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.
KEY FIGURES††
ACCOUNTS
Our main communication this year is through an online web 2.0 Annual Report as the vast majority of our shareholders have opted out of receiving communications in print. For this reason, we have dispensed with a separate Annual Review, incorporating a summary set of financial statements. We are still required to produce a full printed version of the Annual Report. The principal change this year is from the adoption of IFRS 8 Operating Segments.
This Financial and Treasury 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* | 2009 £m | 2008 £m | Change † |
|---|---|---|---|
| Revenue | 2,118 | 2,312 | -8% |
| Operating profit | 278 | 317 | -12% |
| Income from joint ventures and associates | [1] | - | |
| Net finance costs | [76] | [55] | -36% |
| Profit before tax | 201 | 262 | -23% |
| Tax charge | [44] | [63] | +29% |
| Minority interest | [16] | [18] | +12% |
| Group profit | 141 | 181 | -22% |
| Adjusted earnings per share | 37.2p | 47.9p | -22% |
REVENUE
The Group's revenue in the year of £2,118 million was 8% lower than the previous year. There was overall revenue growth of 1% from our B2B divisions, due to currency gains, whilst revenues of our consumer divisions fell by 14% due mainly to falls in advertising revenues.
The analysis of revenue by activity, illustrated in Graph 1, shows that the percentage of revenue from consumer media has fallen further this year and is now 59%, down from 68% in 2005. Graph 2 shows the geographic split of revenue. This shows that 65% of revenue by source was generated by U.K. businesses, compared with 78% in 2005, but we estimate that approximately 65% of overall Group income is generated in overseas currencies, principally the U.S. dollar.
OPERATING PROFIT
The Group's operating profit* amounted to £278 million, a decrease of 12% on the equivalent figure for last year. This figure is stated before charging £99 million as exceptional operating costs. This charge comprised reorganisation, restructuring and closure costs mainly within Associated, Northcliffe and dmg world media, offset by pension curtailments of £25 million. Of this, £50 million represents expenditure during the year and a further £37 million will be spent during 2009/10; the balance represents non-cash items.
The charge for amortisation of intangible assets fell by £1 million to £89 million. The Group also made an impairment charge of £347 million, principally relating to assets acquired in recent years by Northcliffe (£94 million), dmg radio (£93 million) and dmg world media (£89 million).
The analysis of operating profit* by activity is shown in graph 3. This shows that the percentage of profit* from B2B has risen from 38% in 2005 to 73% this year.
The Group's B2B operations demonstrated their resilience, growing their overall profit* by £13 million (7%), benefiting from a 21% reduction in the average sterling: U.S. dollar exchange rate over the year. The underlying†† result was a fall of 5%. The average sterling: U.S. dollar exchange rate for the year was £1: $1.55 (against £1:$1.97 last year).
Within consumer media, profits for the year fell by £54 million. Profits* of A&N Media were significantly lower, but rebounded in the second half reflecting more stable conditions and a lower cost base. At Associated Newspapers, this performance was driven by the strength of the Daily Mail. At Northcliffe, an improving profits* trend was aided by stabilisation of absolute weekly levels of advertising revenue. dmg radio australia increased its profits* substantially, despite a small fall in revenues.
JOINT VENTURES AND ASSOCIATES
The Group's share of the results* of its joint ventures and associates fell by £1.5 million to a loss of £1.1 million. The profits of dmg radio australia's joint ventures were offset by our share of the losses of India Today.
NET FINANCING COSTS
| 2009 £m | 2008 £m | Movement% | |
|---|---|---|---|
| Net interest payable and similar charges | [77] | [75] | -2% |
| Swap premia income | 1 | 20 | -96% |
| Total | [76] | [55] | -36% |
As the table shows, net interest payable and similar charges (excluding swap premia but including deemed finance charges and interest receivable) rose by £2 million to £77 million with the higher sterling value of interest on fixed US$ liabilities offset by lower interest rates on floating rate debt.
Income from tax equalisation swap premia fell by £19 million as these structures have been discontinued due to market conditions.
The Group's interest cover calculated as the ratio of adjusted profits* before interest, depreciation and amortisation (EBITDA) to net interest payable (excluding swap premia), was 4.5 times this year, down from 5.8 in 2008, but well above the required three times. This is illustrated in graph 5.
OTHER INCOME STATEMENT ITEMS
The Group recorded other net losses of £24 million, compared to net gains of £28 million in the prior period. This comprised mainly exceptional losses on the sale of consumer businesses and write offs of investments, offset partly by exceptional profits on the sale of properties. There were also £36 million of exceptional finance charges which included foreign exchange hedges.
RESULT BEFORE TAX
The statutory result was a loss before tax for the year of £401 million, after charging £443 million for amortisation and impairment losses of assets, and £159 million of exceptional items.
TAXATION
After allowing for the effect of exceptional and other items that are not expected to recur, the underlying tax rate fell from 24.0% to 22.1%. The continued low rate reflects tax reductions from tax-efficient financing and tax deductible amortisation in the U.S. that are expected to recur.
There were net exceptional credits of £138 million, being the deferred tax credits on goodwill and intangible assets (£52 million), tax credits on exceptional items (£24 million), the write back of provisions arising from the agreement of certain prior year open issues with tax authorities (£35 million) and the £28 million credit on foreign exchange hedges.
PROFIT/LOSS AFTER TAX
Adjusted profit after tax and minority interests amounted to £141 million. The statutory result was a loss for the year of £303 million, after the exceptional tax credits.
PENSIONS
The deficit on the Group's defined benefit pension schemes has increased from £41 million last year end to £430 million at 4th October, 2009 (calculated in accordance with IAS 19). This change is primarily due to an increase in the value attributed to its liabilities because of lower bond yields, augmented by a fall in the market value of the schemes' assets. The funding agreement with the trustees remains in place until replaced by a new agreement reflecting the results of the 2010 triennial valuation.
CASH FLOW AND NET DEBT
Net debt has fallen by £178 million since the half year, but rose by £33 million during the full year from £1,015 million to £1,049 million, principally due to an increase of £50 million from the depreciation of sterling against the U.S. dollar. The Group generated trading cash flow of £296 million and disposal proceeds of £28 million. These funded acquisitions of £73 million, capital expenditure of £40 million, taxation (including related tax equalisation payments) of £83 million, interest of £67 million and dividends totalling £65 million.
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 investments was £300 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, before allowing for exceptional operating costs.
Acquisitions were largely pre-contracted earn-out payments and other deferred consideration. Disposals were of properties and businesses, principally the sale of the Antiques Trade Gazette in October 2008.
The Group's ratio of year end net debt to EBITDA was 3.10 times, above the Group's target of 2.5 times but is comfortably within the requirements of the Group's bank covenants. The ratio was adversely affected by the decline in profitability at its consumer businesses. During the year, the Group acted to increase profitability and reduce cash outflows, in particular by reducing acquisition activity with the aim of returning the ratio of net debt to EBITDA to 2.5 by 2011. The Group's Standard & Poor's credit rating was reduced to BB+, largely due to the perceived weakness of the consumer businesses and the temporary increase in debt arising from the operational exceptional items and the impact of exchange rates on US$ liabilities. Net debt was reduced sharply in the second half of the year and we are looking to reduce it further.
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 £847 million of Bonds due for repayment in 2013, 2018, 2021 and 2027. It also had £180 million of committed banking facilities available to it 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 £200 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. The Group aims to have 70% to 80% of its debt at fixed interest rates to reduce the impact of interest rate fluctuations. 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. During 2009 this policy was suspended and US$ liabilities were below this target and they remain so. This was to ensure that the Group minimised both liquidity risk and the risk of failing bank covenants. As the financial position is now clearer the Group will move back to its policy stated above. About 60% of the Group's profits are expected to be earned from revenue billed in U.S. dollars outside the U.K. 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 U.S. dollar.
[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 raised a further £25 million of funding through a sale and hire purchase back amortising over eight years. 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.
Although the Group's bank facilities are multi-currency, the limit to total drawings available is denominated in sterling. During the year the increase in value of the Group's U.S. dollar drawings reduced the unutilised committed facilities below the Group's £100 million target. This liquidity risk was eliminated through normal cash inflow and by increasing the Group's borrowing facilities, releasing facilities used for Letters of Credit and by using medium term forward sales of US$ as an alternative to borrowing in U.S. dollars.
[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 U.S. dollars and Euros and net payments in sterling and Canadian dollars. Euromoney has a series of U.S. dollar and Euro forward sale contracts in place up to two years forward to meet its sterling and Canadian dollar 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 gains 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 12 prohibits TES gains and losses 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 £28 million (2008 £68 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. These transactions are unlikely to continue at the same level in the near future.
(ii) Translation Exposure
Borrowings are principally incurred in sterling, with lesser amounts in U.S. dollars and other currencies. Generally, the proportion of foreign currency debt (after allowing for any hedging instruments) to total net debt is managed to be approximately equal to the proportion of foreign EBITA, compared to total Group EBITA. During 2009 this policy was suspended and US$ liabilities were below this target and they remain so. This was to ensure that the Group minimised both liquidity risk and the risk of failing bank covenants. As the financial position is now clearer the Group will move back to its policy stated above. 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 U.S. 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. During 2009 the currency policy was suspended and US$ liabilities were below this target and they remain so. This was to ensure that the Group minimised both liquidity risk and the risk of failing bank covenants. As the financial position is now clearer the Group will move back to its policy stated above.
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. 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. As such the ratio will not be met consistently, as is currently the case, but will define the medium-term target level of net debt. Covenants on the Group's bank facilities and hire purchase obligations 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 results are stated before amortisation and impairment of intangible assets and exceptional items.
†† 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.