CHIEF EXECUTIVE'S REVIEW

OUR STRATEGY FOR FUTURE SUCCESS CONTINUES TO FOCUS ON THREE KEY AREAS:

1_GROWING OUR BUSINESS-FOCUSED MEDIA INTO STRONG LEADERSHIP POSITIONS

2_CONTINUING TO INVEST IN OUR NEWSPAPER AND PURE PLAY DIGITAL BUSINESSES

3_RUNNING OUR BUSINESSES FASTER

INTRODUCTION

This Business Review is addressed to the members of the Company to help them assess how the Directors have performed their duty to promote the success of the Company, as set out in the new Companies Act 2006. It is framed, having in mind the principles and guidelines for Operating and Financial Reviews published by the UK Accounting Standards Board in January 2006. It describes the main operational and financial factors underpinning the development, performance and position of the Group as well as those likely to affect performance over the coming year, illustrating this with key performance indicators.

This Chief Executive’s Review sets out the nature, objectives and strategy of the Group, together with the principal risks and uncertainties we face. It is followed by a business review of the development and performance of each of our operating divisions. A Financial and Treasury Review follows.

DMGT’S PHILOSOPHY

DMGT’s practice over many years has been to take advantage of its shareholding structure to invest for the long term in order to generate value for its shareholders. Control by a founding family is a model which has been demonstrated to serve the media industry well over time. Our strategy takes as given the controlling family’s wish that the Group’s investments will be media businesses; be operated with a view to sustaining good medium/long-term returns; and be financed and managed on a prudent risk/reward basis. We are prepared to have a long timeframe to investment maturity and realisation, provided the business in question is progressing well, meeting milestones and creating value.

NATURE OF THE BUSINESS

DMGT is a multiple media business, as illustrated at the front of this Annual Report, operating in different markets, each within its particular competitive and regulatory environments. Operational responsibility is devolved to our six divisions whose boards the executive Directors chair. We operate with a light touch from the centre, relieving line management of public company activities that do not contribute at the operating level, but strong financial controls, particularly over capital allocation, are retained at the centre. DMGT’s objectives are embedded into the thinking of each of our divisional management teams.

STRATEGY

The Group’s objective is to be the owner of high quality sustainable media properties, which lead their markets, thereby generating a premium return for shareholders. Over the past decade the strategy has been to continue to sustain and invest in the core UK newspaper businesses, and to use the surplus cash flow and leverage of the Group to acquire or develop high growth media businesses unaffected by the UK advertising market and regulatory regimes. By a combination of these objectives, we seek to drive up DMGT’s overall share rating from the lower levels attaching to UK newspapers to the higher levels attracted by focused subscription-driven business to business (B2B) assets. The Group’s overall strategy has progressed over the ten years since. Our expertise is in buying early stage businesses and taking them forward.

DMGT’s owner-minded structure has allowed it to deploy a consistent capital allocation plan over time, moving its formidable cash flow progressively away from a dependence on UK newspapers. Our newspapers have done tremendously well, faring much better than others, and remain highly profitable – indeed 2007 was a record year for the Daily Mail – and we have continued to invest in them in order to maintain their market-leading positions. But whereas the Group’s earnings grew strongly in the late 1990s largely due to our newspapers, more recently it is its business-focused operations that have shown stronger earnings growth. Hence our strategy has been to gear up and invest beyond our newspapers: in DMG Information where performance has been stellar; and in Euromoney and exhibitions over many years. In the allocation of capital over the long term, there has been a move towards investment in B2B operations which we expect to continue.

As a consequence of this deliberate deployment of capital, an increased percentage of the Group’s revenues is generated from streams, other than advertising, principally subscriptions and events. A significant part of the asset base is now outside the UK; the Group’s exposure to regulation has been greatly reduced; and for the first time in 2007 more than a half of its operating profits* were derived other than from newspaper publishing, compared to a quarter ten years ago.

The approach to managing the Group’s divisions and those divisions’ strategies has not changed in recent years. The DMGT operational model has been generally autonomous divisional management, strong incentives based on performance and central control of surplus capital and of its re-investment.

Over the last few years, it has become clear that the Group has needed to be run faster as the pace of change in business has quickened, particularly the threat to traditional media forms from new technologies. We commented last year on the loss of classified advertising at the Evening Standard and the decline of profits at Teletext due to structural changes in its market. Both businesses have been substantially restructured in the last year. The need for the Group to go faster led directly to the decision in 2004 to put a Capital Appreciation Plan into Euromoney Institutional Investor; the strategic review of Northcliffe Media during 2005/6; and to a strategic review of dmg world media undertaken during this year.

The motivating impact of the CAP on Euromoney’s senior management has turbo-charged its performance, after several years of flat earnings, leading to the CAP vesting a year early. We have put long-term incentive plans into other divisions also.

Our review of dmg world media has led the Board to decide to focus on the B2B sector which is growing strongly and where the growth opportunities are greatest. Secondly, it decided to accelerate the acquisition of George Little Management (GLM) in order to unlock value through revenue synergies and increased efficiencies, establishing a new business to retail (B2R) sector, putting gift and surf together, in order to build profit; and thirdly it decided to sell the US home shows within the business to consumer (B2C) division. These shows have generated good cash flows over the years, but have lower margins and require greater management attention. In the UK, it will seek to re-fashion the Ideal Home Show which has experienced challenging conditions.

At Associated Newspapers, we have continued to invest in editorial quality. This graph demonstrates the extent to which the Mail titles have continued to increase their market share, due to their strong brands.

Last year, I identified a strategic challenge to be addressed of Associated’s relatively low margins which have a material impact on the Group’s overall margins. These margins fell in the year because of increased losses in the London publishing market which is now a key focus of management. We have reviewed the Evening Standard and embarked upon a plan to restore it to profitability in the medium term by establishing itself as the quality London evening newspaper. This plan depends on stabilising revenue after years of decline and stringent cost control. Progress has also been made in London Lite’s business plan.

From January 2008 Associated will benefit from the availability of full colour. It will also bear increased production costs from 1st October 2007 as a result of the new Didcot plant coming online, but we expect to receive a reduction in the price of newsprint from 1st January for the first time in five years. There is a continued focus on costs: progress has been made in editorial and media buying and further efficiencies will come from external printing and promotions. The cost base of our national newspapers continues to adjust to a lower level of revenue growth due to the likely migration online of display and classified revenues at varying speeds. Our objective is to meet this challenge without losing the powerful advertising response from an engaged readership, given that the Mail titles have a most envied position in the UK market and that Associated are efficient producers of high quality publications, not low cost producers like some others. Associated is growing its enterprise revenue, selling goods and services to readers.

Associated has talented people who know how to attract people to read their products and this will not change. Our aim is to produce the most entertaining and informative media and we believe that strong trusted brands with premium content will ultimately prevail in the digital world. Considerable advances have been made in the year in making our titles more digital. The companion websites have been fully integrated into the editorial process of our newspaper operations and Mail Online has, from a standing start, become the second biggest newspaper website, backed by the Mail’s formidable editorial resources. Mail Online now has access to all of the Mail’s editorial content and stories are now broken online. Further revenue opportunities will emerge as the Mail becomes more interactive, getting closer to its readers in Middle Britain.

We have continued to defend and extend the Group’s advertising base regardless of format. DMGT’s initial measured forays into new media proved that newspaper executives needed to acquire different skills. As a consequence, we used the internet downturn in the early part of the century to acquire established businesses. Our strategy at Associated Northcliffe Digital (AND) has involved investments to increase exposure to areas of the online advertising market pertinent to Associated. First of all, in April 2004, we acquired Jobsite which has proved highly successful, retaining its passionate management team with AND providing the central expertise to help them grow. We have built a presence also in the online property, motors and dating markets and through Teletext in travel. We have been less successful in personal finance where volumes have dropped off and the market has proved more competitive than we had expected.

Associated invested £14 million in the year on smaller in-fill acquisitions, bringing to £169 million the total invested in pure play digital consumer businesses since 2004. AND is now one of the leading players in the UK digital media industry with “old media’s” best set of digital consumer assets, and its objective is to be the number one or two player in each chosen market. To this end, we have invested heavily during the year in growing particularly our property and motors portals in order to take market share from the pre-eminent industry players.

At Northcliffe Media, we have re-engineered its business over the past two years to create an operation with strong capability. Its revitalised and repositioned business is becoming an integrated provider of local media services. Its strategy within the UK is focused on meeting local reader and advertiser requirements across a variety of media formats. Digital publishing is a key component. Overseas, it has expanded within the emerging economies of Central Europe where there are good growth prospects – in print and online. It is focused on generating profitable revenue growth and has built a resilient business model which has the potential to generate solid and steady revenue performance.

The key steps leading up to a revitalised Northcliffe, allowing us to run the business faster, were re-balancing its portfolio; delivering improved operational efficiency through its “Aim Higher” programme and instilling a renewed sense of purpose throughout the organisation. The cost reduction target of £45 million per annum was achieved in the year.

Northcliffe is now focused on its core publishing capability and has created geographical synergies through regionalisation. In June it disposed of its non-core retail business. The acquisition of titles from Trinity Mirror plc in the South of England in July created critical mass for Northcliffe in that area. We do not expect to find further significant acquisition opportunities in UK local media.

Northcliffe has repositioned its commercial propositions for online jobs, property and cars, having left the fish4 consortium. Its key online commercial platforms are provided by AND’s digital pure plays, Jobsite, Findaproperty and motors.co.uk. Its advertisers have access to a powerful combination of media platforms when they place an advertisement in print and online with us. This will enhance their reach to a wider audience. Already, it is achieving growth in digital revenue, from an admittedly low base, far higher than that of its peers. We believe the national portals and the print/online combination provide us with two key competitive advantages. Furthermore, the strength of partnering with the pure plays is that these online businesses must stay ahead in terms of technology and user experience if they are to compete in the digital marketplace. As they develop their platforms, the enhanced functionality is immediately available to all of Northcliffe’s sites and, thus, all of Northcliffe’s users and customers.

Last year, I identified a further objective of Northcliffe needing to defend its newspaper circulations. These experienced disappointing declines in 2007, particularly in the weekly titles which are now subject to renewed focus to understand the underlying causes.

At DMG Information we invested a further £54 million in the year, mainly on strengthening its property division through the acquisition of Quest, making a total of £474 million since 1996 (net of disposals). This year the business made another record operating profit* and maintained the impressive growth in its profits from a standing start in 1998, illustrated here, which is such a credit to its management team based in the US. Its strategy will remain focused on investing in those companies with attractive business model characteristics, strong market positions, growth potential and good management. We expect DMGI to continue to grow its business annually by around 15% per annum over the next five years due to the strength of its business models and growth of its newer products, although current uncertainties in its property and financial markets obscure the short-term outlook.

Euromoney Institutional Investor had a superb year and successfully integrated the acquisition of Metal Bulletin and completed synergies ahead of expectations. Euromoney is seeing good organic growth in its markets, assisted by high quality products. It has successfully diversified away from a dependence on advertising and has demonstrated its ability to leverage its brands across the world. Any downturn in its markets will be an opportunity for it to make further acquisitions. DMGT acquired shares in Euromoney during the year to increase its interest back over 61%, following its dilution from 69% due to the issue of shares to part fund the Metal Bulletin deal. The Board regards Euromoney as a core business and our objective is that DMGT’s diluted holding should not fall again below 60%.

Our total investment in dmg world media since 1995 was approximately £400 million at the end of the year. This increased by £77 million on 1st October, 2007, following the accelerated acquisition of the 51% stake in GLM to which the Group had been committed by 2014. dmg world media had a good year due to a strong performance by its B2B sector, offsetting falls within UK consumer events and its Western US gift shows. Following our review, new growth opportunities are likely to come mainly from the B2B sector.

DMG Radio Australia was established in 1996 with a plan to build a national metropolitan FM broadcasting network through the Australian government’s licence auction process with the intention of delivering an above average return on investment. Net investment since its creation has totalled £200 million. Progress has been slower than we had hoped when we embarked upon its expansion in 2000, but was made this year with Nova Adelaide becoming the fifth and final station in the Nova network to break into profit*. It was hindered, however, by an especially competitive radio landscape and by soft advertising in the key Sydney market during the first half of the year. The Vega product, launched late in 2005 to complement Nova, is now demonstrating momentum and the whole division moved back into profit in the later months of the year. Our Australian management team remains highly concentrated on the task before them which is to provide DMGT with a return on its investment programme which is now complete.

During 2007, the Group made further strides, making strategic acquisitions and selling non-core assets. We have re-established our prudent debt ratios, temporarily stretched by the acquisition of the Metal Bulletin companies.

RESOURCES

The Group’s main resources are its brands, its people, its reputation and the market leading position of its major businesses.

PRINCIPAL RISKS AND UNCERTAINTIES

The principal risks and uncertainties the Group faces vary across the different businesses and are the focus of the Risk Committee which I chair. These risks are identified in a Group Risk Register. The materiality of each risk is assessed against a framework to determine its significance and likelihood of occurrence. The Risk Register is used to determine the agenda and activity of the Risk Committee. The most material inherent risks identified in the Risk Register, together with the steps taken to mitigate them, are described below. The operation of the Risk Committee is described here.

The geographic spread and diverse portfolio of businesses within the Group help to dilute the impact of some of the Group’s key risks. Certain of these risks are interdependent and should not be considered in isolation.

The impact of technological and market changes on our competitive advantage

Our businesses operate in highly competitive environments that can be subject to rapid change. Our products and services, and their means of delivery, are affected by technological innovations, changing legislation, competitor activity or changing customer behaviour. A structural change in advertising markets resulting in significant advertising moving away from some of our traditional products to the internet has affected our results both positively and negatively.

We have developed an internet strategy for each of our main segments of advertising revenue. The decentralised autonomous culture of the Group encourages an entrepreneurial approach to the development of new opportunities in response to these threats and we continue to invest and adapt to remain competitive. Our strategy of diversification and willingness to take a long-term view helps us to react beneficially to these challenges and opportunities.

Exposure to changes in the economy and customer spending patterns

General economic conditions and the financial health of our customers affect the performance of all of our businesses to some degree. In addition, a significant proportion of our revenue is derived from advertising spending which has historically been cyclical, with companies spending less on advertising in times of economic slowdown. Our commitment to investment in our core brands and products helps us to reduce the effect of these fluctuations by maintaining the strength of our products in their markets.

Impact of a major disaster or outbreak of disease

Any disaster, such as a geopolitical event or a pandemic, such as influenza, which significantly affects the wider environment or infrastructure in a sector where the Group has material operations, could adversely affect the Group. Although plans and procedures are in place to manage the impact of such risks, the event might affect our ability to produce and deliver our products, reduce the demand for them, or significantly affect our cost base. The importance of travel to many of our event businesses increases the sensitivity of our results to incidents that may affect confidence in travel to specific destinations.

Pension schemes

We operate defined benefit schemes for our newspaper divisions and for certain senior executives. Reported earnings may be adversely affected by changes in our pension costs and funding requirements due to lower than expected investment returns and changes in demographics and particularly longer life expectancy. These risks are being considered with the scheme trustees to agree an appropriate funding approach and an asset allocation strategy designed to reduce and diversify the risk inherent in the investment portfolios. The Company is also assessing the future financial impact of people living longer and how the impact of this risk can be controlled. These measures are in addition to the introduction in 2005 of a two-tier benefit structure in the defined benefit schemes, providing greater employee choice with increased member contributions in the top tier and a higher retirement age in the lower tier. These actions, together with the introduction in 2008 of updated defined contribution pension plans in all other divisions and overseas, are helping to reduce pension liabilities and control the pension costs incurred by the Group.

Reliance on key management and staff

In order to pursue our strategy, we are reliant on key management and staff across all our businesses. We cannot predict with certainty that we will enjoy continued success in our recruitment and retention of high quality management and creative talent. However, we have a number of measures in place within each division to address this risk. These include payment of competitive rewards, employee performance and turnover monitoring and a variety of approaches to staff communication. In addition, divisional management are tasked with reviewing staff performance and with developing appropriate succession plans.

Tax risk

The Group operates within many jurisdictions; our earnings are therefore subject to taxation at differing rates across these jurisdictions. Whilst we endeavour to manage our tax affairs in an efficient manner, due to an ever more complex international tax environment there will always be a level of uncertainty when provisioning for our tax liabilities. There is also a risk of tax laws being amended by authorities in the different jurisdictions in which we operate which would have an adverse effect on our financial results. Working with divisional management and external tax experts we have a team of in-house tax specialists who review all tax arrangements within the Group and keep abreast of changing tax legislation globally.

Legal and regulatory

DMGT businesses are subject to varying legislation and regulation across several jurisdictions including health and safety and employment law as well as more specific regulations such as from the Office of Fair Trading and the Audit Bureau of Circulation. Changes to this legislation or regulations could adversely affect the results and future trading of the business. Employees are made aware of health and safety and employment rights through employee handbooks. Controls are also in place surrounding compliance with the ABC’s regulations and other regulatory bodies to which we adhere.

Reader/listener promotions

Many reader and listener promotions and competitions are run by companies within the Group. As highlighted by the recent controversy over television and radio phone-in competitions, this is inherently an area which could significantly impact the Group’s reputation if a promotion was found to be conducted inappropriately within one of the Group’s businesses. Competitions and promotions within the newspaper and radio divisions are closely reviewed and monitored both before they begin and whilst they are in progress.

Treasury Risk

There are a number of risks arising from the Group’s Treasury operations including currency exchange rate fluctuations impacting on the Group’s reported earnings, liquidity risk, interest rate risk and debt levels. In addition the treasury function within DMGT undertakes high value transactions and therefore there is inherently a risk of treasury fraud or error. The policies and procedures in place to manage these risks are discussed in the Financial and Treasury review here.

Price volatility of newsprint

Newsprint represents a significant proportion of our costs within the newspaper divisions. Newsprint prices are subject to volatility arising from variations in supply and demand. Whilst generally these variations are not large and therefore not significant to the Group, there have been periods historically where the impact on the Group was material and a repeat of such events cannot be ruled out. The Group’s newsprint requirements on price, volume and quality are monitored by the Newsprint Committee.

Reliance on key suppliers

The loss of a key supplier due to disaster or economic downturn, or a significant worsening of commercial terms with key suppliers could adversely affect the Group’s results and the Group’s ability to produce key products and services. DMGT has disaster recovery plans in place and resources are also devoted to ensuring the relationships with key suppliers are maintained and upheld.

Acquisition and disposal risk

As well as launching and building new businesses, an integral part of our success has, and will continue to be, the acquisition of businesses that complement our existing products or expand the scope of our expertise into new markets. A number of risks are inherent within any strategy to acquire. The Group generally acquires businesses with a high potential for growth in related markets. The majority of acquisitions considered are smaller add-on acquisitions, which reduces the size of the risk of each acquisition to the Group.

There are risks to our ability to achieve optimal value from disposals including the incorrect timing of any sale, the inability to identify and agree a deal with a purchaser, the unsuccessful separation of a business and management of any related costs, as well as the failure to realise any other anticipated benefits of a disposal.

SHARE PRICE PERFORMANCE

Share performance remains important to us as a measure that our strategy and balance are understood and recognised by the market, enabling management to pursue intrinsic value. Over time our strong historic operating performance has been recognised by the market, as can be seen from the graphs here and here. However, since the end of July, a disconnect has emerged between our belief in the Group’s growth prospects and our earnings forecasts on the one hand and its share price performance.

The price of our widely traded ‘A’ Ordinary Non-Voting shares started the financial year at £6 and rose steadily throughout the autumn on perceptions of an improvement in UK advertising conditions. The announcement of our 2005/6 results in November 2006 and the messages accompanying it, which demonstrated that DMGT was not just a UK newspaper stock, led to the price continuing to rise, peaking at £8.65 in mid-May.

Since the summer, the price has fallen below £6 in response to economic uncertainties. All of our market intelligence tells us that DMGT is regarded more positively than other UK media groups because of its diversification strategy. However, at present, investors are looking for bad news and do not appear to want to be exposed to consumer advertising or to the financial or property sectors. We hope that, once the current economic fears are played out and a return to sanity prevails, DMGT will once more be accorded a proper rating by the market.

CAPITAL STRUCTURE

The Company has not made a capital call on its shareholders for nearly 75 years. Capital growth is funded by long-term debt and by retained earnings. DMGT’s policy is to seek to increase the dividend each year by 5% to 7% in real terms, within reason regardless of the results, as long as we continue to have confidence in the strength of our businesses. As shown below, the compound dividend growth over the last ten years is 10% in nominal terms, which is an increase of just under 7% in real terms.

The Company spent £28 million on buying its ‘A’ Ordinary Non-Voting shares during the year to add to the £21 million spent in 2005/6.

We will continue to review opportunities to repurchase our own shares, where appropriate, in accordance with the resolution passed at the AGM in February.

RELATIONSHIPS WITH STAKEHOLDERS, OTHER THAN SHAREHOLDERS

Environmental, employee, social and community issues are taken seriously by the Company, as set out in the Corporate Responsibility Report here. DMGT also has a dedicated Corporate Responsibility section on its website which is updated regularly. The Board has policies on the environment and on equal opportunities for employees, as well as on whistle blowing and health and safety. All of these policies are established and set out on the DMGT extranet.

DMGT AND THE ENVIRONMENT

We recognise that our businesses have an impact on the environment through our printing operations, offices, transport and other business activities. We are committed to ensuring that, where practical, any adverse impact on the environment from our activities will be minimised. The major environmental impacts arise in our printing operations where we focus on newsprint, energy, CO2, water and ink efficiencies. We have gathered the data over recent years in order to monitor each of these impacts, and graphs illustrating them over each of the last five years are set out on our website. The overall trend is positive. For example, newsprint production waste, as a percentage of total newspaper output, fell again this year and, as shown in the graph above, the Group achieved a marginal improvement in CO2 efficiency, due to the continued effect of the closure of older and relatively less efficient print centres and to the transfer of production to newer, more efficient, sites.

DMGT AND OUR EMPLOYEES

Our record on retention of staff remains good, aided by our autonomous culture and by our provision of the appropriate form of pension provision to all our employees. DMGT has kept open its final salary pension schemes in the UK newspaper divisions where people tend to stay with us for a long time and where the average age is higher. In the other divisions, which are more international and where employees are generally younger, we believe defined contribution pension plans are more appropriate.

The number of employees has risen from 16,033 at the beginning of the year to 17,296 at the end, an increase of 8%, driven by acquisitions. Excluding acquisitions and disposals, the number of employees within Northcliffe’s UK operations fell by a further 192 (4%) as a consequence of its reorganisation programme.

TRENDS AND FACTORS LIKELY TO AFFECT THE OUTLOOK

The new financial year has generally started well for the Group.

The Mail titles are enjoying good circulation figures, showing modest year on year growth, and are seeing strong demand from retail advertisers. The London market, while still challenging, is improving for Associated. The greater availability of colour and potentially lower newsprint prices for Associated from January 2008 will create new opportunities and a competitive advantage on which to capitalise. Our local media titles are continuing to see improving advertising revenues in the key recruitment category, while property advertising is now broadly flat year on year. Northcliffe, as an integrated provider of local media services, is well positioned for 2008 and beyond.

Our business-to-business divisions continue to perform well. The prospects for DMGI remain encouraging, given its strong business model and new product development. Risk Management Solutions continues to perform strongly. Despite the continuation of uncertainties in the credit markets and a slowdown in the property market, DMGI’s businesses continue to see good levels of activity. Euromoney, now with much greater reliance on high quality subscription products, is seeing continued growth in its markets. dmg world media continues to perform well within its B2B sector and our Australian radio business is showing encouraging signs of improvement.

Overall the strength of the Group’s portfolio of market leading business and consumer media businesses makes the Board optimistic of achieving another year of steady growth in earnings, provided that the UK economy does not deteriorate substantially.

CHARLES SINCLAIR
Chief Executive

* Adjusted operating profit (before exceptional items and amortisation and impairment of intangible assets).