January 2007

Media Products, which are supplied to book, magazine and music publishers as well as film and computer games software companies, mainly in the UK. Products supplied include:

• Books – monochrome hardback and paperback books for the trade and general, reference and religious markets.
• Magazines – the production of high quality saddle-stitched and perfect bound magazines and associated mailing services for consumer and business-to-business publishers.
• Multimedia – in the UK and continental Europe, the production of inserts, inlays and booklets and special packaging for CDs and DVDs for the audio, video, computer games and software markets;

Commercial Products, which are mainly supplied not for resale to commercial and governmental organisations and which include the following products and services:

• Direct Response and Commercial print – personalised direct mail, other mail order pieces, catalogues, brochures and leaflets, corporate publications including company annual reports.
• Point-of-Sale and Large Format Graphics – the provision of a full range of printed products and services for retailers (mainly multiple store chains) and international brand companies; and a wide range of large format digital print services to the exhibition, retail, creative, live event and leisure sectors.

USA, where the Group supplies magazine, commercial and point-of-sale markets.

Businesses which principally supply one of the above segments may also supply customers in other market segments in respect of a small part of their sales.

It is considered that the demand for focused and therefore shorter-run, quicker turnaround work will grow in the Group’s markets. We expect that as advertisers accumulate more information on consumers’ purchasing habits, they will focus their promotions accordingly; similarly, magazine customers will continue to target titles at more narrowly defined audience groups; book publishers will seek to avoid risky investment in long runs when they can rely on a quick reprint for a bestselling title; and requirements for point-of-sale materials for in-store promotions are immediate and time-sensitive and specifically targeted at individual stores within multiple chains.

The Group often provides added value services such as stock management, fulfilment, distribution, mailing and logistics services in addition to the supply of the printed product. We concentrate on supplying markets which have high service requirements, and products are mostly supplied just-in-time to domestic markets. There is little export business and import penetration into the Group’s markets is limited.

During the last year, in the UK, we set up a Group Sales team, offering customers the combined service and printing resources across both the Commercial and Media Products segments and a single point of contact with St Ives’ facilities. This strategy is directed to offering customers an alternative to print management companies and other intermediaries who, in contrast to St Ives, predominantly sub-contract their customers’ work to the trade thereby surrendering a large degree of control and accountability.

We keep all areas of our business under continual review and remain committed to the development and growth of our core activities for the benefit of shareholders.

The business of the Group in its last financial year is reported on below by market segment.

Media Products

Comprise the production of books, magazines and printing for the multimedia and music industries.

Media Products represented 47% of Group external sales.

Books

Cost effective short initial runs and quick turnaround reprints allow publishers to reduce risk stock on the initial run and respond quickly to market demand while still keeping their risk stock to a minimum.

Books currently account for approximately 37% of Media Products’ external sales. St Ives has a substantial share of the UK’s monochrome trade and general book market. Some Bibles and reference books are also manufactured. The Group’s principal competitors are CPI Group (Cox & Wyman, Bath Press, Mackays and Bookmarque) and other small to medium sized private companies.

St Ives works for almost all of the major UK trade publishing houses, including Bloomsbury, Hachette (including Orion, Hodder, Headline and Little, Brown), Harper Collins, Penguin and Random House, which together account for the significant majority of sales.

The UK demand for monochrome books remains strong and our Book business continues to benefit from its unrivalled reputation and ability to deliver a first class service. We have seen further growth in demand for direct deliveries and for post-bind services. Activities such as stickering and shrink wrapping are often a requirement as a result of books being delivered directly to retail outlets or customers’ chosen distributors.

During the year we once again produced a high proportion of the bestsellers which included ‘Journey’s End’ (Josephine Cox) for HarperCollins; ‘Mary, Mary’ (James Patterson) for Headline; ‘Being Freddie: The Story so Far’ (Andrew Flintoff) for Hodder; ‘I Can Make You Thin’ (Paul McKenna) for Transworld; ‘Labyrinth’ (Kate Mosse) for Orion; ‘Next to You’ (Gloria Hunniford) and ‘Freakonomics’ (Levitt and Dubner), both for Penguin; ‘Mao: The Unknown Story’ (Chang and Halliday) for Random House; ‘Predator’ (Patricia Cornwell) and ‘Extreme: My Autobiography’ (Sharon Osbourne), both for Time Warner; ‘Schott’s Almanac’ (Ben Schott) for Bloomsbury.

Investment during the year included additional printing capacity further to strengthen our ability to respond to ever increasing demand for faster service; further development of electronic trading solutions for our customers; and the expansion of our cover and jacket printing capabilities. Utilising IT solutions to support the additional post-bind services being offered has been particularly important to our growth in this area. We continue to develop online solutions to enable our customers to track orders and to place production and delivery instructions.

In addition to winning several new accounts, we are delighted to have renewed some major contracts during the year for periods of up to seven years. The current dollar exchange rates have made it difficult to grow sales to the US Bible market but we have retained some key customers, including IBS, Living Stream and Tyndale.

Magazines

UK magazines currently account for around 45% of Media Products’ external sales. All types of consumer and business magazines are produced from shorter-run sheet fed titles of 1,000+ copies, to longer-run heatset web offset magazines. Our competitors include Cooper Clegg, Polestar, Southernprint, Wyndeham Press, and a number of small to medium sized private companies.

Magazines with paginations that vary every issue are often produced for customers within hours of the disc or digital transmission being received. This allows customers more selling time for filling their advertising space and including up-to-the-minute editorial material. St Ives works for most of the UK magazine publishers including The Economist, EMAP and Time Out, as well as the UK businesses of international publishers such as AOL/Time Warner (IPC), Condé Nast and VNU.

In order further to reduce our costs of production during the year we purchased a new Goss M600 press for our Plymouth site which, when fully operational in Autumn 2006, will replace two older, less productive, presses. This press, complemented by the high-speed Kolbus/Ferag perfect binder that was recently installed, will improve productivity.

Pricing pressures remain due to continued over-capacity in the web offset market. During the year we declined work for a number of customers because we believed that prices had reached uneconomic levels. As a consequence, sales in the second half of the financial year were reduced in comparison to the previous year and further restructuring of our cost base was implemented mainly by reducing overheads.

Our strategy of seeking shorter-run time-sensitive work, which has resulted in our winning over 80 new titles, continues to broaden our customer base and we are also able to offer our customers integrated printing, mailing and fulfilment services following the establishment of SouthWest Mailing on a site adjoining our factory at Roche.

Multimedia

The Group’s Multimedia business provides CD and DVD booklets and inlays and a wide range of specialist board packaging to music, television series, movie and computer games publishers and manufacturers of electronic media in both the UK and Europe. Our main competitors in the UK and Europe are AGI and Shorewoods (both owned by US parent companies) and a range of smaller operations serving local markets: CMCS, Delga and Ingersol in the UK and Alt, Kaiser and Pozzolli in Europe. Two major disc duplicators serving publishers in Germany and The Netherlands have their own in-plant printing facilities.

Booklets and inserts for new release music CDs are often produced with a large initial order to meet the product launch requirements followed by repeat, short-run, just-in-time orders. Quick reprints are linked to the CD disc duplicators’ production control systems to keep customers’ risk stock to a minimum.

Customers include most of the major international home entertainment and media publishers including Electronic Arts, Microsoft, Universal Music, Universal Pictures, Warner Home Entertainment, Warner Music; large independent UK licensees and distributors including Anchor Bay and Contender; and the major European disc duplicators Cinram, EDC, MediaMotion, ODS, Sonopress, Sony DADC and Technicolor.

The business made significant improvements in the pattern of sales over the prior year despite challenging market conditions. The UK business reaped full year benefits of cost savings implemented from a restructuring initiated in the second half of the previous financial year and from additional sales of multimedia print. Progress has been made in broadening the customer base at Uden, our business based in The Netherlands.

Our reputation for quality and reliability throughout the year remains unrivalled amongst the specialist print suppliers serving multimedia publishers. This has resulted in our securing substantial additional contracted work from Universal Music and EDC Blackburn.

The multimedia market is expected to remain highly seasonal and extremely price competitive. To mitigate this we are also offering our specialist packaging capabilities to other markets which present opportunities for winning some counter-cyclical work.

There is little sign that the price pressure experienced in recent years will abate in the near future. In reaching longer-term agreements with our principal customers we have negotiated increased volumes and revised service levels in exchange for sharing resultant savings in costs. More flexible working arrangements with our workforce to better align our capacity with the seasonal requirements of our customers were achieved during the year.

Include direct response and general commercial printing; corporate and financial security printing; and point-of-sale materials for major retailers and brands.

Commercial Products accounted for 37% of Group external sales.

Direct Response

Products include mail order catalogues, business catalogues, brochures, leaflets, newspaper and magazine inserts and other promotional material and direct mail pieces mostly for more narrowly targeted, specialist and shorter-run markets. Services provided to customers include data manipulation, personalisation and fulfilment, as well as printing.

The Group’s main competitors are Communisis, Howitt, Pindar, Polestar, Wyndeham Press and other small to medium sized private companies.

As almost all commercial enterprises and other organisations of any size have some requirement for print, the market is substantial. In the UK, significant customers for our targeted and personalised print services include Co-op, Focus, the Government (including HMRC, DWP and COI), HSBC, Makro, OgilvyOne, RBS, Shop Direct and Somerfield.

Market conditions within our commercial markets have remained extremely challenging throughout the year as supply continued to exceed demand and, as a consequence, trading margins have declined on sales which were maintained overall, but which masked reductions in prices and added value. Managing capacity loadings was particularly challenging, with little forward visibility.

There has, however, been growth in sales to our major commercial customers which has partly offset reductions in demand from those Government departments with whom we have dealt.

In the commercial web offset market we have had some success within the retail sector in winning more time-sensitive, in-store marketing material. We are now even better placed to win this work following the commissioning of a new 5 unit 32-page short grain press at our Bradford site in May 2006. The overall profitability of our commercial web operations has declined over the prior financial year due mainly to lower sales volumes following the end of a contract with a major customer as well as reduced prices reflecting the wider commercial print market.

More targeted direct marketing has resulted in a fall in demand for volume personalised direct mail although the number of individual campaigns undertaken for our customers has risen. We have also seen an increase in variable content colour personalised work, particularly in the automotive, entertainment and financial sectors as a result of the investment in digital print facilities in Leeds in the previous year. The trading performance of our direct mail, digital and graphics operations was adversely affected by fierce competition in an over-supplied market which saw a significant reduction in demand from the financial services sector in particular.

Our commercial sheet fed businesses also suffered from significant over-supply within the wider market arena.

During the year we established a new Group Sales team. The costs of setting up and developing the infrastructure were incurred from January 2006. Initial orders were won in April and sales have been built up as the year progressed, with incremental sales being secured from existing and new customers, including Atos, Ethel Austin, Halfords, Manor Bakeries and Verve Venues – an encouraging start. Customers are now able to have immediate access to the full range of St Ives’ capabilities through a dedicated sales team, headed by the Group Sales director supported by a new business development director.

Customers are offered a proprietary online tool, named ‘dna’™, to facilitate complete control of all their print activity, including progress monitoring, stock and logistics management, storage and management of creative assets and proofing.

Access to a centralised customer service team gives customers the opportunity to simplify the process of specifying, buying and managing complex projects.

Point-of-Sale

We produce point-of-sale material for the retail market, predominantly in the UK, and for UK and international brands. Point-of-sale products and services account for approximately 38% of Commercial Products’ external sales. Campaigns are mainly bespoke, store specific and produced to tight timetables to meet marketing needs. This market has grown considerably in importance for the Group following the acquisition of SP Group in September 2004 and of Marks and Spencer’s in-house printing facility in August 2005. As well as supplying printed products, the Group usually provides ancillary services, including complex collation, fulfilment and distribution, front-end inventory control and asset management. Customers include Arcadia, Cadbury, Halfords, Levi’s, Marks and Spencer and SPAR.

Competitors include Augustus Martin, bezier and numerous small private companies.

This was a year of mixed fortunes: sales grew 63%, year-on-year, as a result of the absorption of Crayford’s point-of-sale activities; the implementation of a long-term exclusive supply agreement with Marks and Spencer for its point-of-sale requirements (including the purchase and integration of its print operation in Burnley); substantial sales growth from other new and existing customers; and the establishment of St Ives Logistics at a new purpose-built facility in Redditch.

The significant volume increase and integration of additional facilities at St Ives Logistics and Burnley caused disruption to the business. High outsourcing and labour costs to meet customers’ needs had a short-term detrimental impact on margins which, predominantly, affected the first half of the financial year. As announced on 29 August 2006 the previously robust accounting controls failed and there were a number of accounting errors which were identified at the year end. Trading and margins in the second half of the financial year were in line with expectations. Comment on our reponses to this failure in controls is made in the report on Corporate Governance contained in the Annual Report and Accounts.

While competitive pressure in the UK continues, we maintain strong relationships with our customers by providing unique added value services to take costs out from the supply chain. High levels of customer service, fast response times and detailed reviews of performance against service level agreements, all serve to cement customer loyalty.

The markets served are vulnerable to volatility in high street spending and consumer confidence but we believe that our business model gives us a competitive advantage. We remain a market leader in the point-of-sale field. Recent capital investments, most notably in a large format litho printing press, provides a platform for further growth and place us in a good position to pursue new sales opportunities as they arise.

On 6 November 2006 St Ives acquired the whole of the issued share capital of Service Graphics Limited, the UK's leading independent large format graphics producer. It provides a wide range of large format digital print services and offers a fully comprehensive consultancy, manufacturing and installation service to the exhibition, retail, creative, live event and leisure sectors. Particular areas of expertise include the provision of all kinds of display products, modular and custom designed exhibition stands, full service retail solutions and giant media production. Service Graphic’s current clients include: RBS, Berkeley Homes, BAA and Boots.

The Company has some 400 employees located in offices and production facilities in London, Bristol, Edenbridge, Edinburgh, Glasgow, Hayes (Middlesex), Nottingham, Salisbury, Skelmersdale and Wales giving it extensive UK geographic coverage. Following the acquisition it will continue to be managed by the existing management team as part of the Commercial Products Segment of St Ives under the leadership of Simon Ward. The acquisition gives both Service Graphics and St Ives the opportunity to cross sell a wider product offering to a broader customer base. There is minimal product or customer overlap and the technical capabilities and product offerings of the two businesses are complementary.

Financial

On 19 December 2006 St Ives plc announced that it had agreed to sell to Bowne & Co Inc (to visit their website please click here) all the corporate finance related activities carried on by St Ives Financial Limited together with the whole of the share capital of St Ives Financial Inc and St Ives Financial Japan KK, the activities of which are solely corporate finance related.  St Ives is retaining its Company Report and Accounts printing business. This transaction completed 16 January 2007.

Services supplied to these markets in the last financial year include the typesetting, proofing, proof distribution and production of statutory or regulatory documents either for the corporate finance transaction market (such as take-overs and mergers, reconstructions, and equity and debt issuance) or annual reports. We offer customers a range of internet-based products for proof distribution and amendment. These products comprise a suite of facilities under the brand name smartproducts™ which facilitate the editing and proof reading of time-sensitive confidential documents, including smartEDGAR™ (for electronic filing with the SEC), smartforum™ (for collaborative amendment of proofs) and smartapps™ (for the compilation of regular fund reports). Smartforum™ was used in compiling the Company’s Annual Report and Accounts.

Corporate finance documentation is produced securely and on an overnight basis. Annual Report and Accounts and projects requiring large and complex distributions are also printed to tight timetables, using the Group’s facilities whenever practicable.

Financial printing accounts for approximately 24% of the Group’s external sales of Commercial Products, less than a quarter of which relates to corporate financial transactional work. This activity is mainly in the second half of our financial year. In the UK we produce Annual Report and Accounts for around 30% of FTSE 100 companies.

The remaining turnover in financial printing has been the Group’s most unpredictable market and low levels of activity have made further cost reductions necessary.

The Group’s principal competitors are Bowne, Merrill Corporation and RR Donnelley (US companies) and, in the UK, Greenaways, Imprima, Royles (a CPI Group subsidiary) and a number of small private companies.

The market for transactional corporate finance work remains very competitive. Although there has been an increase in the amount of deal activity, over-capacity and more electronic distribution continue to reduce the size of the market. In some cases customers have ceased printing altogether, by making more use of the SEC’s Access=Delivery legislation. Whilst this has led to a decline in printed volumes it has however created a new demand for stronger electronic tracking (provided by smarttrans).

Total sales of financial printing declined during the year. Half of this is attributable to the transfer of the UK Funds business to the Group’s Direct Response business. The balance was due to the loss of some low margin print contracts which were only renewable on an uneconomic basis and a reduction in printed volumes as more documents are distributed electronically. These low levels of activity necessitated further cost reduction initiatives, which included an increase in our outsourcing of typesetting to India.

In the Annual Report and Accounts market, increased legislation has led to the growth of compliance work, with a requirement for greater disclosure within shorter timeframes. Whilst run lengths have remained steady, pagination has expanded and we expect that this trend will continue. In both the corporate finance and the compliance markets, customers are seeking ways of more effectively managing their content and data. They are searching for ways of saving time and reducing cost. Smartproducts™ will assist us to meet these market needs.

Comprise magazine printing, general commercial printing and the supply of point-of-sale materials to retailers and franchisees.

USA revenue represented 16% of Group external sales.

In the USA, the Group produces controlled circulation magazines and specialist mail order catalogues and brochures (predominantly print runs of less than 150,000 copies) and magazines for the Spanish speaking market.

We also produce point-of-sale material for franchise operators, such as Domino’s Pizza and Pizza Hut, and for brand advertising for distribution in national store chains. In addition, we manufacture marketing coupons for News America, which are supplied to up to 30,000 outlets over recurring two week cycles, together with in-store advertising material.

St Ives’ competitors in the USA are Banta, Quad/Graphics, Quebecor, RR Donnelley and a large number of other printers.

The loss sustained by the business resulted mainly from interruption during the most active and damaging hurricane season for many years and from continued industry over-capacity. Physical damage to our premises was light, but we suffered from lengthy power and telecommunications outages and many of our Florida based customers were also affected by the hurricanes and volume was reduced as a result. Our sites in Florida have relocated their computer servers offsite to ensure that they will be able to operate M.I.S. and St Ives On-Line™ services in the event of future hurricane disruption. We have concentrated on securing more repetitive work and continue to focus on customers with a requirement for shorter print runs and higher service levels. Competitors, in an over-supplied market, continue to price at uneconomic levels.

The principal regulations affecting the Group’s day-to-day business and the markets we serve have been identified by the board as Employment Law, Health & Safety Law, Environmental Law, Planning Law, Data Protection legislation, Taxation Law, the law of defamation and Competition Law. The board each year reviews the impact that these might have on the business and how to manage the risks to the business.

The Group has a policy of continuous investment in the latest technology where it can be justified. The size of some capital items is such that expenditure is not evenly spread from year-to-year.

Almost all the Group’s properties are freehold or long leasehold. The Group has also invested significantly in systems to enable it to provide an increasingly rapid, flexible and tailored response to customers’ changing requirements. All the Group’s facilities are equipped with computer-to-plate systems which have been a major contributor to shorter lead times and enhanced service levels. Much of our business is just-in-time, to enable customers to meet their marketing needs, reduce stock levels and stock holding risk, extend selling time for advertising and keep editorial content up-to-date. Inevitably, however, this reduces our forward visibility of activity levels.

Market characteristics have changed little since the start of our new financial year. The majority of the Group’s businesses experienced low demand in the first few weeks of August although volumes have picked up since then.

Our Group Sales team’s efforts have added revenues: since its inception in April 2006 we have invoiced around £1 million of additional sales and signed up a number of long-term contracts for periods of one to three years. Although volume is not guaranteed these contracts currently have an estimated total value of over £20 million over their terms.

Most of our markets have limited visibility and volume can be volatile. Oversupply is prevalent and consequently markets are very price competitive. We continue to seek ways of lowering the cost of production, including investment and refining working patterns to meet continuously changing customer requirements.

None of our customers guarantees volume. However the majority of our book publishing customers are signed up to long-term contracts. We continue to win contracts from magazine customers, mainly in the short to medium run area to replace uneconomic and longer-run work. We have recently won additional titles previously produced by a competitor who has now closed. As always, our mix of work is subject to continuous review.

The book business continues to perform well and we look forward to another successful year and further progress in developing our services beyond traditional book printing and binding services to provide a unique offering to the UK monochrome book market.

Music and multimedia markets have extremely short visibility although demand for special packaging of, in particular, back list titles is a useful addition to the business. Music CD is now a mature product and we expect volumes to fall as downloading from the internet increases.

At the beginning of our new financial year we decided to merge the sales management of our direct and point-of-sale activities. Many customers, particularly in retail and financial services, have requirements for the services of both. The extensive digital facilities of our point-of-sale business are particularly suited to the increasingly focused spend of marketing departments. Our logistics and fulfilment facility is also in demand as customers want more active management of marketing material to reduce waste and distribution costs.

Markets for direct mail and commercial web offset products are still price competitive. Our focus remains on the shorter-run, personalised and targeted areas of this market. Whilst market conditions are expected to remain highly competitive, some customers are becoming concerned about the financial health of certain of our competitors and our financial standing and recent investments in new, technologically advanced, equipment position us well to pursue opportunities as they arise.

Corporate financial documentation activity in both the UK and USA is flat. We have recently outsourced some typesetting requirements to affiliates in India where costs are lower.

Similar market conditions to the UK face our magazine and commercial activities in the USA.

The containment of utility and labour costs is an ever present challenge and there are continuous reviews of these items in particular. We are well invested and, as around 90% of our manufacturing space is occupied freehold or long leasehold, we can be flexible in responding to changing requirements.

Market conditions remain challenging and consumer confidence and related markets do not seem to be particularly robust. However, we believe our continued focus on cost effective, usually shorter-run, time-sensitive, logistically complex and targeted products, coupled with strong commitment to customer service, will provide a base for improved returns for shareholders over time.