Interim Announcement

RNS Number : 3562K

Photo-Me International PLC

18 December 2008

 



Thursday 18 December 2008

PHOTO-ME INTERNATIONAL PLC - INTERIM ANNOUNCEMENT

Photo-Me, the instant service equipment group, announces its results for the half year to 31 October 2008. 

Key Points - Financial

• Revenue on continuing business up 9% at £115.9m (2007: £106.4m) or, at 2007 exchange rates, down 3% at £103.5m.

• EBITDA, one of the Group's principal metrics, remained substantial at £23.6m, representing over 20% of revenue.

• Profit before exceptional items totalled £5.2m (2007: £7.8m); profit after exceptional items was £1.6m (2007: £2.1m). 2008 profit benefited significantly from foreign exchange gains.

• 2008 exceptional items totalled £3.6m, mainly for an impairment charge against minilab R&D ; 2007 exceptional items totalled £5.7m, mainly for strategic review costs.

• The strong cash flows of the Group's larger Division, Operations (previously termed Vending), facilitated a reduction in net debt in the six months of over one-third, from £45.5m to £29.9m.

• The pre-exceptional result and the debt reduction were both in line with the Board's expectations.

Key Points - Commercial

Operations

• Operating profit, pre-exceptionals, held up well at £11.1 m (2007: £11.2m) or, at 2007 exchange rates, £9.9m.

• Revenue increased by 9% to £85.7m, benefiting from the weakening of Sterling; at 2007 exchange rates, it reduced by 2% to £77.1m.  

• Revenue, in local currency, decreased by 7% in the UK and Ireland, reflecting a reduction in passport applications, but increased slightly in each of France and Japan.  

• Agreements were reached with Tesco and the Co-op for the installation of up to an additional 1,000 digital media kiosks in their premises. A further contract for 200 digital media kiosks has recently been signed with Migros, the leading Swiss retailer.  

Sales & Servicing (previously termed Manufacturing)

• Revenue increased by 7% to £30.2m; at 2007 exchange rates, it reduced by 6% to £26.4m.

• Operating loss, pre-exceptionals, increased to £4.3m (2007: £0.3m) or, at 2007 exchange rates, £3.6m.  

• The reduced result principally reflects the extreme difficulties experienced by customers in accessing financing. In addition, the retail photographic market has seen reduced confidence and a change in product mix.

Commenting on the result, Hugo Swire, Chairman, stated 'Photo-Me has made progress in implementing the strategy announced in July. It has not, however, escaped the impact of the global economic crisis. In particular, the Group's photo-processing equipment sales are being affected by customers' extreme difficulties in accessing finance, and both volumes and profit margins are coming under pressure as a result. Despite this, Operations, the Group's principal activity, remains relatively resilient'.

With regard to prospects, Mr Swire said 'Historically, the financial results of the Group's Operations activities have been stronger in the first half, whilst those of Sales & Servicing have been stronger in the second half. In the current year, it is expected that this pattern will continue for Operations. For Sales & Servicing, which is reliant upon customers being able to access credit facilities to finance the purchase of equipment, prospects for the second half are poor. Accordingly, the Board believes that the Group will be loss-making in the second half.

The Board continues to aim to achieve stability in the full year relative to last year's adjusted result, which was a small pre-tax loss. However, this outcome is dependent upon no material unforeseen worsening in market conditions.

Further out and as previously stated, the introduction of biometric data requirements for passports in the EU represents a potentially serious threat to the Group's ID photography business. The threat is most acute in France, where government proposals favour the effective nationalisation of official ID photography, not just for passports but also for ID cards, increasingly from June 2009.'

Legal Disclaimer:

The Interim Management Report has been prepared for the shareholders of the Company, as a body, and no other persons.  Its purpose is to assist shareholders of the Company to assess the strategies adopted by the Company and the potential for those strategies to succeed and for no other purpose.  The Interim Management Report contains forward looking statements that are subject to risk factors associated with, amongst other things, the economic and business circumstances occurring from time to time in the countries, sectors and markets in which the Group operates.  It is believed that the expectations reflected in these statements are reasonable but they may be affected by a wide range of variables which could cause actual results to differ materially from those currently anticipated.  No assurances can be given that the forward-looking statements in this Interim Management Report will be realised.  The forward-looking statements reflect the knowledge and information available at the date of preparation.

 Presentation:

A presentation to institutional investors, brokers' analysts and private client brokers will be given from 09.00 to approximately 10.00 today at Regus, CityPoint, 1 Ropemaker Street, London EC2 (approximately 200 yards from Moorgate Station).

Enquiries:

Photo-Me International	01372-453 399
Hugo Swire (Chairman)
Thierry Barel (CEO)
Robert Lowes (Company Secretary)
Bankside Consultants
Charles Ponsonby	020-7367 8851 / 07789-202 312

INTERIM MANAGEMENT REPORT

Photo-Me has made progress in implementing the strategy announced in July. It has not, however, escaped the impact of the global economic crisis. In particular, the Group's photo-processing equipment sales are being affected by customers' extreme difficulties in accessing finance, and both volumes and profit margins are coming under pressure as a result. Despite this, Operations (previously termed Vending), the Group's principal activity, remains relatively resilient.  

Overall, operating profit before exceptional items of £7.1m for the six months to 31 October 2008 held up well against last year's equivalent result of £8.8m, albeit benefiting significantly from foreign exchange gains. In addition, EBITDA, one of the Group's key metrics, remained strong, at £23.6m, representing 20% of revenue. The strong cash flows from the Group's Operations Division resulted in a substantial reduction in net debt in the six months, as expected by the Board, from £45.5m at the end of April to £29.9m.

Assessing current market conditions, the Board has concluded that prospects for equipment sales in the second half of the year and beyond have deteriorated and, as a result, has made an exceptional (non-cash) impairment charge of £3.0m to reduce the carrying value of previously capitalised research and development costs relating primarily to minilab equipment. 

FINANCIAL REVIEW

As indicated in the Preliminary Announcement of 10 July 2008, the Group is pursuing three main activities: Operations, Sales and Servicing. As a consequence, the two Divisions, Vending and Manufacturing, have been renamed Operations and Sales & Servicing, respectively. The following table summarises the results, excluding exceptional items and discontinued activities: 

	Revenue			Operating profit
Half year to 31 October	2008	2008†	2007	2008	2008†	2007
	£m	£m	£m	£m	£m	£m
Operations	85.7	77.1	78.3	11.1	9.9	11.2
Sales & Servicing	30.2	26.4	28.1	(4.3)	(3.6)	(0.3)
Group overheads	-	-	-	(2.2)	(2.2)	(2.1)
Foreign exchange gain	-	-	-	2.5	2.5	-
	115.9	103.5	106.4	7.1	6.6	8.8
† Results of overseas subsidiaries converted at 2007 exchange rates   Group overheads benefited from foreign exchange gains arising on intercompany financing balances, primarily with the Company’s Japanese subsidiary. To facilitate comparison of Group overheads, this benefit has been separately identified in the above table. The impact of foreign exchange in 2007 was not material.

After net finance costs of £1.9m (2007: £1.0m, net of a profit of £0.5m on the deemed partial disposal of the Group's investment in its Australian associate), pre-tax profit before exceptional charges was £5.2m (2007: £7.8m). 

Exceptional items of £3.6m in 2008 relate to the impairment charge of £3.0m referred to above and some additional costs associated with items charged as exceptional in the prior year, whilst those of £5.7m in 2007 related to the professional fees arising from the proposed disposal of the Vending Division and restructuring costs.

After exceptional items, pre-tax profit was £1.6m (2007: £2.1m). After a tax charge equating to 49%, profit for the year from continuing operations was £0.8m (2007: loss of £0.2m). Earnings per share from continuing operations amounted to 0.24p (2007: loss per share 0.10p). Adjusted earnings per share, before exceptional items, amounted to 0.89p (2007: 1.24p).

Shareholders' equity at 31 October 2008 totalled £82.1m (30 April 2008: £76.9m), equivalent to 22.8p (30 April 2008: 21.3p) per share. 

Net debt (as analysed in note 11) reduced by £15.6m in the period to £29.9m at 31 October 2008 (30 April 2008: £45.5m; 31 October 2007: £33.6m). Based on total equity, gearing reduced to 35%, from 57% and 38%, respectively. Capital expenditure in the period, of £7.5m, was less than half the £16.8m depreciation charge and a similar relationship can be expected in the second half and next year. The Group continues to trade comfortably within its loan covenants and, at 31 October 2008, had in excess of £20m of unused bank facilities.

BUSINESS REVIEW

Geographical analysis of revenue and profit (by origin)

	Revenue			Operating profit
Half year to 31 October	2008	2008†	2007	2008	2008†	2007
	£m	£m	£m	£m	£m	£m
Continental Europe	69.6	60.0	60.7	2.8	2.5	6.5
UK & Ireland	31.1	30.8	33.1	3.0	3.0	1.7
Asia & Australia	15.2	12.7	12.6	1.3	1.1	0.6
	115.9	103.5	106.4	7.1	6.6	8.8
† At 2007 exchange rates Continuing operations only and before exceptional items.

Continental Europe, which includes the great majority of Sales & Servicing revenue, contributed 60% (2007: 57%) of Group revenue - 58% on a constant currency basis - and 39% (2007: 74%) of Group operating profit. Substantially all Group overheads arise in the UK & Republic of Ireland. The foreign exchange gains of £2.5m on intercompany financing balances in 2008 arose in the UK.

Operations 

	Revenue			Operating profit
	2008	2008†	2007	2008	2008†	2007
	£m	£m	£m	£m	£m	£m
Half year to 31 October	85.7	77.1	78.3	11.1	9.9	11.3
† At 2007 exchange rates

Operations (previously 'Vending') comprises the business of unattended instant service equipment, including photobooths, digital media kiosks, amusement machines and other vending equipment.  Photobooths, historically the core business of Photo-Me, are an efficient and competitively-priced provider of ID photographs and represent a mature cash generative business. Revenue from photobooths accounted for 81% (2007: 82%) of Operations revenue. 

Photo-Me's Operations business is global, operating in 15 industrialised countries. However, 87% of sites are located in three territories - the UK & Ireland, France and Japan. Of the Group's 44,100 sites worldwide (2007: 42,000), Continental Europe accounted for 17,700 (2007: 17,300), the UK & Ireland for 18,700 (2007: 17,300) and Asia & Australia for 7,700 (2007: 7,400). 

Whilst the number of photobooths sites worldwide increased by 2%, other vending sites increased by 8% as the Group continued to implement its objective of diversification.  

The slowdown in consumer spending in reaction to the global economic crisis was felt most significantly in the UK & Ireland, where takings decreased by 7% as customers deferred passport renewals. Elsewhere, the impact was much less, with takings increasing, in local currency, by 2% in France and 1% in Japan. The effect on profit of the revenue decrease in the UK & Ireland was substantially mitigated by widespread cost savings. 

The impact of the global recession on the Group's Operations business has continued beyond the end of the period, including the announcement of the Administration of Woolworths. The UK business has a significant amount of operational equipment located in Woolworths' stores. Although the future of Woolworths is uncertain, the Board expects that some of the equipment will be retained as stores are taken over by other retailers. Other equipment will be relocated, either in the UK or overseas.

Photobooths

Of the 21,500 photobooths sited worldwide (2007: 21,000), Continental Europe represented 44%, the UK & Ireland 27% and Asia & Australia 29%. Photobooth takings increased by 7% overall but, in constant currency, reduced by 4%. Whilst the Group is increasingly using marketing to encourage consumers to use photobooths as a leisure activity to take 'fun' photos, they are still overwhelmingly used for ID photographs. The onset of the global economic crisis was felt mainly in the UK, where consumers started to reduce spending noticeably from July.

Digital Media Kiosks

Digital media kiosks, which allow customers to print photos from a range of digital media (including memory card, USB stick, CD, or via Bluetooth) on a self-service basis, represent an increasingly popular choice with consumers for printing photos and are becoming a key element of the Group's diversification away from its traditional ID photobooth market.

In the period, the number of digital media kiosks sited increased by 9% to 4,900 (2007: 4,500). Of these, Continental Europe accounted for 3,900, with France by far the principal territory. The UK & Ireland increased to 1,000, only in small part reflecting agreements recently reached with Tesco and the Co-op, representing in aggregate a potential of an additional 1,000 kiosks. Agreement was also reached with Migros, the leading Swiss retailer, for the installation of 200 kiosks.

Takings from digital media kiosks increased by 30%, or, in constant currencies, 13%.  

As well as being used for immediate photo printing on a small scale, kiosks can also be connected to a remote central lab for larger quantities of prints or for specialised printing, for subsequent collection or mailing. This 'off-load' process opens up opportunities for the printing of T-shirts, mugs, key rings and other items, all available to consumers from the self-service kiosk. This offering is expected to be attractive to large retail chains and supermarkets, since it enables them to offer a wide range of photo-printing services from each of their stores whilst utilising labour and equipment in an efficient central processing laboratory. This is starting to be implemented in France and the UK.

Amusement Machines and Other Equipment

Amusement machines and other equipment provide the Group with another important opportunity to diversify away from its historical reliance on ID photobooths, leveraging the Group's strong relationships with site-owners and its field service and cash collection infrastructure.

In the period, units of other equipment sited increased by 7% to 17,700 (2007: 16,500), of which 6,500 (2007: 6,400) were kiddie rides, the balance comprising mainly amusement machines, toy dispensing machines, copiers and card machines. The vast majority of kiddie rides are sited in the UK & Ireland.  

Takings from amusement machines and other equipment increased by 5% but, in constant currency, reduced by 1%, mainly due to a decline in revenues from sticker machines in Japan.

Kiddie rides and amusement machines benefit from strong associations with well-known licensed characters. A number of licence agreements have recently been concluded for use in toy dispensing machines and, using photobooths in an amusement machine context, fun photos.

Sales and Servicing

	Revenue			Operating profit
	2008	2008†	2007	2008	2008†	2007
	£m	£m	£m	£m	£m	£m
Half year to 31 October	30.2	26.4	28.1	(4.3)	(3.6)	(0.3)
† At 2007 exchange rates

Sales and Servicing (previously 'Manufacturing') revenue primarily derives from the sale to third parties of photo-processing equipment manufactured by the Group or by sub-contractors on its behalf, together with related spare parts and consumables, and from the servicing of that, and other, equipment. The Group has a comprehensive range of photo-processing equipment, covering all market segments from wholesale labs, to minilabs and self-service digital media kiosks, with outputs of between 500 and 20,000 prints per hour. Related equipment, such as photo-album making machinery, is of increasing importance.

The reduction in Sales and Servicing revenue and the deterioration in its result principally reflected the extreme difficulty experienced by the Group's customers in accessing finance and the deterioration in the selling price of the Group's equipment in an increasingly difficult market. In addition, the market contraction amongst retailers, including the recently-announced Administration of Bowie Castlebank (trading as Klick Photopoint and Max Spielman), is expected to result in a surfeit of second hand equipment becoming available, which will further impact on both sales volumes and prices.

Servicing for third parties, which has only been actively introduced within the past few months, remains marginal in revenue and profit. To date, developments in the UK are the most encouraging.

Retail Photographic Equipment

Photo-Me's subsidiary, KIS, which is based at Grenoble in France, designs and develops retail photo-processing and other instant service equipment, with volume production sub-contracted to specialist manufacturers in low cost territories, currently in Asia. 

In the period, retail photographic equipment revenue increased by 5% to £15.9m, but reduced by 9% to £13.8m in constant currency and a substantially increased loss was made. The result reflected trading conditions which had deteriorated significantly in the second half of the year to 30 April 2008 and continued to worsen in the six months to 31 October 2008, with much reduced finance available to customers and low retail confidence. Although revenue was ahead of budget, the gross profit margin was much lower as a result of the significance of a large low-margin contract, the necessity to increase discounts so as to achieve equipment sales, and a much less favourable product mix. Indeed, kiosks are replacing minilabs in some big retailers and, even though they generate more recurring business, the initial selling price and margins are lower.

Wholesale Photographic Equipment

Photo-Me's subsidiary, Imaging Solutions, based at Zurich in Switzerland, is involved in the development, manufacture, sale and technical support of high volume photo-finish laboratories (up to 20,000 prints per hour). 

In the period, revenue reduced by 3% to £6.9m (by 19% to £5.8m in constant currency) and a loss was made. Revenue was significantly lower than budget and reflected the lack of availability of finance to customers, whilst the loss resulted from the high level of fixed costs and increased discounting. Sales of the FastBook photo-album making machines are progressing well. Imaging Solutions has also introduced a 12' wide printer to enable it to offer a full range of photo-album sizes.

STRATEGY IMPLEMENTATION

As announced in July 2008, Photo-Me's objective is to become a leading operator, supplier and servicer of instant service equipment, with a product offering that increasingly extends beyond digital imaging.

The strategic objective is to leverage the Group's strengths:

• its extensive network of Operations sites, with related site-owner contracts and relationships;

• its market-leading position in Europe and Japan;

• its established substantial field service and cash-collection infrastructure;

• its integrated R&D and low-cost production facilities; and

• the cash-generative characteristics of Operations.

Specific initiatives are:

• using the Group's research and development capabilities to identify and introduce new models of equipment both to sell and to operate;

• diversification away from the Group's core ID photobooth business through the introduction of innovative vending machines;

• generation of additional revenues by selling the services of the Group's field service and cash-collection infrastructure to third parties;

• increasing the co-ordination between the Group's two Divisions to enhance sales and improve efficiency;

• streamlining the organisation and introducing cost and working capital reductions.

Building on the Group's considerable expertise in photo-processing technology, Photo-Me introduced at the biennial Photokina trade fair in September a revolutionary self-service photo-album maker that will make it possible for a consumer to create, print and bind a photobook within minutes, without assistance. This extends the opportunities for photobooks beyond their previous limitations, in wholesale lab environments, to multi-site vending locations and will be marketed in the first quarter of the next financial year. The product has received an extremely positive reaction from the retail market.  

Research has also commenced into the possibilities of developing printing technologies beyond traditional silver halide, in a joint project between the Group's two manufacturing subsidiaries, KIS and Imaging Solutions. KIS is also pursuing research into other instant service equipment opportunities to support the Group's diversification initiative. 

Organisational structures are being simplified and the Group is focusing increasingly on fewer, major, territories. In the period, Central Europe operations were consolidated within the German organisation and the loss-making US vending operations were sold, generating £0.8m of exceptional profits. Also in the period, headcount was reduced by 3% (5% since 31 October 2007). In addition, streamlining of the Group's logistics facilities is underway and is expected to achieve further efficiencies and cost savings.  

RISKS AND UNCERTAINTIES

The 2008 Annual Report, published in July, set out the principal risks and uncertainties affecting the business activities of the Group:

• reduced demand for ID photographs as governments introduce a requirement for centralised biometric data in support of passport and other ID applications; 

• increased competition from major multi-national companies as photo-printing shifts from silver halide to dye-sublimation and ink-jet technologies, reducing sales of equipment and profit margins; and 

• reduced demand for photographic prints by digital camera users, resulting in lower sales of minilabs and wholesale labs.

Since the 2008 Annual Report was published, the global economic crisis has significantly worsened and the Board considers that the following risks have become more significant:

• a further contraction of consumer spending , reducing the level of Operations revenue;

• a further reduction in the retail site-owner base, impacting on Operations revenue and reducing the potential market for sales of photo-processing equipment;

• an ongoing lack of available finance for customers, affecting the level of sales of equipment and reducing margins;

• further volatility in foreign exchange rates; and

• the impact on costs of equipment and consumables of a sustained appreciation of the Japanese yen, in which currency a significant amount of the Group's supplies is denominated.

PROSPECTS

Historically, the financial results of the Group's Operations activities have been stronger in the first half, whilst those of Sales & Servicing have been stronger in the second half. In the current year, it is expected that this pattern will continue for Operations. For Sales & Servicing, which is heavily reliant upon customers being able to access credit facilities to finance the purchase of equipment, prospects for the second half are poor. Accordingly, the Board believes that the Group will be loss-making in the second half.

The Board continues to aim to achieve stability in the full year relative to last year's adjusted result, which was a small pre-tax loss. However, this outcome is dependent upon no material unforeseen worsening in market conditions.

Further out and as previously stated, the introduction of biometric data requirements for passports in the EU represents a potentially serious threat to the Group's ID photography business. The threat is most acute in France, where government proposals favour the effective nationalisation of official ID photography, not just for passports but also for ID cards, increasingly from June 2009.

Hugo Swire                                       17 December 2008

Chairman

GROUP INCOME STATEMENT

for the six months ended 31 October 2008

	Notes	Unaudited 6 months to 31 October 2008 £'000	Unaudited 6 months to 31 October 2007 £'000	Audited Year to 30 April 2008 £'000
Revenue	3	115,904	106,454	209,684
Cost of sales		(104,969)	(89,379)	(202,723)
Gross profit		10,935	17,075	6,961
Other operating income		627	504	1,110
Administrative expenses		(7,954)	(14,322)	(26,693)
Share of post-tax losses from associates		(24)	(71)	(1)
Operating profit/(loss)	3	3,584	3,186	(18,623)
Analysed between:
Profit/(loss) before exceptional items		7,147	8,843	(3,282)
Exceptional strategic review costs	4	-	(3,950)	(4,306)
Exceptional impairment charges	4	(3,238)	-	(7,827)
Exceptional restructuring and other items	4	(325)	(1,707)	(3,208)
		3,584	3,186	(18,623)
Finance revenue (including exceptional item, see note 4)		422	1,026	1,464
Finance cost		(2,390)	(2,063)	(4,491)
Profit/(loss) before tax		1,616	2,149	(21,650)
Total tax (charge)/credit	6	(792)	(2,356)	2,584
Profit/(loss) for the period - from continuing operations		824	(207)	(19,066)
Profit/(loss) for the period - from discontinued operations	5	815	(518)	(747)
Profit/(loss) for the period		1,639	(725)	(19,813)
Attributable to:
- Equity shareholders of the Parent	10	1,688	(890)	(19,908)
- Minority interests	10	(49)	165	95
		1,639	(725)	(19,813)
Earnings/(loss) per share (total)
Basic	8	0.47p	(0.25p)	(5.52p)
Diluted	8	0.47p	(0.25p)	(5.52p)
Earnings/(loss) per share (continuing operations)
Basic	8	0.24p	(0.10p)	(5.32p)
Diluted	8	0.24p	(0.10p)	(5.32p)
Non-GAAP measure:
Adjusted profit/(loss) after tax		3,209	4,470	(7,211)
Adjusted basic earnings/(loss) per share	8	0.89p	1.24p	(2.00p)
Adjusted diluted earnings/(loss) per share	8	0.89p	1.23p	(2.00p)

  GROUP BALANCE SHEET

as at 31 October 2008

	Notes	Unaudited 31 October 2008 £'000	Unaudited 31 October 2007 £'000	Audited 30 April 2008 £'000
Assets
Non-current assets
Goodwill	9	11,486	9,728	10,840
Other intangible assets	9	14,909	22,785	19,621
Property, plant and equipment	9	77,564	86,288	79,850
Investment property	9	2,815	3,004	3,105
Investments in associates		677	516	595
Other financial assets - held to maturity		486	328	445
- available-for-sale		105	109	123
Deferred tax assets		142	852	142
Trade and other receivables		1,389	1,577	1,359
		109,573	125,187	116,080
Current assets
Inventories		30,401	30,742	34,935
Trade and other receivables		29,782	32,720	32,372
Other financial assets - held to maturity		278	64	13
- available-for-sale		286	406	333
Derivative financial asset		77	-	32
Current tax		138	1,882	3,672
Cash and cash equivalents	11	21,785	27,808	30,371
		82,747	93,622	101,728
Assets held for sale		-	-	469
Total assets		192,320	218,809	218,277
Equity
Share capital		2,037	2,035	2,037
Share premium		5,436	5,377	5,436
Treasury shares		(5,802)	(5,802)	(5,802)
Other reserves		12,820	(984)	9,242
Retained earnings		67,630	85,184	66,019
Total shareholders' equity	10	82,121	85,810	76,932
Minority interests	10	2,712	2,313	2,589
Total equity		84,833	88,123	79,521
Liabilities
Non-current liabilities
Financial liabilities		35,530	14,466	32,365
Post-employment benefit obligations		4,764	3,862	4,245
Provisions		4	4	3
Deferred tax liabilities		6,743	10,577	7,806
Trade and other payables		1,470	961	784
		48,511	29,870	45,203
Current liabilities
Financial liabilities		16,903	47,877	44,036
Derivative financial liability		-	-	62
Provisions		3,041	2,326	2,098
Current tax		3,936	5,586	2,969
Trade and other payables		35,096	45,027	43,104
		58,976	100,816	92,269
Liabilities held for sale		-	-	1,284
Total equity and liabilities		192,320	218,809	218,277

  GROUP CASH FLOW STATEMENT

for the six months ended 31 October 2008

		Unaudited 6 months to 31 October 2008 £'000	Unaudited 6 months to 31 October 2007 £'000	Audited Year to 30 April 2008 £'000
Cash flows from operating activities
Profit/(loss) before tax		1,616	2,149	(21,650)
Finance cost		2,390	2,063	4,491
Finance revenue		(422)	(1,026)	(1,464)
Operating profit/(loss) from continuing operations		3,584	3,186	(18,623)
Operating loss from discontinued operations		-	(496)	(710)
Share of post-tax loss from associates		24	71	1
Amortisation and depreciation		16,784	16,077	39,122
Impairment		3,238	-	7,827
Loss on sale of property, plant and equipment		74	277	410
Exchange differences		820	216	2,092
Other items		(14)	(517)	35
Changes in working capital		(2,481)	6,328	5,810
Cash generated from operations		22,029	25,142	35,964
Interest paid		(2,330)	(2,085)	(4,501)
Taxation received/(paid)		1,324	(4,677)	(8,286)
Net cash generated from operating activities		21,023	18,380	23,177
Cash flows from investing activities
Acquisition of subsidiaries, net of cash acquired		-	304	338
Investment in intangible assets		(1,190)	(3,626)	(5,571)
Purchase of property, plant and equipment		(6,345)	(14,085)	(25,396)
Proceeds from sale of property, plant and equipment		187	298	1,540
Payments to acquire other investments		(56)	-	-
Proceeds from sale of available-for-sale investments		-	-	90
Interest received		207	493	803
Dividends received from associate		-	54	108
Net cash utilised in investing activities		(7,197)	(16,562)	(28,088)
Cash flows from financing activities
Issue of Ordinary shares to equity shareholders		-	5	66
Purchase of treasury shares		-	(3,835)	(3,835)
Repayment of capital element of finance leases		(235)	(59)	(136)
Proceeds from borrowings		8,539	1,510	22,238
Repayment of borrowings		(10,456)	(3,965)	(9,446)
(Increase)/decrease in other financial assets		(241)	11	24
Dividends paid to equity shareholders		-	(3,659)	(8,690)
Net cash (utilised in)/generated from financing activities		(2,393)	(9,992)	221
Net increase/(decrease) in cash and cash equivalents		11,433	(8,174)	(4,690)
Cash and cash equivalents at beginning of the period		8,317	11,573	11,573
Exchange gain on cash and cash equivalents		2,001	31	1,434
Cash and cash equivalents at end of the period		21,751	3,430	8,317

  GROUP STATEMENT OF RECOGNISED INCOME AND EXPENSE 

for the six months ended 31 October 2008

	Unaudited 6 months to 31 October 2008 £'000	Unaudited 6 months to 31 October 2007 £'000	Audited Year to 30 April 2008 £'000
Income and expense recognised directly in equity
Actuarial loss on defined benefit pension scheme and other post-employment benefit obligations	-	(478)	(571)
Exchange differences	3,811	1,311	11,799
	3,811	833	11,228
Taxation on items taken directly to or transferred from equity
Actuarial loss on defined benefit pension scheme and other post-employment benefit obligations	-	137	151
Net income recognised directly in equity	3,811	970	11,379
Profit/(loss) for the period	1,639	(725)	(19,813)
Total recognised income and expense for the period	5,450	245	(8,434)
Attributable to:
- Equity shareholders of the Parent	5,327	67	(8,888)
- Minority interests	123	178	454
	5,450	245	(8,434)

NOTES TO THE INTERIM REPORT

1 Corporate information

The condensed consolidated interim financial statements of Photo-Me International plc (the 'Company') for the six months ended 31 October 2008 ('the Interim Report') were approved and authorised for issue by the Board of Directors on 17 December 2008.

The Company is a public limited company, incorporated and domiciled in England, whose shares are quoted on the London Stock Exchange, under symbol PHTM. 

Photo-Me's principal activities are the operation and service of unattended instant service equipment, including photobooths for identification and fun purposes, digital media kiosks, copiers, express print services, children's rides and other vending and amusement equipment, together with the manufacture (including by sub-contractors) and the sale and service of photo-processing equipment (mainly minilabs and central processing laboratories), together with the sale of related spare parts and consumables. 

2 Basis of preparation and accounting policies

The condensed consolidated interim financial statements for the six months ended 31 October 2008 have been prepared in accordance with IAS 34 Interim Financial Reporting and International Financial Reporting Standards ('IFRS') as adopted by the European Union ('EU') and in accordance with the Disclosure and Transparency Rules of the UK Financial Services Authority.  They do not include all of the information and disclosures required for full annual financial statements, and should be read in conjunction with the Group's financial statements for the year ended 30 April 2008.

The Interim Report is unaudited but has been reviewed by the auditors and their report to the directors is included in the Interim Report. The comparative figures for the financial year ended 30 April 2008 are not the Company's statutory accounts for that financial year. Those accounts have been reported on by the Company's auditors and delivered to the registrar of companies. The report of the auditors was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 237(2) or (3) of the Companies Act 1985.

Accounting policies

The accounting policies applied by the Group in this Interim Report are the same as those applied in the Group's financial statements for the year ended 30 April 2008.

Discontinued operations 

The Group's US vending business was disposed of on 16 July 2008 with effect from 1 May 2008.  At 30 April 2008, this business was classified as assets and liabilities held for sale in the balance sheet and its results were shown as a discontinued operation in the income statement.  Accordingly, the results for the six months ended 31 October 2007 have been restated to show the results of this business as a discontinued activity.

Use of non-GAAP profit measures

Items which, due to their significance and special nature, do not reflect the Group's underlying performance, are excluded from underlying profit and performance. These items may be gains or losses and can have a significant impact on both absolute profit and profit trends. 

The directors believe that underlying profit (referred to as adjusted profit) and underlying diluted earnings per share (referred to as adjusted earnings per share) provide additional useful information to shareholders on underlying trends and performance. These measures are used internally and may not be directly comparable to other companies' adjusted profit measures, as underlying profit is not defined under IFRS.

Risks and uncertainties

The principal risks and uncertainties affecting the business activities of the Group are set out in the 'Risks and Uncertainties' section of the Interim Management Report, contained within this Interim Report.

3 Segmental analysis

The Group pursues two principal activities: Operating and Sales & Servicing. These segments have been identified as the primary segments, as the Group organises and manages its business in accordance with these activities.  In prior periods, Operations was referred to by the Group as Vending, and Sales & Servicing was referred to as Manufacturing.

Operations comprises the operation of photobooths and other vending equipment, including digital media kiosks and children's rides. Sales & Servicing comprises the manufacture (by both the Group and subcontractors), sale and after-sale servicing of photo-processing equipment, together with the servicing of other third-party equipment. 

The segment results are as follows:

	Operations £'000	Sales & Servicing £'000	Group overheads £'000	Sub-total  £'000	Discontinued activity  £'000	Total £'000
Six months to 31 October 2008
Total revenue	85,728	37,091	-	122,819	-	122,819
Inter-segment sales	-	(6,915)	-	(6,915)	-	(6,915)
Revenue	85,728	30,176	-	115,904	-	115,904
Operating profit/(loss) before exceptional items	11,059	(4,269)	357	7,147	-	7,147
Exceptional items (note 4)	(563)	(3,000)	-	(3,563)	-	(3,563)
Segment result	10,496	(7,269)	357	3,584	-	3,584

Group overheads are reported net of foreign exchange gains arising on intercompany financing balances, primarily with the Company's Japanese subsidiary.  The impact of foreign exchange in prior periods was not material.

	Operations £'000	Sales & Servicing £'000	Group overheads £'000	Sub-total  £'000	Discontinued activity  £'000	Total £'000
Six months to 31 October 2007
Total revenue	78,339	41,886	-	120,225	628	120,853
Inter-segment sales	-	(13,771)	-	(13,771)	-	(13,771)
Revenue	78,339	28,115	-	106,454	628	107,082
Operating profit/(loss) before exceptional items	11,269	(331)	(2,095)	8,843	(496)	8,347
Exceptional items (note 4)	(144)	(1,215)	(4,298)	(5,657)	-	(5,657)
Segment result	11,125	(1,546)	(6,393)	3,186	(496)	2,690

	Operations £'000	Sales & Servicing £'000	Group overheads £'000	Sub-total  £'000	Discontinued activity  £'000	Total £'000
Year to 30 April 2008
Total revenue	148,821	86,156	-	234,977	1,156	236,133
Inter-segment sales	-	(25,293)	-	(25,293)	-	(25,293)
Revenue	148,821	60,863	-	209,684	1,156	210,840
Operating profit/(loss) before exceptional items	9,072	(7,782)	(4,572)	(3,282)	(710)	(3,992)
Exceptional items (note 4)	(5,748)	(5,160)	(4,433)	(15,341)	-	(15,341)
Segment result	3,324	(12,942)	(9,005)	(18,623)	(710)	(19,333)

The discontinued activity relates to the Group's US vending (see note 5).

Seasonality of operations

Historically, the Group's Operations activities have shown greater revenue and profits in the first half of the year than the second, whilst Sales & Servicing has shown greater revenue and profits in the second half.  For the current year ending 30 April 2009, it is expected that this pattern will continue for Operations. For Sales & Servicing, which is reliant upon customers being able to access credit facilities to finance the purchase of equipment, there is considerable uncertainty surrounding the performance of this business segment in the second half.

4 Exceptional items

The Group separately identifies and discloses significant one-off or unusual items (termed exceptional items).  Management believes this provides a more meaningful analysis of the trading results of the Group.

	6 months to 31 October 2008 £'000	6 months to 31 October 2007 £'000	Year to 30 April 2008 £'000
Charged against operating profit
Impairment of intangible assets	3,000	-	2,804
Impairment of property, plant and equipment	-	-	4,230
Write-down of inventory	238	-	666
Impairment of property, plant and equipment	-	-	127
Employment termination and other restructuring costs	325	1,707	3,208
Strategic review costs	-	3,950	4,306
	3,563	5,657	15,341
Credited as finance revenue	-	-	(571)
Total exceptional costs	3,563	5,657	14,770
Related tax credit	(1,227)	(815)	(2,805)
Net exceptional costs	2,336	4,842	11,965

Exceptional items in the six months ended 31 October 2008 primarily relate to a provision for impairment of previously capitalised research and development costs for minilab photo-processing equipment, on which prospects for sales have deteriorated.  In addition, a write-down of the value of spare parts connected with operating equipment previously impaired has also been treated as an exceptional item, as has an adjustment to costs relating to a termination effected in the prior year and treated as an exceptional item.

 5 Discontinued activity

The discontinued activity relates to the Group's US vending business, the sale of which was completed on 16 July 2008 with effect from 1 May 2008.

	6 months to 31 October 2008 £'000	6 months to 31 October 2007 £'000	Year to 30 April 2008 £'000
Revenue	-	628	1,156
Operating loss	-	(496)	(710)
Net finance costs	-	(22)	(37)
Loss before tax	-	(518)	(747)
Tax expense	-	-	-
Loss after tax	-	(518)	(747)
Profit on sale	815	-	-
Profit/(loss) for period	815	(518)	(747)

During the six months ended 31 October 2007, the American business contributed cash flows of £145,000 from operating activities, an outflow of £89,000 from investing activities and £1,000 from financing activities.

During the year ended 30 April 2008, the American business contributed cash flows of £122,000 from operating activities, an outflow of £92,000 from investing activities and an outflow of £13,000 from financing activities. 

6 Taxation

	6 months to 31 October 2008 £'000	6 months to 31 October 2007 £'000	Year to 30 April 2008 £'000
Profit/(loss) before tax from continuing operations	1,616	2,149	(21,650)
Total taxation (charge)/credit	(792)	(2,356)	2,584
Effective tax rate	49.0%	109.6%	11.9%

The taxation expense is recognised based on management's best estimate of the tax rate expected for the full financial year.  The significantly higher effective tax rate for the six months to 31 October 2007 arose from a combination of certain exceptional strategic review costs which are not deductible for tax in the UK, an overseas adverse prior year adjustment, and no tax relief being taken for losses arising overseas.  The lower effective tax rate for the year ended 30 April 2008 arose from the non-recognition of deferred tax assets arising from carried forward tax losses in certain jurisdictions.

7 Dividends

An interim dividend of £3.7m (1.00p per share) in relation to the year ended 30 April 2007 was paid on 3 May 2007. A final dividend of £5.0m (1.40p per share) in relation to the year ended 30 April 2007 was paid on 2 November 2007. No dividends were paid in relation to the financial year ended 30 April 2008 and the Directors have not declared an interim dividend in relation to the year ending 30 April 2009.

8 Earnings/(loss) per share

The earnings and weighted average number of shares used in the calculation of earnings/(loss) per share are set out in the table below:

	6 months to 31 October 2008	6 months to 31 October 2007	Year to 30 April 2008
Basic earnings/(loss) per share	0.47p	(0.25p)	(5.52p)
Diluted earnings/(loss) per share	0.47p	(0.25p)	(5.52p)
Earnings/(loss) available to Ordinary shareholders (£'000)	1,688	(890)	(19,908)
Weighted average number of shares in issue in the period
- basic ('000)	359,724	361,288	360,425
- including dilutive share options ('000)	359,724	363,315	360,425

In addition to showing on the face of the income statement total earnings/(loss) per share (from continuing and discontinued operations), the Group also shows on the face of the income statement earnings/(loss) from continuing operations.

	6 months to 31 October 2008	6 months to 31 October 2007	Year to 30 April 2008
Basic earnings/(loss) per share from continuing operations	0.24p	(0.10p)	(5.32p)
Diluted earnings/(loss) per share from continuing operations	0.24p	(0.10p)	(5.32p)
Earnings/(loss) available to Ordinary shareholders (£'000)	1,688	(890)	(19,908)
Less (profit)/loss on discontinued operations (£'000)	(815)	518	747
Earnings/(loss) from continuing operations (£'000)	873	(372)	(19,161)
Weighted average number of shares in issue in the period
- basic ('000)	359,724	361,288	360,425
- including dilutive share options ('000)	359,724	363,315	360,425

As a non-GAAP measure, the Group has decided to show on the face of the income statement those material one-off items of income and expense which, because of their nature and expected infrequency of the event giving rise to them, merit separate disclosure to allow shareholders to better understand the underlying performance of the Group and to facilitate comparison with prior periods. As a result, the Group also shows basic and diluted earnings per share on this adjusted basis from continuing operations.

  Adjusted earnings/(loss) per share calculations

	6 months to 31 October 2008	6 months to 31 October 2007	Year to 30 April 2008
Adjusted basic earnings/(loss) per share	0.89p	1.24p	(2.00p)
Adjusted diluted earnings/(loss) per share	0.89p	1.23p	(2.00p)
Unadjusted earnings/(loss) available to Ordinary shareholders (£'000)	873	(372)	(19,161)
Strategic review costs (£'000)	-	3,950	4,306
Impairment charges (£'000)	3,238	-	7,827
Restructuring and other exceptional costs (£'000)	325	1,707	3,208
Exceptional finance revenue (£'000)	-	-	(571)
Minority share of exceptional items (£'000)	-	-	(15)
Tax on adjustments to earnings (£'000)	(1,227)	(815)	(2,805)
Adjusted earnings/(loss) (£'000)	3,209	4,470	(7,211)
Weighted average number of shares in issue in the period
- basic ('000)	359,724	361,288	360,425
- including dilutive share options ('000)	359,724	363,315	360,425

9 Non-current assets - intangibles, property, plant and equipment and investment property

	Goodwill £'000	Capitalised research & development costs £'000	Other  intangible assets £'000	Property, plant and equipment £'000	Investment property £'000
Net book value at 1 May 2008	10,840	14,575	5,046	79,850	3,105
Exchange adjustment	(5)	285	235	4,879	(2)
Additions
- photobooths and vending machines	-	-	-	5,342	-
- research and development costs	-	1,111	-	-	-
- other additions	651	-	79	1,003	-
- transfers	-	-	(5)	5	-
Depreciation provided in the period	-	(2,737)	(680)	(13,079)	(288)
Impairment	-	(3,000)	-	-	-
Net book value of disposals	-	-	-	(436)	-
Net book value at 31 October 2008	11,486	10,234	4,675	77,564	2,815

The addition to goodwill arises from the reassessment of the amount of deferred contingent consideration arising on the acquisition of assets by Imaging Postprocessing Solutions GmbH.

10 Reconciliation of movements in equity

				6 months to 31 October 2008 £'000	6 months to 31 October 2007 £'000	Year to 30 April 2008 £'000
Balance at beginning of period				76,932	98,301	98,301
Exchange differences				3,639	1,298	11,434
Shares issued in the period				-	5	66
Purchase of treasury shares				-	(3,835)	(3,835)
Profit/(loss) for the period				1,688	(890)	(19,908)
Share options				(138)	(38)	(22)
Actuarial movements in defined benefit pension scheme and other post-employment benefit obligations				-	(478)	(565)
Deferred tax on actuarial movements				-	137	151
Dividends				-	(8,690)	(8,690)
Balance at end of period				82,121	85,810	76,932

  Minority interests

	6 months to 31 October 2008 £'000	6 months to 31 October 2007 £'000	Year to 30 April 2008 £'000
At beginning of period	2,589	2,135	2,135
Exchange differences	172	13	365
(Loss)/profit for the period	(49)	165	95
Other movements	-	-	(6)
At end of period	2,712	2,313	2,589

11 Net debt

	31 October 2008 £'000	31 October 2007 £'000		30 April 2008 £'000
Cash and cash equivalents per the balance sheet	21,785	27,808	30,371
Bank overdrafts	(34)	(24,378)	(22,070)
Financial assets - held to maturity	764	392		458
Deposits - available-for-sale	-	28		24
Non-current bank loans	(35,083)	(13,471)		(31,906)
Current instalments on bank loans	(16,495)	(23,372)		(21,513)
Finance leases	(821)	(580)		(912)
Net debt	(29,884)	(33,573)		(45,548)

12 Related parties

The Group's significant related parties are disclosed in the 2008 Annual Report and include its associates, its pension funds and the Company's directors. 

In prior years related parties also included companies in which a certain former director had declared an interest and with which the Group had a trading relationship. This director resigned during the year ended 30 April 2008 and thus there is no related party transactions, in respect of these parties, in the current period.

RESPONSIBILITY STATEMENT OF THE DIRECTORS IN RESPECT OF THE HALF-YEARLY FINANCIAL REPORT

We confirm that to the best of our knowledge:

• the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU; 

• the interim management report includes a fair review of the information required by: 

(a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

(b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

By order of the Board

Hugo Swire (Chairman)

Jean-Luc Peurois (Group Finance Director)

17 December 2008

INDEPENDENT REVIEW REPORT BY KPMG AUDIT PLC TO PHOTO-ME INTERNATIONAL PLC

Introduction

We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 31 October 2008 which comprises the Group income statement, the Group balance sheet, the Group cash flow statement, the Group statement of recognised income and expense and the related explanatory notes. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the company in accordance with the terms of our engagement to assist the company in meeting the requirements of the Disclosure and Transparency Rules ('the DTR') of the UK's Financial Services Authority ('the UK FSA'). Our review has been undertaken so that we might state to the company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company for our review work, for this report, or for the conclusions we have reached.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the DTR of the UK FSA.

As disclosed in note 2, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by the EU. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU.

Our responsibility

Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review. 

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 31 October 2008 is not prepared, in all material respects, in accordance with IAS 34 as adopted by the EU and the DTR of the UK FSA.

KPMG Audit Plc
Chartered Accountants  

1 Forest Gate

Brighton Road

Crawley

RH11 9PT

17 December 2008 

 

END

 

 

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