Games Workshop Financial Results 2007

FINANCIAL REVIEW

53rd week
This annual report covers the 53 weeks to 3 June 2007. The sales for the 53rd week amounted to £1.7 million.

Key performance indicators (KPIs)
Currently, the KPIs used in the business relate to sales performance by channel and by territory and to cost control throughout the business. KPIs evolve over time and are reviewed periodically for their appropriateness.

Sales and operating profits
The sales and operating profits earned by the business, split by half year, have been as follows:

Sales and operating profit £m
*2003-2004 operating profit prepared under UK GAAP and 2005-2007 operating profit prepared under IFRS

This chart demonstrates the high level of operational gearing which results from the fixed nature of much of our cost base, particularly in the Games Workshop Hobby stores. It is with this characteristic of our cost base in mind that we have commenced the cost reduction programme, which we expect will reduce an element of the financial risk caused by this high operational gearing. It should also increase the financial opportunity of future sales growth.

Exceptional costs: cost reduction programme
Of the costs of £4.0 million charged this year, £0.4 million relates to cash costs, £0.5 million to asset impairment and £3.1 million to costs committed but not yet spent.

Cash generation
The movement in net debt of £8.0 million resulted from an uncovered dividend payment of £5.9 million, and investment in working capital and payment of taxes.

Our investments in capital expenditure have been as follows:

	2007 £m	2006 £m
Shop fits for new and existing stores	2.0	1.5
Production equipment and tooling	2.6	4.5
Computer equipment and software	1.7	1.6
Office facilities	0.7	1.0

Total capital additions	7.0	8.6

Over the next year, we will be investing £2 million in the upgrade of our global webstore. We expect that this investment will materially improve our internet sales engine and enable our webstore to offer significantly enhanced customer service functionality. Once this investment has been completed, we expect that the level of capital expenditure for the foreseeable future will fall to be broadly similar to the level of annual depreciation/amortisation of capital assets.

Taxation

The tax charge has been increased by £1.3 million due to unrecognised losses incurred in this year in the Americas, which cannot be offset against profit earned elsewhere in the world.

	2007 £m	2006 £m
(Loss)/profit before tax	(2.9)	3.7

(Loss)/profit multiplied by the UK corporation tax rate of 30%:	(0.9)	1.1
Effects of:
Expenses not deductible for tax purposes	0.4	0.3
Movement in deferred tax not recognised	1.3	0.7
Higher rate of tax on overseas earnings	(0.1)	-
Prior year adjustments	(0.1)	(0.4)

Total tax charge for the year	0.6	1.7

In the March 2007 Budget Statement, the UK Government announced a number of changes to the UK corporation tax system. These changes were either included in the 2007 Finance Act (enacted June 2007) or are expected to be enacted in the 2008 Finance Act. The most significant of these changes is the phasing out of industrial buildings allowances from 2008 onwards. Once enacted, this will result in a charge of £1.1 million to reduce the deferred tax asset which we recognise for industrial buildings. This is further explained in note 35.

Currency exposures
The principal exchange rates used to translate our earnings and our balance sheet are as follows:

	euro		US dollar
	2007	2006	2007	2006
Year end rate used for the balance sheet	1.47	1.46	1.98	1.86
Average rate used for earnings	1.48	1.46	1.93	1.77

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 2007 had been converted at the rates used in 2006, they would have been lower by some £0.2 million.

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.

Bank facilities
During the year we had an unsecured revolving credit facility of £10 million that expires on 1 September 2008 and a working capital facility of £10 million (£15 million between 1 September and 31 January). The covenants were based on interest cover and gearing. Interest was paid at floating rates which equated to 5.7% during the year.

Since the year end these facilities have been renewed, and we now have a new three year unsecured revolving credit facility of £15 million and a working capital facility of £5 million (£10 million up to 31 January with an additional £1 million between 1 November and 31 December). The covenants are based on interest cover, net debt to pre-exceptional EBITDA ratio and cash flow to interest and dividends ratio.

Michael Sherwin
Finance director
30 July 2007

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