TIDMGRA
RNS Number : 6596V
Grafenia plc
16 April 2021
CERTAIN INFORMATION CONTAINED WITHIN THIS ANNOUNCEMENT IS DEEMED
BY THE COMPANY TO CONSTITUTE INSIDE INFORMATION AS STIPULATED UNDER
THE MARKET ABUSE REGULATIONS (EU) NO. 596/2014 AS AMED BY MARKET
ABUSE (AMMENT) (EU EXIT) REGULATIONS 2019/310. UPON THE PUBLICATION
OF THIS ANNOUNCEMENT, THIS INSIDE INFORMATION IS NOW CONSIDERED TO
BE IN THE PUBLIC DOMAIN.
16 April 2021
Grafenia plc
("Grafenia", the "Group" or "Company")
Pre-close Trading and Strategy Update
Grafenia plc today publishes a trading update, based on
preliminary unaudited financial information, for the year ended 31
March 2021 ("the Year").
Trading update
In our half year report on 25 November 2020, we discussed the
impact the pandemic has had on our business, and in particular
sales of printed products.
Since that update, the UK has been in full or partial lockdown
for most of the time. We sell to clients of different sizes, in
different industries. Fortunately, we aren't reliant on one
particular segment or key account. However, many of our clients in
hospitality, retail, sports and events have been closed since
December 2020, or earlier. And that's had an impact on our
revenues.
Trading in January and February this year was the most
challenging. As winter turned to spring, revenue in March 2021
improved and was 80% of the same period last year. This April has
started well, as businesses in England begin to pull up the
shutters and prepare to re-open. Given that last April, the whole
country was watching Tiger King in the first lockdown, it shouldn't
be difficult to beat last year's performance.
We expect full year revenue to 31st March 2021 to be around
GBP9.5m (2020: GBP15.6m). Whilst that's a significant fall in
product sales, income from subscription fees and services was
steadier. We expect our gross profit to be around GBP5.6m (2020:
GBP8.0m) As a result, gross margin has increased as a percentage
and we expect our net loss to be lower than last year.
Proportionately, a greater part of our revenues derived from
licencing, subscription and service income in the Year than they
did in the year ended 31 March 2020. However, we didn't get to
where we wanted to be. Cash at 31 March 2021 was GBP2.7m (2020:
GBP1.1m).
So what now?
Grafenia is essentially two businesses: a manufacturing business
and a Software-as-a-Service ("SaaS") business. We've begun
reorganising our internal reporting and simplifying our group
structure. We'll now start reporting the two business units
independently.
Business one: Works Manchester
We manufacture print and signage for clients in our main hub.
Last year, we blended two factories into one. They're known
internally as "Works Manchester". By combining two factories and
restructuring, we significantly reduced our revenue breakeven
point. However, we lost money in the manufacturing business in the
second half. Life in the print sector is tough and it got tougher.
Prices continue to fall and costs are rising. Every print business
has high fixed overheads. When volumes decline, like they have done
in the pandemic, profits disproportionately erode.
Like many businesses who export to the EU, we've faced increased
shipping costs since leaving the single market and customs union on
1st January 2021. Despite our systems being ready to handle
commodity codes and commercial invoices, we still continue to
experience customs delays and disruption. Although product sales to
Europe are a very small part of our revenues, we don't like to let
our clients down. In December 2020, we began producing some orders
in France, using local Works Makers connected to our platform. It's
likely that more products sold in mainland Europe will be
manufactured by third party Works Makers. Any printers or
manufacturers interested in supplying specialist products to our
network can register interest at www.nettl.works
The Works Manchester business includes our trade channel
Marqetspace.com, as well as Image Group, our direct sales team.
Revenue in this segment was approximately GBP3.9m for the year just
ended (2020: GBP7.3m).
Works Manchester has been fighting with one arm tied behind its
back. As a tightly integrated supplier to our network, its primary
focus has been making what our partners sell. Since the pandemic
began, those product sales have been impacted and our Nettl
partners have sold more digital services to clients. That's meant
Works Manchester is operating well below capacity.
By separating reporting, and refocusing our team, we're giving
Works Manchester a new freedom. The business will be free to look
for opportunities to fill capacity, from outside of our network.
That might be by forming new strategic relationships or just being
more nimble and opportunistic. We now have a dedicated team focused
on sales development for this unit.
Business two: Nettl Systems
When you think about what used to be "the printer at the
corner", it's now an integrated graphics business. Or it's gone.
Online printers have played a role in that transition. However, the
high street design business has not vanished. Far from it. It had
to adapt and serve customers better by being a purveyor of
solutions as opposed to products.
Grafenia's answer to this trend was to establish Nettl - the
toolkit to run a neighbourhood graphics business. That format has
been a success - not only in the UK but also in other countries.
The Nettl platform helps design studios run their businesses more
effectively. To do more for clients and get more from
relationships. Over the past six or so years, Nettl has grown into
a profitable business. In the second half, our subscription licence
fee income was steady.
Revenue from our Nettl Systems segment was GBP5.6m for the Year
(2020: GBP8.3m). That includes software licences, subscriptions,
revenue from our five Nettl company stores and sales of products
and services to Nettl "brand" partners.
A few years ago, we made a core strategic choice to acquire
signage firms to expand our product mix. The logic was, and still
is, compelling. A Nettl partner has more products to help solve
problems for a client. Solution-provider not product-seller. Since
we first started adding signage capabilities, that product range
has become an important part of our offering. Nettl is better
because we can provide signs.
We've also added other adjacent product lines to the offering.
They all play into the strategy of Nettl: having more arrows in the
quiver to solve clients' problems. Interestingly, most of these
categories - take search engine optimisation (SEO) as an example -
did not require us to buy a supplier. Rather we were able to
source, integrate and quality control a third-party supplier. Our
partners buy from us, because they like the centralised aspect.
They like the convenience of an integrated offering within the
operating system. They like inspiration on how to sell these
products and the arsenal of marketing they can put to work.
Time to reflect
When Covid19 happened, it made us rethink our whole supply
chain. Travel was restricted and the idea of running a lot of
different sign production hubs throughout the UK became, well, less
appealing. Also, 'necessity' became a virtue. We wanted to include
more suppliers into our supply chain - partly driven by the need
for including personal protection equipment in our offering. And do
it quickly.
The software behind Nettl - which we refer to as w3p Flyerlink -
turned out to be optimal for integration of third-party suppliers.
We call them "Works Makers". We did the work to give these niche
suppliers the tools to list, make and ship orders within our
platform.
As we've done that, it has raised the question of whether we
really need to buy signage capacity to achieve our goal of
enriching our product offering. We can source it from quality
suppliers and still increase the value Nettl provides to our
partners. Do we need to own more machines in a warehouse in the
Midlands?
Why did we want to buy signage businesses in the first
place?
Besides the industrial logic, there was a second reason we liked
buying signage firms. In fact, it looked like small-to-medium sized
signage firms could be bought at below 5x EBIT (what we think of as
a good acquisition price for a stable business). Allocating capital
at such a valuation would make a compelling case to either deploy
free cash flows or to raise more capital. Any business that deploys
substantial amounts of capital at 5x sustainable EBIT will thrive.
Needless to say, life is simple in Excel and in real life EBITs are
not numbers, but the fruits of hard labour and happy customers. We
thought we could be a platform for both and facilitate sign
acquisitions.
We are happy with Image Group, our first acquisition in the
space. Since acquisition, we've moved most of the team into our
core production hub and numbers have held up alright. We make in
EBIT what we thought of as our "low case" at acquisition. Certainly
not something to be smug about, but also not a disaster.
On the other hand, we have not been successful in finding more
signage firms that meet our quality and price threshold. We bought
several smaller ones - acquisitions we would do again - but none of
them really moved the needle. Nonetheless, we are not unhappy about
the outcome. The integration of Image Group - whilst successful -
showed the immense management attention and work required to grow a
physical production footprint by way of M&A.
We've learned a lot about the sign survey, manufacture and
installation process. In 2020, a large part of our R&D has been
extending our platform to do this more effectively. Connecting
clients, with design studios, sign makers and installers. Now, we
think the right approach is to licence the software and systems
we've built to other sign businesses. And to achieve our aim of
providing national installation, by licencing our technology,
rather than filling a shopping cart with beige machines.
So what of acquisitions?
We will double down on the software part of Grafenia. With Nettl
+ w3p Flyerlink we own a pretty nice little nucleus: a profitable,
entrenched and appreciated software business. Now we're looking to
acquire other software businesses to complement our group, under
the plc umbrella. We're not starting from zero - because we already
own one such software firm.
When we talk about software companies, maybe you think of
artificial intelligence or blockchain or underwater facial
recognition or something exciting and dangerous. The reality is, in
business today, software is much more boring. But also much
simpler. In the wider world, lots of roles will be automated and
taken over by some form of software. Twenty years ago, it was Excel
replacing pen and paper. Nowadays it's some vertical-market
software replacing, or adding to, Excel. In the end, niche
vertical-market software doesn't win because it has some kind of
amazing tech inside. It wins, because it's very well-tailored to
the very specific needs of a very specific audience.
We've updated our target acquisition profiles at
www.grafenia.com/acquisition - we'd welcome businesses to start a
conversation by emailing letmein@grafenia.com
Outlook
The road to economic recovery looks a little hazy. Are those
sunlit uplands? Or did someone start a fire in the top field?
Tricky to say. We made significant and permanent reductions to our
overhead base during 2020, to reduce our breakeven point.
There's lots of reason to believe our clients will reopen to
increased demand. Events will restart. Diners will feast. Drinkers
will sip, or gulp. And when they do, we'll be ready. In hundreds of
neighbourhoods, ready to design. To make. To ship. All using our
software platform to smooth the process.
For further information:
Grafenia plc
Peter Gunning (Chief Executive Officer) 07973 191 632
Allenby Capital Limited (Nominated
Adviser and broker)
David Hart / Liz Kirchner 0203 328 5656
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