced supply chain disruptions late in the year. These disruptions led to reduced sales call offs, resulting in elevated inventory levels. Additionally, the prior year inventory position was unusually low due to earlier call-downs of buffer stock to mitigate the freight-related issues. While these factors negatively impacted Europe, they offset the progress made in working capital efficiency across the rest of DG International and DG Americas. Capital expenditure for the year totaled $6.5 million down from $9.9 million in FY '24. The reduction was primarily due to lower investment levels in DG Americas. As of 31st of March 2025, average net cash was $40.2 million, up from $27.7 million in the prior year. Pleasingly, at the start of July, we secured a new 3-year receivables finance banking arrangement, which offers better value and is simpler to manage for the group going forward. I'll now pass back to Stewart as we spend some more time looking at our DG International business in more detail.

This slide highlights the robust foundation and operational excellence to the business has built over the years. The company's strength lies in its strong heritage, which has fostered long-established and stable relationships with key stakeholders, both suppliers and customers alike. This history not only provides a sense of reliability, but also a clear pathway to continued success in the market. Made up of the 3 operating segments in the U.K., Europe and Australia, DGI has over 730 employees and offers an extensive product range of over 22,000 SKUs. This breadth of offerings is a testament to the company's capacity to meet diverse customer needs and adapt to evolving market demands. This extensive reach is underpinned by 3 manufacturing facilities ensuring a well coordinated and efficient production process. Innovation remains at the heart of this business with a strong focus on product design and development. The company's ability to innovate while maintaining responsible sourcing and manufacturing practices ensures that products not only meet market needs, but also align with sustainability goals. This is increasingly important in today's market where consumers and businesses alike are prioritizing ethical and responsible business practices. In addition to manufacturing excellence, the company maintains a strong distribution and fulfillment network, which guarantees timely delivery and customer satisfaction across multiple regions. Finally, the commitments and market insight allows the business to anticipate trends and stay ahead of competitors, offering a competitive edge in a rapidly changing landscape.

The continuing group has demonstrated a more consistent financial trajectory over the 3-year period. Revenue remained relatively stable in FY 2023 and FY 2024 with a slight increase of 0.8%. However, FY 2025 saw a modest decline of 3%. When we look at profitability, adjusted operating profit nearly doubled from 2023 to 2024, reflecting the recovery of higher freight and other input costs and the normalization of these pressures. FY 2025 saw a slight pullback, though profit remained significantly above 2023 levels. The group is expected to face several challenges that will weigh on profitability in FY 2026. Heightened competition is expected to continue with pricing pressure compressing margins. The U.K. exports to the U.S. and the new U.S. tariffs will have a material effect on profitability. Persistent inflationary pressures are likely to dampen consumer and business demand, particularly in discretionary categories. The required 2025 warehouse relocation in Australia is expected to result in elevated costs in FY 2026 and beyond due to the adjustment in current market rental levels. We have now included a slide on modeling as we reinstate guidance. For FY '26, we expect revenue to be circa $270 million to $280 million, with adjusted profit margin of 3% to 4%. We have a number of headwinds in our FY 2026 profit discussed in the previous slide. Looking beyond FY '26, we expect the business to grow organically up to 5% per annum and achieving operating margins of circa 45% by FY 2027. We have modeled this on a continuing business basis and have not modeled any organic growth opportunities which include channel expansion to reach new customer segments, customer and geographic expansion of both celebrate and create and product portfolio expansion to meet evolving market needs. We will update guidance as these are delivered into the future. In terms of capital allocation, our strategy remains focused on supporting long-term growth ambitions while maintaining a disciplined and resilient balance sheet. We continue to prioritize organic growth within our existing footprint, with targeted investments in geographical expansion, product development and customer diversification. These initiatives are designed to strengthen our market position and unlock new revenue streams. Given our strategic priorities and current market conditions, the Board has not recommended a dividend for the year ended 31st of March 2025. However, we recognize the importance of shareholder returns and we'll keep this under review over the coming year and update in due course. And I'll now hand back to Stewart to conclude.

Following the recent divestment, the group is now positioned as a simpler, more profitable and cash-generative business with a streamlined focus on core operations and organic growth. The group maintains a robust order book currently representing 87% of budgeted revenues, providing strong visibility and confidence in near-term performance. While the group is well positioned over the short term, as detailed earlier on in the presentation, it continues to navigate several external headwinds. Despite these challenges, the group expects sustainable growth in both revenue and margin over the medium term, underpinned by strategic initiatives and operational resilience. The group remains focused on unlocking value through a number of growth opportunities, channel and product expansion, along with geographic and customer diversification. We have renewed optimism for the period ahead, and we look forward to building on the strong foundations of DG International to drive growth and rebuild shareholder value over the long term. To conclude, our investment case is built on 3 key pillars. We have a robust and stable business, and we can build on its strengths. We're now concentrating on developing DG International, leveraging our long established relationships with major retailers and well-defined product categories. Innovation remains a crucial pillar for delivering long-term value. We will exploit our geographical diversification with revenues distributed across the U.K., Europe and Australia. We have the ability to innovate while maintaining responsible sourcing and manufacturing practices, which is increasingly important in today's market, and we have a robust balance sheet following the disposal of DGA. As we touched on earlier, in addition to our core strengths, there were multiple opportunities to harness organic growth and we are fueled to deliver this. And finally, we're well positioned to deliver sustainable growth in revenue and margin whilst continuing to deliver strong cash generation. Underpinning this, of course, is our strong balance sheet, which shows a net cash balance of $85 million as of March 2025 despite typical working capital fluctuations. So that wraps up the formal presentation. We're now very happy to take your questions.

[Operator Instructions] We've had a few questions already submitted. I'll kick off with the first one of these. As from Mark, the company mentions the closure of inefficient Chinese manufacturing facility, what products were made in the now closed facility and where has that manufacturing been moved to?

Thanks, Mark. Yes, most of the manufacturing there was the crackers. And we've actually now actually sourcing from a number of different suppliers in China. It remains an interesting category for us because a lot of the technical compliance group, so we feel there's some competitive advantage there. But we're all looking at how we might develop the category going forward.

Next question. Are there any plans to change the reporting currency from U.S. dollars given the change in the group?

Yes. I think given the fact that we have very little revenue in U.S. dollars now, it is under consideration, and we obviously will make the decision of the Board to make an announcement at appropriate time.

Next question is what adjacent product category areas might you look to, to drive higher selling prices and more value added to your retail customers and ultimately, end consumer?

Yes. I think this is the big opportunity. A significant part of our business is around Wrap and a lot of that is sold around EUR 1 and GBP 1. And what we need to do is we evolve into higher premium pricing. So I think with Wrap alone, there are opportunities to premiumize and we are exploring how we get a better quality paper and how we exploit maybe craft opportunities, the Eco Nature brand and also in terms of license propositions. So I think there's some work we can do in terms of premiumizing Wrap. Equally, what we want to do in terms of all the new growth areas to look at higher retail pricing, which the consumers to better actually pay for, which then creates a much greater cash margin for the retailer and also for us. So there's areas like home decor that we're actually exploring at the moment, but also we're working through the business units of what is the appropriate areas to focus on in terms of our existing customers whilst also looking at new channels, new customers and new geography.

Next question, can you help me understand the quantified impact of the headwinds to get me from the FY '25 pro forma margin of 7.1% to the FY '26 guidance of 3% to 4%? And when might you envisage a return to that 7% level?

Yes, sure. I mean, on Slide 15 we basically have the pro forma numbers for FY '25 that you basically see of $20.7 million adjusted operating profit at a 7.1% margin. And then underneath, we list the headwinds we're facing, which equate to about $10 million in total. If we take the first one, pricing pressures that we see there, this is a continuation of what we're seeing in the current year. So FY '25 in the revenue bridge for DG International. We said that we had normal pricing pressures from normalized tender processes and that we've seen, particularly within the European landscape. In FY '25, that was $9.8 million. We don't see it being as big in FY '26. However, it's going to be about half of that. So about $5 million and is the continued pricing pressures we see across Europe. The second impact we see is tariffs with U.S. So we still produce Wrap in the U.K., which is shipped to a major customer in the U.S. And I said in the presentation, they have a material impact on profitability. That is about $3 million of the impact of tariffs shipping Wrap into the U.S. And then the other 2 are the continued softness we see in the market due to the inflationary environment and also the Australian operational cost increase were in the last -- in FY '25, Australia to move into a new warehousing facility, the old lease ran out. They've moved into a new location. And it's now a market-related rental. That adds about another $1 million to the cost base. So the combination of those is about $10 million, which basically takes the adjusted operating profit from the $20.7 million down to guiding.

That's very comprehensive. One, I guess, for Stewart, so a more general question. Is there any change in overall strategy following the disposal of DG Americas?

Yes. I mean I think that's what I was alluding to earlier is that we've got to try and find ways of how we premiumize and how we move up the value chain in terms of the products that we're actually selling. There's a real focus now in trying to increase the cost -- average cost price of what we're selling, but where that starts with how we command a higher retail price. And so I think what we want to pivot the organization towards is much more focused on sustainable growth in new categories, or premiumizing existing categories. And that's the work we're starting. We've already had some engagement with each of the business units and they're building their ideas of how we might execute about going forward. Now to be clear, that slightly won't have significant impact on '26, but the idea is to start to see some of these coming to fruition as we go into full year '27 and start to move that revenue -- top line revenue forward.

We've had a number of people asking a lot of different questions about the fortunes of DG Americas and about any views you're able to give on the potential realization from Hilco. Rohan, I wonder if you could just sort of sweep those -- all those questions up with whatever you're able to say about that topic.

Yes. I mean, I think we had a slide on the actual sale process. So we sold the DGA to Hilco for a nominal value of $1. We retained the right to have 75% of the proceeds that come from that. But obviously, we haven't put anything into the guidance. And I think at this stage, it's still too early to say what that potentially could be. But the one thing we did is we limited the downside with regard to DGA and the timing at which we exited the DGA sale was a pivotal moment for the group and when we needed to exit ahead of the working capital cycle to retain a strong balance sheet within DGI.

Okay. Thank you. Next question from Niko. Will International Greeting continue to deliver goods to the new DG Americas?