Final Results

Games Workshop Group PLC 26 July 2005 PRELIMINARY RESULTS Games Workshop Group PLC announces its preliminary results for the year ended 29 May 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 our short-term difficulties, the Hobby is in good health. 'The directors believe the long-term prospects for the business remain very good.' For further information, please contact: Games Workshop Group PLC Today only: 01756 770 376 Tom Kirby, Chairman and Chief Executive Thereafter 0115 900 4001 Michael Sherwin, Finance Director 0115 900 4001 Julia Woodall, PR Manager 0115 900 4006 Wade Pryce, Assistant PR Manager 0115 900 4010 The analyst presentation may be viewed at Investor Relations website http://investor.games-workshop.com General website http://www.games-workshop.com Rawlings Financial PR Limited Tel: 01756 770 376 John Rawlings Catriona 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 both sales and profits, but nonetheless I am pleased to report that the Games Workshop Hobby, and the business which supports and maintains it, continues to enjoy good health. For the last two years we have been concerned that, for Games Workshop, the Lord of the Rings business might create a bubble effect * which might not be sustainable, but we have to confess that we underestimated the impact which this would have on our sales and profits in the last quarter of this financial year. Once the level of the decline became clear, we acted quickly to slow down our production and to reduce unnecessary costs throughout the business. We see this as a temporary reduction in sales for a business which has proven its growth credentials over many years, credentials we expect to re-establish. We are therefore not taking short-term actions on our cost base which would prejudice our ability to grow in the long term. To reiterate, we continue to see the Company as a growth business. Nevertheless, following the phenomenal 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 of growth in sales and profits. We know what we need to do: we need to stick to the basics of our business model, which is designing and manufacturing the best model soldiers in the world, and getting these into the hands of hobbyists wherever they may be. There are no quick fixes or smart tricks, nor are we looking for any. The basics of the business remain sound in all of our territories. Both new and existing hobbyists continue to engage with our products, the quality of which we believe remains without peer. * 'We reported last year that 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 was sold through traditional magazine newsstand distribution channels, was heavily TV advertised, and this resulted in an unexpected increase in the sales of our Lord of the Rings products. At the time we indicated that this 'bubble' effect increase in sales might not be sustainable in the future.' (extract from the 2004 annual report) Sales by territory 2005 2004 Decline Decline (constant currency: see note 8) Continental Europe £59.5m £61.3m -£1.8m -£1.6m UK £40.1m £48.2m -£8.1m -£8.1m The Americas £28.7m £33.1m -£4.4m -£3.0m Asia Pacific £8.3m £9.1m -£0.8m -£0.7m The downturn in sales in the final quarter has been most evident in Continental Europe and the UK, territories which have experienced particularly strong growth in 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 is supported and promoted by our own hobby stores, through which 46% of sales are made. As we continue to grow the Hobby, we have opened another 21 stores during the year taking our total to 327. Sales are also made through independent retailers 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 mission it is to develop the Games Workshop Hobby in France, Germany, Spain, Northern Europe and Italy. We now have 99 Games Workshop Hobby stores, up from 90 last year. Sales grew modestly in Germany and Northern Europe but fell in the other businesses during the year, in particular during the last quarter. Nevertheless we continue to see growth in community activity and in the number of people attending our annual Games Day celebrations of the Hobby, which augurs well for the future. UK We have 120 Games Workshop Hobby stores in the UK (2004: 117). Our UK business has seen a slowdown in sales throughout the year, but the last quarter was particularly tough. We have simplified the management structure to improve the effectiveness of decision making and implementation in the business, and to ensure that the balance between customer facing and back office roles remains healthy. The Americas 2005 has been a year of consolidation and bedding in for our operations in the Americas, which for us comprises the USA and Canada, after the significant investment and structural change which we effected in 2004. We believe that we now 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 entire country. These offices, and the dedicated sales teams which each has established, are now responsible for sales in each region, and for providing customer service both through independent retailers and through our own Games Workshop Hobby stores. To support these efforts on the ground we have opened a further eight new Games Workshop Hobby stores, taking the total to 81 in the Americas. Sales in the year through our own stores and through the direct internet and mail order channels have continued to show healthy growth, while sales to independent retailers have been in decline. The health of our independent retailer customer base in the USA has been a source of concern for some years now: we began this year with 958 active accounts and we have ended it with 798. This consolidation is in part due to us choosing no longer to work with uneconomic accounts, and in part due to some accounts going out of business. We remain confident that the investment we have put into each region will result in continued sales growth in our own stores and through our direct channels. Whether this will also help to restore the health of our sales to independent retailers, we shall have to wait and see. Asia Pacific This business comprises Australia and New Zealand, where we now have 27 Games Workshop Hobby stores (2004: 28). Our sales in Australia and New Zealand in local currency were flat year on year, the Lord of the Rings effect being less significant than in the UK or Continental Europe. The improvement in performance of this region has resulted from the refocusing of the management team on Australia and New Zealand following the closure of our Hong Kong and Singapore activities last year. Just after the year end we opened our first store in Tokyo, Japan. While we expect our business here to grow modestly in its early years, we see this as an exciting long-term growth area. Manufacturing and supply chain We have continued the programme of investment in our vertically integrated design, manufacturing and distribution supply chain this year, resulting in the consolidation of our European supply activities onto our newly developed Nottingham site. The final stage of this programme, which involves moving our plastic injection moulding facility from Wisbech, UK, to Nottingham, will be completed during the next financial year. This programme is focussed upon ensuring that our supply activities are flexible and responsive and that the needs of our Continental European and UK businesses are catered for into the medium term. This flexibility was well proved during the last quarter of this financial year when the supply business responded swiftly to the downturn in sales 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 year we have introduced both metal casting and plastic injection moulding in Memphis, and also bulk distribution for our Asia Pacific business. Going forwards we expect that the Memphis facility will supply the majority of the needs of both our 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 the development of Warhammer Online, a venture to operate a massively multiplayer online role-play game (MMORPG) set in the Warhammer world. We have recently concluded an agreement with Mythic Entertainment Inc., the developer and publisher of Dark Age of Camelot, who will develop MMORPGs set in the Warhammer world under licence from Games Workshop. Mythic Entertainment Inc. expects the first game to be released on PC in 2007. In addition to the MMORPG licence, we have granted licences in relation to our intellectual property to certain publishers of console and PC based computer games. THQ Inc. published Dawn of War during the year, based on our Warhammer 40,000 property, and we have recently licensed Namco Hometek Inc. to publish games based on our Warhammer property. BL Publishing Our publishing business, which made sales of some £1.3m this year, has continued its strategy to extend its activities outside the Warhammer and Warhammer 40,000 intellectual properties into other fantasy, science fiction and horror properties published under the Black Flame title. This business is developing a small but profitable niche publishing portfolio, while continuing to enhance and develop the existing Games Workshop intellectual property. Sabertooth Games This US based collectible card game business, which has been struggling to break even since we acquired it in 2002, is now based in our Memphis facility to ensure that it can carry on business on a low cost infrastructure and obtain the maximum benefit from Games Workshop's operational and logistical structures. We believe 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 with four 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 to improving our business focus we believe that we are now better placed to address the key areas of management recruitment, development and succession planning in a more systematic way. Workforce Games Workshop is a special business with an even more special workforce. Many share a passion for the Games Workshop Hobby, and those who do not have an equally 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 Workshop to provide reassurance to our staff that success isn't just about beating last year's numbers (although that helps), it is about doing your best, every day, to develop and further the business. So long as our staff are doing that, then they get my wholehearted vote of confidence. So once again, I would like to use this annual report to say thank you to all our 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. The divisional management structure referred to above is how we make this process transparent and accountable. The Games Workshop Tabletop Wargaming division is responsible for keeping the Hobby fresh and exciting and for managing market facing risks, the Manufacturing and Supply division is responsible for managing product delivery risks, the Other Activities division is responsible for using our intellectual property appropriately while not distracting our tabletop wargaming activities, and Group is responsible for managing corporate risks. We have a formal risk reporting process as part of our annual budgeting and planning cycle, which is linked into the internal and external audit process, but the management of these risks is an integral part of the daily management process. Foremost amongst the market facing risks is our ability to forecast sales and factory demand. As I have indicated elsewhere, we failed this year accurately to forecast the extent of the sales downturn after the last of the Lord of the Rings movies, although our supply business was able to react very swiftly once the decline was upon us. We are currently looking at ways in which we might better predict future sales by using trend analysis and statistical tools - however, we believe it is unlikely that we will again find ourselves with such a significant sales 'bubble' caused by third party advertising and movie marketing, neither of which forms part of our normal business model. Amongst the product delivery risks are those relating to input prices. The cost of core raw materials (metal and plastic) represents no more than 3% of our sales. While the prices of these commodities have shown significant volatility during the last 18 months, we do not believe that this volatility represents a significant threat to our long-term profitability. In the short term our buying team continues to work hard to minimise these risks and the Manufacturing and Supply division continues to seek process efficiencies to offset any cost impact. Many of our risks are mitigated by the significant portfolio effect which we usually enjoy with different geographies, different routes to market and different currencies. This leads me to conclude that the main source of risk for us remains management error. This is why management recruitment, development and succession planning are so important. Prospects In the short term our trading prospects remain challenging: it is inherently difficult to predict when our sales will again re-establish their historical growth 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-term trading 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. Between 2002 and 2004, the Lord of Rings products took our sales above the normal growth line, and the 'bubble' is now deflating. We believe that it is only a matter of time 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, based upon our 2005 sales and the population statistics for each country. In the long term we see no reason why we shouldn't achieve similar levels of sales penetration 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 potential for 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 we are 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 Kirby Chairman and Chief Executive CONSOLIDATED PROFIT AND LOSS ACCOUNT Year to Year to 29 May 2005 30 May 2004 £000 £000 Turnover 136,647 151,775 Cost of sales (42,071) (50,099) --------- --------- Gross profit 94,576 101,676 Net operating expenses (80,683) (81,821) --------- --------- Operating profit 13,893 19,855 Interest receivable 153 145 Interest payable and similar charges (538) (427) --------- --------- Profit on ordinary activities before taxation 13,508 19,573 Taxation on profit on ordinary activities (4,863) (7,245) --------- --------- Profit on ordinary activities after taxation 8,645 12,328 Equity minority interests - 1 --------- --------- Profit for the financial year 8,645 12,329 Dividends (5,886) (5,749) --------- --------- Profit retained for the financial year 2,759 6,580 ========= ========= Basic earnings per ordinary share 28.2p 40.8p Diluted earnings per ordinary share 27.8p 40.1p Dividend per ordinary share 18.975p 18.75p All items dealt with in arriving at the profit on ordinary activities before taxation relate to continuing activities. There is no difference between the profit on ordinary activities before taxation and the retained profit for the year 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 12,329 Currency translation differences on foreign currency net investments 483 (2,012) --------- --------- Total recognised gains and losses relating to the year 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 assets Goodwill 2,085 2,463 - - Tangible assets 31,049 25,627 - - Investments - - 30,281 30,281 --------- --------- --------- --------- 33,134 28,090 30,281 30,281 --------- --------- --------- --------- Current assets Stocks 12,838 12,102 - - Debtors: due within one year 10,757 12,321 8,321 9,890 Debtors: due after one year 2,283 1,291 11 12 Cash at bank and in hand 8,610 8,570 2,115 551 --------- --------- --------- --------- 34,488 34,284 10,447 10,453 Creditors: amounts falling due within one year (23,533) (26,558) (9,349) (9,833) --------- --------- --------- --------- Net current assets 10,955 7,726 1,098 620 --------- --------- --------- --------- Total assets less current liabilities 44,089 35,816 31,379 30,901 Creditors: amounts falling due after more than one year (5,383) (788) (5,000) - Provisions for liabilities and charges (633) (924) - (392) --------- --------- --------- --------- Net assets 38,073 34,104 26,379 30,509 ========= ========= ========= ========= Capital and reserves Called up share capital 1,553 1,542 1,553 1,542 Capital redemption 101 101 101 101 reserve Share premium 6,542 5,251 14,570 13,279 Profit and loss account 29,877 27,210 10,155 15,587 --------- --------- --------- --------- Equity shareholders' funds 38,073 34,104 26,379 30,509 Equity minority - - - - interests --------- --------- --------- --------- Total capital employed - 38,073 34,104 26,379 30,509 all 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 finance Interest received 151 147 Interest paid (503) (408) Interest paid on finance leases (13) (9) --------- --------- Net cash outflow from returns on investment and servicing of finance (365) (270) --------- --------- Taxation UK 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 investment Purchase of tangible fixed assets (11,891) (13,968) Sale of tangible fixed assets 49 117 --------- --------- Net cash outflow from capital expenditure and financial investment (11,842) (13,851) --------- --------- Equity dividends paid (5,818) (5,218) --------- --------- Net cash outflow before financing (5,745) (4,027) --------- --------- Financing Issue of ordinary share capital 727 1,363 Repayment 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 19,855 Loss/(profit) on disposal of tangible fixed assets 59 (35) Depreciation of tangible fixed assets 6,940 6,080 Amortisation of goodwill 379 366 (Increase)/decrease in stocks (644) 263 Decrease/(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 bank and in hand 8,570 (183) - 223 8,610 Debt due after one 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 in debt 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's statutory accounts. Statutory accounts for the years ended 29 May 2005 and 30 May 2004 which have been reported on by the Group's auditors, were unqualified and 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 the Registrar of Companies and the statutory accounts for the year ended 29 May 2005 will be delivered to the Registrar of Companies in due course. 2. The annual report will be mailed to shareholders on 27 July 2005. Copies of the annual report will also be available from Michael Sherwin, Games Workshop Group 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 geographical analysis 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 design and development of tabletop wargaming product. Other design and development costs include £0.6 million (2004: £2.5 million) in respect 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 £000 Administrative 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 profit for the year of £8.6 million (2004: £12.3 million) and the weighted average number of shares in issue throughout the year. The calculation of diluted earnings per ordinary share has been based on profit for the year and the weighted average number of shares in issue throughout the year, adjusted for the dilution effect of share options outstanding at the year end. 2005 2004 Weighted average number of shares: For basic earnings per ordinary share 30,691,357 30,223,087 Dilution 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 4,410 Overseas 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 28 October 2005 to shareholders on the register at the close of business on 7 October 2005. 8. Constant currency growth is calculated by comparing sales in underlying currencies 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

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