NEOPOST : STABLE CURRENT OPERATING MARGIN AND STRONG CASH FLOW GENERATION

STABLE CURRENT OPERATING MARGIN AND STRONG CASH FLOW GENERATION

• HY 2017 sales up +0.4%, and down -0.9% on an organic basis^[1]
• Q2 2017 sales practically stable at -0.2% on an organic basis^[2]
• Stable HY 2017 current operating margin at 18.0%^[3]
• Net attributable income for the first half of 2017 of €51 million
• Strong cash flow generation

MEDIUM-TERM AMBITIONS CONFIRMED

• Return to organic growth
• Maintain current operating margin2 above 18.0%, with the target of returning the margin to above 20.0%

Paris, September 26, 2017

Neopost, a global leader in digital communications, shipping and mail solutions, today announced its 2017 first half results (for the period ended on July 31, 2017) and sales for Q2 2017. These financial statements were reviewed and approved by the Board of Directors at its meeting on September 25, 2017.

In the first half of 2017, the Group achieved €559 million in sales, up +0.4% year-on-year and up +0.1% before currency effects, with organic change of -0.9%. Sales for the second quarter were practically stable at €283 million, and down a slight -0.2% on an organic basis.

HY 2017 current operating income totaled €101 million, before acquisition-related expense, up +0.9% compared with the first half of 2016. Current operating margin (before acquisition-related expense) remained stable at 18.0% of sales.

Factoring in the impact of asset disposals, net attributable income came out at €51.0 million in HY 2017, compared with €58 million one year earlier. The net margin^[4] was 9.1% of sales, from 10.5% in first-half 2016. Cash flow after investments rose sharply to €61 million from €44 million in the same period in 2016.

Denis Thiery, Chairman and Chief Executive Officer of Neopost, commented: "Our performance in the first half of 2017, and especially in the second quarter, confirms the improved overall trend that began in Q3 2016. Our legacy business declined moderately while our new businesses continued to grow, even though it was still at a rate of under 10%.

We stabilized our current operating margin while continuing our substantial investment program. Our growing EBITDA and robust cash flows give us the resources to pursue our transformation.
These strong results confirm the value of our strategic choices and reaffirm our confidence in our ability to meet our medium-term objectives".

Income statement

Sales by division

*Including €2.6 million in sales generated by the CVP-500 automatic packaging solution in HY 2017, and €1.4 million in HY 2016.

*Including €2.3 million in sales generated by the CVP-500 automatic packaging solution in Q2 2017, and €1.3 million in Q2 2016.

Enterprise Digital Solutions (EDS)

Enterprise Digital Solutions posted a +16.9% increase in sales in the first half of 2017 at constant exchange rates. Restated for the scope effects of the acquisition of icon Systemhaus and the disposal of DMTI Spatial, sales grew +7.1% on an organic basis.

This sales performance falls short of expectations and is largely due to the under-performance of icon Systemhaus and license sales in the United States. Maintenance revenues, however, were up sharply.

In this division, GMC Software, Satori and Human Inference were combined under the Quadient brand to target the broader customer experience market with a unique portfolio of solutions bringing together customer communications management and data quality capabilities.

2017 second-quarter sales for the Enterprise Digital Solutions division rose +16.7%, at constant exchange rates. Restated for the scope effects of the acquisition of icon Systemhaus and the disposal of DMTI Spatial, sales grew +8.1% on an organic basis, an improved performance on the first quarter, but not yet at expected pace.

Neopost Shipping

In the first half of 2017, Neopost Shipping's sales growth topped 10%, at +11.6%, excluding currency effects. This increase was due to sales of three CVP-500 automated packaging solutions notably to existing customers, and to the growth of the Packcity business in Japan.

Q2 2017 sales for the division showed an increase of +16.8%, at constant exchange rates, showing a strong quarter to quarter improvement.

SME Solutions

SME Solutions' sales for the first half of 2017 were down -2.1%, and down -2.5% at constant exchange rates.

Communication & Shipping Solutions activities were up +5.7%, excluding currency effects. Graphic activities were down slightly, while digital communications and logistics grew about +13%, excluding currency effects. Growth has yet to reach a level sufficient to offset the decline in Mail Solutions business within this division.

Mail Solutions activities were down -3.7%, excluding currency effects, slightly better than expected. Once again, the decline in Mail Solutions was more contained in North America, and sharper in Europe. Conditions in the Mail Solutions market remain tough and the Group continues to expect a structural decline in its Mail Solutions business of between -4% and
-6%.

In Q2 2017, SME Solutions' sales were down -2.5%, excluding currency effects, compared to the same period in 2016.

Neopost Group

All in all, the second quarter saw a significant improvement over the first quarter of 2017 for the Group as a whole and confirms the reversal of the trend started in Q3 2016.

The Group's transformation continues. In total, Communication & Shipping Solutions accounted for 27% of Group sales in the first half of 2017, up from 24% one year earlier. The percentage was 29% of sales in Q2 2017.

HIGHLIGHTS OF THE FIRST HALF

Neopost raised the equivalent of €215 million (US$ 87million and €135 million) in February 2017, maturing in 3, 5 and 6 years, through a Schuldschein private placement under German law. In June, Neopost opened a new revolving euro/dollar credit line for €400 million with 10 international banks. This is a five-year facility with two one-year extension options. The Group used these financing transactions, which were largely oversubscribed under very good conditions, to redeem existing lines and extend the maturity of its debt.

Neopost disposed of its SME Solutions subsidiaries in Indonesia, Malaysia, Singapore and Thailand as part of a portfolio optimization strategy. These assets had been booked as assets held for sale in the financial statements at January 31, 2017. The EDS division's DMTI Spatial subsidiary was disposed of at the end of this first-half 2017.

Neopost also increased its stake in Temando from 55% to 65% during the first half, through a reserved capital issue. Early in September 2017, after first-half closing, the Group bought back all the minority shareholdings and now holds 100% of the company's capital.

Current operating income

Current operating margin³ by segment 

*Excluding Temando and CVP-500 sales and related expenses.
**Expenses to develop the web platform and related SaaS applications specifically for small businesses, and sales and expenses to finance the development of the CVP-500 automated packaging solution.

The current operating margin³ in the EDS division, declined slightly, attributable to commercial investments aimed at new vertical markets. It came out at 12.4% of sales in HY 2017, from 13.9% in HY 2016. 

The current operating margin³ in the Neopost Shipping division, excluding Temando, was also down due to the pound sterling's impact on the profitability of some contracts. It came out at 1.7% of sales in HY 2017, from 8.2% in HY 2016.

In the SME Solutions division, the current operating margin³, was up at 21.8% of sales from 21.0% in the first half of 2016. The Group's new digital communications and logistics businesses are not dilutive. The Group is starting to see results from its programs to reduce costs and optimize organization to adapt to new businesses and tougher market conditions for its legacy businesses. During the first half of 2017, SME Solutions' net operating expenditure was lower by €11 million, at constant exchange rates. In two and a half years, Neopost reduced this division's cost base by €47 million, on course to meet the target of cutting costs by at least €50 million^[6] by the end of 2017.

Excluding investments in innovation and Temando, and before acquisition-related expense, the Group's operating margin rose to 20.3% in HY 2017 from 20.1% one year earlier.

Innovation-related expenditure concerned the development of the CVP-500 automated packaging system, a web distribution platform, and the development of digital applications for SMEs. It totaled €5 million in HY 2017, unchanged from the first half of 2016.

The Group's current operating income before acquisition-related expense stood at €101 million, up 0.9% from €100 million in the first half of 2016. Current operating margin (before acquisition-related expense) remained stable at 18.0% of sales.

Acquisition-related expenses were unchanged year-on-year at €6 million.

Current operating income was €95 million in the first half of 2017, compared with €94 million in the prior year.

Non-current items

As announced during its 2014 annual results presentation, the Group recognized structural optimization charges in the amount of €6 million in HY 2017, the same amount as in HY 2016.

During the first half, Neopost disposed of its subsidiaries in Indonesia, Malaysia, Singapore and Thailand (SME Solutions division), as well as DMTI Spatial (EDS division). With respect to Temando, the Group reviewed its business plan and bought back the minority shareholdings in September 2017. Consequently, part of the earn-out and the purchase and sale options were adjusted. The goodwill recorded at the time of the acquisition was also partly depreciated.

After these exceptional items, operating income totaled €83 million at July 31, 2017, versus €86 million one year earlier.

Net income

The net cost of debt stood at -€17 million compared with -€15 million in the first half of 2016. This increase in the cost of debt is due solely to one-off items related to refinancing during the half. They fall into two categories: cost of carry/carrying costs and early amortization of financing costs for the credit lines redeemed.

In addition, no foreign exchange gains were posted in the first half, unlike in the previous year when forex gains totaled €2 million.

Overall, net financial income/(loss) came to a loss of -€17 million in the first half, compared with -€13 million one year earlier.

The tax rate was 26.6% up from 23.3% in HY 2016, due to losses on asset disposals and adjustments for Temando which do not grant entitlement to tax credits. Excluding these losses, the tax rate was 24.3% in HY 2017, in line with the usual rates.

The Group's net attributable income came out at €51 million from €58 million in HY 2016, which represents a net margin of 9.1%, compared with 10.5% in the prior year. Diluted net income per share⁴ was €1.27, down from €1.46 in HY 2016.

Before asset disposals and adjustments related to Temando, the Group's net attributable income remained practically stable at €57 million.

STRONG CASH FLOW GENERATION

EBITDA^[7] was up 2.7% to €142 million in HY 2017 from €138 million in the same period in 2016.

The change in working capital requirement is in line with what is usual for this period of the year.

Leasing and other financing services receivables amounted to €733 million at July 31, 2017, from €798 million as of 31 January 2017, a decrease of -3.1% at constant exchange rates.

Investments in tangible and intangible fixed assets amounted to €44 million, an increase on the €42 million at July 31, 2016, largely attributable to the Group's investment in Packcity Japan.

Total cash flows before acquisitions and dividends rose sharply to €61 million, from €44 million one year earlier.

Given the strong cash flow from operations, the reduction in the leasing portfolio and the weaker dollar, net debt was down significantly at July 31, 2017 to €715 million, from €819 million at July 31, 2016. The net debt to EBITDA ratio was 2.4 in HY 2017, compared with 2.7 in the prior year. Banking covenants are met. Neopost points out that its net debt is fully backed by future cash flows expected from its rental and leasing activities.

The Group had €1,136 million in equity at July 31, 2017, up from €1,078 million one year earlier. As such, gearing came out at 63% of shareholders' equity compared with 76% at July 31, 2016.

MEDIUM-TERM AMBITIONS CONFIRMED

Neopost's transformation continues:

• in the Enterprise Digital Solutions division, the Group continues to invest to firmly anchor its leadership position and will benefit from icon Systemhaus's complementary range. The Group is targeting growth in excess of 10% per year and improved profit margins;
• in Neopost Shipping, the Group's offering is now established and will be rolled out to generate significant organic growth and improve profitability;
• in SME Solutions, the Group is accelerating the roll-out of digital and logistic solutions to offset the decline in sales of mail solutions. Meanwhile, Neopost will pursue its plan to lower net costs by at least €50 million⁶ by January 31, 2018 to stabilize its operating margin around 22%;
• in addition, the Group's investment in innovation will stay on course, with an annual average budget of €10 million.

This strategy is designed to return Neopost to organic sales growth in the medium term. It will also ensure the Group maintains a current operating margin, before acquisition-related expense, above 18.0% throughout the period of transformation, and return it to above 20.0%, before acquisition-related expense, in the medium term.

The Group also intends to hold sufficient cash flow to sustain growth, meet its dividend distribution commitments and maintain a solid balance sheet structure.

Calendar

Third-quarter 2017 sales will be published on December 4, 2017 after the market close.

For more information, please contact:

Or visit our website: www.neopost.com

Appendices

Glossary

• Enterprise Digital Solutions (EDS): division offering Customer Communications Management (CCM) and Data Quality (DQ) solutions for large companies. It includes GMC Software, Human Inference and Satori, now combined in Quadient, as well as icon Systemhaus.
• Neopost Shipping: division offering management solutions for shipping and delivery; tracking of goods and merchandise for players in e-commerce, distribution and carriers. It includes ProShip and Temando.
• SME Solutions: division offering Mail Solutions products and services for small and mid-sized enterprises, the Group's long-standing customers. This division also delivers digital, shipping and graphic solutions for the same customer base.
• Mail Solutions: mailing systems, document management systems (folder/inserters for offices and mailrooms; other mailroom equipment) and related services
• Communication & Shipping Solutions (CSS): customer communications management and data quality solutions, logistics solutions, document finishing solutions and graphics solutions

Sales by business line

Sales by region

Sales by revenue type

First half 2017

Consolidated income statement

First half 2017

Summary consolidated balance sheet

First half 2017

Simplified cash flow statement