FINANCIAL REVIEW
Profits
The profits earned by the business, split by half year,
are as follows:
Operating profit (pre-exceptional) - £m
December falls into the second half of the year, and in the past this has resulted in a first half to second half profit ratio of around 44:56. However, this year the unexpected sales increase in the UK, and the weakening of sterling against the euro resulting in currency gains on the conversion of our euro earnings (see below), have both boosted our second half profits.
Cash generation
The Group's operating activities generated £23.2m
(2002: £22.0m) of cash during the year, and after
capital expenditure of £8.2m we had net cash
at the year end of £11.7m. We chose to build
year end stocks, which were £3.2m higher than
last year, ahead of the transfer of our US distribution
activities to the new Memphis facility in June 2003.
Our capital expenditure was spent on the following
asset categories:
| 2003 £m |
2002 £m |
|
|---|---|---|
 | ||
| Shop fits for new and existing stores | 2.5 | 1.5 |
| Production equipment and tooling | 2.3 | 1.9 |
| Computer equipment and software | 2.4 | 1.2 |
| Office facilities | 1.0 | 0.8 |
| ||
| 8.2 | 5.4 | |
 | ||
We expect to maintain our capital expenditure well ahead of depreciation over the next few years, as we continue to invest in the infrastructure of the business to underpin its growth. In particular we will be developing the new supply chain facility in Memphis to support our North American business, and we expect to invest further to develop our core site in Nottingham.
Return on average capital employed (ROACE)*
The business makes relatively high returns on its capital
employed. These have been consistently improving
over recent years as set out in the chart below:
* We use average capital employed to take account of the significant fluctuation in working capital which occurs as the business builds both stocks and trade debtors in the pre-Christmas trading period. Return is defined as pre-exceptional operating profit, and the average capital employed is adjusted by deducting assets and adding back liabilities in respect of cash, borrowings, provisions, taxation and dividends.
During the ‘post float’ period the business was relatively undercapitalised and the cost base was running very lean. The period of ‘stabilisation and move’ saw the consolidation of the Group’s activities into the Lenton site in Nottingham and the investment in that site. The last three years have seen the rebuilding of returns. At the low point of this progression, the return was still in excess of three times our cost of capital. We currently estimate this to be 9%.
Our planned investment in manufacturing and property assets is likely to reduce these returns over the next three years. However, we still expect them to remain well in excess of the Group's cost of capital.
Taxation
The effective rate of tax for the year is 37.1% (2002:
36.5%). The increase in the rate this year is due
to tax losses in subsidiaries not being recognised.
This is likely to persist in the current year after
which we expect the rate to return to our normal
levels of recent years.
Dividend
Having established our dividend cover at a prudent
level of 2.2 times we expect to maintain a progressive
dividend policy based principally on the growth in
the Company's earnings per share.
Warhammer Online Limited
Games Workshop Group owns 71.25% of the ordinary
shares in this subsidiary company, and there is
a put and call option in place, with an agreed
valuation methodology, whereby Games Workshop Group
may acquire the remaining shares not before June
2006, at a price which will be consistent with
the value to the Group of the additional shares
at that time.
Games Workshop Group's accounting policy is to write off 100% of the development costs in respect of this project until the relationship between that expenditure and the revenue of a future period can be established with reasonable certainty. We will continue to review this policy as we approach the commercial launch of the project.
Sabertooth Games, Inc
Games Workshop Group owns 85% of the share capital
of this subsidiary company. The remaining 15% was
retained by management, with a put option in place,
with an agreed valuation methodology, whereby Games
Workshop Group may be required to purchase the remaining
holding not before June 2005, at a price which will
be consistent with the value to the Group of the
additional shares at that time.
Currency exposures
During the year sterling weakened against the euro
and strengthened against the US dollar. The principal
exchange rates used to translate our earnings and
our balance sheet are as follows:
| euro | US dollar | |||
|---|---|---|---|---|
| 2003 | 2002 | 2003 | 2002 | |
| Year end rate used for the balance sheet | 1.39 | 1.57 | 1.64 | 1.46 |
| Average rate used for earnings | 1.52 | 1.62 | 1.58 | 1.44 |
The net impact of these fluctuations at the half year was slightly favourable to our earnings when converted into sterling, however this impact was accentuated during the second half of the year as the movement of sterling against the euro was stronger. The net impact of both transaction and translation differences compared to the actual exchange rates used last year amounts to £1.1m (favourable).
As each of our businesses pays our manufacturing operation in foreign currency (primarily US dollar and euro), we have continued our policy of managing this transactional exposure through the use of forward currency contracts covering a proportion of our estimated non-sterling receipts for a prospective 12 month rolling period. Translational exposures, for both the trading results and the balance sheets of non-sterling denominated subsidiaries, are not hedged.
Share based commitments
Under a long-term incentive plan, the Group has a future
commitment to provide shares to the scheme participants.
Shares have been purchased in the market to cover
some 90% of the anticipated liability. The final
three year performance period for this scheme ended
on 1 June 2003 and the share options will be exercisable
in June 2005. In the past the Company has issued
various executive share options and the details of
the options outstanding are set out in note
22 of this annual report. There have been no significant
grants under these executive schemes since August
2000. It is now our intention only to operate sharesave
schemes which are made available on equal terms to
all our staff.
Share buy-back programme
Having considered the potential uses of our surplus
cash, we commenced a programme of share buy-backs
in 2001. During the year we purchased 100,000 shares
in the market, equivalent to 0.3% of the shares in
issue at the beginning of the year. We intend to
continue with this programme, but we will remain
mindful of the capital requirements of the business
and the risks associated with debt.
Bank facilities
We have a four year unsecured revolving credit facility
of £5m, and a working capital facility of £5m,
both of which were put in place during the year.
The covenants, based on interest cover and gearing,
were comfortably met. Interest was paid at floating
rates, which equated to 4.75% during the year.
Communication with shareholders
Our investor relations web site at http://investor.games-workshop.com
is updated regularly with all of our external communications,
including the presentations which we use to brief our
institutional shareholders. We offer our shareholders
the opportunity to receive all communications from
the Company electronically. Information on how to sign
up is available on the web site.
We also offer investors the chance automatically to reinvest their cash dividends in the Company's shares. The dividend reinvestment plan is a simple and economic way to increase holdings and is administered by Lloyds TSB Registrars.
Michael Sherwin
Finance Director
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