FINANCIAL AND TREASURY REVIEW

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 international financial reporting standards are required to be adopted this year. This means that the accounts have been prepared without the need for any prior year adjustments, caused by changes in accounting policies. We have, however, provided further detail in response to developments in international accounting practice and to a reporting statement, issued by the Accounting Standards Board on retirement benefits. This has increased the length of the Annual Report even further this year to 152 pages, compared to 92 pages two years ago, the final year in which the Group Accounts were prepared under UK accounting standards.

We are conscious that small shareholders may not wish to receive the full report with all of its long and complex disclosures. For this reason, we have for the first time produced a separate Annual Review, incorporating a summary set of financial statements as an alternative for those shareholders who have chosen to receive it.

This Financial Review focuses on the adjusted numbers, in addition to the statutory figures, because we believe the alternative measures give a more comparable indication of the Group’s underlying business performance. These numbers are shown opposite.

REVENUE

The Group’s revenue in the year of £2,235 million was 3% higher than the previous year. There was underlying revenue growth from all of our divisions, after adjusting in the case of Northcliffe and DMG Information their figures to exclude the impact of acquisitions and disposals. We estimate that underlying revenue growth was 5%.

The analysis of revenue by activity, illustrated in graph 1, shows that there has been little overall change in the shape of the Group in terms of revenues. However, if Associated Northcliffe Digital’s activities are excluded from our newspaper divisions, the percentage of revenue from newspapers has fallen to 58% from 67% in 2003. Graph 2 shows the geographic split of revenue. This shows that 74% of revenue by source was generated by UK businesses, compared with 80% in 2003, but we estimate that approximately 45% of overall Group income is derived from revenues invoiced in US dollars.

OPERATING PROFIT

The Group’s operating profit* amounted to £322 million, an increase of 7% on the equivalent figure for last year. This figure is stated before charging £28 million as exceptional operating costs. This charge comprised reorganisation costs within Associated, Northcliffe, Euromoney and dmg world media.

The charge for amortisation of intangible assets rose by £31 million to £82 million, primarily due to the acquisition of Metal Bulletin which counted for £16 million of the increase. The Group has also made an impairment charge of £53 million, principally relating to a number of consumer and gift shows, its investment in Simply Switch and an additional impairment in respect of Loot. After deducting these charges, the Group’s reported operating profit rose by 6% to £159 million.

The analysis of operating profit* by activity is shown in graph 3. This shows strong growth from Euromoney Institutional Investor, despite a £5 million increase in the charge for its capital appreciation plan, enhanced by a first contribution from the Metal Bulletin businesses, and smaller rises from our local media, exhibitions and business information divisions, as well as a reduction in losses by our Australian radio division. These increases, totalling £39 million, were offset partly by a fall of £16 million in the profits of our national newspaper division, due to the competitive situation in the London newspaper market and to a loss* by Teletext of £4 million, and by central costs which were £1 million higher. Within national newspapers, the operating profits* of Associated Northcliffe Digital fell by £2 million due to significant revenue investment in developing its businesses.

Strong growth by our business-to-business operations, especially Euromoney, means that 53% of this year’s operating profit* has been generated other than from newspaper publishing, up from 47% last year.

JOINT VENTURES AND ASSOCIATES

The Group’s share of the results* of its joint ventures and associates fell by £1 million to £6 million. The elimination of Northcliffe’s digital associates and an improvement in the performance of DMG Radio Australia’s joint ventures was more than offset by RMS’s Japanese associate becoming a subsidiary and a lower contribution from ITN.

NET FINANCING COSTS

Dividend income fell by £2 million due mainly to a lower distribution by GCap Media plc and to the absence of a dividend from Reuters Group plc resulting from the sale of the Group’s remaining interest last year.

Net interest payable (excluding dividend income and deemed finance charges but including interest receivable) fell by £8 million to £40 million. Higher interest income from swap premia more than offset the impact of increased interest rates payable on higher average net debt.

OTHER INCOME STATEMENT ITEMS

The Group recorded other exceptional gains and losses of £36 million, compared to £189 million last year. This comprised mainly an exceptional profit of £42 million on the deemed disposal of a portion of our holding in Euromoney which issued new shares as part of its funding of the acquisition of Metal Bulletin. This gain was offset partly by a charge of £24 million, relating to our investment in GCap Media plc, charged to reserves in previous years, but now required to be recognised through the Income Statement in accordance with IAS 39.

The Group generated £10.3 million of foreign exchange losses on hedges of intra-group financing. This foreign exchange loss is excluded from adjusted profit because an equal and opposite credit is excluded from the adjusted tax charge. In addition the £4.7 million foreign exchange loss on intra-group financing, premium on repurchase of bonds and the change in fair value of put options are also excluded from adjusted profits.

PROFIT BEFORE TAX

Statutory profit before tax for the year of £142 million was 54% lower than last year’s figure. The equivalent figure in 2006 was boosted by the profit of £175 million on the disposal of Aberdeen Journals and Study Group. Excluding amortisation and impairment and exceptional items, the adjusted profit* before tax figure was £288 million, up 11% on last year.

TAXATION

The tax charge of £20 million represents 14.3% of profit before tax and 7.2% of profit before amortisation and impairment.

The adjusted tax on adjusted profits* amounted to £76 million and the resulting rate is 26.3%, up from 23.9% last year due mainly to a higher proportion of profits coming from the United States, with no more accounting benefit from unrecognised US tax losses. This is still 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. Over the next few years the adjusted tax rate is still expected to continue to increase to around 30%, despite the reduction in the rate of UK corporation tax from 30% to 28% from next April.

Exceptional tax amounted to a net credit of £55 million, including the £10.3 million tax credit on exchange differences on intra-group financings.

PENSIONS

The Group’s defined benefit pension schemes have moved from a deficit of £151 million last year end to a surplus of £81 million as at 30th September, 2007 (calculated in accordance with IAS 19). This change is primarily due to investment returns and is despite a significant strengthening of mortality assumptions.

CASH FLOW AND NET DEBT

Net debt increased during the year from £738 million to £950 million, an increase of £212 million. Total acquisition spend, capital expenditure, taxation, interest, dividends and share repurchases were offset partly by operating cash flows and disposals of investments and businesses.

Graph 4 summarises the Group’s sources of free cash flows and use of those funds during the year. The net cash inflow from operations, joint ventures and investment was £391 million. In general, the Group’s profits are converted rapidly into cash and cash generation was strong across the Group, with 99% of profits* converted into cash.

Capital expenditure of £72 million was lower than last year’s level, reflecting lower payments on the construction of Associated’s new plant in Didcot, Oxfordshire, as it neared completion. Acquisitions cost £388 million, the largest items being the purchase of Metal Bulletin, £165 million of which was funded by debt, Northcliffe’s acquisition of titles in the South of England for £64 million and Landmark’s acquisition of Quest for £36 million. Disposal proceeds amounted to £56 million, principally from the sale of Buy & Sell, Northcliffe’s retail operations and non-core Euromoney businesses.

The Group’s interest cover, calculated as the ratio of adjusted profits* before interest and depreciation (EBITDA) to net interest payable, was 9.8 times this year, up from 7.8 in 2006 and above the Group’s current target of six times. The Group’s ratio of year end net debt to EBITDA was 2.4 times. The Group’s Standard & Poor’s credit rating remains at BBB, as does our rating from Fitch.

At the year end, the Group had £839 million of Bonds due for repayment in 2013, 2018, 2021 and 2027. It also had £120 million of committed banking facilities available to it until late summer 2008 and £270 million until September 2009. In June, the Group refinanced its short term debt by issuing £200 million 6.375% Bonds due 2027. This proved to be excellent timing, occurring before the liquidity crunch that emerged in August. Consequently, the Group has sufficient committed debt facilities to meet its foreseeable requirements. It had surplus committed facilities of £240 million at the year end.

TREASURY POLICIES

The following paragraphs are a summary of the treasury policies of the Group and, where appropriate, of the Company. 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. The Group’s priority is to address the economic impact of financial risks using the most efficient or appropriate approach. This may result in IFRS accounting volatility.

OVERVIEW

The Group has adequate committed debt finance to meet current trading requirements. Foreign exchange risk on transactions is not a large issue for the Group as the majority of its businesses operate in the country in which they are located. In principle, the underlying currency of net debt after taking account of derivatives is managed in proportion to the EBITDA in each currency. A growing proportion of the Group’s profits are earned in foreign currencies. The Group’s assets are only partially hedged by its foreign currency debt, and economically its earnings are exposed to declines in value of the US dollar in particular. The Group has a prudent level of fixed interest rate debt to reduce 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 four sterling Eurobonds. Maturities of debt are maximised and spread in order to avoid the requirement for significant repayments at any point in time, as shown in Graph 6. Surplus funds are generally used to pay down debt. If temporary surpluses 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 Company or its immediate subsidiary, rather than of trading subsidiaries. This gives operating management maximum flexibility to run the business without the distraction of meeting short-term financing requirements.

(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 which has net receipts in US dollars and net payments in sterling and Canadian dollars. Euromoney has a series of US dollar forward sale contracts in place up to three years forward to meet its sterling outgoings. Other than Euromoney there were no significant foreign currency forward contracts in existence that hedge revenues or costs. The sterling value of capital expenditure in foreign currency is fixed using forward currency purchases.

Tax on non-trading exchange rate movements is hedged, using cross currency swaps and forward currency contracts. The Group’s acquisition financing structures may give rise to foreign exchange gain or losses in the UK which are either taxable or tax deductible. The Group enters into market derivatives to hedge this exposure in economic terms. However, IAS 39 prohibits such items from being shown net in the tax line and as a result increased volatility is introduced in the income statement. This year’s profit before taxation has been reduced by £10 million (2006 £17 million increase) in relation to these structures and tax payable has been reduced by a similar amount. Both have been removed in arriving at adjusted profits.

(ii) Translation Exposure

Borrowings are principally incurred in sterling, with lesser amounts in US dollars and other currencies. Generally, the proportion of foreign currency debt (after allowing for any hedging instrument) to total net debt is managed to be approximately equal to the proportion of foreign EBITDA, compared to total Group EBITDA. This is expected to continue. A substantial proportion of non-sterling debt liabilities are created through the use of foreign exchange derivatives and treated as net investment hedges. The consequence of this policy is that the Group’s significant foreign earnings are not hedged back to sterling.

(iii) Economic Exposure

A substantial proportion of the Group’s value relates to foreign subsidiaries, in the US in particular. The foreign currency debt described above is only a partial hedge of this economic exposure.

(iv) Netting

The Group may offset currency risks on trading, capital expenditure, tax and borrowings and only hedge the net exposure. This may result in not obtaining IFRS hedge accounting.

(c) Interest Rate Risk

The Group aims to have approximately 70% of forecast net debt to 80% of target net debt as fixed interest rate liabilities. It aims to achieve this ratio over the medium term and it is applied to each of the Group’s main currencies. 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 either fixed or floating rates. Interest rate swaps, cross currency swaps, and options are used to help attain the Group’s target level of fixed interest rate debt. The maturity dates are spread in order to avoid interest rate basis risk and also to negate short-term changes in interest rates. At the year end, fixed interest rate debt represented approximately 90% of total net debt. Options are not treated as effective hedges under IFRS.

(d) Counterparty Risk

Counterparties and their credit ratings are regularly reviewed by Group Treasury. The Group has counterparty limits for banks with long term credit ratings of ‘AA’ or better, and a lower limit for single ‘A’ rated banks. Typically this is banks that extend credit facilities to the Group. The Group does not expect any counterparties to be unable to meet their obligations.

(e) Debt Levels

The Group currently aims to have a 6:1 ratio of EBITDA to net interest costs and seeks to ensure that the ratio of net debt to EBITDA does not normally exceed 2.5:1. It is believed that this achieves close to the optimum level of gearing for the Group, but leaves it with sufficient headroom should it desire to increase its debt levels without reducing the Group’s quoted debt below investment grade. As such the ratio will not be met consistently, but will define the medium-term target level of net debt.

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