Financial Reviews
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 £18.6m
(2004: £23.5m) of cash during the year, and after
capital expenditure of £11.9m we had net funds
at the year end of £3.4m.
Our stocks at the end of the year were slightly above
normal levels due to the slow down in sales in the
final quarter. The May 2004 levels, which show a year end stock turn
of 4.1 times (2005: 3.3 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:
| 2005 £m |
2004 £m |
|
|---|---|---|
| Shop fits for new and existing stores | 1.9 | 3.0 |
| Production equipment and tooling | 4.0 | 2.7 |
| Computer equipment and software | 2.0 | 2.8 |
| Office facilities | 1.9 | 1.2 |
| Building developments - Nottingham | 2.5 | 5.1 |
 |
||
| Total fixed asset additions | 12.3 | 14.8 |
 |
||
While we expect to maintain our capital expenditure ahead of depreciation as the business continues to grow, the investment in the Nottingham building developments will be completed by May 2006 and we do not expect to make any further major investments of this nature for several years.
Return on average capital employed (ROACE)*
The business
makes relatively high returns on its capital employed.
The trend over recent years is set out in the chart
below:
In
the current year, both the downturn in our profitability and our investment in
manufacturing and property assets has reduced these returns. However, we continue
to expect our returns to remain well in excess of the Group’s
cost of capital, which we currently estimate to be 8%.
*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 2005 as we
have continued to invest heavily in fixed assets, as
described above, and as our profits have declined in
the second half. 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
36.0% (2004: 37.0%). This rate is higher than that
of a business with activities based only in the UK
due to higher overseas tax rates and unrecognised tax
losses.
Dividend
Our long-term aim is to maintain a progressive dividend
policy based principally on the growth in the Company’s
earnings per share.
In April we announced that it was the intention of the board to recommend a maintained final dividend for the 2005 year at the 2004 level of 14.025 pence per share. While recognising that this results in a relatively low dividend cover (1.5 times for 2005) in view of the profitable and cash generative nature of Games Workshop’s business, the board believes that it is appropriate to accept this lower level of cover in respect of the 2005 year and thus avoid any reduction in dividend.
Dividend reinvestment plan
We also offer investors
the opportunity 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.
Currency exposures
The principal exchange rates used
to translate our earnings and our balance sheet are
as follows:
| euro | US dollar | |||
|---|---|---|---|---|
| 2005 | 2004 | 2005 | 2004 | |
| Year end rate used for the balance sheet | 1.46 | 1.50 | 1.82 | 1.83 |
| Average rate used for earnings | 1.46 | 1.46 | 1.86 | 1.74 |
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 2005 had been converted at the rates used in 2004, they would have been lower by some £0.3m.
As each of our businesses pays our manufacturing operation in foreign currency (primarily US dollar and the 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.
Cash management and bank facilities
We have a four
year unsecured revolving credit facility of £10m and a working capital facility of £5m
(£15m between 1 August and 31 December). The
covenants, based on interest cover and gearing, were
comfortably met. Interest was paid at floating rates,
which equated to 5.47% during the year.
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 the
liability. The final three year performance period
for this scheme ended on 1 June 2003 and the share
options are exercisable from 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 our Nottingham property
has been the focus of much of our surplus cash. We
intend to continue with the share buy-back programme
when our cash generation once again renders this possible.
International financial reporting standards (IFRS)
For
the year ending 28 May 2006, the Group will be required
to prepare its consolidated accounts using IFRS. These
first IFRS accounts will include comparative figures
for the year to 29 May 2005, also prepared using IFRS.
We have established a project team to assess the impact
of the adoption of these new standards for Games Workshop
Group PLC and to plan for their implementation. This
planning is now at an advanced stage and we have established
our opening (30 May 2004) balance sheet and our results
for the year to 29 May 2005 using IFRS. The results
for the year to 29 May 2005 using IFRS will be reviewed
by our auditors in the coming months so that we are
able to enter the year to 28 May 2006 with a clear
and agreed view of the effect of the accounting policies
being adopted. The main differences impacting the Group
are in respect of capitalisation of development costs,
goodwill amortisation, share options, forward currency
contracts and proposed dividends. In January 2006,
we will report our interim results for the six months
ending 27 November 2005, the prior year comparable
period and results for the year to 29 May 2005, under
IFRS.
Michael Sherwin
Finance Director
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