The results are hardly great, and the share price is clearly far from convinced, but this month’s debt refinancing out until 2026 and a reduction in net borrowings in the year to the end of March both mean that IG Design’s revamped management team has space in which to work and put their turnaround plan into place.
Net debt, including leases, fell to $30 million from $74 million in the second half and from $59 million a year ago, helped by the cancellation of the dividend and better-than-expected profits, thanks in the main to restructuring efforts in the USA, where the AIM-quoted firm is also extricating itself from unprofitable contracts.
AJ Bell investment director Russ Mould said: “Those revenues, and the need to turnaround the US operations in particular, are still the uncomfortable legacy of two acquisitions.
“The first was 2018’s purchase of the American business Impact Innovations, for an upfront price of £56.5 million in cash, supplemented by a £15.4 million share award to the purchase’s then CEO John Dammermann and his wife and a £27.9 million investment in stock and working capital, for an all-in cost of just under £100 million.
“The second was 2020’s swoop for America’s CSS Industries for £90 million, including debt.
“Both deals broadened IG Design’s geographic reach, customer base and product range but they brought debt, an increased reliance on seasonal business at Thanksgiving and Christmas and exposure to retail giants such as Wal-Mart. While such sales relationships can be very helpful given the route to market that they offer, they can also bring challenges. IG Design outsources the majority of its product production and at a time of inflation and rising freight and input costs that leaves the firm as the meat in the sandwich between sub-suppliers on one side and price and margin-conscious retail buyers on the other.
“These challenges lay at the heart of IG Design’s profit warnings of October 2021 and January 2022. A slump in profits also made it harder to service the debt and stay within banking covenants although careful management of working capital and costs mean that the AIM-quoted concern has managed to do just that. A refinancing in the next six months would give management additional room within which to work as the board and new boss seek to affect a turnaround in the company’s fortunes.
“At least retail customers such as Tesco, Lidl and Carrefour in Europe and Kroger and Wal-Mart in the USA seem to be keeping the faith, since IG Design can point to an order book which already covers 62% of budgeted sales for the year (although that is down from 71% at the same point a year ago and analysts are only expecting flat sales for the new fiscal year to March 2024).”
