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...and how they contributed to "normalised" group operating profits:
The overall revenue and profit figures are boosted by the Peterson (renamed Emap USA) acquisition of last year. Stripping out this contribution, sales rose 2.6% to £858m and operating profits rose 13.8% to £187m. At the full group level, operating margins arrived at 20.2% -- Emap successfully achieving their goal of 20%-plus margins by this year. It's obvious from the figures that margin improvements were the main drivers of profit growth.
The unease that faced shareholders leading to the annual results was a combination of slowing organic growth, operating margins perhaps nearing their optimum and a significant US acquisition that had developed a few teething troubles soon after purchase. All in all, not the greatest set of operating characteristics for any company to have.
So, with Emap announcing its results yesterday for the year to 31st March 2000, was there any short-term trouble to concern shareholders? In this feature, I'll concentrate mainly on the numbers. On Friday, I'll touch upon valuation and Emap's membership of the Qualiport.
The results
Here's how the six major divisions contributed to the top line at Emap...
2000 1999 Change
(£m) (£m) (%)
Emap UK
* Consumer Magazines 292.7 290.2 +1%
* Business Communications 214.8 219.9 -2%
* Radio 84.0 77.8 +8%
Emap France 243.9 232.3 +5%
Emap USA 244.1 43.2 n/a
New Media/International 23.3 16.7 +40%
Total 1,102.8 880.1 +25%
2000 1999 Change
(£m) (£m) (%)
Emap UK
* Consumer Magazines 73.9 64.9 +14%
* Business Communications 53.0 47.5 +12%
* Radio 30.2 26.8 +13%
Emap France 37.8 32.8 +15%
Emap USA 36.1 7.0 n/a
New Media/International (2.1) (2.5) n/a
Other (5.8) (5.2) -12%
Total 223.1 171.3 +30%
Emap UK
Delving down into the separate divisions does reveal a year of two halves in most parts of the group. As noted at the interim stage, Emap's UK consumer magazine business had slightly deteriorated after the company chose not to chase "unprofitable copy sales, principally in the volatile teenage sector".
First half circulation revenue growth from UK consumer magazines declined 3.5%. But, as the teenage titles worked their way out of the comparisons, revenues rose by 5% in the second half. Significantly, although UK circulation numbers fell throughout the year, advertising revenues continued to edge upwards and thus highlight the inherent business strengths of Emap's market-leading publications. According to Emap, the division remains "on track for a return to positive volume growth". Margins at this division have now reached 25.2%.
The UK Business Communications division suffered a 2% revenue decline due to disposals. This operation, that publishes specialist trade magazines and runs exhibitions, witnessed underlying revenue growth of just 1%. The concentration on the more profitable aspects of the division saw operating margins surge from 21.6% to 24.7%.
As part of the fastest-growing advertising medium bar the Internet, it was Emap's radio operation that was the star of the show. Flat revenue growth in the first half combined with a stunning 16% growth in the second equated to an overall growth performance of 8%. Certainly the prospects for the division appear to be rosy. Leveraging the strength of radio brands into other areas such as compilation CDs, nightclub promotions and digital television gives Emap much in the way of generating additional revenue streams alongside the traditional airtime advertising. Like most radio businesses, operating margins are an obscene 36%.
Emap Abroad
The purchase of a few continental consumer magazines helped French revenues jump 5% to £244m. On an underlying basis, sales edged just 1% upwards. The story across the channel was similar to the UK, in that a decline in circulation revenues and overall readership numbers was offset by underlying advertising revenue growth. One very bright spot was the French launch of FHM magazine. After only nine months, it quickly established itself as the country's leading "men's lifestyle" magazine. Volumes were 40% ahead of those planned and advertising sales were double initial expectations. With operating margins at the French division at just 15.5%, there does appear substantial scope for further cost-cutting to bring margins up to the UK benchmark.
Unlike the European parts of Emap, where a mild first-half performance was offset by a stronger second half, the opposite occurred at the company's US-based operation. Advertising revenues plummeted 7% in the US during the company's third quarter and remained flat in the fourth. That performance was all the more disappointing after the US business witnessed 7% advertising growth in the first half. Emap does state that the coming year wll be one of "continuing slow advertising growth" and that early signs are "positive".
Cash and Debt
One great feature of the Emap financial profile is the cash flow. After adding back the non-cash charge of depreciation (£14.3m), the company generated £237m of operating cash flow. Of that, just £12.3m was absorbed into working capital and £12.0m was expensed on fixed assets.
Emap like to measure their profit-to-cash performance by expressing operating cash adjusted for tangible fixed asset spend as a percentage of reported operating profits. The average performance of this ratio over the five years prior to the 2000 results was 96%. This year, Emap gave an "average" performance with its key financial management tool yielding a 96% conversion rate. In reality, this performance is far from average. The complete lack of working capital and fixed assets required at Emap does leave the media group as a veritable cash fountain.
As interest cover (calculated by dividing operating profit by net interest payable) was a low 5.5 times in fiscal 2000, it was reassuring to see the vast majority of the group's free cash flow reducing the debt created by the purchase of Peterson. Of the £130m free cash flow produced, £100m was exhausted in reducing net debt to £587m in the year. The low interest cover should rise happily over the next couple of years as the debt principal declines and profits increase.
Another commendable feature in terms of cash flow was the restrained approach when investing in the plethora of new media opportunities available. Although the group spent heavily on new ventures, with £87.1m leaving the kitty in this respect, the amount was offset by disposals of under performing assets and investments elsewhere.
Return on equity
Trying to get some sort of handle on the return on equity performance of Emap is difficult. The acquisition of Peterson and its partial contribution in 1999 does muddy the waters when trying to determine the return on the average equity employed during 2000.
Probably a more useful measurement is the incremental return on equity. Rather than just measuring the performance over just one year, taking into account returns over several years gives a "smoothed" and more realistic picture. For Emap, I'll take a six year view, from 1994 to 2000, simply because both years are uncomplicated by significant acquisitions.
Earnings during 1994 and 2000 were £29.4 and £179.4m respectively. At 31st March 1994, shareholders' equity at Emap stood at £165m. Add back the then £86m of goodwill written off, and adjusted shareholders' equity of 1994 is £251m. At 31st March 2000, shareholder's equity stood at £941m. Adding back the £180m of goodwill previously amortised and £94m of goodwill written off during 2000 leaves adjusted shareholders' equity of 2000 at £1,215m.
The incremental return on equity over the six-year period can be calculated by the increase in earnings divided by the increase in the equity base. Or in other words, ((£179.4m - £29.4m ) / ( £1215m - £251m)), equalling 15.6%. That's not a bad return, especially when taking into account the recent underperformance of the chunky Peterson purchase.
Summary
Having had a look through the reported results, there's nothing really untoward. At the earnings level, pedestrian organic sales growth was helped by significant cost savings, leading to pre-exceptional earnings per share jumping 10% to 53.7p in the year. Cash flow is still great and even with a stack of acquisitions over the past few years, including the fully priced Peterson, the incremental return on shareholders' equity is still a creditable 15%-plus. And although the 2000 operating margin target of 20% has been breached, there's still plenty of scope for rationalisation in both the French and US businesses.
My initial apprehension towards Emap has been diluted by the results. But I'm still a little wary of the miniscule organic growth. The way forward for Emap is simple -- cut costs, acquire other businesses and most importantly, start to generate meaningful organic revenues. On Friday, I'll try to round up my thoughts on Emap, concentrating on the immediate outlook and its valuation.
Your thoughts and comments to the Qualiport discussion board, please.
Related Links
• The Emap business
• The Emap financials
• The orginal Emap valuation
• Emap 1998 annual results
• Emap 1998 interim results
• Emap 1999 annual results
• Emap 1999 interim results
• Emap discussion board
• A short-term Emap Dilemma
• Emap website