Chief Executive's Review
MARTIN MORGAN, CHIEF EXECUTIVE
OUR STRATEGY FOR FUTURE SUCCESS FOCUSES ON THREE KEY AREAS
- FOCUSING ON BUSINESS FUNDAMENTALS IN TOUGH ECONOMIC CIRCUMSTANCES
- GROWING OUR BUSINESS FOCUSED MEDIA
- SUPPORTING OUR NEWSPAPERS AND INVESTING IN CONSUMER DIGITAL BUSINESSES
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 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 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 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 to long-term returns; and be financed and managed on a prudent risk and reward basis. We are prepared to have a long timeframe to investment maturity and realisation, provided the business in question is a market leader, growing and achieving strong margins.
NATURE OF THE BUSINESS
DMGT is a multiple media business, as illustrated in the Overview section of this Annual Report, operating in different markets, each within its particular competitive and regulatory environments. operational responsibility is devolved to our 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.
Our operations are divided between business to business (B2B) and consumer media. B2B comprises DMG Information (DMGI), with RMS now becoming a separate division, Euromoney and DMG World Media. Consumer media is made up of Associated and Northcliffe Media and DMG Radio Australia. In September, we established A&N Media, a structure to share services across both newspaper divisions and to improve operational efficiency.
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. Since 1996, our strategy has been to continue to sustain and invest in our market leading UK newspapers, and to acquire or develop high growth media businesses on an increasingly global scale. By a combination of these objectives, we seek to drive up DMGT’s overall share rating.
Having taken over as Chief Executive only at the start of the new financial year, I am working with the Chairman to refresh our long-term strategy, although the current focus is inevitably on leading the Group through its short-term challenges. I plan to make a statement to the market in March 2009 on our plans for the Group. This will include how we intend to turn DMGT into a truly global growth company, building on the solid and diversified platform that we have established.
Allocation of capital
DMGT’s owner minded structure has allowed it to deploy a consistent capital allocation plan over time, moving cash flow progressively away from a dependence on UK newspapers. Our national newspapers have done tremendously well, faring much better than others, and remain highly profitable. We have continued to invest in them in order to grow their market-leading positions. Whereas the Group’s earnings grew strongly in the late 1990s largely due to our newspapers, more recently it is our business-focused operations that have shown stronger earnings growth. Hence our strategy has been to invest in DMGI and Euromoney where performance has been excellent; and in exhibitions where performance has been improving. So capital allocation over the long term has seen a move towards investment in B2B operations, a trend we see continuing.
As a consequence of this deliberate deployment of capital, an increased percentage of the Group’s revenues is generated from revenue streams other than advertising, principally subscriptions and events. A significant part of our operations are now outside the UK and the Group’s exposure to regulation has been greatly reduced so that in 2008 more than 60% of its operating profits* were derived outside newspaper publishing, compared to 14% in 1996.
Looking back over the past five years, as illustrated here in the Financial Review, the Group’s overall performance has been reasonable, but recently more mixed. Northcliffe has been the largest contributor of net cash in the period, but this cannot now be assumed in future. This means that tougher choices will be needed as to where to allocate capital.
DMGT operational model
The approach to managing the Group’s divisions and those divisions’ strategies has not changed in recent years. The DMGT operational model has been for 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 rate of change within the Group has needed to quicken, given the threat to traditional media forms and the opportunities from new technologies. The need for the Group to go faster led directly to: the decision in 2004 to put a Capital Appreciation Plan (CAP) into Euromoney Institutional Investor; the strategic review of Northcliffe Media during 2005/6; and to a strategic review of DMG World Media undertaken last year.
The motivating impact of the CAP on Euromoney’s senior management turbo-charged its performance over the period of the scheme, after several years of flat earnings, and in 2008 the second tranche of its CAP vested as Euromoney again reported record profits*. We have agreed to support the proposed introduction of a new CAP following the satisfaction of the performance tests for the final tranche of the first CAP. We have put long term incentive plans into other divisions also.
Short term considerations
We completed our budgets during August and early September, but with the rapidly changing environment, we spent October revisiting all of them and are now running the business against new detailed action plans. Cash generation is a priority, with constraints on capital expenditure and we are monitoring trading very closely.
Within A&N Media, at Associated Newspapers we quickly took action to increase revenue by raising the cover price of the Daily Mail on Saturdays. We have also introduced a tighter publishing programme through a whole range of measures which include controlled issue sizes, tighter advertising to editorial ratios, reductions in the weight of paper and more efficient distribution.
Regrettably we are reducing staff numbers, and a number of reorganisations have been implemented, for example in the advertising sales operation.
At Northcliffe Media, a significant reorganisation of the business is underway which also involves staff reductions. The formation of A&N Media is facilitating a speeding up of operational synergies between Associated and Northcliffe in areas which make up IT, purchasing, technology, transportation, printing and accounting.
We have restricted new acquisitions to those which are strategic bolt-ons to existing growth companies. They will be few in number and small in cost. We have been running a disciplined disposal programme over the last few years, which will continue. But most critically we will be maintaining revenue investment where we have growth opportunities, for example Jobsite, RMS, Genscape, Mail Online and Northcliffe International. Euromoney is maintaining a similar policy.
Business to business
Over the years we have built a significant and highly successful group of companies in B2B, with combined revenues of £849 million and with a healthy operating* margin of 22%.
Whilst our B2B group is expected to experience some negative impacts from the economic downturn, these should be significantly less severe than in the consumer group, providing an important protection on the downside.
DMG Information
DMGI’s overall growth story continued, though not without some reverses of a cyclical rather than structural nature, with the tough market conditions prevailing in the property markets affecting its year on year performance. The business made another record operating profit* and maintained the impressive growth in its profits from a standing start in 1998, illustrated in the DMG Information section of this report.
Total investment in DMGI now amounts to £459 million since 1996, net of disposals. In 2008, Dolphin and the European graduate recruitment businesses of Hobsons were sold and we made bolt-on acquisitions to our property and energy divisions and for Hobsons in the education market.
DMGI’s purpose is investing in must-have high growth innovative business information companies. Common characteristics shared by our operating companies are the provision of essential information and analysis by combining large databases with proprietary software, the resulting products delivered to customers in electronic form. DMGI's remit is to by sector, by business model and by geography.
Its strategy will remain focused on investing in those companies with attractive business model characteristics, strong market positions, growth potential and entrepreneurial management. Although the current turmoil in the property and financial markets inevitably makes the short-term outlook uncertain, we still expect DMGI to grow its business annually by around 15% per annum over the course of an economic cycle due to the strength of its business models and rate of product innovation.
In July, we recruited Suresh Kavan from Thomson Reuters as my successor. Suresh is a proven leader with an outstanding record of success in growing information businesses such as those which make up DMGI . He is already bringing fresh thinking and energy to the portfolio, but the broad thrust of strategy will continue unchanged.
We have decided henceforth to establish RMS as a separate division from DMGI, led by Hemant Shah, its co-founder in 1989 and chief executive since 1999. RMS has been owned by DMGT for 10 years and is an integral part of the Group, but its success has brought it to a size which justifies standing alone as a new division, so from 2009, we will be reporting its results separately.
Euromoney Institutional Investor
Euromoney’s strategy over the past five years has been to build a more resilient and better focused business. This strategy has been executed through increasing the proportion of revenues derived from subscription products; investing in products of the highest quality that customers will value in tough times as well as good; eliminating products with a low margin or too high a dependence on advertising; maintaining tight cost control at all times; retaining and fostering an entrepreneurial culture; and making selective acquisitions to accelerate that strategy.
The success of this strategy is highlighted by Euromoney’s 2008 results. Since 2003, revenues have more than doubled. In the same period, subscription revenues have increased threefold and are now nearly double the level of advertising revenues. It has also made a successful transition from a predominantly publishing driven business to one with significant activities in events and training, and more recently in the provision of electronic information and database services. In 2008 these accounted for operating profits* of £21 million compared to under £3 million in 2003.
Euromoney’s strategy is equally applicable in tough trading conditions and will continue to drive its activities in 2009. Its strong cash generation means it can sustain its investment in high quality subscription products, new events and the quality of editorial. Euromoney will continue with this strategy, even if revenues come under pressure in the short term as customers react to pressure on their own earnings, because we believe it will deliver excellent growth in the medium and longer term. The focus on costs and maintaining margins will increase.
Euromoney’s acquisition strategy has been to look for small, specialist transactions that complement its existing businesses and provide scope for strong organic growth. No significant acquisition has been completed since October 2006, largely due to its focus on the integration of Metal Bulletin and the reduction of its debt. It remains keen to make small acquisitions, which are easily financed from its strong operating cash flows, but it is unlikely to make any significant acquisitions over the coming 12 months.
DMGT spent £27 million, acquiring further shares in Euromoney up until February to increase its interest to 66%, following its dilution from 69% due to the issue of shares in 2006 to part fund the acquisition of Metal Bulletin plc. The Board regards Euromoney as a core business and our objective is that DMGT’s diluted holding should not fall again below 60%.
DMG World Media
The execution of the 2007 Strategic Plan continues. This involves focusing on the B2B sector which is growing strongly and where the growth opportunities are greatest. As part of this plan, we accelerated the acquisition of George Little Management (GLM), which was completed at the start of the year in order to unlock value through increased efficiencies, establishing a new business to retail (B2R) sector, comprising the former GLM exhibitions, and the gift and surf exhibitions already owned by us. The North American home shows within the business to consumer (B2C) division were successfully sold in July, followed by the Antiques Trade Gazette early in the new financial year.
Our total investment in DMG World Media since 1995, net of disposals, rose to approximately £450 million in the year. In 2008, B2B continued its successful development of its exhibitions and events, with Dubai, Energy and Technology being outstanding.
Consumer media
Our UK newspaper operations are bearing the brunt of the economic slowdown with classified advertising being the first to be affected earlier in the year.
Associated Newspapers
The longer term outlook for Associated Newspapers’ nationals remains robust. We continue to invest in editorial quality. Graph two in the Associated Newspapers section of this report demonstrates the extent to which the Mail titles have continued to increase their market share, due to their strong brands. The value of the Mail’s readership is underpinned by market research encapsulated in Modern Mid Britain. We are working to create a viable strategy to monetise better the Mail’s readership through database marketing. Metro is well established.
Associated’s margins, reflecting the national newspaper sector, remain relatively low, but the programme of cost and efficiency improvements started in response to the worsening trading conditions, prevailing since the summer, aims to protect them. Progress has also been made with London Lite’s business plan. The Evening Standard has established a market position as the quality London daily newspaper. Its priority remains to stabilise revenue which will inevitably be challenging in the short term. It continues to exercise stringent cost control. The London publishing market remains a key focus of management.
Harmsworth Printing successfully completed its press enhancement programme on schedule in January. The final stage of the colour investment programme culminated with the commissioning of full colour capability at Surrey Quays. Short-term costs, benefiting from a fall in the price of newsprint from 1st January, were contained despite the additional expense of full colour printing. In September A&N Media was established to deliver all its consumer newspaper and digital brands through Associated Newspapers and Northcliffe Media, while realising the efficiencies that this combination brings about. This creates a structure for the shared services already in place, such as printing, marketing and procurement, and those to come, including finance. Further progress was made in editorial and media buying and further efficiencies came 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 publishers of high quality publications. Associated is growing its enterprise revenue, selling goods and services to readers.
Our aim is to publish the most entertaining and informative media and we believe that strong trusted brands with premium content will ultimately prevail in the digital world. In 2008, the companion websites were fully integrated into the editorial process of our newspapers and from 1st October, 2008, Mail Digital has been established as a separate business. Its strategy is to provide a market leading website which leverages the content of the Mail brands to exploit and develop online commercial opportunities, both in conjunction and separate from the print operations.
As illustrated in its innovation case study, Mail Online was re-launched in May, backed by the Mail’s formidable editorial resources. Mail Online has access to all of the Mail’s editorial content and stories are broken online. Further revenue opportunities will emerge as the Mail becomes more interactive, getting closer to its readers in Modern Mid Britain. In 2008 the titles’ companion websites achieved a near trebling of total digital revenues from a low base.
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 2004, we acquired Jobsite which has proved highly successful, retaining its outstanding 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 exited the utility switching market in March.
Associated invested £23 million in the year on acquiring ‘bolt-on’ value enhancing media properties, bringing to £192 million the total invested in pure play digital consumer businesses since 2004. AND is 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 business in each chosen market. In conjunction with its product development strategy, we are investing heavily in building brand awareness.
In May we created the Digital Property Group, bringing all our property brands within a single management structure. This combination provides estate agents and new home developers with exposure to a larger and more differentiated audience.
Northcliffe Media
We reorganised Northcliffe Media in 2006 and 2007, creating a business with strong capability as an integrated provider of local media services. Its strategy is focused on meeting local reader and advertiser requirements across a variety of media formats. Digital publishing is a key component. Overseas, it is expanding within the emerging economies of Central Europe where there are good growth prospects both in print and online.
Northcliffe encountered exceptionally challenging regional advertising markets in 2008 as the impact of the credit crunch spread across the wider economy. These adverse economic conditions look set to continue for the next two years and will compound the underlying structural challenges caused by the migration of readers and advertisers to the internet.
We will continue to transform Northcliffe into a local information network. The three building blocks at the core of this vision are the local audience, local relationships with advertising customers and a sustainable operating model.
Since the year end, a new regional operating structure has been implemented which will allow Northcliffe to benefit from its scale in the South West and in the Midlands and North of England. In addition to its divisional cost cutting measures, we will improve operational efficiency through A&N Media. Our objective is to create a leaner, more nimble, cost-efficient organisation through further regional consolidation and through streamlining the business, benefiting from the A&N Media restructuring.
Northcliffe’s key online commercial platforms (in jobs, property and motors) are provided by AND. Its advertisers have access to a powerful combination of media platforms when they place an advertisement in print and online. We are now in a position to demonstrate that this combination delivers the best proposition to advertisers.
The titles acquired in the South of England in July 2007 have been badly affected by the adverse conditions in local advertising. We do not expect to make further significant acquisitions in UK local media.
DMG Radio
DMG Radio Australia (DMGRA) 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 the Nova network achieving further good growth, driven largely by an increase in its share of national revenue. The Vega stations improved their ratings position, but their overall performance was disappointing. DMGRA returned to profitability and our Australian management team remains highly concentrated on the task before them which is to provide DMGT with a return on its investment.
In the UK, our continuous participation in the commercial radio industry from its creation in 1973 ended when the board of GCap Media plc recommended Global Radio’s timely offer for the company. We realised £53 million for our 14% stake.
Summary
During 2008, DMGT performed resiliently in difficult trading conditions and we successfully sold a number of non-core assets. Our strategy of creating a diversified international portfolio of market-leading operations across both business and consumer companies has provided considerable overall resilience and leaves us well positioned to deliver long-term growth.
Although the worsening economic conditions during the year had an adverse impact on the newspaper and property businesses, our B2B divisions continued to perform well. The short term outlook remains difficult and we are taking decisive action to defend profitability. However, the Group’s strong cash flow will also allow continued selective internal investment to ensure our businesses achieve their full potential.
Growth will be driven by businesses which operate in growth markets; have products that are highly innovative and valued; market-leading positions; strong entrepreneurial management and which benefit from our long-term perspective.
RESOURCES
The Group’s main resources are its brands, people, reputation and the market-leading position of its major businesses. In order actively to pursue our intention constantly to raise the quality and performance of our people, in February, we appointed DMGT’s first ever Human Resources Director, Joe McCollum, who is making outstanding progress on a co-ordinated talent agenda across the Group. DMGT will invest in its people in order to grow.
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 the DMGT 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 in the Governance section.
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.
EXPOSURE TO CHANGES IN THE ECONOMY AND CUSTOMER SPENDING PATTERNS
General economic conditions and the financial health of our customers can positively or negatively affect the performance of all of our businesses to some degree. The current global economic outlook, especially in the UK and US economies, represents a significant risk to the Group. In addition, a significant proportion of our revenue is derived from advertising 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 and the diverse nature of the Group’s revenues helps us to reduce the effect of these fluctuations by maintaining the strength of our products in their markets.
THE IMPACT OF TECHNOLGICAL 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 the advertising markets resulting in significant advertising moving away from 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 must continue to invest and adapt to remain competitive. Our strategy of diversification and willingness to take a long-term view helps us to react to these challenges and opportunities.
PENSION SCHEME SHORTFALLS
We operate defined benefit schemes for our newspaper divisions and 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, changes in demographics and particularly longer life expectancy. These risks are considered with the scheme trustees as part of the three yearly actuarial valuation. A funding approach to the end of December 2010 and an asset allocation strategy, designed to reduce and diversify the risk inherent in the investment portfolios, have been agreed. These and other proposed actions, together with the introduction in April of updated defined contribution pension plans in all divisions, will help to control pension liabilities and costs incurred by the Group. Recent turmoil in global equity markets has increased our focus on this risk. The schemes are still neutral in cash flow terms and so are not needing to sell assets.
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.
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.
The addition of a Group Human Resources Director in February is helping us develop mitigating actions and we have a number of measures in place in 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.
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. Generally, these variations are not large, but from time to time increases are significant. 2009 may be such a year. The Group’s newsprint requirements are monitored by the Newsprint Committee and, where possible, long-term arrangements are agreed with suppliers to limit the potential for volatility.
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.
RELIANCE ON IT INFRASTRUCTURE
All of our businesses are dependent on technology to some degree. Information systems are critical for the effective management and provision of services around the Group. Disruption to our information technology infrastructure or failure to implement new systems effectively could result in lost revenue and damage our reputation. This is particularly relevant in our newspaper divisions which are in the process of implementing a new and shared finance system. Dedicated project management teams are used to manage the risk in any change project and business continuity plans are in place in each division to protect existing systems.
INFORMATION SECURITY
Information security has become an important issue in recent years as a result of several high profile losses of data. We suffered our own information security incident during the year which has increased the focus on, and attention given to, this important issue. Information security risks are managed by divisional management teams and a Group-wide policy has been set. Any future breach in our data security could have a harmful impact on our business and reputation.
CLIMATE CHANGE
The risks associated with climate change include the introduction of or increase in legislation and regulation of the environmental impact of our operations. In the longer term, the physical impact of climate change could affect our business locations, distribution routes or third party suppliers. A Group wide review of the impact of climate change was performed in 2008 to identify the key risks and opportunities for the Group presented by future climate change.
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 (ABC). Changes to this legislation or regulations could adversely affect the results and future trading of the business. Whilst employees need to be responsible for their own health and safety, they are made aware of health and safety and of employment rights through the employee handbook. Controls are also in place surrounding compliance with the ABC’s regulations and other regulatory bodies to which we adhere.
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. The current problems in global financial markets as a result of the credit crunch and banking crisis heighten the risk in this area. In addition the treasury function within DMGT undertakes high value transactions and therefore there is inherently a risk of treasury fraud or error.
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 experts we have a team of in-house specialists who review all tax arrangements within the Group and keep abreast of changing legislation.
SHARE PRICE PERFORMANCE
Share performance remains important to us as a measure that our strategy and prospects are understood. Over time our strong historic operating performance has been recognised by the market, as can be seen from the graph below and in the Remuneration Report.
The price of our widely traded ‘A’ Ordinary Non-Voting shares started the financial year at £6.30, having fallen rapidly since the summer of 2007. It fell below £5 on the announcement of our 2006/7 results in November 2007 on fears about the health of the UK economy. At this point, our perception of the value of the Group, based on our forecasts, compared to that of the market, led us to purchase our own shares at an average price of £4.75. In hindsight, we were too early as the share price continued to fall as investors shied away from exposure to consumer advertising and to the financial and property sectors.
Over the last year, there has been unprecedented stock lending of DMGT’s shares, along with other cyclical media companies, which rose from its normal level of below 5% to 16% in the year. This led to considerable volatility in the price which fell as low as £2.59 in July, before recovering somewhat to £3.24 at the year end. More recently, we have out-performed our peers due perhaps to an appreciation of our diversification strategy and to the higher quality of our consumer national media franchises.
CAPITAL STRUCTURE
The Company has not made a capital call on its shareholders for 75 years. Capital growth is funded by long-term debt and by retained earnings. Since the late 1980s, our strategy has been to raise the dividend in real terms. Since 2002, the Board’s policy has been to seek to increase the dividend each year by 5% to 7% in real terms, as long as it continues to have confidence in the Group’s long-term prospects and financial health. This year the Board increased the dividend by 2.4%, considering it prudent in the current circumstances to hold the final dividend at last year’s level, but it is maintaining its policy of increasing the dividend in real terms over the cycle. As shown below, the compound dividend growth over the last 20 years is 11% in nominal terms, which is an increase of 7% in real terms.
DMGT DIVIDEND HISTORY FOR THE PERIOD 1988 – 2008 (PENCE)
The Company spent £74 million on buying its ‘A’ Ordinary shares and a further £14 million in matching obligations to provide shares to minority shareholders of RMS who had acquired them as a result of exercising their stock options under its scheme. Purchases were opportunistic, rather than part of a buy back programme. Since February, no further purchases have been made and none are planned in the foreseeable future as the Group concentrates on reducing its debt.
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. DMGT also has a dedicated Corporate Responsibility section on its website which is updated regularly. The Board has policies in place on the environment and on equal opportunities for employees, as well as on whistleblowing 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 activities. We are committed to ensuring that, where practicable, 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 energy efficiency. We have gathered data over recent years in order to monitor the Group’s use of energy. Whilst there has been an increase in the overall amount of energy used during the year, the Group’s energy efficiency has improved due to the introduction of a new production facility at Didcot.
Another area we focus on is our Carbon Footprint. We started to measure this from 2006 and the graph shown above illustrates that the Group’s emissions have fallen. We recently embarked on a new energy management and abatement programme, commissioning specialist consultants to conduct an energy efficiency exercise at DMGT’s head office and an audit of energy and water consumption at its eight UK print plants (which are responsible for a significant proportion of DMGT’s consumption). This is currently in progress. A main aim of the audit is to identify potential opportunities for saving energy, thereby reducing the Group’s environmental impact. Meanwhile, Harmsworth Printing has been making strides to cut water use, following an earlier study.
DMGT and our employees
Retention of staff benefits from our autonomous divisional culture and from 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 17,296 at the beginning of the year to 17,524 at the end, an increase of 1%. The number of employees within Northcliffe’s UK operations fell by a further 209 (4%) as a consequence of its reorganisation programme.
Social and community issues
Whilst the Group does not have formal policies in this area, community involvement is integral to our business as well as to the personal motivation of our employees. We donate money, time and in-kind donations such as radio airtime and Teletext pages, and staff actively give time to areas including fundraising and trusteeships.
Information about persons with whom the company has contractual or other arrangements essential to the company’s business
Group companies undertake business with a range of customers and suppliers. There is no dependence on any particular contractual arrangement, other than those disclosed in Note 37 to the Accounts as regards ink and printing, where arrangements are in place until 2015 and 2022 respectively to obtain competitive prices and to secure supply.
As regards the Group’s principal commodity, newsprint, arrangements are made annually with a range of suppliers to ensure the security of supply at the best available prices, having regard to the need for the necessary quality. Particularly in the light of its strategy to create a diversified international portfolio of media businesses, the Group is not dependent on any suppliers of other commodities, nor for its revenue on any particular customer. Distribution arrangements are in place to ensure the delivery of newspapers to retail outlets.
TRENDS AND FACTORS LIKELY TO AFFECT THE OUTLOOK
The new financial year has started with very challenging economic conditions, particularly in the UK. Our business to business divisions are generally continuing to trade well, with the benefit of significant subscription revenues, but our UK consumer media businesses are being affected. As a consequence, we are taking decisive action to defend their profitability and, more generally, to focus on cash generation and debt reduction. Measures across the Group are worth in the region of £100 million and will offset downward pressure on advertising and upward pressure on newsprint prices.
For DMG Information, whilst much uncertainty remains in its markets, its businesses are well positioned to deliver strong growth both in an upturn and through the medium term. DMGI’s companies have robust business models and the range of new product developments underway underpins their growth opportunities.
Euromoney’s current trading is in line with its expectations, but in such volatile markets it is difficult to predict how well sales will hold up beyond the first quarter. October’s revenues were ahead of last year and forward revenues for the first quarter also are ahead of the same time last year, but sales for the past eight weeks have shown signs of weakening. Nearly 40% of its revenues come from subscriptions which continue to grow and will provide Euromoney with substantial stability.
For DMG World Media, the economic climate will have an impact on the rate of growth for certain exhibitions. There are continuing growth prospects in others with particular strength in the Middle East and in Oil and Gas events. Generally, we are seeing strength in market leading shows, and we are fortunate that most of our larger shows are in that position.
Our B2B divisions will benefit from the strengthening US dollar with each five cent rise in the average £:$ exchange rate estimated to improve full year profits* by approximately £4 million.
Within Associated Newspapers, October has seen total advertising revenues, including display, down by 10%, but it is difficult to predict trading performance for the rest of the first quarter, with even less visibility thereafter. A plan has been implemented to improve revenues and to reduce costs within Associated, including a Saturday cover price increase for the Daily Mail and the combining of some functions within the Mail titles. At Northcliffe Media, UK advertising trends have deteriorated further since the year end, particularly in the property and recruitment sectors, with October revenues down on the prior year by 28%. Property revenues were 52% below the prior year and recruitment revenues were down 37%. The gloomy economic outlook points to extremely challenging conditions for our key advertising markets throughout the coming year. As well as the implementation of the new regional operating structure, we have reviewed all areas of expenditure and are in the process of removing significant costs from Northcliffe during the coming year.
In addition to the divisional cost cutting measures within Associated and Northcliffe, we have also established A&N Media, a structure to share services across both divisions and to improve operational efficiency.
At DMG Radio Australia, we expect Nova further to improve its reach into its target demographic of all listeners aged 18-39 and we look for continued growth from Vega.
Our focus is on managing the Group through the current difficult trading conditions, based on an assumption of no improvement during 2009. At the same time, we will take advantage of opportunities to increase market share, to launch new products and to leverage the strengths of the Group’s diverse portfolio. DMGT’s long-term strategy remains in place and we are confident that the Group will emerge well from the current economic downturn.
Martin Morgan
Chief Executive
* Adjusted operating profit (before exceptional items and amortisation and impairment of intangible assets).