OPERATING REVIEW
Summary of results
We have enjoyed another year
of strong sales growth (+£20.5m)
which we have successfully converted into cash (operating
cash flow +£1.2m) and operating
profit (+£4m).
Sales
Sales growth is a consistent feature of the Games Workshop
Group story as the following chart demonstrates:
Total sales - £m
Sales in constant currency terms have grown in all key territories, with particularly impressive growth in Continental Europe and the UK.
Sales by territory
cc - constant currency*
* Constant currency growth is calculated by comparing sales in the underlying currencies for 2002 and 2003, both converted at the 2002 average exchange rates as set out in the financial review.
In 2002/3 sales made through our own Games Workshop Hobby stores made up 46% of turnover, as our store opening programme gained momentum. We opened 28 stores during the year taking our total to 278 at the end of May 2003. The rest of our sales were made through independent retailers (47%) and direct, through the internet and mail order (7%).
The balance of sales made through the different channels varies between our various sales businesses: sales in the UK and Asia Pacific are dominated by Games Workshop Hobby stores; sales to independent retailers represent a larger part of our businesses in the Americas and Continental Europe.
Sales by channel
Continental Europe
We have five autonomous sales businesses in Continental
Europe, responsible for developing the Games Workshop
Hobby in France, Spain, Germany, Northern Europe and
Italy. We now have 81 Games Workshop Hobby stores,
up from 69 last year. Each of these businesses enjoyed
strong growth during the year. The Italian sales business,
which is the smallest of these units, is in the process
of relocating its sales function from Nottingham to Rome.
While this will incur higher costs in the short-term,
this move is necessary to enable the business to develop
the Games Workshop Hobby properly in Italy.
UK
We have 116 Games Workshop Hobby stores in the UK, and
this business has enjoyed a remarkably successful year.
For the eight months to February 2003 the business achieved
sales and profit growth well ahead of inflation, which
confirmed that we are able further to develop this, the
market in which our brands and products are best known.
Then DeAgostini, a third party business which had been
granted a licence by the Games Workshop Group to produce
a serialised gaming supplement based upon our Lord of
the Rings tabletop battle game, launched its 'Battle
Games in Middle Earth' product in the UK. This product,
which is sold through traditional magazine and newsstand
distribution channels, was heavily TV advertised in the
UK. Until then, sales of our Lord of the Rings tabletop
battle games in the UK had accounted for less than 10%
of sales, as in all of our other territories. However,
from the launch in February onwards, we enjoyed an unexpected
increase in sales in the UK, particularly of the Lord
of the Rings products, which represented over 10% of
UK sales during the last quarter of the financial year.
We believe that this increase is due, at least in part,
to the DeAgostini product launch and we therefore believe
that an element of these sales could represent a ‘bubble’ effect
which may not be sustainable in the future. While the
UK management team has put measures in place to support
and help the new entrants which this phenomenon may have
introduced to the Hobby, we are monitoring developments
closely.
The Americas
We believe that the American market, which for us at
present comprises the USA and Canada, represents a
great growth opportunity for Games Workshop. We are
therefore investing in that opportunity in three
ways:
- During the year we opened 12 new Games Workshop Hobby stores, taking the total to 54
- We have begun the regionalisation of our US sales effort, establishing regional sales offices in the North East (Baltimore) and the West (Los Angeles) during the year, with the Mid West (Chicago) and the South (Memphis) opening early in the new financial year
- To support this sales effort, we have built a new supply facility in Memphis, which began operations in June 2003
We believe that these ongoing investments will ensure that we have the necessary infrastructure to grow this business significantly in the future.
During the year our sales to independent retailers and our direct sales in North America were sluggish, however, we continued to enjoy like for like growth in our Games Workshop Hobby stores. This continues to give us confidence in the long-term potential for this business, and in our investment programme.
Asia Pacific
We opened four Games Workshop Hobby stores during the
year, taking our total to 27. While this business
mainly comprises Australia and New Zealand, we also
have two Games Workshop Hobby stores in Hong Kong
and we opened one in Singapore during the year.
Manufacturing and supply chain
Our vertically integrated design, manufacturing and distribution
supply chain has continued to operate smoothly during
the year, responding very positively to the significant
increase in demand placed upon it by our sales growth.
To ensure that it can meet future demand, a major new
facility has been built in Memphis, Tennessee which
will support both the North American and Asia Pacific
markets. This facility has opened in June 2003 as a
warehouse and distribution centre, and we expect to
develop it into a manufacturing facility over the next
12 months.
Warhammer Online
This venture, owned 71.25% by Games Workshop Group, was
established to create a massively multiplayer online
computer game set in the Warhammer world. Along with
our partner, the UK computer games developer Climax Development
Limited, we have progressed this project towards the
beta testing phase of the game, due to begin in January
2004. During the year we have also established commercial
relationships with the various third parties required
to market, distribute and operate an online game. In
particular we have recently announced that Sega will
be our marketing and distribution partner, ensuring that
the launch of the game into the traditional computer
game channels will be handled by a large computer games
publisher. Overall progress on this project remains in
line with our original plans regarding both cost and
timescale. Development costs of £1.7m were expensed
in 2002/3.
Sabertooth Games, Inc
In the second half of the 2001/2 financial year Games
Workshop Group acquired an 85% shareholding in Sabertooth
Games, Inc, a start-up collectible card game business
based in Seattle in the USA. During the year this business
focussed much of its efforts on the launch in March 2003
of WarCry, its second game set in the Warhammer universe.
It made sales of £1.0m
during the year. For this niche, fantasy card game publisher
to be successful it needs to establish a regular flow
of monthly product releases and this in turn requires
it to establish access to a portfolio of intellectual
properties. Over the next year we expect Sabertooth
to continue to publish games based upon the Warhammer
and Warhammer 40,000 worlds, but also to expand to some
third party properties. For example, it has recently
signed a licence with Sony to produce games based upon
the EverQuest property.
BL Publishing
This is our publishing business, which has grown up within
the Games Workshop Group publishing novels, comics and
magazines based in the Warhammer and Warhammer 40,000
universes. In the year, this business made sales of some £1.6m.
BL Publishing has recently entered into various third
party licensing arrangements to publish novels and other
related products based upon other fantasy, science fiction
and horror properties. We believe that this business
can build a small but profitable niche publishing portfolio,
applying its existing skills and infrastructure to a
broader base of intellectual property. In addition, it
is a powerful enhancer and developer of existing Games
Workshop Group intellectual property.
Other activities
We have granted a licence to THQ Inc, the US based
computer games publisher, to develop several PC and
console games based upon Warhammer 40,000 imagery.
The first of these games will be Fire Warrior, a
first person shooter game which is due to be launched
in September 2003. We expect this game to begin to
generate royalty income once launched. We continue
to explore potential new avenues to create royalty
income.
Management team
Management development is still high up on my personal
agenda. I find it hard to improve on the words I used
last year. "These results have been delivered
by a management team which has grown enormously in stature
in recent years. The team has to work co-operatively
across cultural and national boundaries to achieve both
individual and corporate goals. This is inherently difficult
and we don't get it right all of the time, but what we
do now have is a blend of internally developed expertise
and recruited experience which gets it right more often
than not." Just as we plan for
the long-term, we recruit for the long-term. This means
that we are looking for people who understand what we
do for a living. It's surprising how unusual this attitude
is.
Workforce
Good management is essential
in a good company, but so is a high quality workforce.
We are blessed with a high quality workforce. Once
I would be able to talk to every person in Games Workshop
and thank them personally. Sadly, thanks to our success
and the growth of the workforce, I am no longer able
to do so. I would like therefore to use this annual
report to send a heart felt thank you to all staff
and I trust shareholders will join me.
Health and safety
The Group's policy is to achieve and maintain high
standards of health and safety. We believe this to
be a key part of good business management.
The chairman and chief executive has overall responsibility for health and safety matters across the Group, however the day to day execution of this responsibility is embedded into the roles of the general managers and line managers in each business area. Health and safety developments, initiatives and best practices are co-ordinated by the corporate social responsibility (CSR) group, which is chaired by the finance director and includes the general managers of both the supply chain and the UK sales business.
We track the number of reportable accidents by business area, and the following table indicates the progress we are making in our manufacturing activities, which we have assessed as the area of highest risk in our operations:
Reportable accidents/1000 employees – Manufacturing
* Source: Page 36 of the Office for National Statistics, Health and Safety Statistics for 2000/01
Risk assessments are reviewed annually, or when a change to a process or to an item of machinery is made. In our manufacturing and supply activities, compliance audits of our policy and practices have been carried out annually, or more frequently if a new process has been introduced. The audit process is now being included in the job descriptions of line managers to further embed health and safety into the day to day activities of the business.
To enhance further health and safety at all sites, extensive training programmes are being undertaken ranging from induction improvements through cell leader training to senior management responsibilities training.
Environmental performance
The Group aims to manage its operations in ways which
are environmentally sustainable and economically feasible,
and to minimise the negative impact of its activities
on the environment. In particular we focus on waste
management, energy use, packaging and recycling.
The chairman and chief executive has overall responsibility for environmental matters across the Group, however the day to day execution of this responsibility is embedded in the supply chain. Environmental developments, initiatives and best practices are co-ordinated by the CSR group.
Recycling
During the year we have made significant progress on
the reduction of landfill and the increase of recycling
of waste, particularly of paper and plastic, as set
out below:
We have begun a life cycle analysis to ensure that we can assess the impact of our products on the environment and upon energy consumption. We continue to explore ways of reducing the amount of waste which our products generate for the end consumers by reducing runners on plastic sprues, re-using trays and ensuring full boxes are despatched from our warehousing facilities, with investigations continuing into packaging and new product development.
In our manufacturing and supply activities, compliance audits of our policies and practices have been carried out annually, or more frequently if a new process has been introduced. These audits have been performed following the ISO 14001 standard.
We have continued to work in co-operation with environmental lobby groups and non-governmental organisations, including Friends of the Earth and EIRIS, to assist in data compilation and transparent public environmental reporting with a view to incorporating ethical values into our manufacturing principles.
Risks facing our business
Shareholders should take great comfort from the portfolio
of businesses we run, and the different routes to
market that exist within each. This means none of our business
customers is individually significant and we enjoy
a degree of natural hedging in our currency exposures.
The main source of risk remains management error. This is why management development is so important.
Future prospects
We believe that Games Workshop Group can continue to
deliver linear growth in sales and profits. As an
indication of the potential of the Games Workshop business,
the chart below shows what our worldwide sales would be if
all the countries in which we already operate sold
the same volumes per head of population as the UK did at
May 2003.
Extrapolated sales - £m
This is not a sales forecast but a rough indication of what the future potential for Games Workshop might be. The directors believe the prospects for the business remain very good.
Tom Kirby
Chairman and Chief Executive
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