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Finance Director
Peter Williams |
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The purpose of this review is
to outline key aspects of the Group's performance over the last
year and of its financial position.
Accounts
No new accounting standards have been published this year. This
means that the accounts have been prepared without the need for
any prior year adjustments, caused by changes in accounting policies.
Additional disclosures have been included in the notes to the accounts
in order to comply with the second year of the transitional arrangements
for the implementation of FRS 17, Retirement Benefits. Last year,
this resulted in disclosure of the main financial assumptions made
in valuing the liabilities of the Group's pension schemes and the
fair value of net assets held. This year disclosure has been made
of amounts that would be reflected in the accounts, together with
an analysis of the movement in scheme surpluses or deficits which
would result. As permitted by FRS 17, the primary statements continue
to be prepared under SSAP 24 "Accounting for Pension Costs".
Turnover
The Group's turnover in the year was £1,945 million, a decrease
of 1% on the previous year. The level of acquisitions of subsidiaries
has been modest this year and this fall in turnover is due to a
reduction in advertising revenues. The analysis of turnover by activity,
illustrated in graph 1, shows that there has been little overall
change in the shape of the graph. Graph 2 shows the geographic split
of turnover. Click
to see turnover graphs... 
Operating Profit
The Group's adjusted operating profit before amortisation and impairment
of intangible assets amounted to £242 million, a 1% increase on
last year's equivalent figure. This year's figure is stated before
charging £9 million of exceptional operating costs, compared to
£10 million of such costs in 2001. Amortisation rose from £47 million
to £55 million, reflecting acquisitions made both in the current
and prior years. In the prior year, we also charged £17 million
in respect of impairments of intangible assets.
The analysis of adjusted operating profit by activity is shown in
graph 3. This shows that the exhibitions, broadcasting and Euromoney
divisions achieved increases in profitability. Within the exhibition
division, the home interest sector grew strongly in the year, whilst
the division benefited overall from a number of non-annual shows.
Broadcasting increased its profits due to a reduction in revenue
investment at DMG Broadcasting and in start up losses at new radio
stations in Australia. Euromoney increased its profits as a result
of strategic initiatives implemented towards the end of the prior
year, involving the closure of loss-making businesses, together
with an extensive cost cutting programme, which mitigated the impact
of the savage downturn in the financial advertising markets. The
other divisions had reduced profitability: for the national newspapers,
the effect of the reduction in advertising revenues was offset largely
by management action early in the year; for the regional newspapers,
profits were lower due to a lower contribution from contract printing
and to revenue investment in the product. The two components of
the business to business information and careers' division had sharply
conflicting fortunes: whilst the former nearly doubled its profits,
the latter suffered from a very weak graduate recruitment market
and the adverse impact of the events of 11th September, 2001 on
its US English language training market. 
Profit before Tax
The contribution from joint ventures and associates rose from £0.4
million to £5.1 million due to reduced losses in new media ventures,
particularly Zoom and Fish4, offset by a lower contribution from
GWR Group plc. GWR's contribution for the year fell significantly
due to the effects of the continued weak advertising market. Income
from fixed asset investments fell due to a reduction in the level
of dividends received from Reuters Group plc. Profit on sale of
fixed assets arose mainly from the sale of surplus properties. Profit
on disposal of businesses comprised that on sale of Eastern Counties
Radio, a further profit-related payment for the earlier sale of
an exhibition by Euromoney and the Group's share of GWR's profit
on disposal of businesses, net of its loss on sale of its 25% interest
in DMG Radio Australia to DMGT. These profits were offset by a loss
on sale of dmg world media's South American operations.
Net interest payable and similar charges rose by £1 million to £69
million: net interest payable was higher due to a higher average
level of debt, whilst other financing charges fell due to lower
deferred consideration outstanding, offset by a premium on redemption
of debt.
The reported profit before tax of £107 million was 30% higher than
last year's figure. Excluding amortisation and other items which
we regard as exceptional, the adjusted profit figure was £183 million,
up 3% on last year.
Taxation
The tax charge of £17.8 million represents 16.6% of profit before
tax and 10.9% of profit before amortisation. The underlying rate
of tax was 27.1%, lower than last year's level and a little below
the UK corporate tax rate, where the Group currently makes most
of its profit. The Group's effective tax rate in the UK is higher
than this due to expenditure disallowed for tax purposes. This is
offset by a lower rate of tax on our US profits, largely due to
deductions for amortisation of acquired goodwill. The reported tax
rate was lower due to the release of prior year provisions of £30
million, primarily relating to agreement of open items with the
UK Inland Revenue. The effect on 2002's profits was to reduce the
underlying tax charge by 3.8% from 2001's rate, a reduction that
should largely remain in place in future years.
Cash Flow and Net Debt
Net debt rose during the year from £875 million to £922 million,
an increase of £47 million. Graph 4 summarises the Group's sources
and use of funds during the year. The net cash inflow from trading
was £265 million, which represented 86% of operating profit before
depreciation and amortisation of the intangible assets. This reflects
the timing of the year end which ended on 29th September this year,
as against 30th September last year, with significant advertising
revenues being receivable on the last day of the month. Had it fallen
a day later, these receipts would have increased operating cash
flow to 96% and net debt would have been reduced by £34 million.
Capital expenditure of £90 million was similar to last year's level,
at a continuing high level during the second year of the programme
to enhance the Group's presses. Acquisitions and investments, net
of disposal proceeds, cost £119 million, the largest item being
the £45 million purchase of Loot. Net tax payments fell by £19 million
to £25 million, reflecting the end of the transitional move to quarterly
current year tax payments in the UK. Click
to see trading and cash flow charts...
In summary and adjusting for the year end date working capital movement,
the Group generated free cash flow of £106 million which it used
to fund net acquisitions of £119 million.
Despite the higher level of debt, the Group's interest cover ratio
remained at 4.7 times this year which we consider to be a comfortable
ratio (see Graph 5). This is a little below our internal target
of 5 times cover but well above our debt covenant level of 2.5 times.
The Group's Standard & Poor's rating has remained unchanged at BBB.
The Group has sufficient committed debt facilities to meet its foreseeable
requirements. It had surplus facilities of £174 million at the year
end, £60 million of which were used in October 2002 to repay its
2.5% Exchangeable Bonds. Following this repayment the Group has
£480 million of Bonds and bank facilities maturing in 2005 and £485
million of Bonds due for repayment in 2013 and 2021.
Treasury Policies
The following paragraphs are a summary of the Group's treasury policies.
Detailed information is given in Note 28 to the balance sheets.
DMGT aims to have sufficient liquidity to meet both operational
and capital cash flows and to impose the minimum cash constraints
on the management and operation of the Group. Financial instruments,
including derivatives, are used by the Group in order to manage
the principal financial risks that arise in the course of business.
These risks are liquidity or funding risk, foreign exchange risk,
interest rate risk and counterparty risk. The instruments are used
within the parameters set by the Finance Committee of the Board,
and are not traded for a profit.
Overview
The Group has adequate committed debt finance to meet current trading
requirements, with over £100 million of unutilised facilities with
terms largely of three years. Foreign exchange risk is not a large
issue for the Group as the majority of its businesses are domestic.
A prudent level of fixed interest rate debt reduces the impact of
interest rate fluctuations.
- (a) Liquidity Risk
It is the Group's policy to have sufficient surplus borrowing
headroom such that its development is not constrained. The Group
is funded by a mixture of equity, debt, and retained profits.
Debt consists mainly of committed bank facilities and bonds.
The bank facilities provide the Group with flexibility for operational
requirements and acquisitions. Uncommitted and overdraft facilities
are also utilised. The bonds currently in issue consist of three
tranches of sterling Eurobonds. A further sterling deep-discount
bond issue, exchangeable for shares in Reuters Group plc, was
redeemed shortly after the year end. Maturities of debt are
spread in order to avoid the requirement for significant repayments
at any point in time, as shown in Graph 6. Surplus funds are
kept to a minimum; when they do arise, they are generally deposited
in money market accounts with banks that provide bilateral credit
lines.
Covenants on debt instruments are kept to a minimum, even if
this results in marginally higher interest costs. External finance
is unsecured and is usually an obligation of the central holding
companies rather than of trading subsidiaries. This gives management
maximum flexibility to run the business without the distraction
of meeting short-term financing requirements. Click
to see Rate of Earnings and Maturity Profile graphs...
- (b) Foreign Exchange Risk
(i) Transaction Risk
Most of the Group's businesses do not transact cross-border:
hence multi-currency transaction risk is not substantial. The
main exception is Euromoney and its subsidiaries whose receipts
are mainly US dollars and payments principally sterling. Euromoney
has a series of US dollar forward sale contracts in place up
to 12 months forward, partially to hedge its dollar revenues
into sterling. Other than Euromoney there were no foreign currency
contracts in existence that hedge revenues or costs. The sterling
value of capital expenditure in foreign currency is fixed using
forward currency purchases.
(ii) Translation Exposure
Borrowings are principally incurred in sterling, US dollars
and Australian dollars. Generally, the proportion of foreign
currency debt (after allowing for any hedging instrument) to
total net debt was approximately equal during the year to the
proportion of foreign operating profit, compared to total Group
operating profit. This is expected to continue.
(c) Interest Rate Risk
The Group aims to have approximately 70% to 80% of its net debt
as fixed interest rate liabilities. The predictability of interest
costs is deemed to be more important than the possible opportunity
cost foregone of achieving lower interest rates. Borrowings
are made in a small number of desired currencies at either fixed
or floating rates. Interest rate swaps, caps and collars are
used to help attain the Group's target level of fixed interest
rate debt. The maturity dates are spread in order to avoid basis,
or interest rate, risk and also to negate short-term changes
in interest rates. At the year end, fixed interest rate debt
represented approximately 72% of total net debt.
- (d) Counterparty Risk
The Group has a policy for net deposit exposure whereby limits
are set for banks with long-term credit ratings of "AA" or better,
and a lower limit for single "A" rated banks. Institutions below
this rating are not usually used for deposits. As regards other
financial instruments, the Group is exposed to credit related
losses in the event of non-performance by its counterparties;
the Group does not expect any counterparties to be unable to
meet their obligations. Counterparties and their credit ratings
are regularly reviewed by Group Treasury.
Introduction of the Euro
The replacement of the local currencies of most European Union
countries by the Euro on 1st January, 2002 had minimal impact
on the Group. Euromoney is the only Group business with significant
European cross-border trade and with a "Euroland" subsidiary,
its Adhesion convention business. Most of the Group's other
businesses trade primarily within their own borders.
Going Concern
The Directors have continued to adopt the going concern basis
for the preparation of the accounts. This has been done since,
after considering relevant information, they have a reasonable
expectation that the Company and the Group have adequate resources
to continue in operational existence for the foreseeable future.
Peter Williams
Finance Director |
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