RNS Number:3467W
Future Network PLC
10 March 2004
PART 1
10 March 2004
THE FUTURE NETWORK PLC
Preliminary results for the year ended 31 December 2003
The Future Network plc (LSE: FNET), the international specialist consumer
magazine group, today announces its preliminary results for the year ended 31
December 2003.
Financial highlights
Adjusted results*
Turnover #182.7m (2002: #165.3m) Up 11%
Adjusted operating profit #22.5m (2002: #18.2m) Up 24%
Adjusted pre-tax profit #22.7m (2002: #18.8m) Up 21%
Adjusted earnings per share 4.9p (2002: 4.4p) Up 11%
First dividend of 1.25p per share New
Net cash balances of #13.4m (2002: #16.8m) Strong balance sheet
Statutory results
Turnover #182.7m (2002: #165.3m) Up 11%
Operating profit #9.5m (2002: #10.1m) Down 6%
Pre-tax profit #9.7m (2002: #10.7m) Down 9%
Earnings per share 0.8p (2002: 1.9p) Down 58%
First dividend of 1.25 p per share New
Net cash balances of#13.4m (2002: #16.8m) Strong balance sheet
Other highlights
Circulation revenue up 12%, advertising up 9% Overall double-digit growth
Games, good; computing, difficult; entertainment, strong Profitable portfolio
UK business solid, US very strong, Europe better Improved in each country
23 new monthly magazines, 15 launches, 8 acquired Expansion continues
Strong performance in second half-year Confirms seasonal trend
Proposed change of financial year-end to 30 September Better for managing business
*Definitions
Adjusted results are presented to provide a better indication of overall
financial performance and to reflect how the business is run on a day to day
basis. The only adjustments made are to remove goodwill amortisation and other
operating income.
Commenting on the results, Greg Ingham, Future's Chief Executive said:
"The Future Network is an international business which has traded well in 2003.
It is growing, and is in a strong position in the field of special-interest
consumer magazine publishers. We have valuable consumer properties managed by
a talented and motivated team. I am optimistic that our shareholders'
confidence in The Future Network will continue to prove justified in the years
to come."
Enquiries:
The Future Network plc
Greg Ingham, Chief Executive Tel: 01225 442244
John Bowman, Finance Director
Hogarth Partnership
James Longfield/Georgina Briscoe Tel: 020 7357 9477
Chairman's statement
Summary
I amdelighted to report on a successful year with double-digit percentage
growth in turnover, adjusted operating profits and adjusted earnings per share.
The Future Network has grown by both launch and acquisition; and the Company is
announcing today its first dividend.
The strength of The Future Network is the focused effort and dedication of our
staff. Their enthusiasm and talent continues to underpin the success and
popularity of our magazines. We now have more than 1,000 people producing 98
monthly magazines.
Financial results for 2003 compared with 2002
Group turnover rose by 11% to #182.7m; adjusted operating profit rose by 24% to
#22.5m; and adjusted earnings per share rose 11% to 4.9 pence per share.
The Future Network has again been strongly cash generative and ended the year
with net cash of #13.4m. This is despite spending #18.4m on acquisition
activity - the benefit of which starts to become more evident in 2004.
Against this strong financial background the Board recommends a first dividend,
amounting to 1.25 pence per share for the full year 2003.
It is also the current intention of the Board to recommend a final-only dividend
of 1.25 pence per share for the nine months to 30 September 2004, in the absence
of exceptional circumstances and following our proposed change of financial
year-end which I explain below.
Business growth
Over the last two years, we have significantly expanded our business. Since the
beginning of 2002, we have launched 28 monthly magazines, acquired a further 8,
and closed or sold a total of 14. This brings our portfolio of monthly
special-interest consumer magazines to a total of 98 at the end of 2003. From
this broader base of games, computing and entertainmenttitles, we have been
able to drive profitability further.
It is pleasing that progress has been made in each of The Future Network's four
countries, most notably in the US in 2003.
In seeking to develop the business further, the Board has spenttime reviewing
strategic priorities and the Chief Executive's review summarises our growth
strategy.
Board and corporate governance
On 12 March 2003 John Mellon and Lisa Gordon joined the Board as independent
non-executive Directors, bringing the number of independent non-executive
Directors to five. John has had a successful business career in magazine
publishing, including as Chairman of IPC Magazines. Lisa was the Corporate
Development Director of Chrysalis Group for eight years.
With effect from 16 September 2003, Colin Morrison, who was Chief Operating
Officer, resigned as a Director of the Company and subsequently left the Group
on 31 December 2003. Colin joined the Company in January 2001 as Chief
Operating Officer and also filled the position of UK Managing Director from July
2001. The role of Chief Operating Officer has now ceased. The Board is
grateful to Colin and wishes him the very best for his next challenge.
We continue to note corporate governance developments. An important aspect of
this is the composition of the Board and I believe that The Future Network has a
good balance between executive and non-executive Directors, and that our Board
is effective. I welcome observations from shareholders on any aspect of
governance.
Annual General Meeting 2004
Our 2004 AGM will be held on Thursday 13 May in Bath and the business for that
meeting will include eleven resolutions. I should like to highlight two
significant new proposals.
Havingpaved the way last year to enable the payment of dividends, and with the
strong financial performance for 2003 summarised above, the Board has
recommended a first dividend, amounting to 1.25 pence per share for the full
year 2003. The payment of this dividend is subject to shareholder approval at
the AGM.
The Board also proposes to change the financial year-end of the Group from 31
December to 30 September. The October to December period generates a
significant proportion of revenues and profits and makes forecasting performance
during the year a challenge. Changing the year-end will facilitate the
management of the business and build in more certainty in predicting outcomes.
It is also notable that within this busiest trading quarter, the business
prepares detailed operating budgets for the ensuing financial year; reviews
staff salaries; and monitors closely the financial implications of any deviation
from budget arising in the last quarter of the financial year.
By changing the financial year-end to 30 September, we believe that we will
achieve a more balanced and effective management of the business internally,
whilst also providing a better framework for managing the business as a public
company. The Board therefore proposes to shorten the current financial
reporting period by three months, so that the Company's next audited results
would be for the nine months to 30 September 2004.
The proposed change of financial year-end is not a matter which requires the
approval of shareholders. However, consistent with our views on aspiring to
best practice in corporate governance, we have decided to invite shareholders to
vote in favour of this change at the 2004 AGM.
Current trading and prospects
Currenttrading for January 2004 has been in line with internal expectations and
we regard our trading prospects positively.
The Future Network is an international business which has traded well in 2003.
It is growing, and is in a strong position in the field of special-interest
consumer magazine publishers. We have valuable consumer properties managed by
a talented and motivated team. I am optimistic that our shareholders'
confidence in The Future Network will continue to prove justified in the years
to come.
Roger Parry
Chairman
10 March 2004
Chief Executive's Review
Overview
2003 was another successful year for The Future Network. In this report I
highlight several important matters in addition to those set out in our
Operating and Financial Review. I also provide an update on our corporate
strategy.
Management of the Group
I am proud to have led the Group through a successful year. I should like to
start by recording my thanks to the many creative and commercial people we
employ, who together are responsible for the very good progress we have made in
2003.
Last year I outlined our ambition to launch new titles in 2003 and to make
further acquisitions. In both cases we have made real progress. We have
expanded our portfolio by doing both: launching in each of our four countries,
and acquiring in the UK, the US and in France.
I am particularly pleased with the progress made overseas, led by our country
Managing Directors. In the US, Jonathan Simpson-Bint has done a remarkable job
in leading strong growth in circulation, revenues and profits. This underpinned
our confidence to invest in the acquisition of sector-leading guitar magazines
in New York in the autumn. Sari Zaimi has worked hard to ensure both
operational improvements in our French business as well as effective integration
of the titles we acquired last year from Hachette. Our Italian business is now
in a robust state under the strong leadership of Bernardo Notarangelo. As a
result of progress in both countries, in terms of adjusted operating profit our
Mainland European businesses are now once more profitable.
Since September I have been acting Managing Director of the UK business. Our UK
results show a business with very good margins - amongst the best in our
industry. From here, our task is to stimulate further growth in what has been
our strongest business.
It is interesting to note that The Future Network's combined international sales
- owned businesses, licences and exports - exceed those in the UK, further
underpinning the improved quality of the Group's earnings.
Special-interest consumer magazine publisher
The Future Network's publishing philosophy is based on providing quality
editorial products that are defined by the depth of understanding of
special-interest areas that meet the needs of defined groups of readers. The
magazines are characterised by editorial authority, quality of content and high
value. In a market place where readers are ever more demanding, The Future
Network is recognised for the excellence of its products.
Our business model is typically based on premium price, premium quality. And
when the highest-priced is also the biggest-selling, then there is an even more
attractive business opportunity. In turn, this creates an appealing audience for
advertisers: sector-leading volumes of readers who have demonstrated their depth
of interest via purchasing high-cover price magazines. Additionally, the scale
of our magazines can also be attractive for non-endemic advertisers.
And specialist is not a proxy for small. Our Official PlayStation 2 Magazine in
the UK is the ninth-highest ranking of all UK monthly magazines in terms of
consumer spend.
Sectors
Games
We continued to drive our long-term success in the games sector in 2003. As
signalled a year ago, the sector now accounts for 46% of Group revenues and 45%
of Group profit (as measured by gross contribution).
The Future Network isthe worldwide leader in games magazines, with 2003
revenues of #85m (2002: #76m). Our largest-selling magazine is now the US
Official Xbox Magazine, with current monthly sales of 403,000, and we now
publish editions of the Official Xbox Magazine infive countries with licensed
editions in a further four. Our largest-selling UK magazine is Official
PlayStation 2 which sold a monthly average of 188,000 copies in 2003, and we
also publish the Official PlayStation 2 magazine in France.
Computing
Computing titles provided 32% of our 2003 magazine revenues. The Future Network
is a significant publisher of computing magazines in its four territories, with
2003 revenues of #58m (2002: #54m).
Once again we have increased our total computing revenues, despite difficult
market conditions. Our teams, who are highly focused, have found smart ways to
develop new business and it is pleasing that some of our newer digital titles
have grown strongly. There are some signs that technology markets are finally
beginning to pick up again, particularly in the US, which should prove
beneficial to a company with a strong technology element such as The Future
Network.
Although it is very early days, we are pleased with the recent launch in the US
of Mobile PC, our first significant launch in the US for two years.
Entertainment
The Future Network's UK Entertainment portfolio comprises a number of separate
special-interest magazines, ranging from music-making to film and
mountain-biking, from stitching to technology and modified cars. Together with
our recently acquired guitar titles in the US, they provide us with a
diversified magazine portfolio. In 2003 our entertainment titles performed
strongly overall and we intend to expand further in these areas, building on our
long-term success in these special-interest areas of the market.
The Future Network has been sector leader in guitar magazines for almost a
decade in the UK. We have achieved growth once more this year, and this durable
success in a familiar special-interest area encouraged us to enter the US guitar
market in 2003. In two separate deals last autumn, we bought the number one and
number three best selling magazines for a combined #11.5m, to become worldwide
leaders of an attractive sector.
UK magazine distribution
The UK's largest magazine distributor, Marketforce, will be distributing our
magazines with effect from May 2004. We are pleased with this appointment and
believe that having thebenefit of their scale and experience will help our UK
business.
Corporate Strategy
The Board seeks to enhance shareholder value by maintaining our pace of growth,
which has seen substantial growth in Group value since 2001. To this end, we
have a clear strategy:
* To exploit the significant growth opportunities in our core area of
expertise - special-interest consumer magazines
* To focus new investment on the UK and US businesses
* Further to increase the diversity of our magazine portfolio, thereby
reducing our dependence on any single sector
* To use the Group's strong balance sheet and cash generative qualities
to pursue acquisitions
* To build onour established track record of launching new titles.
We have been focused in 2003 on seeking to improve the business in every area.
We have continued to make significant progress, which has been beneficial to
shareholders and to Future people alike. We look forward with confidence.
Greg Ingham
Chief Executive Officer
10 March 2004
Operating and Financial Review
New in 2003
* Double-digit growth in adjusted eps
* First dividend
Purpose of Review
This review explains the financial results for 2003. It is also intended to
help readers to assess the future performance of the Group by setting out the
Directors' analysis of the business. Accordingly, I comment on business trends
evident in 2003; on accounting policies that have required the exercise of
judgement in their application, and to which the results are most sensitive; and
on the measures used by the Directors as key performance indicators in managing
the business.
As last year, this review focuses on adjusted figures which are presented to
provide a better indication of overall financial performance and to reflect how
the business is managed on a day to day basis. The only adjustments made are to
remove goodwill amortisation and other operating income.
Looking forward, I also comment on our aspirations to achieve further growth in
earnings, our dividend policy, the planned change of financial year-end in 2004,
and the likely impact of International Financial Reporting Standards in 2005/
2006.
Structure and size of the Group
By the end of 2003, the Group published 98 special-interest consumer magazines
and operated subsidiary companies in the UK and three overseas countries: the
US, France and Italy. In addition, the Group licensed local editions of its
magazines in a further 31 countries. The Group's progress in comparison with
2002 can be seen from the following information.
2003 2002 Change
Total turnover #182.7m #165.3m Up 11%
Magazines 98 82 See table overleaf
Overseas subsidiaries 3 3 No change
Year end headcount 1,033 934 Up 11%
Acquisition spend #18.4m #0.1m Four in 2003
Net cash #13.4m #16.8m Net outflow of #3.4m
Magazine portfolio
By the end of the year, the Group published 98 special-interest consumer
magazines in four countries, as follows:
Monthly titles At 1 January Launches/ Disposals/ At 31 December
acquisitions closures
UK 54 12 (5) 61
US 5 2 - 7
France 13 6 (2) 17
Italy 10 3 - 13
Total 82 23 (7) 98
The Group's magazine portfolio can be analysed by sector as follows:
Monthly titles Games Computing Entertainment Total
UK 15 21 25 61
US 3 2 2 7
France 8 7 2 17
Italy 6 7 - 13
Total 32 37 29 98
During the year 15 titles were launched and eight were acquired. The amount
spent on magazine launches was #2.0m (as measured by losses at the gross
contribution level), which is within the estimate provided by management in
September. The net cash consideration paid for magazine acquisitions amounted to
#18.4m. Magazine launch activity is discussed below and magazine acquisitions
are discussed later in this report.
#1.3m was spent on magazine launch activity in the UK and mainland Europe. Ten
magazine titles were launched in the UK. The most expensive of these launches
was Bang, an alternative music magazine, which did not achieve the required
volume of sales to justify continued publication. Accordingly, this magazine
was closed in December 2003. The financial performance of magazine launches in
France and Italy was satisfactory.
In the US, #0.7m was spent on the set-up costs of Mobile PC, which went on sale
in January 2004. All staff, promotional and other expenses relating to this
titleincurred during 2003 were expensed against 2003 US profits.
Magazines launched during 2003
Country Title
UK Focus Guides
UK Digital Camera Shopper
UK Digital Photography Techniques
UK Windows XP Answers
UK Masterclass series
UK Your Family Tree
UK Bang
UK What Guitar
UK Digital Home
UK Laptop magazine
France Digital Foto
France Kid Paddle
Italy Digital Camera
Italy Linux Pro
Italy Videogiochi
Magazines acquired during 2003
Country Title
US Guitar World
US Guitar One
France PlayStation 2: Le Magazine Officiel
France Joypad
France Joystick
France DVD Magazine
UK PSW
UK Xbox World
During the last two years, the Group has launched a total of 28 magazines and
acquired a further 8. Magazines closed or sold in the same period number 14.
This represents net expansion of 22 magazines, and the Group plans to expand
further in 2004. In relation to magazine launches, the Group anticipates a
similar level of financial commitment to that incurred in 2003 (#2m of net
losses as measured at the gross contribution level). This level of investment
in the development of the Group's portfolio can readily be funded from the
Group's cash resources.
Key performance indicators used by management
The Directors monitor the Group's progress by reference to circulation and
advertising revenue by territory, by type and by sector. For management
accounts purposes, each magazine has its own profit and loss account, detailing
magazine revenues and (after deducting direct magazine-related costs) the
resulting grosscontribution. Any magazine which produces a negative gross
contribution is considered carefully, to ensure that such a result is justified
in business terms: for example, that early losses following a magazine launch
are running within acceptable parameters. Overheads are reviewed as a block of
expenditure on a country-by-country basis. Gross contribution less overheads
(excluding goodwill amortisation) results in adjusted operating profit, which
the Directors regard as the single most important performance measure in
assessing the Group's profitability at the operating level.
In addition, the Directors monitor central costs, financial commitments, the
management of treasury risk and taxation liabilities.
The Board's overall aim is to achieve growth in adjusted earnings per share.
Accounting policies
The Group's accounting policies remained unchanged compared with the previous
year. Accordingly, no accounting policy changes had any impact on the
measurement of the Group's pre-tax profits for 2003. There are however several
areas within the 2003 Group accounts which required the exercise of judgement by
management, notably the areas of revenue recognition, bad debt provisions and
provisions in respect of onerous property leases which have reduced during the
year.
Revenue recognition
As in previous years, circulation and advertising revenue relating to a magazine
is recognised with effect from the date the issue goes on sale. For example,
the results for each year include revenue relating to magazines which went on
sale during December, but which did not come off sale until during January.
Because magazines are distributed to retail outlets on a sale or return basis,
an estimate is made of expected sales; this is later corrected to actual sales
when these are known. Appropriate adjustments were made to the results for 2003
(and for each previous year) in order to update initial estimates to reflect the
latest available returns information.
Review of the Group profit and loss account
Group turnover
Group turnover for the year was #182.7m, an increase of 11% on 2002. In 2003
turnover of #7.8m was generated from acquisitions made during the year whilst
the increase in turnover from continuing operations was #9.6m or 6%. All
turnover was derived from the Group's principal activity, of publishing
special-interest consumer magazines serving the games, computing and a number of
entertainment sectors.
2003 2002 Change
% #m #m %
Continuing operations 96% 174.9 165.3 Up 6%
Acquisitions 4% 7.8 - -
Group turnover 100% 182.7 165.3 Up 11%
A comparison of turnover by territory is shown below:
2003 2002 Change
% #m % #m %
UK 54% 100.3 58% 97.1 Up 3%
US 25% 46.2 24% 40.5 Up 14%
Mainland Europe 21% 38.6 18% 29.5 Up 31%
Intra-group - (2.4) - (1.8) -
Group turnover 100% 182.7 100% 165.3 Up 11%
In constant currencies, the above comparison would show the following:
2003 2002 Change
% #m % #m %
UK 54% 100.3 58% 97.1 Up 3%
US 27% 50.2 24% 40.5 Up 24%
Mainland Europe 19% 35.1 18% 29.5 Up 19%
Intra-group - (2.4) - (1.8) -
Group turnover 100% 183.2 100% 165.3 Up 11%
Turnover analysed by type is shown below:
2003 2002 Change
% #m % #m %
Circulation 69% 125.5 68% 111.9 Up 12%
Advertising 29% 53.0 29% 48.6 Up 9%
Other 2% 4.2 3% 4.8 Down 13%
Group turnover 100% 182.7 100% 165.3 Up 11%
Turnover analysed by sector is shown below:
2003 2002 Change
% #m % #m %
Games 46% 85.4 45% 76.3 Up 12%
Computing 32% 58.4 33% 54.4 Up 7%
Entertainment 22% 41.322% 36.4 Up 13%
Intra-group - (2.4) - (1.8) -
Group turnover 100% 182.7 100% 165.3 Up 11%
Turnover by half year is shown below:
2003 2002 Change
% #m % #m %
First half 44% 80.6 45% 74.0 Up 9%
Second half 56% 102.1 55% 91.3 Up 12%
Group turnover 100% 182.7 100% 165.3 Up 11%
Group adjusted operating profit
Analysis of adjusted operating profit by territory is shown below:
2003 2002
#m #m
UK 17.0 16.7
US 7.5 4.6
Mainland Europe 0.7 -
Central costs (2.7) (3.1)
Adjusted operating profit 22.5 18.2
Adjusted operating profit by half year is as follows:
2003 2002 Change
% #m % #m %
First half 29% 6.5 26% 4.7 Up 38 %
Second half 71% 16.0 74% 13.5 Up 19 %
Adjusted operating profit 100% 22.5 100% 18.2 Up 24 %
The proportion of the Group's profits, as measured by gross contribution, by
sector was:
2003 2002
Games 45% 38%
Computing 31% 38%
Entertainment 24% 24%
UK performance for year
Margin 2003 Margin 2002 Change
% #m % #m %
Turnover 100.3 97.1 Up 3%
Direct costs (60.5) (57.2)
Gross profit 40% 39.8 41% 39.9 -
Distribution costs (6.0) (5.3)
Gross contribution 34% 33.8 36% 34.6
Overheads (16.8) (17.9)
Adjusted operating profit 17% 17.0 17% 16.7 Up 2%
Turnover for the year amounted to #100.3m, an increase of 3% compared with 2002.
Circulation revenue increased by 3% compared with 2002 and advertising revenue
increased by 3% compared with 2002. The proportion of turnover derived from
circulation revenues remained the same at 73% (2002: 73%).
In terms of UK sales, the split of revenue for 2003 and 2002 by sector was:
2003 2002
Games 33% 34%
Computing 30% 29%
Entertainment 37% 37%
Turnover for the computing and entertainment sectors showed modest year-on-year
increases of 5% and 6% respectively whilst games turnover has increased by 1% on
the prior year.
The split of gross contribution by sector is shown below:
2003 2002
% %
Games 33% 32%
Computing 31% 32%
Entertainment 36% 36%
The UK adjusted operating profit was #17.0 m, representing an adjusted operating
profit margin of 17% (2002:17%).
UK magazine portfolio
During the year, Future launched ten monthly magazines including What Guitar,
which has been added to the UK's already successful portfolio of guitar
magazines; Digital Camera Shopper, supplementing Digital Camera Magazine which
was launched in 2002; Windows XP Answers and Laptop magazine and the
aforementioned Bang. The UK also launched a successful Masterclass series of
"bookazines", large magazine-format manuals sold at newsagents.
In November, Future acquired the UK trading subsidiary of Computec Media AG for
a cash consideration of #3.2m and a licensing arrangement with Computec Media in
Germany. The principal magazines acquired were PSW and Xbox World and these are
now published by Future in the UK.
In February 2004 Future published the latest ABC audited circulation figures
covering 48 titles in its UK portfolio of 60 monthly magazines. Average monthly
sales in the UK for the audited titles were slightly up at 1,787,825 copies.
The UK trends for Future's portfolio were (i) growth in entertainment; (ii)
enhanced position within games; (iii) respectable performance for computing
titles in difficult market conditions.
The UK performance overall was satisfactory, and we have expanded the UK
magazine portfolio by both launches and acquisitions.
Export Activity
The largest export markets for Future's UK magazines are the US and Australia.
We are pleased to have grown total export sales from the UK to #10.9m, an
increase of 12% on the #9.7m in 2002.
Licensing
We also significantly increased international licensing of Future's magazine
portfolio by 29% during the year. The UK portfolio had licence revenues
totalling #2.4m (2002: #1.8m) and the US portfolio had license revenues of #0.3m
(2002: #0.3m) giving a Group total of #2.7m (2002: #2.1m).
The Group licenses 103 editions of its magazines in 32 countries, in addition to
those published by Group companies in the UK, US, France and Italy. T3 remains
the Group's most licensed title, with local editions sold in 14 different
overseas countries.
US performance for year
2003 2002 Change
#m #m %
Turnover 46.2 40.5 14%
Adjusted operating profit 7.5 4.6 63%
Margin 16% 11% -
Turnover for the year amounted to #46.2m, an increase of 14% (in sterling terms)
compared with 2002. The increase in turnover from continuing operations was
#3.6m or 9%.
In September and October respectively, Future acquired Guitar World (and
associated titles) and Guitar One magazines for a total consideration of #11.5m.
These magazines together contributed #2.1m of turnover and #0.1m of adjusted
operating loss and gave rise to goodwill amortisation of #0.7m.
The average value of the dollar against the pound declined by 9% compared with
2002, so that revenue growth in dollar terms was 24% overall and 19% for
continuing operations. Most of the increase in turnover came from increased
circulation (up 30% in dollar terms) with advertising revenue (in dollar terms)
up 19%.
Adjusted operating profit for the year totalled #7.5m, representing an adjusted
operating margin of 16% of turnover.
In February 2004 Future published the latest circulation figures for its US
magazines. Overall, US circulation increased by 23.6% year on year to 1,906,828
copies, including Guitar World and Guitar One.
Future's US games magazine circulation growth has been driven by a 39% increase
from Official Xbox Magazine, which is now Future's largest selling magazine of
any sort at 403,222 copies per month.
Of total US turnover, 51% came from circulation and 46% from advertising.
Subscription revenue in the year accounted for 21% of US turnover (2002: 24%).
The different business model applicable in the US is evident from the turnover
splits noted above. Unlike UK magazines, most of which are sold at newsstands,
over 75% of Future's magazine sales in the US are achieved by subscription.
Magazine publishers estimate in advance the total number of magazine sales for a
given period (known as the "rate base") and it is on the basis of such estimates
that advertising bookings are sold. The most recent circulation statistics
covering the six months to December 2003 show that all our titles sold at least
their rate base numbers. This has been the case throughout the life of Future
Network USA.
The US operation had a strong year in 2003, with revenues, profits and margins
all well beyond management expectations. The strength of the portfolio, the
recent launch of Mobile PC and the newly acquired guitar magazines in New York
means that the outlook for 2004 is promising.
However, after sucha strong year in 2003, the Group does not expect to achieve
significant profit growth in 2004, when the loss-making phase of Mobile PC
magazine will continue to impact the result.
Mainland Europe performance for year
2003 2002 Change
#m #m %
Turnover 38.6 29.5 31%
Adjusted operating profit 0.7 - -
Margin 2% - -
Combined turnover from France and Italy was #38.6m including #5.4m from the
Hachette (HDP) titles acquired in April 2003. Excluding these, the increase in
turnover was 13%. The average value of the euro against the pound strengthened
by 9% compared with the previous year, so that this revenue growth in euro terms
was 2%.
For 2003, 75% of revenue came from circulation and 24% from advertising.
Circulation revenue (excluding HDP) grew by 13% and advertising revenue by 11%
compared with 2002.
The adjusted operating profit of #0.7m represents an adjusted operating profit
margin of 2% and is stated after (a) intra-Group licence fees for the year of
#1.8m (2002:#1.4m) and (b) integration costs of HDP amounting to #0.2m.
During the year, the Group acquired HDP, a subsidiary company of Hachette
Filipacchi Presse S.A. for a cash consideration of #3.5m. Prior to the year-end,
the legal entity of HDP was merged with Future France.
The HDP titles together contributed #5.4m of turnover and #0.2m of adjusted
operating profit. This is before the anticipated full year effect of cost
savings which have been targeted at #0.75m.
Operating profitability as measured by adjusted operating profit
Apart from launches, virtually all of the Group's magazines achieved a positive
gross contribution in 2003 and magazines acquired during the year also recorded
a positive gross contribution. Overheads in each country remained under control
throughout the year.
Adjusted operating profit achieved by theUK for 2003 was #17.0m and that
achieved by overseas subsidiaries was #8.2m, giving a combined total of #25.2m.
After deducting Group central costs of #2.7m (2002: #3.1m), adjusted operating
profit for the year was #22.5m (2002: #18.2m) on turnover of #182.7m (2002:
#165.3m) representing an adjusted operating profit margin of 12% (2002: 11%) on
turnover.
The Group's aim is for an adjusted operating profit margin of 15% in the
mid-term and the improvement achieved in 2003 is consistent with that aim.
Other operating income
No such income arose during 2003. During the previous year, the UK business
received #2.2m from HM Customs & Excise in respect of VAT overpaid in years
prior to 2001. Most of this refund related to amounts reclaimable following a
review of the complex rules relating to VAT applicable to magazines featuring
cover-mounts.
Goodwill amortisation
In respect of continuing operations, the charge for the year was #10.4m (2002:
#10.3m). Goodwill amortisation charged in relation to acquisitions totalled
#2.6m and this reflects particular amortisation periods, which are explained
below (under "Intangible fixed assets").
Net interest receivable and similar items
Net interest receivable and similar itemstotalled #0.1m for the year. This
represents bank interest receivable of #0.6m, exchange gains of #0.1m less other
charges totalling #0.6m.
Pre-tax profit
The Group's pre-tax profit of #9.7m (2002: #10.7m) comprises pre-amortisation
profits of #22.7m (2002: #21.0m) less goodwill amortisation of #13.0m (2002:
#10.3m).
Tax
The tax charge for the year amounted to #7.0m on pre-amortisation profits of
#22.7m, giving an effective tax rate for the year of 31% (2002: 21%). The lower
rate in the prior year reflected the recognition of a deferred tax asset in the
US and certain prior year tax credits. The current year rate of 31% is
consistent with the estimate provided when the Group announced its half-year
results. The Group's current estimate of the effective tax rate likely to apply
to taxable profits for calendar year 2004 is in the region of 30%.
Earnings per share
Basic earnings per share for the year amounted to 0.8p, (2002:1.9p). The
reduction arises as a result of the increased amortisation charge in 2003 and
the fact that in 2002 the earnings benefited from #2.2m of other operating
income as discussed above. Adjusted basic earnings per share reflects earnings
before goodwill amortisation and other operating income. Adjusted basic earnings
per share for the year amounted to 4.9p per share (2002: 4.4p per share), an
increase of 11%.
Dividends
During 2003, we took the necessary preparatory steps to enable the payment of
dividends. This involved the cancellation of the Company's share premium
account, which was effected on 12 June 2003 following the approval of
shareholders at the Annual General Meeting held on 15 May 2003 and Court
approval. As a result, the Company now has significant distributable profits. In
light of the strong financial performance for the year, the Board recommends a
final dividend, payable in respect of full year 2003, of 1.25p per share. If
approved at the 2004 Annual General Meeting to be held on 13 May 2004, this
first dividend will be payable on 24 May 2004 to shareholders on the register as
at 23 April 2004.
Dividend Policy and Dividend Cover
The Board's intention is that dividends should be covered at least twice by
adjusted earnings per share. These amounted to 4.9p for 2003, providing more
than adequate cover for the proposed first dividend of 1.25p. It is also the
current intention of the Board to recommend a final-only dividend of 1.25 pence
per share for the nine months to 30 September 2004, in the absence of
exceptional circumstances and following our proposed change in financial
year-end.
Proposed change of financial year-end
The Board proposes to change the financial year-end of the Group from 31
December to 30 September. TheOctober to December period generates a significant
proportion of revenues and profits and makes forecasting performance during the
year a challenge. Changing the year-end will facilitate the management of the
business and build in more certainty inpredicting outcomes.
It is also notable that within this busiest trading quarter, the business
prepares detailed operating budgets for the ensuing financial year; reviews
staff salaries; and monitors closely the financial implications of any deviation
from budget arising in the last quarter of the financial year.
By changing the financial year-end to 30 September, we believe that we will
achieve a more balanced and effective management of the business internally,
whilst also providing a better framework for managing the business as a public
company. The Board therefore proposes to shorten the current financial
reporting period by three months, so that the Company's next audited results
would be for the nine months to 30 September 2004.
The following tables illustrate that a 31 December year-end results in a 25:75
split in adjusted operating profits (comparing H1 to H2). With a September
year-end this will change to an estimated 60:40 split of adjusted operating
profits (H1 compared to H2).
The quarterly analysis of the performance during the year ended 31 December 2003
was as follows:
Quarter ending: March June September December Total
Turnover 21% 23% 24% 32% 100%
Adjusted operating
profit 14% 11% 29% 46% 100%
The corresponding estimates in respect of the twelve months to 30 September 2003
show the following pattern:
Quarter ending: December March June September Total
Turnover 30% 22% 23% 25% 100%
Adjusted operating
profit 48% 13% 11% 28% 100%
The proposed change of financial year-end is not a matter which requires the
approval of shareholders. However, consistent with our views on aspiring to best
practice in corporate governance, we have decided to invite shareholders to vote
in favour of this change at the 2004 Annual General Meeting.
If approval is given, our reporting plan will be as follows:
Reporting period: Announcement in:
Half year results to 30 June 2004 September 2004
Nine month results to 30 September 2004 December 2004
Half year results to 31 March 2005 June 2005
Full year results to 30 September 2005 December 2005
The next audited financial statements would be those for the nine-months to 30
September 2004.
These would be accompanied by pro-forma financial statements for the twelve
months to 30 September 2003 and 30 September 2004. These pro-forma financial
statements would encompass the Group profit and loss account, Group cash flow
statement, and notes to the financial statements concerning the Group profit and
loss account. All this pro-forma financial information would be accompanied by
a report prepared by the Company's auditors.
Cash flow and funding
Net cash position
The Group started the year with net cash of #16.8m and ended the year with
#13.4m. The year was significantly cash generative for the Group and the net
cash inflow from operating activities was #22.6m (2002: #27.0m). The Group has
maintained its bank facility, currently amounting to #27.5m and has borrowings
under the facility denominated in US Dollars totalling #5.1m thereby leaving
more than adequate headroom for the operational funding requirement of current
activities.
Hedging policy on interest rates
No hedgingarrangements were entered into during 2003 and none was outstanding
from previous years.
Hedging policy on foreign exchange rates
The Group is exposed to exchange rate fluctuations in the US dollar and the
Euro. The Board has developed policies in order to manage the exposures
effectively. These policies include consideration being given to currencies
negotiated in cross-border contracts and the use of spot and forward contracts
as appropriate. No other instrument may be used without the approval of the
Board. At 31 December 2003 there were no outstanding contracts with banks or
other third parties in respect of foreign exchange hedging arrangements.
Capital expenditure
Capital expenditure amounted to #1.4m in 2003, compared with #0.7m in 2002. For
2004 capital expenditure is not expected to exceed #2.0m.
Review of the Group's balance sheet
The Group's net assets amounted to #111.9m (2002: #112.0m) at 31 December 2003.
The most significant change in the make-up of theGroup's balance sheet is the
reduction in net current assets, a consequence of the #18.4m of cash spent on
acquisitions during the year which is reflected in the increase in intangible
fixed assets. Consequently the net current assets at 31 December 2002 of #5.8m
have been reduced to net current liabilities of #7.0m (including a creditor of
#4.0m for the proposed dividend). However the Group continues to have net cash,
which at 31 December 2003 amounted to #13.4m (2002 #16.8m).
Intangible fixed assets
Intangible fixed assets at the year-end were carried on the balance sheet at
#117.3m compared with #108.6m at the previous year-end. During the year,
additions totalled #12.9m in respect of the titles acquired in the US, Guitar
World and Guitar One; #4.7m in respect of the acquisition of HDP in France; and
#3.8m in respect of the business acquired from Computec in the UK. The Group
also acquired a number of smaller titles and subscriptions lists which amounted
to #0.4m.
The amortisation charge for the year amounted to #13.0m, compared with #10.3m in
the previous year. The charge reflects goodwill amortisation over different
periods, appropriate to the circumstances of each case. These periods are:
Total period
Years
Existing UK business, acquired in 1999 20
UK business acquired from Computec in 2003 3
Existing US business, acquired in 1999 10
Guitar World and Guitar One magazines, acquired in the US in 2003 5
HDP business acquired in France in 2003 2
Existing Italian business, acquired in 1999 10
As at 31 December 2003, the #117.3m may be analysed by territory as follows:
#m
United Kingdom 77.9
United States 25.4
France 2.6
Italy 11.4
Total 117.3
The estimated likely goodwill amortisation charge in respect of 2004 is #15.8m.
Tangible fixed assets
The carrying value of the Group's tangible fixed assets at the year-end
increased from #3.2m to #3.3m. This net increase reflects capital expenditure
of #1.4m; a depreciation charge of #1.4m; and a net exchange gain of #0.1m.
Working capital
The Group had stocks of paper and other raw materials at the year-end, and
work-in-progress in relation to magazines scheduled for publication in 2004.
The total of these amounts was #3.5m, compared with #3.6m at 31 December 2002.
Group debtors at 31 December 2003 amounted to #42.4m (2002: #33.3m) and included
trade debtors of #34.1m (2002: #24.5m). The majority of this increase is
attributable to the increased scale of the business following the four
acquisitions made during 2003. In terms of average debtor days outstanding at
the balance sheet date these remained at 56 days (2002: 56 days).
Net cash
As at 31 December 2003 the Group's net cash position was #13.4m represented by
(i) cash at bank and short-term deposits totalling #20.1m; (ii) borrowing in US
dollars totalling #5.1m, and (iii) a shareholder loan of #1.6m.
Provisions
Leasehold property
The consolidated balance sheet contains provisions totalling #1.3m (2002: #2.9m)
representing provisions against onerous lease commitments in respect of
property.
The property provision reduced during the year mainly as a result of rental
payments in respect of vacant property and the net release of other provisions
amounting to #0.5m.
During the year the Group paid a total of #3.6m (2002 #4.1m) in relation to
leasehold property, of which #2.8m (2002 #2.7m) was in respect of occupied
property and #0.8m (2002 #1.4m) was in respect of unoccupied property.
By the end of 2003, all UK property was fully occupied and accordingly the Group
is no longer paying for any unoccupied property in the UK.
Impact of International Financial Reporting Standards
We have been planning carefully the steps required to ensure that the Group will
be able to comply with the introduction of International Financial Reporting
Standards following these becoming mandatory in 2005. Future is a relatively
straightforward business and accordingly we expect to be able to comply with
IFRS in the Group's financial statements for the year ending 30 September 2006,
which will be the first period to which IFRS will apply.
Alongside the audited figures for that year will be comparative figures for the
year ending 30 September 2005. I note below the main areas of impact to Future:
Intangible assets
The most significant item on Future's balance sheet is goodwill which will need
to be reassessed under current IFRS proposals in order that the total carrying
value should be split under the following indicative headings:
* Trademarks
* Non-compete
* Subscription lists
* Goodwill
Whilst the values allocated to trademarks, non-compete and subscription lists
will be amortised over the appropriate periods the goodwill element will not be
amortised but will instead be subject to annual impairment testing. It is
therefore possible that fluctuations to reported earnings could occur in the
event of impairment reviews concluding that impairment has taken place.
Share based payments
Since its Initial Public Offering in June 1999, Future has issued a significant
number of share options. Our initial review of the impact of IFRS on accounting
for share based payments concludes that the likely charge against Group profits,
in this respect will not be more that #0.5m per annum. Additional charges would
arise to the extent that further share options or shares are awarded in the
future.
Segmental reporting
Segmental reporting is potentially more extensive under IFRS than at present but
we believe that we already provide comprehensive segmental analysis of the
Group's business.
Cash flow reporting
Future is a strongly cash generative business and the Group's cash flow
statement is therefore important to a proper understanding of the business. The
main changesto cash flow statements envisaged by IFRS are presentational in
nature.
Among Future's other assets and liabilities, we do not forsee any particular
reporting difficulties arising. It is worth noting that Future does not have any
financial instruments or defined benefit pension schemes, both of which can give
rise to particular accounting complexity.
In our Annual Report 2004 we will continue to monitor developments in this area
and to summarise the more significant implications for financial reporting of
the Group's results.
Summary
We have achieved greater profitability through increased sales, improved
margins, an expanded portfolio, and bolt-on acquisitions funded from surplus
cash. With significant growth in adjusted earnings per share and a strong
balance sheet, this is the right time for us to start paying dividends. At the
same time, we will continue to seek growth both organically and by pursuing
appropriate opportunities to expand.
John Bowman
Group Finance Director
10 March 2004
This information is provided by RNS
The company news service from the London Stock Exchange
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