Interim Results

Xaar plc ("Xaar"), the inkjet printing technology group headquartered in Cambridge, has issued its interim report for the 6 months ended 30 June 2011.

Financial summary

* H1 2010 restated in relation to recognition of revenue from a distributor.  This restatement is consistent with the 2010 Annual Report.  Further details are provided in note 2.

**Before restructuring provisions, exchange differences on intra-group transactions, gain on derivative financial instruments, exceptional commercial agreement costs and the cost of share-based payments.

Key points

• Strong financial performance; revenue up 33% over H1 2010
• Growth driven by Platform 3 (P3) products for industrial applications
• Profitability has increased with both gross margin and profit before tax substantially up over H1 2010
• The Huntingdon expansion programme for P3 production is on track to deliver further capacity increases during H2 2011 and H1 2012
• The market for Platform 1 (P1) products is showing signs of maturity with sales reducing against H1 2010.

Chairman, Phil Lawler commented: 

“Our sales performance in the period has validated our confidence in the market potential for P3 products and we are pleased to report that our capacity expansion programme remains on track.  We are excited about the opportunities that have emerged and are committed to pursuing them.”

Contacts

Xaar Plc:
Ian Dinwoodie, Chief Executive Officer
Alex Bevis, Finance Director
01223 423663
www.xaar.com

Singer Capital Markets Limited:
Shaun Dobson
020-3205-7626

Bankside Consultants:
Simon Bloomfield or James Irvine Fortescue
020-7367-8888

CHAIRMAN’S STATEMENT

Introduction

During the first half of 2011, revenues have continued to increase and were up 33% compared with H1 2010.  The growth over H1 2010 reflects the substantial demand for Platform 3 (“P3”) for industrial applications, which has been satisfied through a combination of productivity gains and the completion of the early stages of the capacity expansion programme at our Huntingdon facility.  Against the same period, Platform 1 (“P1”) sales have fallen, reflecting market maturity and some loss of market share.

The geographic spread of our sales has continued to shift towards continental Europe through the growth in P3.  Our increasing exposure to Euro-denominated revenues (37% of H1 sales versus 25% of sales in 2010) is partly mitigated by Euro capital expenditure related to capacity expansion as well as normal Euro-denominated costs.

Royalty revenue from our licensees has increased slightly (6% over H1 2010).

The Group is profitable and growing.  Adjusted profit before tax trebled against the same period last year to £4.3m (H1 2010 restated: £1.4m).

The Group’s net cash reduced as expected during the period as a result of capital investment related to the capacity expansion programme which remains on track to deliver further incremental P3 capacity during the second half of 2011 and first half of 2012.

Results

Revenues for the six months ended 30 June 2011 were £31.6m (H1 2010 restated: £23.8m; H2 2010: £30.9m).  Product sales were £28.2m (H1 2010 restated: £20.5m; H2 2010: £26.8m).  Royalty revenue was £3.3m (H1 2010: £3.1m; H2 2010: £3.9m).  Development income continues to be immaterial.

Adjusted gross margin at 44% has continued to improve (H1 2010 restated: 41%; H2 2010: 43%), reflecting production efficiencies and revenue growth.

Adjusted profit before tax for the period was £4.3m (H1 2010 restated: £1.4m; H2 2010: £4.2m).  Reported profit before tax was £4.1m (H1 2010 restated: £1.9m; H2 2010; £3.5m). 

After payment of the final dividend for 2010 of £1.1m and £5.2m of capital investment (excluding capitalised development costs), net cash reduced by £1.4m during the period to £20.6m (31 December 2010: £22.0m; 30 June 2010: £8.2m).

Business Commentary

The geographic spread of our business, in terms of revenue, is now EMEA 57% (H1 2010 restated: 42%; H2 2010: 48%), Asia 32% (H1 2010 restated: 43%; H2 2010: 39%), and the Americas 11% (H1 2010 restated: 15%; H2 2010: 13%).  Whilst we have benefited during the past few years from the majority of sales coming from a high growth region (Asia), this also increased the risks associated with more volatile markets.  We have now established reasonable volume in both Asia and EMEA and expect to capitalise on the improved balance that now exists in the business.

Continued success with P3 in industrial applications has enabled us to establish a major market for that product family in EMEA, with potential for other regions.  Manufacturing efficiencies and increased shift patterns, coupled with the first deliveries of new processing equipment, have all helped to achieve a better than expected P3 revenue in the first half of the year.  Platform 2 (“P2”) sales remain a small proportion of our business although they increased over the same period last year. As already announced, this product family has been largely superseded by P3 and hence further volume increases are not expected. P1 sales have been disappointing and have declined more quickly than planned. This reflects a number of factors including reduced product replacement orders as older P1 based printers are superseded by newer versions, not always with Xaar printheads. This market is very mature and the P1 product family refreshes have not been as successful or as dominant as we had planned. Royalty revenues have increased over the same period last year, reflecting a switch of P1 market share to some licensees.

Industrial sector growth continues with sales increasing by 132% over H1 2010. Growth in the Packaging sector was a more modest 12% over H1 2010, reflecting the adoption of P3 in one sub sector and maturing market decline of P1 in another. Graphic Arts growth of 1% compared to H1 2010, which also represents a decline against H2 2010 sales, is disappointing. Work continues in this area to improve results.

Good progress has been made with the expansion programme which we began in November 2010, with all constituent elements going according to plan. This involves a major development of our facility in Huntingdon, including the construction of a full third clean-room. In addition to the facilities upgrade and expansion, we have ordered a range of high value, sophisticated processing, test and measurement equipment, some of it unique to Xaar.

The successful installation and commissioning of this equipment continues to receive a high degree of focus and attention and is fundamental to our being able to increase P3 manufacturing capacity as planned. Inevitably, such changes are not without their challenges but we are on track and remain confident that this expansion programme will be successfully concluded during 2012 as previously announced.

Aligned with this physical expansion has been a significant increase in employee recruitment. This increase covers many disciplines and we have been successful in attracting the skill sets and calibre of people required. Headcount increases of this size require a great deal of effort, not just in recruitment but also in the resulting organisational expansion, integration and training. We have been successful in this area which continues to receive the appropriate attention.

Progress has been made in improving the management of new product development, manufacturing and integration. This in turn has enabled a refocusing of resource back on to future product versions and technologies that will sustain our growth for the longer term. We continue to manage our patent portfolio closely, and we regularly monitor possible conflicts and competitive activity.

As a result of our formal strategy review, held early this year, we confirmed that our approach remains niche with our commercial focus entirely on a few applications and leading OEMs where we can make the most impact.

Dividend

Based on the continuing cash generation of the business, an unchanged interim dividend of 1.0p per share will be paid on 23rd September 2011 to shareholders on the register at close of business on 26th August 2011.

Board

As previously reported Rob Eckelmann, non-executive and senior independent director, decided to retire from the board at the company’s Annual General Meeting in May of this year, and was replaced by David Cheesman.  I would like to thank Rob for the benefit of his considerable experience and almost six years of wise counsel.  Robin Williams, non-executive director, was appointed Senior Independent Director in May.

Also as previously reported, Phil Eaves, Sales and Marketing Director, has notified the company of his intention to retire in mid 2012. A process is underway to ensure an appropriate successor is in place during the second quarter of 2012.

Outlook

We continue to live in an economically challenged world where growth is uncertain. For Xaar, the successful expansion of our manufacturing capacity, as planned, will represent a major milestone achieved. Although uncertainties remain, we believe that the market for P3 products will continue to be strong and that our new manufacturing capacity will enable us to capitalise on this demand. Our competitive advantage is the result of supplying a product capable of delivering significant benefits to our customers in selected segments of the inkjet printing market. Although we assume that competition will develop over time, the barriers to entry are high and we believe that our disruptive technology, combined with our management experience, technical skill, talent and resources, will enable us to maintain our competitive edge for a sustained period.

Phil Lawler
Chairman
18 August 2011