FINANCIAL REVIEW
Profits
The profits earned by the business, split by half year,
are as follows:
Operating profit (pre-exceptional) - £m
Cash
generation
The Group’s operating activities generated £23.5m
(2003: £23.2m) of cash during the year, and after
capital expenditure of £14.0m we had net cash at
the year end of £8.6m. Our stocks at the beginning
of the year were unusually high because we chose to build
stocks ahead of the transfer of our US distribution activities
to the new Memphis facility which began operations in
June 2003. The May 2004 levels, which show a year end
stock turn of 4.1 times (2003: 3.4 times), represent what
we believe to be a more normal level of stockholding for
the business. Our capital additions were in the following
asset categories:
| 2004 £m |
2003 £m |
|
|---|---|---|
 |
||
| Shop fits for new and existing stores | 3.0 | 2.4 |
| Production equipment and tooling | 2.7 | 2.3 |
| Computer equipment and software | 2.8 | 2.4 |
| Office facilities | 1.2 | 1.1 |
| Building developments - Nottingham | 5.1 | - |
|
||
| Total fixed asset additions | 14.8 | 8.2 |
|
||
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 continue to develop 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:
In
the current year, our investment in manufacturing
and property assets has begun to reduce these
returns, and this process is likely to continue
over the next few years. However, we still expect
our returns to remain well in excess of the Group’s
cost of capital, which we currently estimate
to be 9%.
* 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.
Interest
Our interest costs have risen in 2004 as we have invested
more heavily in fixed assets, as described above. Our
working capital cycle requires us to build stocks and
receivables ahead of the Christmas period. Accordingly,
we typically run an overdraft between September and
December of each year. As the business has grown, so
the absolute amount of this working capital swing has
increased.
The Group’s exposure to interest rate fluctuations is reviewed periodically by the board, however this exposure has not been significant in recent years.
Taxation
The effective rate of tax for the year is 37.0% (2003:
37.1%). This rate is higher than that of a business
with activities based only in the UK due to higher overseas
tax rates and tax losses in subsidiaries not being recognised.
Dividend
We expect to maintain a progressive dividend policy
based principally on the growth in the Company’s
earnings per share.
Dividend reinvestment plan
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.
Warhammer Online
As stated above, a decision to terminate this venture
was taken in June 2004. Games Workshop Group’s
accounting policy is to write off 100% of the development
costs in respect of this activity. The costs of termination
will be accounted for in the results for 2005.
Sabertooth Games
Games Workshop Group acquired the outstanding 15% interest
in this subsidiary during the year for a nominal consideration.
This formed part of the restructuring of this business
whereby we have reduced its cost base and moved its
head office to Memphis. All of the costs associated
with these changes have been expensed in the results
for 2004.
Currency exposures
During the year sterling strengthened against both
the euro and the US dollar. The principal exchange
rates used to translate our earnings and our balance
sheet are as follows:
| euro | US dollar | |||
|---|---|---|---|---|
| 2004 | 2003 | 2004 | 2003 | |
| ||||
| Year end rate used for the balance sheet | 1.50 | 1.39 | 1.83 | 1.64 |
| Average rate used for earnings | 1.46 | 1.52 | 1.74 | 1.58 |
|
||||
The net impact of these fluctuations on our results for the year was slightly favourable to our earnings when converted into sterling. If our results for 2004 had been converted at the rates used in 2003, they would have been lower by some £0.9m.
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.
There are no other exposures which the Group manages with financial instruments.
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 have not purchased
any shares as our investment programme in both
the Americas and in our Nottingham property has
used up our surplus cash. We intend to continue
with the share buy-back programme when our cash
generation once again renders this possible.
Bank facilities
We have a four year unsecured revolving credit facility
of £10m, and a working capital facility of £5m.
The covenants, based on interest cover and gearing,
were comfortably met. Interest was paid at floating
rates, which equated to 4.4% during the year.
International accounting standards (IAS)
For the year ending May 2006, Games Workshop Group will
be required to prepare its consolidated accounts using
IAS. These first IAS accounts will include comparative
figures for the year to May 2005, also prepared using
IAS. We have established a project team to assess the
potential impact of the adoption of these new standards
for Games Workshop Group and to plan for their implementation.
This planning is now at an advanced stage, and during
the year to May 2005 we intend to establish our opening
(May 2004) balance sheet using IAS. We plan to have
this balance sheet, and any IAS adjustments which are
required to be made to the consolidated reserves, reviewed
by our auditors so that we are able to enter the year
to May 2006 with a clear and agreed view of the effect
of the accounting policies being adopted. When we report
our results for the year ending May 2005 we will report
further on the progress of this project.
Michael Sherwin
Finance Director
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