Games Workshop Regulatory News (GAW)

26 Jul 2005 07:00

Games Workshop Group PLC26 July 2005 PRELIMINARY RESULTS Games Workshop Group PLC announces its preliminary results for the year ended 29May 2005. Highlights * Underlying business healthy notwithstanding sales decline with the Lord of the Rings downturn * Turnover at £136.6m (2004: £151.8m) * Operating profit at £13.9m (2004: £19.9m) * Earnings per share of 28.2p (2004: 40.8p) * Maintained final dividend per share of 14.025p (2004: 14.025p) * 21 new Hobby stores opened bringing the total to 327 Tom Kirby, Chairman and Chief Executive of Games Workshop, said: "Despite ourshort-term difficulties, the Hobby is in good health. "The directors believe the long-term prospects for the business remain verygood." For further information, please contact: Games Workshop Group PLC Today only: 01756 770 376Tom Kirby, Chairman and Chief Executive Thereafter 0115 900 4001Michael Sherwin, Finance Director 0115 900 4001Julia Woodall, PR Manager 0115 900 4006Wade Pryce, Assistant PR Manager 0115 900 4010 The analyst presentation may be viewed atInvestor Relations website http://investor.games-workshop.comGeneral website http://www.games-workshop.com Rawlings Financial PR Limited Tel: 01756 770 376John RawlingsCatriona Valentine FINANCIAL HIGHLIGHTS 2005 2004 Turnover £136.6m £151.8m Operating profit £13.9m £19.9m Pre-tax profit £13.5m £19.6m Year end net funds £3.4m £8.2m Earnings per share 28.2p 40.8p Dividend per share 18.975p 18.750p OPERATING REVIEW BY THE CHAIRMAN AND CHIEF EXECUTIVE Summary of results - for the year to 29 May 2005 Sales This is the first set of results for the Company which shows a fall in bothsales and profits, but nonetheless I am pleased to report that the GamesWorkshop Hobby, and the business which supports and maintains it, continues toenjoy good health. For the last two years we have been concerned that, for GamesWorkshop, the Lord of the Rings business might create a bubble effect * whichmight not be sustainable, but we have to confess that we underestimated theimpact which this would have on our sales and profits in the last quarter ofthis financial year. Once the level of the decline became clear, we actedquickly to slow down our production and to reduce unnecessary costs throughoutthe business. We see this as a temporary reduction in sales for a business whichhas proven its growth credentials over many years, credentials we expect tore-establish. We are therefore not taking short-term actions on our cost basewhich would prejudice our ability to grow in the long term. To reiterate, wecontinue to see the Company as a growth business. Nevertheless, following thephenomenal growth of the past few years, which has proven to be unsustainable,we do need to call 'time out' while we re-establish our more normal pattern ofgrowth in sales and profits. We know what we need to do: we need to stick to the basics of our businessmodel, which is designing and manufacturing the best model soldiers in theworld, and getting these into the hands of hobbyists wherever they may be. Thereare no quick fixes or smart tricks, nor are we looking for any. The basics ofthe business remain sound in all of our territories. Both new and existinghobbyists continue to engage with our products, the quality of which we believeremains without peer. * 'We reported last year that DeAgostini, a third party business which had beengranted a licence by the Games Workshop Group to produce a serialised gamingsupplement based upon our Lord of the Rings tabletop battle game, launched its'Battle Games in Middle-earth' product in the UK. This product, which was soldthrough traditional magazine newsstand distribution channels, was heavily TVadvertised, and this resulted in an unexpected increase in the sales of our Lordof the Rings products. At the time we indicated that this 'bubble' effectincrease in sales might not be sustainable in the future.' (extract from the2004 annual report) Sales by territory 2005 2004 Decline Decline (constant currency: see note 8) Continental Europe £59.5m £61.3m -£1.8m -£1.6mUK £40.1m £48.2m -£8.1m -£8.1mThe Americas £28.7m £33.1m -£4.4m -£3.0mAsia Pacific £8.3m £9.1m -£0.8m -£0.7m The downturn in sales in the final quarter has been most evident in ContinentalEurope and the UK, territories which have experienced particularly strong growthin recent years buoyed especially by sales of the Lord of the Rings products. Sales by channel The Group has a single business segment, the Games Workshop Hobby. This issupported and promoted by our own hobby stores, through which 46% of sales aremade. As we continue to grow the Hobby, we have opened another 21 stores duringthe year taking our total to 327. Sales are also made through independentretailers and direct, through the internet and mail order. Independent retailers £61.0m 45% Hobby stores £62.9m 46% Direct £12.7m 9% Continental Europe There are five autonomous sales businesses in Continental Europe, whose missionit is to develop the Games Workshop Hobby in France, Germany, Spain, NorthernEurope and Italy. We now have 99 Games Workshop Hobby stores, up from 90 lastyear. Sales grew modestly in Germany and Northern Europe but fell in the otherbusinesses during the year, in particular during the last quarter. Neverthelesswe continue to see growth in community activity and in the number of peopleattending our annual Games Day celebrations of the Hobby, which augurs well forthe future. UK We have 120 Games Workshop Hobby stores in the UK (2004: 117). Our UK businesshas seen a slowdown in sales throughout the year, but the last quarter wasparticularly tough. We have simplified the management structure to improve theeffectiveness of decision making and implementation in the business, and toensure that the balance between customer facing and back office roles remainshealthy. The Americas 2005 has been a year of consolidation and bedding in for our operations in theAmericas, which for us comprises the USA and Canada, after the significantinvestment and structural change which we effected in 2004. We believe that wenow have a sales infrastructure which can deliver long-term growth to the Group.Last year we established three new regional sales offices for the US in Chicago(Mid-West), Los Angeles (West) and Memphis (South) in addition to the Baltimore(North-East) operation; Baltimore was previously our sales centre for the entirecountry. These offices, and the dedicated sales teams which each hasestablished, are now responsible for sales in each region, and for providingcustomer service both through independent retailers and through our own GamesWorkshop Hobby stores. To support these efforts on the ground we have opened afurther eight new Games Workshop Hobby stores, taking the total to 81 in theAmericas. Sales in the year through our own stores and through the directinternet and mail order channels have continued to show healthy growth, whilesales to independent retailers have been in decline. The health of ourindependent retailer customer base in the USA has been a source of concern forsome years now: we began this year with 958 active accounts and we have ended itwith 798. This consolidation is in part due to us choosing no longer to workwith uneconomic accounts, and in part due to some accounts going out ofbusiness. We remain confident that the investment we have put into each regionwill result in continued sales growth in our own stores and through our directchannels. Whether this will also help to restore the health of our sales toindependent retailers, we shall have to wait and see. Asia Pacific This business comprises Australia and New Zealand, where we now have 27 GamesWorkshop Hobby stores (2004: 28). Our sales in Australia and New Zealand inlocal currency were flat year on year, the Lord of the Rings effect being lesssignificant than in the UK or Continental Europe. The improvement in performanceof this region has resulted from the refocusing of the management team onAustralia and New Zealand following the closure of our Hong Kong and Singaporeactivities last year. Just after the year end we opened our first store inTokyo, Japan. While we expect our business here to grow modestly in its earlyyears, we see this as an exciting long-term growth area. Manufacturing and supply chain We have continued the programme of investment in our vertically integrateddesign, manufacturing and distribution supply chain this year, resulting in theconsolidation of our European supply activities onto our newly developedNottingham site. The final stage of this programme, which involves moving ourplastic injection moulding facility from Wisbech, UK, to Nottingham, will becompleted during the next financial year. This programme is focussed uponensuring that our supply activities are flexible and responsive and that theneeds of our Continental European and UK businesses are catered for into themedium term. This flexibility was well proved during the last quarter of thisfinancial year when the supply business responded swiftly to the downturn insales without a significant growth in stock levels. In June 2003 we opened our new Memphis warehousing and distribution facility,and in 2004 we introduced a box packing activity in the new facility. This yearwe have introduced both metal casting and plastic injection moulding in Memphis,and also bulk distribution for our Asia Pacific business. Going forwards weexpect that the Memphis facility will supply the majority of the needs of bothour American and Asia Pacific regions. Other activities Warhammer Online/computer games licensing On 21 June 2004, we announced the termination of our direct involvement in thedevelopment of Warhammer Online, a venture to operate a massively multiplayeronline role-play game (MMORPG) set in the Warhammer world. We have recentlyconcluded an agreement with Mythic Entertainment Inc., the developer andpublisher of Dark Age of Camelot, who will develop MMORPGs set in the Warhammerworld under licence from Games Workshop. Mythic Entertainment Inc. expects thefirst game to be released on PC in 2007. In addition to the MMORPG licence, we have granted licences in relation to ourintellectual property to certain publishers of console and PC based computergames. THQ Inc. published Dawn of War during the year, based on our Warhammer40,000 property, and we have recently licensed Namco Hometek Inc. to publishgames based on our Warhammer property. BL Publishing Our publishing business, which made sales of some £1.3m this year, has continuedits strategy to extend its activities outside the Warhammer and Warhammer 40,000intellectual properties into other fantasy, science fiction and horrorproperties published under the Black Flame title. This business is developing asmall but profitable niche publishing portfolio, while continuing to enhance anddevelop the existing Games Workshop intellectual property. Sabertooth Games This US based collectible card game business, which has been struggling to breakeven since we acquired it in 2002, is now based in our Memphis facility toensure that it can carry on business on a low cost infrastructure and obtain themaximum benefit from Games Workshop's operational and logistical structures. Webelieve that these actions will place this small business (sales this year of$1.6m) on a firmer footing for the future. Management structure Last year we established a divisional management structure for the business withfour management groups. Each division has clearly defined responsibilities as follows: Games Workshop Tabletop Wargaming division - responsible for the development of the Hobby throughout the world. This encompasses the sales businesses in each territory around the world as well as the design studio based in Nottingham. Manufacturing and Supply division - responsible for the realisation of the designs into manufactured products, and the supply and distribution of those products to our sales businesses and their customers around the world. Other Activities division - responsible for the sales of all non-tabletop wargaming products, including publishing, collectible card games and computer games. Group - responsible for the financing and corporate governance of the activities carried out in the divisions. This also includes intellectual property management, legal, treasury, reporting and investor relations. This structure has been in place throughout this year, and in addition toimproving our business focus we believe that we are now better placed to addressthe key areas of management recruitment, development and succession planning ina more systematic way. Workforce Games Workshop is a special business with an even more special workforce. Manyshare a passion for the Games Workshop Hobby, and those who do not have anequally strong passion for providing excellent quality service to support it. This year has been tough for all of our staff as we see the sales 'bubble'deflating. And it remains tough today too. Most of our staff love what they do,but they also love to succeed. It is part of management's job in Games Workshopto provide reassurance to our staff that success isn't just about beating lastyear's numbers (although that helps), it is about doing your best, every day, todevelop and further the business. So long as our staff are doing that, then theyget my wholehearted vote of confidence. So once again, I would like to use this annual report to say thank you to allour staff and I trust that our shareholders will join me. Risks facing the business Managing the risks which face our business is what we do every day. Thedivisional management structure referred to above is how we make this processtransparent and accountable. The Games Workshop Tabletop Wargaming division isresponsible for keeping the Hobby fresh and exciting and for managing marketfacing risks, the Manufacturing and Supply division is responsible for managingproduct delivery risks, the Other Activities division is responsible for usingour intellectual property appropriately while not distracting our tabletopwargaming activities, and Group is responsible for managing corporate risks. Wehave a formal risk reporting process as part of our annual budgeting andplanning cycle, which is linked into the internal and external audit process,but the management of these risks is an integral part of the daily managementprocess. Foremost amongst the market facing risks is our ability to forecast sales andfactory demand. As I have indicated elsewhere, we failed this year accurately toforecast the extent of the sales downturn after the last of the Lord of theRings movies, although our supply business was able to react very swiftly oncethe decline was upon us. We are currently looking at ways in which we mightbetter predict future sales by using trend analysis and statistical tools -however, we believe it is unlikely that we will again find ourselves with such asignificant sales 'bubble' caused by third party advertising and moviemarketing, neither of which forms part of our normal business model. Amongst the product delivery risks are those relating to input prices. The costof core raw materials (metal and plastic) represents no more than 3% of oursales. While the prices of these commodities have shown significant volatilityduring the last 18 months, we do not believe that this volatility represents asignificant threat to our long-term profitability. In the short term our buyingteam continues to work hard to minimise these risks and the Manufacturing andSupply division continues to seek process efficiencies to offset any costimpact. Many of our risks are mitigated by the significant portfolio effect which weusually enjoy with different geographies, different routes to market anddifferent currencies. This leads me to conclude that the main source of risk forus remains management error. This is why management recruitment, development andsuccession planning are so important. Prospects In the short term our trading prospects remain challenging: it is inherentlydifficult to predict when our sales will again re-establish their historicalgrowth rates once we have put the Lord of the Rings sales 'bubble' behind us. However, we remain confident that we are right to refer to these as short-termtrading issues. This confidence is based upon the following three fundamentals: 1. The long-term growth credentials of the business As I have indicated above, we see Games Workshop as a growth business. Between2002 and 2004, the Lord of Rings products took our sales above the normal growthline, and the 'bubble' is now deflating. We believe that it is only a matter oftime before we resume our historic linear growth rate. 2. The market opportunity for our existing sales businesses The table below shows our sales per capita in our key sales territories, basedupon our 2005 sales and the population statistics for each country. In the longterm we see no reason why we shouldn't achieve similar levels of salespenetration in each of these markets to those which we currently have in the UK.Achieving this would result in a multiple of our current level of sales. Sales per capita by geographical area UK 59p Asia Pacific 39p Continental Europe 23p The Americas 12p Japan 0p This is not a sales forecast but a rough indication of what the future potentialfor Games Workshop might be. 3. The health of the Games Workshop Hobby Despite our short-term difficulties, the Hobby is in good health. Add to that weare coming to the end of our programme of building developments in Nottingham,which leaves the business seriously well invested. The directors believe the long-term prospects for the business remain very good. Tom KirbyChairman and Chief Executive CONSOLIDATED PROFIT AND LOSS ACCOUNT Year to Year to 29 May 2005 30 May 2004 £000 £000 Turnover 136,647 151,775Cost of sales (42,071) (50,099) --------- --------- Gross profit 94,576 101,676Net operating expenses (80,683) (81,821) --------- --------- Operating profit 13,893 19,855Interest receivable 153 145Interest payable and similar charges (538) (427) --------- --------- Profit on ordinary activities before taxation 13,508 19,573Taxation on profit on ordinary activities (4,863) (7,245) --------- --------- Profit on ordinary activities after taxation 8,645 12,328Equity minority interests - 1 --------- --------- Profit for the financial year 8,645 12,329Dividends (5,886) (5,749) --------- --------- Profit retained for the financial year 2,759 6,580 ========= ========= Basic earnings per ordinary share 28.2p 40.8pDiluted earnings per ordinary share 27.8p 40.1pDividend per ordinary share 18.975p 18.75p All items dealt with in arriving at the profit on ordinary activities beforetaxation relate to continuing activities. There is no difference between theprofit on ordinary activities before taxation and the retained profit for theyear stated above and their historical cost equivalents. CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES Year to Year to 29 May 2005 30 May 2004 £000 £000 Profit for the financial year 8,645 12,329Currency translation differences on foreigncurrency net investments 483 (2,012) --------- ---------Total recognised gains and losses relating to theyear 9,128 10,317 ========= ========= BALANCE SHEETS Group Company As at As at As at As at 29 May 2005 30 May 2004 29 May 2005 30 May 2004 £000 £000 £000 £000 Fixed assetsGoodwill 2,085 2,463 - -Tangible assets 31,049 25,627 - -Investments - - 30,281 30,281 --------- --------- --------- --------- 33,134 28,090 30,281 30,281 --------- --------- --------- --------- Current assetsStocks 12,838 12,102 - -Debtors: due withinone year 10,757 12,321 8,321 9,890Debtors: due after oneyear 2,283 1,291 11 12Cash at bank and inhand 8,610 8,570 2,115 551 --------- --------- --------- --------- 34,488 34,284 10,447 10,453 Creditors: amountsfalling duewithin one year (23,533) (26,558) (9,349) (9,833) --------- --------- --------- --------- Net current assets 10,955 7,726 1,098 620 --------- --------- --------- --------- Total assets lesscurrent liabilities 44,089 35,816 31,379 30,901Creditors: amountsfalling due aftermore than one year (5,383) (788) (5,000) -Provisions forliabilities andcharges (633) (924) - (392) --------- --------- --------- --------- Net assets 38,073 34,104 26,379 30,509 ========= ========= ========= ========= Capital and reservesCalled up share capital 1,553 1,542 1,553 1,542Capital redemption 101 101 101 101reserveShare premium 6,542 5,251 14,570 13,279Profit and loss account 29,877 27,210 10,155 15,587 --------- --------- --------- ---------Equity shareholders'funds 38,073 34,104 26,379 30,509Equity minority - - - -interests --------- --------- --------- --------- Total capital employed - 38,073 34,104 26,379 30,509all equity ========= ========= ========= ========= CONSOLIDATED CASH FLOW STATEMENT Year to Year to 29 May 2005 30 May 2004 £000 £000 Net cash inflow from operating activities 18,607 23,490 --------- ---------Returns on investments and servicing of financeInterest received 151 147Interest paid (503) (408)Interest paid on finance leases (13) (9) --------- ---------Net cash outflow from returns on investment andservicing of finance (365) (270) --------- ---------TaxationUK corporation tax paid (4,141) (6,201)Overseas taxation paid (2,186) (1,977) --------- --------- Net cash outflow from taxation (6,327) (8,178) --------- ---------Capital expenditure and financial investmentPurchase of tangible fixed assets (11,891) (13,968)Sale of tangible fixed assets 49 117 --------- ---------Net cash outflow from capital expenditure andfinancial investment (11,842) (13,851) --------- --------- Equity dividends paid (5,818) (5,218) --------- --------- Net cash outflow before financing (5,745) (4,027) --------- --------- FinancingIssue of ordinary share capital 727 1,363Repayment of principal under finance leases (165) (124)Increase in medium-term revolving credit facility 5,000 - --------- --------- Net cash inflow from financing 5,562 1,239 --------- --------- Decrease in cash in the year (183) (2,788) ========= ========= NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT Reconciliation of operating profit to operating cash flow 2005 2004 £000 £000 Operating profit 13,893 19,855Loss/(profit) on disposal of tangible fixed assets 59 (35)Depreciation of tangible fixed assets 6,940 6,080Amortisation of goodwill 379 366(Increase)/decrease in stocks (644) 263Decrease/(increase) in debtors 1,307 (1,754)Decrease in creditors (3,036) (484)Decrease in provisions (291) (801) --------- --------- Net cash inflow from operating activities 18,607 23,490 ========= ========= Analysis of net funds As at Other non- Exchange As at 31 May 2004 Cash flow cash changes movement 29 May 2005 £000 £000 £000 £000 £000 Cash at bankand in hand 8,570 (183) - 223 8,610Debt due afterone year - (5,000) - - (5,000)Finance leases (364) 165 19 (1) (181) --------- -------- --------- --------- --------- Net funds 8,206 (5,018) 19 222 3,429 ========= ========= ========= ========= ========= Reconciliation of net cash flow to movement in net funds Year to Year to 29 May 2005 30 May 2004 £000 £000 Decrease in cash in the year (183) (2,788)Cash (inflow)/outflow from (increase)/decrease indebt and lease financing (4,835) 124 --------- --------- Change in net funds resulting from cash flows (5,018) (2,664)New finance leases 19 (491)Exchange movement 222 (367)Net funds at 31 May 2004 8,206 11,728 --------- --------- Net funds at 29 May 2005 3,429 8,206 ========= ========= NOTES TO THE ACCOUNTS 1. The financial information given above does not constitute the Group'sstatutory accounts. Statutory accounts for the years ended 29 May 2005 and 30May 2004 which have been reported on by the Group's auditors, were unqualifiedand did not contain statements under s237(2) or (3) of the Companies Act 1985.Statutory accounts for the year ended 30 May 2004 have been delivered to theRegistrar of Companies and the statutory accounts for the year ended 29 May 2005will be delivered to the Registrar of Companies in due course. 2. The annual report will be mailed to shareholders on 27 July 2005. Copiesof the annual report will also be available from Michael Sherwin, Games WorkshopGroup PLC, Willow Road, Lenton, Nottingham NG7 2WS. This information is also available on the company web site at http://investor.games-workshop.com. 3. Segmental analysis The Group has one business segment, the Games Workshop Hobby. A geographicalanalysis of the Group's business is provided below: Turnover By geographical area of sales operation 2005 2004 £000 £000 Continental Europe 59,539 61,290 United Kingdom 40,166 48,241 The Americas 28,670 33,110 Asia Pacific 8,272 9,134 --------- -------- Turnover 136,647 151,775 ========= ========= By geographical area of destination 2005 2004 £000 £000 Continental Europe 61,732 66,643 United Kingdom 36,666 42,143 The Americas 29,624 33,291 Asia Pacific 8,530 9,501 Other 95 197 --------- --------- Turnover 136,647 151,775 ========= ========= Operating profit By geographical area of sales operation 2005 2004 £000 £000 Continental Europe 15,356 19,948 United Kingdom 7,071 11,370 The Americas 365 (829) Asia Pacific 1,027 756 --------- --------- 23,819 31,245 Design and development costs - core (3,324) (2,873) Design and development costs - other (1,667) (3,761) Central costs (5,309) (4,942) --------- --------- Operating profit before royalties 13,519 19,669 Royalty income 374 186 --------- --------- Operating profit 13,893 19,855 ========= ========= Core design and development costs relate to expenditure incurred in the designand development of tabletop wargaming product. Other design and development costs include £0.6 million (2004: £2.5 million) inrespect of the Warhammer Online venture. Net assets By geographical area of sales operation 2005 2004 £000 £000 Continental Europe 15,644 10,919 United Kingdom 11,851 8,252 The Americas 9,182 10,377 Asia Pacific 3,119 398 --------- --------- 39,796 29,946 Unallocated net assets/(liabilities)- cash 8,610 8,570- borrowings (5,000) -- taxation 792 (813)- central (6,125) (3,599) --------- --------- Net assets 38,073 34,104 ========= ========= 4. Turnover, cost of sales, gross profit and net operating expenses 2005 2004 £000 £000 Turnover 136,647 151,775 Cost of sales 42,071 50,099 --------- --------- Gross profit 94,576 101,676 --------- --------- Selling and distribution costs 45,311 45,035 Administrative costs 35,746 36,972 Operating income - royalty income (374) (186) --------- --------- Net operating expenses 80,683 81,821 --------- --------- Operating profit 13,893 19,855 ========= ========= 2005 2004 £000 £000Administrative costs include: Design and development costs - core 3,324 2,873 Design and development costs - other 1,667 3,761 Other administrative costs 30,755 30,338 --------- --------- Total administrative costs 35,746 36,972 ========= ========= 5. The calculation of basic earnings per ordinary share has been based on profitfor the year of £8.6 million (2004: £12.3 million) and the weighted averagenumber of shares in issue throughout the year. The calculation of diluted earnings per ordinary share has been based on profitfor the year and the weighted average number of shares in issue throughout theyear, adjusted for the dilution effect of share options outstanding at the yearend. 2005 2004 Weighted average number of shares:For basic earnings per ordinary share 30,691,357 30,223,087Dilution effect of share options outstanding 384,946 495,036 ----------- ----------- For diluted earnings per ordinary share 31,076,303 30,718,123 =========== =========== 6. Taxation on profit on ordinary activities 2005 2004 £000 £000 Current taxation UK corporation tax 3,633 4,410Overseas tax 1,823 2,193 ----------- ----------- Total current taxation 5,456 6,603 Deferred taxation (593) 642 ----------- ----------- Taxation on profit on ordinary activities 4,863 7,245 =========== =========== 7. The proposed final dividend per share of 14.025p will be paid on 28October 2005 to shareholders on the register at the close of business on 7October 2005. 8. Constant currency growth is calculated by comparing sales in underlyingcurrencies for 2004 and 2005, both converted at the 2004 average exchange rates. 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 This information is provided by RNS The company news service from the London Stock Exchange