Financial and Treasury Review
The purpose of this review is to out line key aspects of the Group’s performance over the last year and of its financial position.
KEY FIGURES††
ACCOUNTS
Last year the vast majority of our shareholders opted out of receiving communications in hard copy form. Therefore, our main communication this year is through an online web 2.0 Annual Report. We are still required to produce a printed version. The main change this year is from the adoption of IFRS 7 Financial Instruments: Disclosures, which has increased the length of the report to 164 pages. We have also produced a separate Annual Review again, 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 results to give a more comparable indication of the Group’s underlying business performance. A discussion of other items included in the statutory results is given after the divisional performance review. The adjusted results are summarised below:
| Adjusted results* | 2008 £m | 2007 £m | Change |
|---|---|---|---|
| Revenue | 2,312 | 2,235 | +3% |
| Operating profit | 317 | 322 | -2% |
| Income from joint ventures and associates | - | 6 | |
| Net finance costs | [55] | [41] | -36% |
| Discontinued activities | - | 1 | |
| Profit before tax | 262 | 288 | -9% |
| Tax charge | [63] | [76] | +17% |
| Minority interest | [18] | [20] | +9% |
| Group profit | 181 | 192 | -6% |
| Adjusted earnings per share | 47.9p | 49.3p | -3% |
REVENUE
The Group’s revenue in the year of £2,312 million was 3% higher than the previous year. There was revenue growth from all of our divisions, other than Northcliffe. We estimate that underlying† revenue growth, excluding the impact of acquisitions and disposals, growth was also 3%.
Now that nearly half of our revenue is generated from outside the Group’s print newspaper titles, we have changed the order of our segments to show our business to business divisions before those in consumer media. The analysis of revenue by activity, illustrated in Graph 1, shows that the percentage of revenue from consumer media has fallen to 63% from 73% in 2004. Graph 2 shows the geographic split of revenue. This shows that 70% of revenue by source was generated by UK businesses, compared with 79% in 2004, but we estimate that approximately 45% of overall Group income is derived from revenue invoiced in US dollars.
OPERATING PROFIT
The Group’s operating profit* amounted to £317 million, a decrease of 2% on the equivalent figure for last year. This figure is stated before charging £32 million as exceptional operating costs. This charge comprised reorganisation, restructuring and closure costs within Associated, Northcliffe and DMG World Media.
The charge for amortisation of intangible assets rose by £8 million to £90 million. The Group also made an impairment charge of £168 million, principally relating to more recently acquired regional media assets and to a number of consumer and gift shows. The charge also included a write down of £14 million of the Group’s original investment in GLM, arising purely from the Group’s IFRS transition election on 4th October, 2004 and matched by an equal and opposite credit to reserves.
The analysis of operating profit* by activity is shown in Graph 3. This shows that the percentage of profit* from business to business has risen from 33% in 2004 to 60% this year.
All of the Group’s B2B divisions increased their profits*, by £24 million in total, despite economic conditions affecting DMG Information’s property businesses and DMG World Media’s remaining consumer exhibitions. The largest increase was at DMG World Media, due to the full acquisition of GLM, but on a like-for-like basis, adjusted for acquisitions and disposals made in the year, its operating profit* rose by 8%. The events experienced by financial markets and institutions in September had no material impact on the year’s results. The average sterling: US dollar exchange rate was unchanged over the year at US$1.97.
In total, profits* from the Group’s consumer businesses fell by £29 million. Associated’s profits* were lower, due to the additional costs of full colour printing, as a result of the new Didcot plant coming on stream, and promotional investment in the property and motors digital companies. Northcliffe was badly affected by the exceptionally challenging advertising markets in 2008 as the impact of the credit crunch spread across the wider economy. DMG Radio Australia moved back into profit*.
Unallocated central costs were substantially unchanged. Higher overheads were offset by a lower financing component as a result of the surplus on the Group’s defined benefit pension schemes at the start of the year.
JOINT VENTURES AND ASSOCIATES
The Group’s share of the results* of its joint ventures and associates fell by £5.6 million to £0.4 million reflecting the reclassification of GLM as a subsidiary. The main item is now DMG Radio Australia’s joint ventures which increased their contribution, but this was offset by our share of the losses of India Today, a start-up venture.
NET FINANCING COSTS
| 2008 £m | 2007 £m | Movement% | |
|---|---|---|---|
| Net interest payable and similar charges | [75] | [70] | -9% |
| Swap premia income | 20 | 27 | -26% |
| Dividend income | - | 2 | |
| Total | [55] | [41] | -36% |
As the table shows, net interest payable and similar charges (excluding swap premia but including deemed finance charges and interest receivable) rose by £5 million to £75 million due to higher average net debt. Income from tax equalisation swap premia fell by £7 million due to market movements.
Dividend income fell by £1.2 million due mainly to a reduced dividend from GCap Media plc which was sold in June.
OTHER INCOME STATEMENT ITEMS
An exceptional gain of £10 million arose within income from associates on the sale of the main business of Centurion (formerly Indigo Holidays). The Group recorded other gains and losses of £28 million, compared to £36 million last year. This comprised mainly net exceptional profits of £24 million on the sale of businesses and gains of £14 million on the sale of surplus properties and investments, offset by impairments of investments of £10 million.
The Group recorded £68 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.
PROFIT BEFORE TAX
The statutory result was a loss before tax for the year of £68 million, after charging £68 million of foreign exchange losses on tax equalisation hedging transactions, which cause an equal and opposite reduction in the tax charge, amortisation and impairment charges totalling £264 million and net exceptional gains of £1 million.
TAXATION
After allowing for the effect of exceptional and other items that are not expected to recur, the underlying tax rate fell from 26.3% to 24.0%. The fall reflects tax reductions from tax-efficient financing and increased tax deductible amortisation in the US that are expected to recur. Over the next few years the adjusted rate is expected to remain at around this rate, but eventually increase to around 30%.
There was a net exceptional tax credit of £148 million, being the write back of prior year provisions, together with the £68 million tax credit on exchange differences on intra-group financings.
PROFIT AFTER TAX
Adjusted profit after tax and minority interests amounted to £181 million. The statutory after-tax result was £Nil, reflecting the benefit of the exceptional tax credits.
PENSIONS
The Group’s defined benefit pension schemes have moved from a surplus of £81 million last year end to a deficit of £41 million at 28th September 2008 (calculated in accordance with IAS 19). This change is primarily due to a fall in the market value of the schemes’ assets, partly offset by a reduction in the value attributed to its liabilities because of higher bond yields.
CASH FLOW AND NET DEBT
Net debt increased during the year from £951 million to £1,015 million, an increase of £64 million. The Group generated free cash flow of £164 million which was used to pay dividends and make share repurchases and acquisitions, partly offset by 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 £371 million. In general, the Group’s profits are converted rapidly into cash and cash generation was strong across the Group, with 100% of profits* converted into cash.
The main acquisitions were GLM for £77 million and the purchase of £27 million of Euromoney shares, increasing the Group’s stake to 66%. The main disposals were the Group’s investment in GCap Media plc, Hobsons’ European graduate businesses, our North America Home Interest shows and Dolphin Software. The Group spent £88 million on acquiring its own ‘A’ Ordinary shares.
The Group’s interest cover, calculated as the ratio of adjusted profits* before interest, depreciation and amortisation (EBITDA) to net interest payable, was 5.2 times this year, down from 5.8 in 2007 (excluding swap premia), below the Group’s current target of six times. The Group’s ratio of year end net debt to EBITDA was 2.7 times, just above the Group’s target of 2.5 times. The Group’s Standard & Poor’s credit rating remains at BBB.
Most of the Group’s debt remains in long-term bonds, the earliest of which is not repayable until 2013. At the year end, the Group had £839 million of bonds due for repayment in 2013, 2018, 2021 and 2027. It also had £70 million of committed banking facilities available to it until late summer 2009, £180 million until September 2011 and £240 million until September 2013. Consequently, the Group has sufficient committed debt facilities to meet its foreseeable requirements. It had surplus committed facilities of £247 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. Over 40% of the Group’s profits are earned from revenue billed in US dollars. The Group’s foreign assets are only partially hedged by its foreign currency debt and economically its earnings are most exposed to movements in value of the US dollar. The Group aims to have 70% to 80% of its debt at fixed interest rates 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. 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. In September, the Group renewed £420 million of bank facilities with maturities of three to five years with no change in basic financial covenants. Surplus funds are generally used to pay down bank 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 in Euromoney there were no significant foreign currency forward contracts in existence that hedge revenues or costs. Major items of capital expenditure in foreign currency are 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 internal financing structures give rise to foreign exchange gain or losses which are either taxable or tax deductible. Where appropriate, the Group enters into market derivatives to hedge this exposure in economic terms through Tax Equalisation Swaps (TES ). However, IAS 39 prohibits TES 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 £68 million (2007 £10 million) 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 which are 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 80% of total net debt (including options which 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 manage its finances such that the ratio of net debt to EBITDA does not normally exceed 2.5:1 and the ratio of EBITDA to net interest costs is above 6:1. 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 ratios will not be met consistently, but will define the medium-term target level of net debt. Covenants on the Group’s recently renewed bank facilities are Net Debt: EBITDA of no more than 4:1 and EBITDA: interest of no less than 3:1.
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
* Adjusted operating profit (before exceptional items and amortisation and impairment of tangible assets).
† Underlying revenue or profit* is revenue or profit* on a like-for-like basis, adjusted for acquisitions and disposals made in the current and prior year and at constant exchange rates.
†† Percentages are calculated on actual numbers to one decimal place.