Directors' Report
The Directors present their Report and Accounts for the year ended 4th October, 2009.
ACTIVITIES
The principal activities of the Group are set out in DMGT at a Glance section of this Annual Report.
The analysis of turnover and operating profit for the years ended 4th October, 2009 and 28th September, 2008 are included as Note 3 to the Consolidated Income Statement.
BUSINESS REVIEW
The information that fulfils the Companies Act requirements of the business review is included in the Business Review. This includes a review of the development of the business of the Group during the year, of its position at the end of the year and of likely future developments in its business. Details of the principal risks and uncertainties facing the Group are set out below.
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. 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 Corporate 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
The current economic climate, especially in the U.K. and U.S. economies, continues to represent a significant risk to the Group. A significant (although decreasing) proportion of our revenue is derived from advertising, which has historically been cyclical, and has reduced as a result of the downturn in the global economy. A similar effect has been seen in our businesses that rely on non-advertising revenues in the financial and property markets. Despite the difficult trading conditions in these businesses, our long-term strategy of diversifying the Group’s portfolio, especially into business information and subscription revenue streams, and our commitment to invest in our core brands, puts us in a strong position both now and when growth returns.
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 pension 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, demographic changes and increased life expectancy. Recent turmoil in global equity markets and reduced bond yields has increased this risk, which is considered with the scheme trustees as part of discussions around the three yearly actuarial valuation. A funding approach and a revised asset allocation strategy, designed to reduce and diversify the risk inherent in the investment portfolios, have been agreed and implemented. The cash flow of the main defined benefit scheme is broadly neutral so the trustees have not needed to sell assets to any material extent in these depressed markets. The next valuation will be undertaken as at 31st March, 2010. These actions have been supplemented by the recently announced closure of the scheme to new employees, changes to benefits and further proposals to be introduced next year that are designed to deal with the ongoing risk to the balance sheet created by defined benefit pension liabilities. By next year a programme to install updated, consistent defined contribution pension plans in all divisions will be complete, a further measure to control pension liabilities and costs incurred by the Group.
IMPACT OF A MAJOR DISASTER OR OUTBREAK OF DISEASE
The first wave of the H1N1 influenza pandemic was not as severe as first predicted and had only a limited impact on DMGT. It is, however, possible that there will be a further wave in the northern hemisphere coinciding with the 2009/10 winter flu season. At present the virus is at the low end of the virulence spectrum; however, it is impossible to predict whether the virus will mutate into a more virulent and severe form. A second wave could affect the Group’s ability to produce and deliver its products, reduce the demand for them, or affect our cost base. Some of our events businesses are more sensitive to a pandemic as the success of certain events can depend on confidence in global travel.
Business continuity plans including specific pandemic planning measures have been implemented across the Group. We have called upon specific pandemic modelling expertise within RMS to give us the best available insight into the likely spread of the pandemic and issued regular communications to senior divisional management and staff members. In addition, we have implemented a pandemic influenza management scheme that includes provision of anti-viral medication to our staff. Our planning in advance of the recent events and since has allowed our businesses to be well prepared and to respond quickly as new information becomes available to protect our staff, brands and reputation.
RELIANCE ON KEY MANAGEMENT AND STAFF RETENTION
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.
Our Group Human Resources Director has worked with divisional and executive management across the DMGT divisions to implement a formal approach to talent management and succession planning. This includes payment of competitive rewards, employee performance and turnover monitoring and a variety of approaches to staff communication.
COMMERCIAL RELATIONSHIPS INCLUDING:
Volatility of newsprint
DMGT is reliant on a number of commercial relationships with key suppliers and third parties. A significant change to the commercial terms under which we trade or a loss of any of these key relationships could have a material impact on the Group’s financial results and ability to trade.
An example of this is newsprint which 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 changes are significant. In response to this, significant time and resources are committed to developing these relationships to ensure they continue to operate satisfactorily. The Group’s newsprint requirements are also monitored by the board of Harmsworth Printing (to which the duties of the Newsprint Committee were transferred in October 2009) and, where possible, long-term arrangements are agreed with suppliers to limit the potential for volatility.
ACQUISITION AND DISPOSAL RISK
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. This risk is particularly pertinent, given the current economic climate.
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.
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. 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. Any future breach in our data security could have a harmful impact on our business and reputation. A Group-wide policy has been set and the Risk Committee have overseen the implementation of this policy in all divisions.
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. The impact of 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. A Group-wide code of conduct highlighting key legal and regulatory issues affecting our businesses and working practices has been developed and distributed in the year. 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. The policies and procedures in place to manage these risks are discussed in the Financial and Treasury review.
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.
This Annual Report contains certain forward-looking statements with respect to the principal risks and uncertainties facing the Group. By their nature, these statements involve risk and uncertainty because they relate to events and depend on circumstances that may or may not occur in the future. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward looking statements. No assurances can be given that the forward-looking statements are reasonable as they can be affected by a wide range of variables. The forward-looking statements reflect the knowledge and information available at the date of preparation of this Annual Report, and will not be updated during the year. Nothing in this Annual Report should be construed as a profit forecast.
RESULTS AND DIVIDENDS
The loss after taxation of the Group amounted to £305 million. After crediting minority interests of £2 million, the Group loss for the year amounted to £303 million.
An interim dividend of 4.80 pence per share was paid on the Ordinary and ‘A’ Ordinary Non-Voting shares and the Directors recommend that a final dividend of 9.90 pence per share be paid on 12th February, 2010 making 14.70 pence per share for the year (2008 14.70 pence).
DIRECTORS
Biographical details of the Directors of the Company at 4th December, 2009 are set out in the Governance section. Messrs M.W.H. Morgan and D.H. Nelson were appointed to the Board on 1st October, 2008 and 1st July, 2009, respectively. Messrs C.J.F. Sinclair, I.G. Park and S.M. Gray retired from the Board on 30th September, 2008, 11th February, 2009 and 31st July, 2009 respectively. All other Directors remained unchanged during the year.
The number of shares of the Company and of securities of other Group companies, in which the Directors or their families had an interest at the year end, are stated in the Remuneration Report.
In accordance with the Articles of Association, Messrs Dutton, Gillespie, Verey and Berry retire by rotation at the Annual General Meeting on 10th February, 2010. Each being eligible, offers himself for re-election. Shareholders will be asked to confirm the appointment of Mr Nelson to the Board. The Directors would like to thank Messrs Sinclair, Park and Gray for their invaluable contributions to the Board’s deliberations.
POST BALANCE SHEET EVENTS
On 26th November, 2009, the Group announced the sale of a 50% interest in dmg radio australia to Illyria for estimated net proceeds of A$112 million (£63 million).
SHARE CAPITAL
There were no allotments of share capital during the year.
At the Annual General Meeting on 11th February 2009, the Company was granted the authority to purchase up to 10% of its own shares.
During the year, the Company transferred 10,184,237 shares out of treasury, representing 2.73% of called up ‘A’ Ordinary Non-Voting shares, in order to satisfy incentive schemes.
The Company also purchased 1,626,058 ‘A’ Ordinary Non-Voting shares for holding in treasury, having a nominal value of £203,257 in order to match obligations under various incentive plans. The consideration paid for these shares was £5.6 million. Shares repurchased during the year represented 0.44% of the called up ‘A’ Ordinary Non–Voting share capital at 4th October, 2009.
Full details of the Company’s share capital are given in Note 35.
EMPLOYEES
Under the Group’s general policy of decentralised management, it is the responsibility of the management in each subsidiary to encourage the involvement and participation of employees in their company. The methods used vary company by company, but the linking to performance targets of a significant portion of remuneration is one widely used means.
The Group gives full and fair consideration to suitable applications from disabled persons for employment. If existing employees become disabled they will continue to be employed, wherever practicable, in the same job or, if this is not practicable, every effort will be made to find suitable alternative employment and to provide appropriate training.
POLICY ON PAYMENT OF SUPPLIERS
The Group’s policy on supplier payments varies across its subsidiaries. These companies have no formal code or standard which deals specifically with the payment of suppliers. However, their policy is to ensure that the terms of payment, as specified by, and agreed with the supplier at the outset, are not exceeded.
THE COMPANY HAD NO TRADE CREDITORS AT THE YEAR END DATE.
The Group’s average payment period, calculated on the basis of year end trade creditors, is 66 days (2008 63 days), although this is dependent on the year end date and cannot therefore be regarded as meaningful.
DONATIONS
Charitable donations made by the Group in the year amounted to £700,000 (2008 £946,000). This excludes the cost of publicity, often provided free of charge by the Group’s titles, and funds raised by them, further details on which are given in the Corporate Responsibility Report of this Annual Report. No political donations were made by the Group.
SUBSTANTIAL SHAREHOLDINGS
As set out in Note 35, the Company has two classes of share capital – Ordinary shares and ‘A’ Ordinary Non-Voting shares. On 4th December, 2009 the following were interested in more than 3% of the issued Ordinary shares:
| Rothermere Continuation Limited (and other parties to an agreement which comes within section 824 of the Companies Act 2006) | 63.1% |
|---|---|
| Codan Trust Company Ltd and Codan Trustees (BVI) Ltd (trustees of the Esmond Harmsworth 1998 Family Settlement) | 29.3% |
DIRECTORS’ RESPONSIBILITIES STATEMENT
The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors are required to prepare the Group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and Article 4 of the IAS Regulation and have elected to prepare the parent Company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under Company law the Directors must not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.
In preparing the Parent Company financial statements, the Directors are required to:
- select suitable accounting policies and then apply them consistently;
- make judgments and accounting estimates that are reasonable and prudent;
- state whether applicable U.K. Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
- prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.
In preparing the Group financial statements, International Accounting Standard 1 requires that Directors:
- properly select and apply accounting policies;
- present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
- provide additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance; and
- make an assessment of the Company’s ability to continue as a going concern.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
RESPONSIBILITY STATEMENT
We confirm that to the best of our knowledge:
- the financial statements, prepared in accordance with International Financial Reporting Standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and
- the Business Review, which is incorporated into the Directors’ report, includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
AUDITORS
The Company’s auditors, Deloitte LLP, have indicated their willingness to continue in office and, in accordance with section 489 of the Companies Act 2006, a resolution proposing their reappointment will be put to the Annual General Meeting.
ANNUAL GENERAL MEETING
The AGM of the Company will be held on 10th February, 2010 at 9.00 a.m. at the Kensington Roof Gardens, 99 Kensington High Street, London W8. Details of all resolutions, including those to be put as special business, are set out in the enclosed circular to shareholders.
CORPORATE GOVERNANCE
The following section on Corporate Governance also form part of this Directors’ Report.
By Order of the Board
N D JENNINGS, FCA
Secretary
4th December, 2009