2018 Half-Year Financial Report

Transcription

1 2018 Half-Year Financial Report As of July 31, 2018

2 Contents 1 Comments on Neopost s results and financial structure 1 Ownership structure 5 Information on related parties 6 Risk factors 6 Outlook 13 2 Consolidated financial statements at 31 july Consolidated financial statements 16 Notes to the consolidated financial statements 23 Statutory auditors review report on the half-yearly financial information 47 3 Statement of the person responsible for the interim financial report 49

3 1 COMMENTS ON NEOPOST S RESULTS AND FINANCIAL STRUCTURE Historical breakdown of income statements 2 EDS 3 Neopost Shipping 3 SME Solutions 3 Half-year highlights 3 Current operating income 4 Non-current items 4 Net income 4 Strong cashflow generation maintained 5 Information on related parties 6 Risk factors 6 Risk assessment 6 Exchange rate risk sensitivity 11 Interest rate risk sensitivity 11 Forecasts 12 Retirement benefit obligations 12 Insurance 12 Ownership structure 5 Outlook 13 1

4 1 Comments on Neopost s results and financial structure In H1 2018, the Group achieved sales of million, down (5.6)% year-on-year, and down (0.8)% excluding currency effects, representing an organic decline of (0.4)% (1). Current operating income, before acquisition-related expenses, was 90.5 million in H EBIT margin before acquisition-related expenses stood at 17.2% of sales, versus 18.0% in first-half Net attributable income was 60.0 million in first-half 2018, up from 50.8 million one year earlier. The Group s net margin (2) climbed to 11.4% of sales, from 9.1% in the same period in Cashflow net of CAPEX totaled 54.9 million, from 61.0 million in H Historical breakdown of income statements (In millions of euros) HY 2018 (ended 31/07/2018) HY 2017 (ended 31/07/2017) FY 2017 Sales % % 1, % Cost of sales (128.1) (24.3)% (138.0) (24.7)% (279.3) (25.1)% Gross margin % % % R&D expenses (28.0) (5.3)% (27.6) (4.9)% (56.9) (5.1)% Selling expenses (132.4) (25.1)% (139.4) (25.0)% (279.6) (25.1)% Administrative expenses (96.7) (18.3)% (99.6) (17.9)% (194.9) (17.6)% Maintenance and other operating expenses (51.8) (9.8)% (52.0) (9.3)% (99.9) (9.0)% Employee profit-sharing and share-based payments (0.2) (0.0)% (1.4) (0.2)% % Current operating income excluding expenses related to acquisitions % % % Expenses related to acquisitions (5.1) (1.0)% (5.8) (1.0)% (11.3) (1.1)% Current operating income % % % Proceeds from asset sales (0.5) (0.1)% (0.0) 0.0% (0.1) (0.0)% Structure optimization expenses (2.5) (0.5)% (5.9) (1.1)% (13.2) (1.2)% Other operating expenses (0.1) (0.0)% (6.2) (1.1)% (11.3) (1.0)% Operating income % % % Financial income/(expenses) (14.5) (2.9)% (16.8) (3.0)% (34.6) (3.1)% Income before taxes % % % Income taxes (8.5) (1.6)% (17.6) (3.1)% (0.8) (0.1)% Income from associated companies % % NET INCOME % % % Attributable to: holders of the parent company % % % non-controlling interests % (2.3) (0.4)% (1.1) (0.1)% First-half 2018 sales are compared at constant exchange rates with sales for the same period in 2017, minus 1.8 million for the (1) disposal of DMTI (five months and one week). 2 (2) Net margin = Net attributable income/sales.

5 Comments on Neopost s results and financial structure 1 EDS Enterprise Digital Solutions sales rose 4.7%, excluding currency effects, in first-half Restated for the scope effects related to the disposal of DMTI Spatial, sales grew 7.4% on an organic basis. This growth is above Group expectations. Sales in Customer Communications Management grew 10.2% as maintenance and service revenues increased, while the decline in license sales on prior-period high base of comparison (especially Q2) was less sharp than expected. In line with expectations, organic growth in Data Quality activities was down (2.5)%. Neopost Shipping Neopost Shipping sales in the first half increased 21.5%, excluding currency effects, mainly due to robust growth in the installed base of Packcity automated parcel lockers in Japan. The installed base reached 3,100 units at end-july 2018, from 2,200 units at end-january 2018 and 600 units at end-july Today, approximately one hundred parcel lockers are installed a month. The number of new CVP-500 automated packing systems placed in the first half of the year was the same as in H Software solutions sales declined (6.2)%, excluding currency effects. SME Solutions SME Solutions sales were down (2.5)% in H at constant exchange rates. Mail Solutions sales decreased (3.9)%, excluding currency effects. The pace of decline slowed in the second quarter (-2.8%), from the first quarter (-5.0%), reflecting the good level of performance recorded in North America. Communication & Shipping Solutions sales by the SME Solutions divisions rose 6.0%, excluding currency effects. This growth resulted from a 21.5% (excluding currency effects) increase in digital communications and shipping solutions sales, partially offset by the persistent decline in graphic activities down (12.0)%, excluding currency effects. Half-year highlights N/A 3

6 1 Comments on Neopost s results and financial structure Current operating income Enterprise Digital Solutions had lower year-on-year license sales, which narrowed its EBIT margin (1) to 10.1% of sales, from 12.4% in the same period in Neopost Shipping s EBIT margin (1) reached (35.7)% of sales, versus (25.9)% one year earlier. Fall in the margin is owing to a decline in sales of software solutions and continued efforts to market and develop new software solutions, CVP packing systems and automated parcel lockers. The SME Solutions division maintained its EBIT margin (1) the same as last year at 21.9% of sales, as it continued to keep operating costs under control. Outside the three operating divisions, expenditure on innovation in the first half was for new projects to develop mobile and cloud applications. In H1 2017, these expenses concerned the development of digital apps for small businesses to use on a web distribution platform, a project in part transferred to the SME Solutions division as of February 1, Group current operating income before acquisition-related expenses came out at 90.5 million, from million in H The current EBIT margin (before acquisition-related expenses) was 17.2% of sales, versus 18.0% one year earlier. Acquisition-related expenses accounted for 5.1 million, unchanged from last year. Current operating income was 85.4 million in the first half of 2018, versus 95.0 million one year earlier. Non-current items The Group posted 2.5 million in structural optimization expenses in H1 2018, 3.4 million lower than the expense incurred in H After factoring in these non-current items, operating income ended at 82.3 million at July 31, 2018, practically unchanged from 82.9 million one year earlier. Note that in the first-half 2017, the Group had 5.9 million in non-recurring expenses related to disposals, including DMTI, and the revised earn-out and goodwill on Temando. Net income The net cost of debt was down to (15.3) million from (16.7) million in H Debt refinancing in 2017 led to carrying charges and early redemption costs for the credit lines that were redeemed. The Group also posted exchange gains in first-half 2018 for 1 million. Net financial loss therefore came to (14.5) million in H1 2018, from (16.8) million in the same period last year. of interest on arrears in relation to the cancellation of taxes on dividends (2) in France in the amount of 4.8 million. Excluding non-recurring items, the tax rate was 23.2% in first-half 2018, in line with Group expectations. Net attributable income rose 18.1% to 60.0 million in the period, from 50.8 million in H1 2017, giving a net margin of 11.4%, up from 9.1% last year. Diluted earnings per share (3) were 1.50 vs in H The Group s tax rate was 12.5%, versus 26.6% in H1 2017, partially down to the cut in the US tax rate and the recognition (1) Excluding acquisition-related expenses. (2) The dividend tax repayment was booked to the income statement in FY 2017, but not the interest on arrears. The amounts in repayment of tax and interests were received in H (3) Net income per share is calculated after deducting dividends paid to ODIRNANE bondholders.

7 Comments on Neopost s results and financial structure 1 Ownership structure Strong cashflow generation maintained EBITDA (1) totaled million, from million in first-half The change in working capital requirements ( million) was more negative than in the same period last year ( million), mainly due to a time lag between the payment and the collection of approximately 10 million in VAT related to intra-group transactions. The payment took place in first-half 2018 but this difference will be made up in the second half of 2018 and will not impact full-year The change in working capital requirements also reflects an increase in inventory and a decrease in trade accounts payable. Leasing receivables decreased by 28.8 million, reflecting a 4.0% contraction in the Group s leasing portfolio, excluding currency effects. In comparison, leasing receivables decreased by 25.4 million in first-half Leasing and other financing services receivables amounted to million at July 31, 2018, from million at January 31, The Group paid 16.6 million in interest and taxes versus 33.0 million one year earlier. The difference was due to the 13.1 million received in French dividend tax repayment and interest on arrears during the first half. Investments in property, plant and equipment and intangible fixed assets came to 40.4 million in the period, from 43.8 million in H Factoring a subsidy of 5.4 million received from the Japanese government during the first half of 2018 for the rollout of Packcity lockers, the Group s investment spend was almost stable year-on-year. Total cashflow net of CAPEX added up to 54.9 million, versus 61.0 million one year earlier. The Group continued to deleverage, and net debt was again reduced to million at July 31, 2018, from million at January 31, The net debt/ebitda ratio was unchanged from H at 2.4. Net debt is fully backed by future cashflows expected from the Group s rental and leasing activities. Equity stood at 1,217.6 million at July 31, 2018, from 1,169.2 million at January 31, As such, gearing came out at 53.7% of shareholders' equity versus 57.7% at January 31, Ownership structure At 31 July 2018, Neopost S.A. s share ownership was as follows: Number of shares % Number of voting rights % Management and employees (2) 524, % 524, % Directors (non-executive) (2) (3) 151, % 151, % Treasury shares held under liquidity contract 143, % - - Treasury shares held for stock option and free share allocations 8, % - - Norges Bank Investment Management (NBIM) (4) 1,632, % 1,632, % Marathon Asset Management LLP (4) 1,630, % 1,630, % Wellington Management Company, LLP (4) 1,578, % 1,578, % HOOPP Investment Management (4) 1,400, % 1,400, % BWM AG (4) 1,375, % 1,375, % LSV Asset Management (4) 1,371, % 1,371, % Dimensional Fund Advisors, L.P. (4) 1,367, % 1,367, % Other shareholders (4) 23,378, % 23,378, % TOTAL 34,562, % 34,411, % To the Group s knowledge, there is no other shareholder owning more than 3% of the capital or voting rights. (1) EBITDA = current operating income + provisions for depreciation of tangible and intangible fixed assetsnet income per share is calculated after deducting dividends paid to ODIRNANE bondholders. (2) As at 31/01/2018. (3) Including shares held by Denis Thiery, Chairman. (4) Source: Nasdaq at 31 July

8 1 Comments on Neopost s results and financial structure Information on related parties Neopost was communicated the following thresholds for the first-half of 2018: Date Name of the Investment Funds Threshold cross 13 March 2018 Marathon Asset Management LLP Crossing downwards the 5% with 4.96% of voting rights 5 April 2018 Norges Bank Crossing upwards the 5% with 5.22% of voting rights 19 April 2018 Norges Bank Crossing downwards the 5% with 4.92% of voting rights 20 April 2018 Norges Bank Crossing upwards the 5% with 5.10% of voting rights 2 May 2018 Norges Bank Crossing downwards the 5% with 4.95% of voting rights 4 May 2018 Norges Bank Crossing upwards the 5% with 5.32% of voting rights 27 July 2018 Norges Bank Crossing downwards the 5% with 4.72% of voting rights 27 July 2018 Goldman Sachs Group, Inc Crossing upwards the 5% with 6.89% of voting rights Information on related parties Neopost owns a 35% stake in Docapost BPO IS and a 24% stake in AMS Investissement. The transactions with these companies, consolidated using the equity method, are not significant. Neopost also holds a 7.39% stake in X Ange Capital 2 and a 6.22% stake in Partech Entrepreneur II, all non-consolidated companies. The transactions with these companies are not significant. Risk factors Risk assessment Le processus d'analyse et de suivi des risques The Group has implemented a mapping process for its risks. The risk map is drawn up for a four-year period and updated in 2010, 2014 and 2017 under the supervision of the head of internal control. The aim is to update and extend the existing risk map. This is done by holding discussions with key Group managers and subsidiary management teams (selection of the 20 top managers). A list of risks classified by theme is then drawn up and rated by the persons interviewed, based on two criteria: impact and likelihood. The risk map is then presented to the Chairman & CEO, the audit committee and other relevant key personnel. A number of operational action plans were introduced across the Group, overseen by clearly identified individuals and monitored on a regular basis at the highest level. 6

9 Comments on Neopost s results and financial structure 1 Risk factors Risk Map Risks are classified by category: strategic, operational, legal, technological, financial and environmental. During the interviews, they are given a rate on a scale of 1 to 4 in terms of impact and likelihood, 4 being the highest level of risk. The risk map below represents the situation after the last risk assessment performed in The horizontal axis represents the impact and the vertical axis the likelihood. The size of the circles represents the number of occurrences (i.e. number of times the risk was cited during the interviews). Average likelihood Forex, interest rates, liquidity and shares Environmental regulation Information systems Dependence on suppliers Tax Attractivity, talent retention and succession plan Transformation Fraud Competition Intellectual property Main risks Data protection Evolution of technology Acquisitions Launch of new products Bigger transactions New regulations Mail decline Strategic risk Legal risk Operational risk Environmental risk Financial risk Technologic risk Main risks Strategic Operational Legal Technological Financial Environmental Decline in mail volumes Launch of new products Competition Evolution of technology Acquisitions Transformation Attractivity, talent retention and succession plan Dependence on suppliers Bigger transactions Intellectual property Highest risks Data protection Moderate risks New regulations Information systems Forex, interest rates, liquidity and shares Tax Fraud Environmental regulation 7

10 1 Comments on Neopost s results and financial structure Risk factors The table below gives a precise description and dedicated action plan for each of the 17 identified risks and the way these risks are mitigated. Highest risks Risks Decline in mail volumes Mail volumes decrease in most countries where the Group operates. Experts anticipate a further decline of about (3) to (6)% per year. The Group s Mail Solutions activities are linked to mail volumes. Excluding currency effects these activities were down by (5.3)% in 2015, by (4.6)% in 2016 and by (4.3)% in Launch of new products Developing and launching products requires major investments. The Group s results and future financial position will depend in part on its ability to improve its products and services, develop and produce new ones at lower prices, deliver on time as well as distribute and market them. Competition Neopost has two main competitors in its legacy business (Mail Solutions): world leader Pitney Bowes and Francotyp Postalia, No. 3 worldwide. Pitney Bowes is listed on the New York Stock Exchange and its main market is the United States of America. Francotyp Postalia is listed on the Frankfurt Stock Exchange. Germany is its main market. Regarding Neopost s digital communications and shipping activities, the Group had made several acquisitions since 2012: GMC Software AG in July 2012, Human Inference in December 2012, DMTI Spatial in October 2013, ProShip in May 2014 and icon Systemhaus in July In addtion, between April 2015 and September 2017, Neopost took full control of Temando. All these companies operate on markets where the competitive landscape is different from that of Mail Solutions. Neopost s competitors in these new markets are more numerous and could have greater financial resources than the Group, a factor that could impair the Group s competitiveness. Transformation To counter the decline in mail volumes in its legacy business, the Group is developing new activities. This entails a considerable efforts in terms of transformation. The rate at which this transformation can be achieved is a key factor for the Group financial results in the future. Attractivity, talent retention and succession plan Intellectual and human capital is a real source of productivity and talent management has become essential. In a constantly changing employment market, it is essential to retain and motivate talent. Some positions require particular attention due to their key role in the organization and the associated specific skills. The succession plan is a tool that should ensure the continuity of the organization s business by identifying these key positions, measuring the risk of failure of the people occupying them and implementing the actions necessary to ensure the succession. Risk management system To mitigate this decline the Group continues to innovate to gain market share and is developing complementary activities which enjoy strong growth. Thanks to these activities, Neopost limited the organic decline of its Group sales by (1.8)% in 2015, (2.1)% in 2016 and (2.2)% in A very strict procedure is applied for each new product launch. It involves a Group project, planning, risk assessment and steering committee. All departments concerned are involved in the Group project and in the steering committee. The strategic and marketing department regularly analyzes the competition, this topic is discussed with the executive committee and the Board on directors at least once a year. With regard to the new activities related to digital communication and shipping, the Group has access to market research carried-out by major research consulting firms. Training programs have been organized for managers and sales teams to familiarize them with new products. In addtion, a one-year training program has been launched to provide continuous support to managemant committees of the SME division to help them better manage all aspects of this transformation. To reduce the risk of losing key personnel, the Group has put in place retention incentives such as phantom shares and free shares. It has also implemented contingency plans for all major key positions at the level of the holding company, Neopost S.A., as well as at the level of each subsidiary. These plans are regularly updated and reviewed by the remuneration committee and the nomination committee. 8

11 Comments on Neopost s results and financial structure 1 Risk factors Risks Neopost decentralized organization and growth by acquistions lead to great diversity in terms of information systems and data base. Moderate risks Risks Data protection Evolution of technology The markets for the Group s products, software and services are and will continue to be subject to rapid changes in technology, as well as continual improvement in existing products and software, and the frequent introduction of new products, software and services. Acquisitions The Group has made acquisitions, the latest of which include ProShip in May 2014 and icon Systemhaus in July In addition, between April 2015 and September 2017, Neopost took full control of Temando. These acquisitions, like all acquisitions, cause uncertainty as to the consolidation of the acquired teams, and o the capacity to develop appropriate products and generate synergies within Neopost s historical distribution network. Bigger transactions The Group has a portfolio of about 500, 000 customers, none of which accounts for more than 1% of sales. The progressive ramp up of new activities in digital communication and logistics leads to an increase in the size of transactions compared to the legacy business where the transactions are relatively small. Dependence on suppliers The Group has hundreds of thousands of customers, none of which accounts for more than 1% of sales. The Group s main supplier is Benchmark, OEM mid-range supplier in Asia. Benchmark accounted for 9.0% of total Group purchases in 2017 and 3.3% in Risk management system The Head of Information Systems Security reports to the Head of Information Systems. He is in charge of defining and applying the security policies within the Group. In terms of security, postal audits were conducted successfully in all countries concerned in Continuous improvement plans are designed to meet postal requirements every year. The Group security policy was updated. Based on the ISO standard, the policy was rolled out early 2017, particularly in markets that commercialize SaaS offerings. Requirements relating to the GDPR ruling will also be addressed in these planned roll-outs to comply with regulation by May Risk management system A new department named Neopost Lab has been created for the purpose of identifying new technologies that may impact Neopost s markets and envisaging how these technologies can be integrated by carrying out new developments or acquisitions. These acquisitions have been integrated into the Enterprise Digital Solutions and Neopost Shipping divisions. New entities are subject to a specific monitoring during operating reviews. In addition, a post mortem analyzis is performed one or two years after integration. These deals rarely exceed 5 million euros and are carefully monitored by general management and Group finance department. The top five suppliers and the top ten suppliers respectively account for 26.0% and 34.1% of total purchases in 2017 versus 18.4% and 25.6% in A disruption in supply from any one of these suppliers could significantly affect the Group s business, despite the contractual clauses in the agreements protecting the Group against such risk. The Group has already put in place alternative solutions in case such an event actually occur. The Group works with three OEM vendors (tier one suppliers), which ssemble entry-level and mid-range machines in Asia. Production is divided between these three tier one suppliers. In the event one of these suppliers should fail, the other two could take over the production. Neopost also has a choice of strategic tier two suppliers, and for each of these, a replacement supplier has been selected. In addition, the Group is the owner of all molds, specific tools and industrial design. 9

12 1 Comments on Neopost s results and financial structure Risk factors Risks New regulations The Group is not aware of any governmental, legal or arbitral proceedings that could have or had a material impact on the Group s financial position or profits over the past 12 months. Intellectual property The Group is the owner of its trademarks and has about 376 families of patents published. Neopost registered 12 patents in The geographical coverage of these patents is essentially European and American. Information systems Neopost highly decentralized organization and growth by acquisition strategy have resulted in great diversity in terms of information systems and infrastructures. Market (exchange, rate, liquidity et shares) The Group is mainly exposed to currency exchange rate risks through its international activity and to interest rate risks through its debt. Neopost benefits from a natural hedge on its current operating margin and its net income. Based on the 2018 budget, the breakdown of sales and costs denominated in United States dollars is as follows: sales 41.5%, cost of sales 48.8%, operating costs 32.6% and interest expenses 27.1%. A 5% decrease in the euro/united States dollar exchange rate from the budget rate of 1.20 would have the following impacts on the Group s income statement: sales (22.8) million euros, current operating income (6.0) million euros and net income (3.7) million euros. Based on the 2018 budget, the breakdown of sales and costs denominated in pounds sterling is as follows: sales 9.0%, cost of sales 6.6%, operating costs 10.5%. A 5% decrease in the euro/pound sterling exchange rate from the budget rate of 0.91 would have the following impacts on the Group s income statement: sales (4.9) million euros, current operating income (1.6) million euros and net income (1.2) million euros. The other currencies are not a major concern for the Group. None of them, individually taken, represents more than 5% of the total sales. However, other than the natural hedge, no guarantee can be given regarding the Group s ability to hedge exchange rate risk effectively. To limit the impact of a rise in interest rates on its interest expenses, the Neopost group has a risk-hedging policy aimed at protecting a maximum annual interest rate for the three years ahead at all times. Sensitivity to interest rate risk based on constant debt for 2018 is as follows: in the event of a 0.5% rise in interest rates, the impact on financial results is below 0.1 million euros on euro denominated debt and (0.9) million dollars on dollar denominated debt; in the event of a 0.5% fall in interest rates, the impact on financial results is below 0.1 million euros on euro denominated debt and +0.9 million dollars on dollar denominated debt. Risk management system Neopost legal counsel department at Group and subsidiary level monitor regularly the evolution of regulations. If necessary Group projects are launched to adapt processes to new regulations such as Sapin 2 law and GDPR. Neopost is not dependent on any single patent which might bring the Group s level of business or profitability into question. The head of Information Systems and his team are integrated into the new technology and innovation department which reports to the Chief Technology and Innovation Officer. The main responsibility of the head of Information Systems is to ensure that the Group s information system strategy is coordinated and consistent, and that Group policy is applied at local level. The Group head of Information Systems leads a network of subsidiary information system managers who also report to the Chairpersons of their respective subsidiaries. This new organization boosts the contribution made by IT resources to innovation and facilitates the integration of new SaaS projects. The Group believes that its cash flow has defined in the consolidated cash flow statement in part 5 of this document will easily enable it to service its debt, given the current level of that debt. Debt by maturity is detailed in note to the consolidated financial statements. Group debt is subject to compliance with covenants. Failure to comply with these covenants may lead to early repayment of the debt. At 31 January 2018, the Group complies with all covenants note The Group treasurer, who reports to the Group chief financial officer, monitors exchange rate and interest rate risks for all Neopost group entities. A report showing the Group s underlying position and hedges is sent each month to the chief financial officer to provide complete visibility on the financial risks relating to hedging activities, and to measure the financial impact of unhedged positions. Neopost uses the services of an independent consultancy based in Paris. This consultancy helps Neopost in its exchange rate risk hedging policy, and values its portfolio of hedging instruments under IFRS. This ensures the consistency of methodologies used and provides a financial opinion independent of any financial institution. This company has the technical and human resources to monitor interest rate and exchange rate trends every day and alert the Group treasurer in light of the strategy in place. Please see to tables below for detailed impacts on interest and exchange rate risks. 10

13 Comments on Neopost s results and financial structure 1 Risk factors Risks With regard to their current activities, Neopost entities are regularly subject to tax audits. Tax adjustments or uncertain tax positions not yet subject to tax adjustments are covered with appropriate provisions. The amounts of these provisions are regularly revised. In 2012, Neopost received a notification of tax adjustments in the Netherlands related to financial years 2006, 2007, The Groups believes that it has serious arguments against the different points raised by the Dutch tax authorities. A mutual agreement procedure was initiated between France and the Netherlands regarding these tax adjustments. The procedure is still under way and at this stage of the process no provision has been booked. In July 2014, the American holding received a tax adjustments notification. An agreement was reached with the IRS (Internal Revenue Service) during 2018 first half-year, the case is closed. The Group has rolled out an initiative with managers of subsidiaries to ensure this risk is fully understood, to gather information on best practices and to ensure standard practices are enforced throughout the Group. Tax Fraud Environmental regulation Given the nature of the Group s assembly and distribution businesses, the Group is not aware of any risk of an environmental nature or which are related to climate change that might have a material impact on its financial position, business or results. Please refer to the social and environmental information detailed in the section 4 of this registration document. Risk management system A tax review is performed at least once a year in each entity with the help of an external tax adviser. Each tax investigation must be reported to Group. An agreement has been signed with a global tax adviser to manage the Group s tax issue. A policy to combat fraud have been prepared and sent out to the chief financial officers and managing directors of different subsidiaries. The policy includes theoretical and practical recommendations to prevent fraud. If there is evidence of attempted fraud using new methods, the head of internal control notifies the subsidiary COOs and CFOs where necessary. Neopost S.A. has taken out a specific insurance policy to enhance its protection against this type of risk. Within the framework of the Group ethics charter, the Group s internal control department introduced a procedure to manage conflicts of interest. Regarding industrial risks, the Group updates a Disaster Recovery Plan every year. This plan allows the Group to assert that these risks would not have a material impact on its financial position, business or results. Exchange rate risk sensitivity Impact on net income before tax on 2018 budget Impact on equity as at 31 January 2018 (In million euros) Increase of 5% Decrease of 5% Increase of 5% Decrease of 5% USD 5.6 (5.6) (2.2) 2.2 GBP 1.6 (1.6) (15.1) 15.1 Interest rate risk sensitivity (In million euros) Impact on net income before tax 31 January 2018 Impact on equity Impact of the rise of +0.5% in interest rates (2.7) 1.5 Impact of the decrease of +0.5% in interest rates 2.9 (1.5) 11

14 1 Comments on Neopost s results and financial structure Risk factors Forecasts Neopost provides its shareholders with information on its medium-term forecasts. These forecasts are formulated based on the Group s three-year plan and take into account on market conditions at the beginning of 2017, namely the competitive environment within the three divisions of the Group and the economic conditions in the countries where the Group operates. Should there be a significant change in market conditions or the competitive environment, the Group cannot guarantee that it would be able to achieve its forecasts. Retirement benefit obligations In the United Kingdom, the pension plan was closed to all new valuation leads to a deficit, then Neopost has to agree a members in 2001 and accrued benefits were frozen in schedule of contributions which will make good the deficit. As June Every three years, the British regulatory authority of 31 January 2018, the British regulation did not identify any requires that a valuation be carried out based on different deficit. The next valuation will be performed at 30 June hypothesis than the one used according to the IAS 19. If this Insurance All Group companies are covered by a worldwide insurance program which covers operating damage and loss, liability, and transport risks. All Group subsidiaries adhere to the guarantees set up and negotiated at the Group level, subject to local regulatory restrictions or specific geographic exclusions. Neopost s risks include a high level of geographic dispersion, which substantially dilutes the consequences of any claim. The cover negotiated by the Group is high and is above all aimed at insuring the largest risks which might have a material impact on the Group s financial position. The operating damage and loss insurance cover was renegotiated for two years on 1 February 2016 with a (21)% decrease in the premium without any change in the guarantee. It was renewed on 1 February 2017 with an increase of kick-back in exchange for an extended commitment to 31 January The insurance covering transport risks was renewed on 1 February 2016 with the guarantee per claim raised to 600,000 euros at no additional cost. The insurance was renewed again on 1 February 2018 under the same conditions. The insurance policy covering liability was re-negotiated on 1 February 2014 on a fixed premium basis, not linked with the sales level as before. This premium has been reduced by around 20% for a two-year period, as no claims had been filed. A renegotiation took place end of It led to a renewal for two years and a decrease of the premium by 10% without changing the guarantee conditions. This insurance policy was then extended to 31 January Given the development of Neopost in software activities, it was decided on 1 February 2014 to cover the risk of possible claims from third parties against Neopost for infringement of copyright and intellectual property. This insurance was taken out worldwide and covers risks for up to 30 million euros per claim (10 million dollars in the United States). The policy was renewed on 1 February 2016 for two years with an increase of the limit for the United States raised to 20 million dollars. Total cost of insurance amounted to 0.7 million euros in The Group s insurance policies are regularly updated to reflect changes in the Group s scope of consolidation and to cover industrial risks within the global insurance market framework. The Group s guarantees are placed with leading insurers with worldwide reputations. 12

15 Comments on Neopost s results and financial structure 1 Outlook Outlook Given the first-half 2018 performance, the Group outlook for sales evolution has improved slightly for full-year However, Neopost continues to expect an organic decline in annual sales, broken down as: Enterprise Digital Solutions: top line now expected at high-single-digit growth from low-single-digit growth previously; Neopost Shipping: double-digit growth confirmed well below H performance; SME Solutions: continued slowdown in Mail Solutions at a pace that, based on trends from previous fiscal years, is still expected between (4)% to (6)%; double-digit growth in Digital communication & Shipping solutions but at a slower pace than in H1; further decline expected in graphic activities. Group current EBIT margin is now expected at above 17% for full-year 2018, from about 18% previously. This new indication is primarily driven by the EBIT margin for the Neopost Shipping division, which is expected to remain around H1 performance. EBIT margin for the Enterprise Digital Solutions is expected to increase versus H1 and SME Solutions EBIT margin to achieve a similar performance to H1. Neopost also expects increased efforts in innovation related to new projects, which are not factored into operating profitability for the three divisions. The Group will continue to generate high operating cashflow. Attention is drawn to: The reimbursement of the French tax on dividends plus interest in the amount of 13 million in H was a one-off item; The time lag issue related to intra-group VAT transactions that led to a payment of some 10 million in the first half of 2018 has led, in turn, to the collection of the same amount in August

16 1 Comments on Neopost s results and financial structure 14

17 2 CONSOLIDATED FINANCIAL STATEMENTS AT 31 JULY 2018 Consolidated financial statements 16 Notes to the consolidated financial statements 23 Note 1 Presentation of the Neopost group and its consolidated financial statements 23 Note 2 Accounting policies 23 Note 3 Scope and principles of consolidation 25 Note 4 Intangible assets, tangible assets and other non-current assets 25 Note 5 Operating data 28 Note 6 Segment information 31 Note 7 Cash flow details 34 Note 8 Headcount and employee benefits 35 Note 9 Other provisions, contingent liabilities and other non-current liabilities 36 Note 10 Financial instruments and financial debts 37 Note 11 Tax position 44 Note 12 Shareholders equity and earnings per share 45 Note 13 Post-closing events 46 Statutory auditors review report on the half-yearly financial information 47 15

18 2 Consolidated financial statements at 31 july 2018 Consolidated financial statements Consolidated financial statements CONSOLIDATED ASSETS (In millions of euros) Notes 31 July July January 2018 Goodwill (4-1) 1, , ,061.5 Intangible fixed assets Gross value (4-2) Amortization (4-2) (350.0) (300.1) (325.5) (4-2) Tangible fixed assets Gross value (4-3) Amortization (4-3) (503.5) (481.8) (481.4) (4-3) Other non-current financial assets Investments in associated companies Non consolidated shares Net Non-current financial derivative instruments (10) Other non-current financial assets (4-4) Net long-term lease receivables (5-2) Other net long-term receivables Deferred tax assets (11-2) Total non-current assets 1, , ,887.9 Net inventories and work in progress (5-5) Net receivables Net accounts receivable (5-2) Net short-term lease receivables (5-2) Income tax receivables Net other receivables Prepaid expenses Current financial derivative instruments (10) Cash and cash equivalents Short-term and liquid investments Cash Total current assets TOTAL ASSETS 2, , ,782.5 The following notes form an integral part of the consolidated financial statements. 16

19 Consolidated financial statements at 31 july Consolidated financial statements CONSOLIDATED LIABILITIES (In millions of euros) Notes 31 July July January 2018 Shareholders equity Share capital Additional paid-in capital Reserves and retained earnings Cumulative translation adjustments (32.2) (26.5) (48.6) Treasury shares (3.5) (3.8) (4.7) Equity instruments (12-1) Net income Total shareholders equity 1, , ,169.2 Attributable to: holders of the parent company 1, , ,161.1 non-controlling interests Non-current financial debts (10-2) Long-term provisions (9-1) Non-current financial derivative instruments (10-1) Other non-current liabilities (9-3) Deferred tax liabilities (11-2) Total non-current liabilities 1, , ,043.7 Accounts payable Trade payables Other operating liabilities Tax payables Short-term provisions (9-1) Deferred income Current financial derivative instruments (10-1) Financial debts Short-term portion of credit institution debt (10-2) Short-term portion of other financial debt Bank overdrafts (10-2) Total current liabilities TOTAL LIABILITIES 2, , ,782.5 The following notes form an integral part of the consolidated financial statements. 17

20 2 Consolidated financial statements at 31 july 2018 Consolidated financial statements CONSOLIDATED INCOME STATEMENTS (In millions of euros) Notes 31 July July January 2018 Sales (5-1) ,111.7 Current operating expenses (5-3) Cost of sales (128.1) (138.0) (279.3) Research and development expenses (28.0) (27.6) (56.9) Sales and marketing expenses (132.4) (139.4) (279.6) Administrative expenses (96.7) (99.6) (194.9) Service and other operating expenses (51.8) (52.0) (99.9) Employee profit-sharing, share-based payments (0.2) (1.4) 1.2 Expenses related to acquisitions (5-6) (5.1) (5.8) (11.3) Total current operating expenses (442.3) (463.8) (920.7) Current operating income (5-3) Proceeds from asset sales (0.5) (0.0) (0.1) Structure optimization expenses net of reversals (5-7) (2.5) (5.9) (13.2) Other non-current operational expenses (5-7) (0.1) (6.2) (11.3) Operating income Interest expenses (15.9) (17.3) (34.5) Interest income Net cost of debt (15.3) (16.7) (32.3) Losses on foreign exchange (1.1) (6.7) (15.0) Gains on foreign exchange Net gains (losses) on foreign exchange 0.8 (0.1) (2.4) Other financial gains Other financial losses (0.0) (0.0) - Income before tax Share of results of associated companies Income taxes (11-1) (8.5) (17.6) (0.8) NET INCOME Attributable to: holders of the parent company non-controlling interests 0.2 (2.3) (1.1) NET EARNINGS PER SHARE (IN EUROS) (12-2) DILUTED NET EARNINGS PER SHARE (IN EUROS) (12-2) The following notes form an integral part of the consolidated financial statements. 18

21 Consolidated financial statements at 31 july Consolidated financial statements CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In millions of euros) 31 July July January 2018 Net income Actuarial variances recognized in equity 11.6 (1.1) 2.8 Deferred taxes on actuarial variances recognized in equity (4.1) 0.2 (1.8) Sub-total of items that could not be reclassified in net income 7.5 (0.9) 1.0 Change in fair value of hedging instruments (0.7) (0.1) 3.4 Deferred taxes on change in fair value of hedging instruments (1.2) Translation variance 16.4 (30.9) (53.0) Sub-total of items that could be reclassified in net income 15.9 (31.0) (50.8) TOTAL INCOME FOR THE YEAR Attributable to: holders of the parent company non-controlling interests 0.2 (2.3) (1.1) The following notes form an integral part of the consolidated financial statements. 19

22 2 Consolidated financial statements at 31 july 2018 Consolidated financial statements CONSOLIDATED STATEMENTS OF CASH FLOW (In millions of euros) Notes 31 July July January 2018 Net income attributable to shareholders of the parent company Net income attributable to non-controlling interests 0.2 (2.2) (1.1) Expenses (income) with no cash effect (7-1) Share of results of associated companies (net of dividends received) (0.9) 0.0 (1.4) Income taxes expense (including deferred taxes) (11-2) Net cost of debt Cash flow before net cost of debt and income taxes Working capital variation (7-2) (40.6) (25.1) 20.6 Increase (decrease) in lease receivables Cash flow from operating activities Interest paid (17.6) (17.2) (30.3) Income taxes paid 1.0 (15.8) (24.3) Net cash flow from operating activities (A) Investments in tangible fixed assets (4-3) (23.5) (26.6) (63.9) Investments in intangible fixed assets (4-2) (16.9) (17.2) (34.9) Financial investments (7-3) (1.9) (1.2) (23.4) Sub-total investments (42.3) (45.0) (122.2) Disposals of fixed assets Repayment of loans and other long-term advances (1.8) Net cash flow from investing activities (B) (41.4) (43.1) (120.9) Parent company capital increase Share buyback liquidity contract 0.6 (0.7) (0.7) Dividends paid to shareholders (27.5) (27.6) (58.6) New medium and long-term borrowings (10-2) ODIRNANE issued * (11-1) (4.5) (4.5) (8.9) Repayment of long-term borrowings (10-2) (33.7) (152.8) (165.7) Net cash flow from financing activities (C) (61.7) 24.2 (14.0) Cumulative translation adjustments on cash and cash equivalents (D) 14.0 (9.4) (15.5) Change in net cash (A) + (B) + (C) + (D) Net cash opening Net cash - closing Cash and cash equivalents Overdrafts (3.8) (2.4) (5.2) NET CASH CLOSING The following notes form an integral part of the consolidated financial statements. * ODIRNANE: senior unsecured net share settled undated bond convertible into new shares and/or exchangeable for existing shares. 20

23 Consolidated financial statements at 31 july Consolidated financial statements CHANGES IN SHAREHOLDERS EQUITY (In millions of euros) Par value Number of shares Share capital * Additional paid-in capital Reserves retained earnings and net income Treasury shares Cumulative translation adjustments Total Consolidated shareholders equity at 31 January 2017 EUR 1 34,562, ,050.5 (3.4) 4.4 1,139.0 Attributable to: holders of the parent company 1,132.0 non-controlling interests 7.0 Net income Items that could not be reclassified in net income Items that could be reclassified in net income (53.0) (50.8) Total comprehensive income (53.0) 82.9 Treasury shares liquidity contract Free shares attributed (13,507 shares) (0.1) (1.3) - (1.4) (0.4) (0.0) - (0.4) 2016 dividends - - (31.0) - - (31.0) 2017 interim dividends (27.5) - - (27.5) Share-based payments (0.6) - - (0.6) Equity instruments ODIRNANE interests (8.9) - - (8.9) Put and call options Minority interests (6.5) - - (6.5) Other (0.2) - - (0.2) Consolidated shareholders equity at 31 January 2018 EUR 1 34,562, ,135.0 (4.7) (48.6) 1,169.2 Attributable to: holders of the parent company 1,161.1 non-controlling interests 8.1 Movements first half of 2018 Net income Items that could not be reclassified in net income Items that could be reclassified in net income (0.5) Comprehensive income first half Treasury shares liquidity contract (0.5) Free shares attributed (2,412 shares) (0.1) dividends (31.0) - - (31.0) Share-based payments (0.2) - - (0.2) Equity instruments ODIRNANE interests (4.5) - - (4.5) Other (0.1) - - (0.1) CONSOLIDATED SHAREHOLDERS EQUITY AT 31 JULY 2018 EUR 1 34,562, ,165.8 (3.5) (32.2) 1,217.6 Attributable to: holders of the parent company 1,209.1 non-controlling interests 8.5 The following notes form an integral part of the consolidated financial statements. * The share capital is fully released. 21

24 2 Consolidated financial statements at 31 july 2018 Consolidated financial statements (In millions of euros) Par value Number of shares Share capital * Additional paid-in capital Reserved retained earnings and net income Treasury shares Cumulative translation adjustments Total Consolidated shareholders equity at 31 January 2017 EUR 1 34,562, ,050.5 (3.4) 4.4 1,139.0 Attributable to: holders of the parent company 1,132.0 non-controlling interests 7.0 Movements first half of 2017 Net income Items that could not be reclassified in net income (0.9) - - (0.9) Items that could be reclassified in net income (0.1) - (30.9) (31.0) Comprehensive income first half of (30.9) 16.6 Treasury shares liquidity contract Free shares attributed (8,392 actions) (0.2) (0.5) - (0.7) 2016 dividends (31.0) - - (31.0) Share-based payments (0.3) - - (0.3) Equity instruments ODIRNANE interests (4.5) - - (4.5) Put and call options Other CONSOLIDATED SHAREHOLDERS EQUITY AT 31 JULY 2017 EUR 1 34,562, ,078.4 (3.8) (26.5) 1,135.6 Attributable to: holders of the parent company 1,129.3 non-controlling interests 6.3 The following notes form an integral part of the consolidated financial statements. * The capital is fully released. 22