25th Feb 2005 07:00
Rank Group PLC25 February 2005 25 February 2005 The Rank Group Plc Preliminary announcement of the results for the year ended 31 December 2004 • Group operating profit* of £204.9m (2003 - £218.0m**); £139.0m after goodwill amortisation and exceptional items (2003 - £160.5m**) • Profit before tax* of £168.1m (2003 - £187.1m**); £83.3m loss after goodwill amortisation and exceptional items (2003 - £122.7m profit **) • Exceptional charge of £233.4m, including a provision for loss on disposal of Deluxe Media of £181.4m, which includes £76.7m of goodwill previously written off to reserves • Earnings per share* of 20.0p (2003 - 19.2p**); 19.9p loss per share after goodwill amortisation and exceptional items (2003 - 13.3p** earnings per share) • Gaming operating profit* up 4.6% to £114.9m (2003 - £109.8m***), reflecting a better second half in both bingo and casinos • Hard Rock operating profit* up 20% to £27.8m (2003 - £23.1m), reflecting a return to like-for-like sales growth in cafes and first time contributions from Seminole hotels and casinos • Deluxe operating profit* of £71.3m (2003 - £92.7m**), reflecting a weaker second half schedule in Film and continued decline within Media • Proposed final dividend up 5.4% to 9.8p (2003 - 9.3p), making a total for the year of 14.6p (2003 - 13.9p) • Net debt down to £606.7m (2003 - £700.5m) • Separation of Deluxe: Deluxe Media to be sold; options for Deluxe Film being pursued * before goodwill amortisation and exceptional items** restated for FRS 17*** restated for FRS 17 and excluding Rank Leisure Machine Services ("RLMS") Commenting on the results, Mike Smith, Chief Executive, said: "The Group's 2004 operating profit before goodwill amortisation and exceptionalitems was down £13.1m to £204.9m (2003 - £218.0m). Gaming enjoyed another yearof profit growth, helped by a much stronger second half performance, and HardRock began to benefit from brand licensing deals and an improved cafeperformance. However, a much weaker film schedule than in previous years and theloss of two contracts in 2003 meant that Deluxe Film's performance in the secondhalf was disappointing. As expected, Deluxe Media was well behind last year.Since the year end, trading patterns across the Group have been in line withexpectations and the Group is well placed to make progress in 2005. A new Gambling Bill is currently being considered by Parliament. Over the pastfour and a half years, Rank has worked closely with Government to try and ensurethat the new legislation passes the critical test of being both consistent withthe Government's policy objectives, whilst serving to stimulate a competitivemarket for the benefit of customers. While much of the Bill is uncontentious,Rank believes that, if passed without suitable amendment, those elements of theBill which affect the UK casino industry will fail this test on both counts. Having now completed a detailed review of the possible separation of both DeluxeFilm and Deluxe Media which was announced in September 2004, the Board hasconcluded that a sale of Deluxe Media is the preferred route to separation forthat business and is currently engaged in discussions with a number ofinterested parties. The Board is convinced of the strategic merit of separatingDeluxe Film and working towards a solution. However, the issuesinvolved are complex and the Board is determined to ensure that any separationwill be undertaken only if it is in the best interests of shareholders." Enquiries: The Rank Group Plc Tel: 020 7706 1111Mike Smith, Chief ExecutiveIan Dyson, Finance DirectorPeter Reynolds, Director of Investor Relations Press Enquiries: The Maitland Consultancy Tel: 020 7379 5151Angus MaitlandSuzanne Bartch IR/02/05 Analyst meeting, webcast and conference call details: Friday 25 February 2005 There will be an analyst meeting at Merrill Lynch Financial Centre, 2 KingEdward Street, London, EC1A 1HQ, starting at 9.30am. There will be asimultaneous webcast and conference call of the meeting. To register for the live webcast, please pre-register for access by visiting theGroup website (www.rank.com). A copy of the webcast and slide presentation givenat the meeting will be available on the Group's website later today. The webcastwill be available for a period of six months. An interview with Mike Smith, Chief Executive, in video/audio and text will alsobe available from 7.00am GMT on 25 February 2005 at www.cantos.com and later inthe day on the Group's website. Conference call details: Friday 25 February 20059.20am Please call 0800 559 3282 (UK) or +44 (0) 20 7784 1017 (International).9.30am Meeting starts Forward-looking statements. This announcement includes 'forward-lookingstatements'. These statements contain the words "anticipate", "believe","intend", "estimate", "expect" and words of similar meaning. All statementsother than statements of historical facts included in this announcement,including, without limitation, those regarding the Company's financial position,business strategy, plans and objectives of management for future operations(including development plans and objectives relating to the Company's productsand services) are forward-looking statements that are based on currentexpectations. Such forward-looking statements involve known and unknown risks,uncertainties and other important factors that could cause the actual results,performance, achievements or financial position of the Company to be materiallydifferent from future results, performance, achievements or financial positionexpressed or implied by such forward-looking statements. Such forward-lookingstatements are based on numerous assumptions regarding the Company's operatingperformance, present and future business strategies, and the environment inwhich the Company will operate in the future. These forward-looking statementsspeak only as at the date of this announcement. Subject to the Listing Rules ofthe UK Listing Authority, the Company expressly disclaims any obligation orundertaking to disseminate any updates or revisions to any forward-lookingstatements contained herein to reflect any change in the Company's expectationswith regard thereto or any change in events, conditions or circumstances onwhich any such statement is based. Past performance cannot be relied upon as aguide to future performance. CHIEF EXECUTIVE'S REVIEW Results The Group's 2004 operating profit before goodwill amortisation and exceptionalitems was down £13.1m to £204.9m (2003 - £218.0m). Gaming enjoyed another yearof profit growth, helped by a much stronger second half performance, and HardRock began to benefit from brand licensing deals and an improved cafeperformance. However, a much weaker film schedule than in previous years and theloss of two contracts in 2003 meant that Deluxe Film's performance in the secondhalf was disappointing. As expected, Deluxe Media was well behind last year.Since the year end, trading patterns across the Group have been in line withexpectations and the Group is well placed to make progress in 2005. Development During 2004, the Group continued its strategy of expansion and carefully plannedinvestment in each of its three business divisions. Total capital expenditurewas similar to last year at £115.6m although on a like-for-like basis (i.e.excluding Rank Leisure Machine Services ("RLMS")), it was £20.5m ahead of 2003.Investment in acquisitions during the year totalled £74.7m (2003 - £123.6m),including a series of small additions to the creative services business withinDeluxe Film and a further bingo club in Spain. Gaming In Mecca Bingo, the plan of relocating some of the older facilities to new,often larger, premises continues. The clubs at Burton, Bolton, Easterhouse(Glasgow) and Ellesmere Port were all relocated during the year. The EdinburghPalais will be relocated and new units will open in Paisley, Thanet and Crewe in2006. Over the past ten years the Group has invested over £330m in its bingofacilities and the quality of the estate is seen as a major strength anddifferentiator from its competitors. Grosvenor Casinos also saw further investment in its estate with the opening oftwo new casinos, in Stoke-on-Trent and Bolton. Two new casino licences were alsogranted in Dundee and Swansea. A total of 22 of the Group's existing 36operational casinos in the UK are now either new or have been relocated orextended since 1997, and whilst there is still further work to do before theprogramme is complete, management believes that the quality of the currentestate is key to Grosvenor's ability to attract and retain casino customers.During the year, changes in the identification rules for guests served tostimulate casino membership which increased by 30%, or 265,000 new members. Blue Square has continued to broaden its product offering with the launch of twoexciting new products during 2004: an on-line casino and a poker room. Thesubstantial growth in the popularity of poker in particular has been welldocumented and now Blue Square has an opportunity to capture some of thisgrowth. The first Blue Square betting shop, located next to the Group's VictoriaCasino in London, is scheduled to open later this year and will offersports-betting customers a different environment and service approach. UK Gambling Bill A new Gambling Bill is currently being considered by Parliament. Over the pastfour and a half years, Rank has worked closely with Government to try and ensurethat the new legislation passes the critical test of being both consistent withthe Government's policy objectives, whilst serving to stimulate a competitivemarket for the benefit of customers. While much of the Bill is uncontentious,Rank believes that, if passed without suitable amendment, those elements of theBill which affect the UK casino industry will fail this test on both counts. The process to deliver a new regulatory framework for UK gaming, which beganback in 2001 with Professor Alan Budd's "Gambling Review", has been a long anddifficult journey. We now have a situation where, despite being close toenactment, the current proposals are not acceptable to the UK casino industrybecause they will place existing casino operations at a substantial competitivedisadvantage. Rank and the rest of the industry is continuing to engage withGovernment on this very important matter and trusts that ministers willrecognise that a level playing field for all casinos is the only sensible way toensure that the UK market remains competitive, and maintains its position as oneof the world's most respected gaming markets. It is against this background that Rank and the rest of the UK gaming industryis having to plan for all possible outcomes. Despite the lack of clarityregarding the detail and timing of any new legislation, the Group intends tocontinue its strategy of improving the quality and scale of its UK gamingoperations through a programme of carefully planned investment and development. Hard Rock Hard Rock's results improved in 2004. Not only were like-for-like salespositive, the investments made in extending the brand into hotels and casinosare now starting to deliver real returns. Whilst merchandise sales remaindifficult, the core restaurant proposition is attracting more and morecustomers, profitability is improving, and this is stimulating additionalfranchise activity. Having opened eight new franchised cafes in 2004, there arealready confirmed plans to open a number of new franchised cafes in 2005: inBelo Horizonte (Brazil), Canary Islands, Caracas, and Santo Domingo. In 2004, Hard Rock's management focus has been on developing and repositioningthe brand to improve its image and marketability. This has prompted areorganisation of the management team, as well as a detailed review of thebusiness' operating assets, including sites and locations. After 20 years on the57th Street site, the Hard Rock cafe in New York is to be relocated to TimesSquare during the third quarter of 2005. In its new location, the cafe is set tobecome a New York landmark featuring a 700-seat restaurant, a 1,500 square-footretail shop, and a live music area for concerts and special events. The hotel joint venture with Sol Melia has made further progress in 2004 withthe opening of the Chicago hotel and the announcement of further hotels in NewYork and Madrid. A fourth urban hotel in San Diego is also expected to openunder franchise in 2006. Continued record occupancy and room rate at the HardRock Hotel in Orlando, and solid performances at the two Hard Rock hotels onSeminole Indian properties in Florida, are further indications of Hard Rock'strue potential as a hotel brand. The two Seminole casinos have performed in linewith expectations to date and a full year's contribution will be a further boostto performance in 2005. The US$235m licensed Hard Rock hotel/casino developmentin Biloxi, Mississippi, is on track and scheduled to open in 2005, and the Groupcontinues to explore other opportunities to license the Hard Rock brand forgaming projects both in the US and other international markets. Deluxe Film During 2004, Deluxe successfully extended two major film contracts so that itsweighted average contract life, as at 31 December 2004, was 53 months, with nomajor contract due for renewal before December 2007. The acquisition of the remaining 80% of EFILM not already controlled by theGroup was an exciting and significant development for the business, andconsolidated Deluxe Film's presence in creative services. These rapidly growingbusiness segments offer high value-added services to film directors andproducers that allow them to improve the quality of their films and associatedDVD products. With one of the most sophisticated digital laboratories in Hollywood, EFILM'smarket leading position in the digital intermediates market means that Deluxecan now offer film-makers the use of state-of-the-art digital imagingtechnologies, helping to optimise the quality and impact of their releaseprints. Increasing competition at the box office is driving film studios tocreate better motion pictures and should help to increase the demand for EFILM'sservices. In 2004, EFILM worked on 29 major films compared with 23 in 2003. Deluxe Digital Studios' compression, encoding and authoring business, nowincorporating DVCC and Softitler, which were acquired during 2004, is one of thelargest of its type in the world. Designing and creating the menus for majorfilm title DVDs, as well as compressing the film data onto a DVD and creatingmuch of the bonus material such as documentaries and interviews, is a highlyskilled and technical process. As the volume of DVD sales has continued toexpand, so has the demand for high quality services like those provided byDeluxe Digital Studios. The digital asset management business continues to broaden its product offeringand has already secured a major contract from one of Hollywood's leading studiosto archive and digitise over 58,000 pieces of content and control thedistribution of that content to third parties. Group Structure Having now completed a detailed review of the possible separation of both DeluxeFilm and Deluxe Media which was announced in September 2004, the Board hasconcluded that a sale of Deluxe Media is the preferred route to separation forthat business and is currently engaged in discussions with a number ofinterested parties. The Board is convinced of the strategic merit of separatingDeluxe Film and is working towards a solution. However, the issues involved are complex and the Board is determined to ensure that any separation will be undertaken only if it is in the best interests of shareholders. Exceptional charge The Group incurred an exceptional charge of £233.4m in the year, of which £19.0mis cash. £30.3m of the total charge was recorded in the first half and relatedto restructuring costs within Deluxe Media and a loss on the sale of RLMS. Afurther exceptional charge of £203.1m has been recorded in the second half. Thisrelates to a provision for loss on disposal of Deluxe Media totalling £181.4mincluding goodwill previously written off to reserves of £76.7m. In addition, acharge of £31.0m has been recorded within Hard Rock, relating to the relocationof the New York cafe, closure of The Vault, and the impairment of certainunderperforming assets. The tax credit on exceptional items was £9.5m. Cash Flow and Financing The Group again generated positive cash flow after interest, tax and dividends,but before acquisitions and disposals, of £36.3m (2003 - £17.1m). Following theconversion of the outstanding £65.0m convertible loan notes which were issued inconnection with the acquisition of Blue Square in 2003, net debt was £606.7m atthe year end (2003 - £700.5m) with an average cost of borrowing of 5.5% for theyear. International Financial Reporting Standards In accordance with regulations issued by the European Parliament in 2002, Rankis preparing for the adoption of International Financial Reporting Standards("IFRS") as its primary accounting basis. IFRS will apply for the first time inthe Group's annual report for the year ended 31 December 2005. As a result, theGroup's results for the six months to 30 June 2005 will be prepared under IFRSand will include a comparative table showing the results for the same period to30 June 2004. Overall, while a full assessment has yet to be completed, it is not expectedthat there will be a material impact on the reported profits of the Group as aresult of the adoption of IFRS. The Group plans to provide a further updateduring the second quarter of 2005. Board Appointment The Board is pleased to announce the appointment of David Boden to the mainBoard of Rank as an executive Director with effect from 1 March 2005. David hasbeen head of the Group's Gaming division since January 1998. Current Trading and Outlook Current trading patterns across the Group are in line with expectations.Overall, both Mecca Bingo and Grosvenor Casinos are performing broadly in linewith expectations although a lower win percentage in the provincial casinos hasoffset the return to a more historic level of profit at the Clermont. Hard Rockhas started well and like-for-like sales are ahead of last year, with Europecontinuing to perform strongly. Deluxe Film has seen reasonable volumes in thefirst few weeks of the year, while at Deluxe Media, DVD volumes have been strongbut VHS continues to decline. The future prospects for the Group will be affected by the outcome andimplementation of the proposed Gambling Bill, and the possible separation ofDeluxe. Notwithstanding these uncertainties, the Group is well placed tocontinue to make progress in 2005. As a result, we are pleased to announce a5.4% increase in the proposed final dividend to 9.8p per share, making a totaldividend for the year of 14.6p per share. Summary of Results Turnover Profit before tax* 2004 2003 2004 2003+ £m £m £m £m Gaming 937.4 865.7 114.8 113.4 Hard Rock 232.0 234.0 27.8 23.1 Deluxe 751.7 788.5 71.3 92.7 US Holidays 32.2 37.7 4.2 6.0 Central costs and other - - (13.2) (17.2) --------- ------- -------- ---------Continuing operations includingacquisitions 1,953.3 1,925.9 204.9 218.0 ========= ======= ======== ========= Net income from associates and jointventure - 0.4 Managed businesses' interest (net) (36.8) (31.3) -------- --------- Profit before tax, exceptional itemsand goodwill amortisation 168.1 187.1 Amortisation of goodwill (7.8) (6.4) -------- --------- Profit before tax and exceptionalitems 160.3 180.7 Exceptional items (243.6) (58.0) -------- ---------(Loss) profit before tax (83.3) 122.7 ======== ========= Basic earnings per share beforegoodwill amortisation and exceptionalitems 20.0p 19.2pBasic earnings per share beforeexceptional items 19.0p 18.2pBasic (loss) earnings per share (19.9)p 13.3pDividend per share 14.6p 13.9p * before goodwill amortisation and exceptional items + 2003 restated for the adoption of FRS 17 decreasing operating profit by £5.0mand profit before tax by £6.6m. Group turnover, as reported, was 1.4% ahead of 2003. This growth was influencedby a number of factors: the net effect of acquisitions and disposals made in2003 and 2004; the change to a gross profits tax regime in UK bingo which added£24.7m to reported turnover; and the effect of movements in exchange rates whichreduced turnover by £67.4m. Group operating profit before goodwill amortisation and exceptional items wasdown 6.0%, to £204.9m, largely due to a weaker performance by Deluxe. Adversecurrency movements reduced reported profit by £6.0m. After a difficult firsthalf of 2004, Gaming's full year performance was 4.6% ahead of last year (afteradjusting for the sale of RLMS) with a strong performance in the second half byGrosvenor Casinos and solid results from Mecca Bingo. At Hard Rock, operatingprofit before exceptional items was up 20.3% to £27.8m, reflecting a combinationof improved trends within owned cafes and first time contributions from a numberof new licensing agreements, including the two new Hard Rock hotel/casinos inFlorida. After a number of years of strong profit growth, Deluxe's operatingprofit before goodwill amortisation and exceptional items was down 23% to £71.3m(2003 - £92.7m). The loss of two contracts in 2003 and a reduction in the numberof major titles released by some of its film studio customers in the secondhalf, were major factors affecting performance and overall footage for the yearwas down 9%. At Deluxe Media, while overall volumes in both manufacturing anddistribution were up on last year, margins were substantially lower due to thecontinuing effect of the decline in VHS and pricing pressure in both DVDreplication and distribution. Managed businesses' interest payable before exceptional items was £5.5m higherthan last year at £36.8m. This was due to higher debt levels following theredemption of the outstanding convertible preference shares at the end of 2003. Earnings per share before goodwill amortisation and exceptional items of 20.0pwas 4.2% above last year (after exceptional items and goodwill amortisation aloss of 19.9p). The pre-exceptional effective tax rate in 2004 was 28.0% (2003 -29.7% restated for FRS 17). The Group has recorded a pre-tax exceptional charge of £243.6m, of which £19.0mis a cash cost. The charge comprises restructuring costs in Deluxe Media of£27.1m, following the loss of a major DVD manufacturing contract in the firsthalf of 2004, a provision for loss on disposal in Deluxe Media of £181.4m(including goodwill of £76.7m), a charge of £31.0m in respect of a number ofHard Rock cafes and other assets, and a £4.1m loss principally relating to thedisposal of RLMS. The following table sets out the divisional results and lossbefore tax, stated after goodwill amortisation and exceptional items: Profit before tax 2004 2003+ £m £m Gaming 112.0 104.9 Hard Rock (3.2) 23.1 Deluxe 39.2 53.0 US Holidays 4.2 6.0 Central costs and other (13.2) (26.5) --------- ---------Continuing operations including acquisitions 139.0 160.5 Net income from associates and joint ventures - 0.4 Non-operating items (185.5) 4.6 Managed businesses' interest (36.8) (42.8) --------- ---------(Loss) profit before tax (83.3) 122.7 ========= ========= + 2003 restated for FRS 17 decreasing operating profit by £5.0m and profitbefore tax by £6.6m. GAMING Turnover Operating Profit* 2004 2003 2004 2003+ £m £m £m £mMecca BingoUK# 265.3 233.1 70.5 70.7Spain 27.3 24.6 7.7 6.8 -------- -------- -------- -------- 292.6 257.7 78.2 77.5Grosvenor CasinosUK 188.4 173.7 32.1 30.1Belgium 12.4 9.6 1.7 0.3 -------- -------- -------- -------- 200.8 183.3 33.8 30.4 Blue Square* 439.6 371.9 2.9 1.9 -------- -------- -------- -------- 933.0 812.9 114.9 109.8 Goodwill amortisation (2.8) (2.5) -------- -------- -------- -------- 933.0 812.9 112.1 107.3 Rank Leisure Machine Services 4.4 52.8 (0.1) 3.6 -------- -------- -------- --------Total 937.4 865.7 112.0 110.9 -------- -------- -------- -------- * before goodwill amortisation and exceptional items+ 2003 restated for FRS 17# 2004 turnover includes £24.7m attributable to the introduction of a grossprofits tax Mecca Bingo UK Bingo statistics 2004 2003 Change (%) Admissions (000s) 20,933 21,066 -0.6Spend per head (£) 11.49 11.06 3.9 On a comparable basis (i.e. after removing the effect of the introduction of agross profits tax), turnover at Mecca UK was up 3%, despite having removed boxoffice fees which contributed £6.6m in the prior year. After a number of yearsof falling admissions in the UK, the change to a gross profits tax regime, theremoval of box office fees, and an increase in promotional spend, all combinedto deliver a 1% increase in admissions in the second half, resulting in a modestdecline of just 0.6% for the year as a whole. The change in the admissions trenddid not however affect the rate of growth in spend per head which continued torise at a consistent 4% throughout the year. After restating the prior year toreflect the adoption of FRS 17, UK operating profit was marginally below 2003 at£70.5m, reflecting the recycling of box office fees into lower margin games, anincrease in the minimum wage, and an increase in promotional spend. The split of UK revenue by activity is shown below. Analysis of UK bingo turnover 2004 2003 Change £m £m % Interval games 108.2 105.8 2.3Main stage bingo 47.0 39.4 19.3Gaming machines 60.2 57.2 5.2Food & beverage 21.5 20.9 2.9Box office - 6.6 -Other 3.7 3.2 15.6 -------- -------- -------- 240.6 233.1 3.2Gross profit tax 24.7 3.8 -------- -------- -------- 265.3 236.9 12.0 ======== ======== ======== Mecca now has 120 bingo clubs (East Ham closed in January 2005) with over 80,000cashline bingo positions, 3,754 amusement with prizes machines (AWPs) and 344jackpot machines. In addition, it has 60 electronic bingo positions andcontinues to trial a number of Section 21 gaming machines across the estate.Turnover from interval games and gaming machines were up 2% and 5% respectivelycompared with 2003. During the year four bingo clubs were relocated to new premises: Burton, Bolton,Easterhouse (Glasgow) and Ellesmere Port. The Edinburgh Palais will relocate toa new, all-electronic bingo club located at Fountain Park and new licensed clubswill open in Paisley, Crewe and Thanet in 2006. The Spanish bingo operation continued its trend of positive like-for-like salesand profit growth achieving an operating profit of £7.7m (2003 - £6.8m). A newclub at Sabadell, Catalonia, was added in December 2004, taking the total numberof clubs to 11. Grosvenor Casinos Turnover Operating Profit 2004 2003 2004 2003+ £m £m £m £mUKLondon - upper 23.4 19.0 3.8 3.4London - other 56.7 54.2 11.3 9.9Provincial 97.3 91.5 24.7 25.5Hard Rock 11.0 9.0 (0.5) (1.6)Overheads - - (7.2) (7.1) -------- ------- ------- -------- 188.4 173.7 32.1 30.1 ======== ======= ======= ======== + restated for FRS 17 Turnover at Grosvenor Casinos in the UK was up by 8% and operating profit was upby 7%. This result was achieved despite the impact of more stringentidentification rules imposed by the EU for casino guests, a huge increase in thenumber of fixed odds betting terminals ("FOBTs") in betting shops offeringroulette on the high street, and additional competition. The effect of thesedevelopments was most noticeable in the first half but had lessened by thesecond half when the business enjoyed double digit growth in turnover andoperating profit. Admissions Handle per head Win % (000s) (£) 2004 2003 2004 2003 2004 2003UKLondon - upper 58 55 2,152 1,901 18.6% 18.2%London - other 630 604 475 486 17.6% 17.3%Provincial 2,910 2,667 169 181 16.8% 16.5%Hard Rock 377 354 142 124 17.2% 17.5% London - upper: turnover at the Group's two London up-market casinos, TheClermont and The Park Tower, was up 23%, reflecting good growth in volume andhandle. However, whilst the Park Tower had an outstanding year following itsrefurbishment in 2003, an adverse movement in bad debts at The Clermont meantthat, combined, profits were only up 12%. London - other: the Group's three mid-market London casinos saw turnover up by5% and operating profit up 14%. After a challenging first six months, theVictoria, the Connoisseur and the Gloucester all enjoyed a much more prosperoussecond half: turnover was up 10% and operating profit was up 30%. This strongperformance was driven by a 9% increase in admissions and an improved winpercentage. Provincial: an unusually weak performance at the interim stage was mitigated bya substantial improvement in performance during the second half of the year. Theimpact in the first half of the new EU identification rules and increasednumbers of FOBTs were compounded by a number of new competitor openings in townsand cities where Grosvenor operates a casino. Taken together, these factorsaffected first half admissions (down 6%), handle (down 8%) and operating profit(down 16%). In contrast, the second half saw like-for-like admissions (i.e.excluding the two new casinos that opened in Stoke-on-Trent and Bolton) up by20%, handle up 8% and operating profit up 19%. The two UK Hard Rock casinos made further progress in 2004. London is nowprofitable and the two casinos taken together broke even during the second halfand delivered good growth in handle per head, up 15%, and also attendance, up6%. This bodes well for the future prospects for the brand within the Grosvenorportfolio. The introduction of live entertainment at the London casino for thefirst time has been well received and future events are being planned. In Belgium, changes in the legislation allowing the introduction of slotmachines into casinos, has had a positive impact on trading. Total revenues wereup by 29% and operating profit was up to £1.7m (2003 - £0.3m). Blue Square Turnover Gross Win 2004 2003* 2004 2003* £m £m £m £m Internet 159.9 178.5 11.7 11.1Telebet 63.7 77.3 4.8 3.9Games 216.0 134.1 9.1 8.1 ------- ------- ------- -------Total 439.6 389.9 25.6 23.1 ======= ======= ======= ======= * proforma to show Blue Square as if Rank had owned the business for the fullyear in 2003 The introduction of a new on-line Blue Square casino in August 2004 and a pokerroom in September 2004 helped to lift total stakes wagered during the year on aproforma basis by 13% to £439.6m. The new products more than compensated for adecline in internet and telebet stakes, where a reduction in the number ofhigh-roller players has improved the quality of earnings, resulting in gross winmargins above last year. Overall, gross win increased by 11% to £25.6m. Reportedoperating profit before goodwill amortisation and exceptional items increased to£2.9m (2003 - £1.9m). HARD ROCK Turnover Operating Profit* 2004 2003 2004 2003 £m £m £m £m Owned cafes 215.2 222.0 25.7 24.4Franchise and other incomeCafes 5.6 6.3 5.4 5.8Hotels and gaming 10.5 3.9 9.9 5.2Territory sales 0.7 1.8 0.7 1.8Overheads - - (13.9) (14.1) ------- ------- ------- ------- 232.0 234.0 27.8 23.1 ======= ======= ======= ======= *before exceptional items Hard Rock delivered a strong result in 2004. Reported turnover was £2.0m below2003 after an adverse currency impact of £21.0m. In constant currency, turnoverwas up by 8%. A much improved performance in the owned cafes, combined with afirst time contribution from the two Seminole hotel/casinos, resulted inoperating profit up 20% to £27.8m (2003 - £23.1m). This was achieved despite theimpact of adverse currency movements which reduced overall operating profitbefore exceptional items by £2.0m compared with 2003. Hard Rock like-for-like cafe sales % Food & Merchandise Total Beverage % % %To 31 December 2004North America 2.0 -6.2 -1.0Europe 8.1 -0.9 4.9Total 3.4 -5.0 0.4 8 weeks to 20 February 2005 4.8 -4.2 2.2 In the owned cafes, like-for-like sales for the year were driven by a strongrecovery in Europe while North America was slightly below last year. Overallfood and beverage sales were up 3.4% and merchandise sales were down 5.0%. Inthe 8 weeks to 20 February 2005 total like-for-like sales were up 2.2%. Despite the impact of adverse currency movements, profit from owned cafes was up5%, reflecting tighter cost controls and the contribution from new units. Theimprovement in profitability was particularly notable in the second half of theyear and reflects the results of a detailed review and reassessment of cafeperformance with an improved focus on margin management. Operating profit generated from cafe franchise and other income was down 7% to£5.4m, although in constant currency this was up by 6%. Hotel and gamingfranchise income contributed £9.9m in 2004 (2003 - £5.2m), reflecting anotherstrong performance by the Orlando hotel, dividends from the Group's interest inthe Universal Rank Hotel Partnership in Orlando, and fees relating to the hoteljoint venture with Sol Melia. In addition, gaming franchise income benefitedfrom the combined fees from the two Seminole hotel/casinos that opened duringthe year. Both properties are performing well and in line with expectations.Territory fees included Venezuela, Dominican Republic, Canary Islands andGothenburg. During the year new owned cafes opened in Bristol, Louisville, Destin (FL) andat Foxwoods. The cafe in Hollywood (FL) was also relocated during the yearwithin the new Seminole hotel/casino. Eight new franchised cafes opened in 2004:Catania (Italy), Buenos Aires, Dublin, Panama, Athens, Hurghada (Egypt), Kuwaitand Gothenburg. The closure of franchised cafes in Queenstown, Belfast andShanghai means that there are now 69 owned and 53 franchised cafes, operating in41 countries. DELUXE Turnover Operating Profit* 2004 2003+ 2004 2003+ £m £m £m £m Film Services 366.6 419.9 60.4 77.3Media Services 385.1 368.6 10.9 15.4 ------- ------- ------- -------- 751.7 788.5 71.3 92.7 ======= ======= ======= ======== Goodwill amortisation (5.0) (3.9) ------- -------- 66.3 88.8Associate and joint venture 0.5 0.4 ------- --------Total 66.8 89.2 ======= ======== * before exceptional items+ restated for FRS 17 and the transfer of digital services businesses fromDeluxe Media to Deluxe Film Film Services Turnover Operating Profit* 2004 2003+ 2004 2003+ £m £m £m £m Film processing and distribution 315.6 387.3 49.9 69.8Creative services 51.0 32.6 10.5 7.5 ------- ------- -------- -------- 366.6 419.9 60.4 77.3 ======= ======= ======== ======== Goodwill amortisation (3.0) (2.3) -------- --------Total 57.4 75.0 ======== ======== * before exceptional items+ restated for FRS 17 and the transfer of digital services businesses fromDeluxe Media to Deluxe Film Film processing and distribution Volumes in film processing were down 9% on 2003. This reflects the loss of theUniversal and Fox International contracts in 2003 and a reduction in the numberof major titles produced by certain studio customers. After taking account ofadverse currency movements of £18.8m, the processing and distribution businessexperienced a 14% reduction in turnover to £315.6m. With Deluxe Film processing31 major titles in 2003, 2004 had just 18 such titles including Spider-man 2,The Day After Tomorrow and I, Robot. Management believes that the lower numberof major titles seen in 2004 was temporary in nature and with a number of majortitles scheduled for this year, including XXX2, Son of the Mask and FantasticFour, it is expected that the trends in footage will return to a more normalisedpattern of growth. Operating profit was £49.9m, with currency movements havingreduced the reported figure by £4.2m. Having extended two film contracts during 2004, all of Deluxe Film's contractsare secure until at least the end of 2007, with 77% of 2004 contracted volumesecure until at least 2008. The weighted average contract life is now 53 months. Creative services Following the acquisition in August 2004 of the 80% of EFILM not already ownedand the integration of the digital services businesses, Deluxe Film is now ableto offer an end-to-end solution to its studio customers, covering a number ofkey post-production and pre-DVD mastering services. In 2004, the creativeservices business increased turnover by 56% to £51.0m and operating profit by40% to £10.5m. The results for 2004 only reflect a part year contribution fromboth DVCC and Softitler, which were acquired during 2004. Underlying growth inoperating profit, after adjusting for acquisitions, was 24%. Media Services Turnover Operating Profit* 2004 2003+ 2004 2003+ £m £m £m £m Video duplication 60.7 111.2 (0.5) (9.1)DVD/CD replication 199.0 150.6 9.2 13.0Distribution services 125.4 106.8 2.2 11.5 ------- ------- ------- -------- 385.1 368.6 10.9 15.4 ======= =======Goodwill amortisation (2.0) (1.6) ------- --------Total 8.9 13.8 ======= ======== * before exceptional items+ restated for FRS17 and the transfer of digital service businesses from Deluxe Media to Deluxe Film The demand for VHS has continued to decline with just 89m units (2003 - 160m)being produced, leading to a 45% decline in turnover and an operating loss of£0.5m. While volumes in DVD manufacturing were up by 43%, reflecting a fullyear's contribution from Disctronics, which was acquired during the second halfof 2003, margins fell as a result of the loss of a major contract and pricingpressures. While the loss of a major DVD contract, announced in May 2004, had amodest impact on operating financial performance during the year, in the absenceof any major contract wins, operating margins and profits will be much lower in2005. The continued growth in demand for DVD and the addition of a major new contractwere key factors behind the growth in revenues and volume for the distributionbusiness. Total volumes increased by 24% to 649m units (2003 - 523m units) andrevenues increased by 17% to £125.4m (2003 - £106.8m). However, increasedcompetitive pressures and larger than expected set-up costs relating to a newcustomer meant that operating profit fell to £2.2m (2003 - £11.5m). US Holidays The US Holidays business generated operating profit of £4.2m (2003 - £6.0m) andnet cash of £5.6m (2003 - £7.8m). Central costs and other 2004 2003+ £m £m Central costs (15.5) (16.0)Other 2.3 (1.2) ------- ------- (13.2) (17.2) ======= ======= + 2003 restated for FRS 17 and before exceptional items Associates and joint ventures 2004 2003 £m £m Deluxe associates and joint ventures 0.5 0.4Hard Rock Hotel joint venture (0.5) - -------- -------- - 0.4 ======== ======== Deluxe associates and joint ventures comprise the investment in Atlab and EFILMuntil the remaining 80% of EFILM was purchased in August. The equity interest inthe Hard Rock Hotel joint venture with Sol Melia produced a loss of £0.5mrelating to the New York Paramount Hotel. Managed businesses' interest* 2004 2003+ £m £m Interest payable and other charges 50.1 46.4Interest receivable (13.3) (13.0)Profit on disposal of Seminole bonds - (2.1) -------- -------- 36.8 31.3 ======== ======== Average interest rate 5.5% 5.4% * before exceptional items+ 2003 restated for FRS 17 Managed businesses' interest increased to £36.8m reflecting increased debtlevels compared to 2003, following the redemption of the £226m cumulativeredeemable preference shares which took place in December 2003. Taxation The effective tax rate, before exceptional items, is 28.0% (2003 - 29.7%restated for FRS 17). The tax rate in recent years has benefited from a numberof prior year adjustments that are not expected to recur in 2005 and beyond. Dividend A proposed final dividend of 9.8p per Ordinary share will be paid on 6 May 2005to those shareholders on the register on 8 April 2005. Exchange rates The average exchange rates used and the net translation effect of changes inaverage exchange rates between 2003 and 2004 is summarised in the table below. Average exchange rate Impact on 2004 Turnover Operating Profit 2004 2003 £m £m US dollar 1.84 1.63 (62.9) (5.5)Canadian dollar 2.40 2.32 (2.3) (0.1)Euro 1.46 1.45 (2.2) (0.4) -------- ---------- (67.4) (6.0) Gaming (0.4) (0.1)Hard Rock (21.0) (2.0)Deluxe (42.0) (3.4)US Holidays (4.0) (0.5) -------- ---------- (67.4) (6.0)Interest 2.8 ----------Net impact on profit before tax (3.2) ========== Exceptional items H1 H2 Total £m £m £mExceptional items within operating profit- Deluxe Media restructuring (27.1) - (27.1)- Hard Rock Cafe - (31.0) (31.0) --------- -------- ---------Total exceptional charge within operating (27.1) (31.0) (58.1)profit --------- -------- --------- Non-operating exceptional itemsDMS - provision for loss on disposal - (104.7) (104.7)DMS - goodwill previously written off to - (76.7) (76.7) reserves --------- -------- --------- - (181.4) (181.4) --------- -------- ---------- Loss on disposal of continuing operations (4.1) - (4.1) --------- -------- ---------Total exceptional non-operating loss (4.1) (181.4) (185.5) --------- -------- --------- Tax credit on exceptional charge 0.4 9.1 9.5Minority interest 0.5 0.2 0.7 --------- -------- ---------Total (30.3) (203.1) (233.4) ========= ======== ========= In May 2004, Deluxe Media Services was informed by a major studio that it wouldbe transferring its business to another supplier on a staged basis over theperiod to July 2005. This contract relates primarily to European DVDmanufacturing and distribution. An exceptional charge of £23.1m, comprising animpairment charge of £18.0m, onerous lease provisions of £3.8m and other costsof £1.3m, was recorded in the first half. Deluxe Media Services also incurred anexceptional charge of £4.0m in respect of the VHS restructuring announced at thetime of the 2003 year end results in February 2004. These charges relate to theclosure of VHS manufacturing facilities in Germany, Italy and Portugal. At Hard Rock, following a detailed review, it was decided to relocate a numberof key cafes, starting with New York, to close The Vault, a rock and roll museumin Orlando, and to write down a number of underperforming units. The effect ofthese actions has meant that an exceptional charge of £31.0m has been includedin the 2004 results. As set out in the Chief Executive's review, the Board has decided to separateDeluxe Media from the rest of the Group by means of a sale. As a result of thisdecision, a £104.7m provision for loss on disposal has been recorded in thesecond half of 2004. In addition, £76.7m goodwill, which had previously beenwritten off to reserves, has been charged through the profit and loss account. A £4.1m exceptional loss has also been recognised principally on the disposal ofthe RLMS business at the start of 2004. The total cash cost associated with all exceptional items is £19.0m. Cash flow 2004 2003** as restated £m £mCash inflow from operating activitiesBefore Deluxe contract advances 242.4 309.2Deluxe contract advances, net of repayments 17.8 (17.3) -------- --------- 260.2 291.9 Capital expenditure (115.6) (111.4)Fixed asset disposals 7.3 9.4 -------- ---------Operating cash flow 151.9 189.9Interest, tax and dividend payments (115.6) (172.8) -------- ---------Free cash flow 36.3 17.1 Acquisitions and investments* (74.7) (123.6)Disposals (including sale and leaseback transactions) 29.9 4.1 -------- --------- (8.5) (102.4)Issue of Blue Square convertible loan stock - 65.0 -------- ---------Cash outflow (8.5) (37.4) ======== ========= * including £65m of Blue Square debt in 2003** as restated for UITF 38 The Group generated £36.3m of cash before acquisitions and disposals but afterinterest, tax and dividends (2003 - £17.1m). This reflects a much reduced netoutflow on interest, tax and dividend payments following the redemption of the£226m cumulative redeemable preference shares, the refinancing of certainfinancial instruments and a net tax repayment of £11.9m. Operating cash flow was £38.0m lower than 2003 due to lower operating profitsand an adverse movement in working capital, largely within Deluxe Media. Capital expenditure 2004 2003 £m £m Gaming (excluding RLMS) 58.9 44.8Hard Rock 13.3 12.4Deluxe 37.4 33.7US Holidays 2.8 1.0 ------- ------- 112.4 91.9 ------- ------- RLMS * 3.2 19.5 ------- -------Total 115.6 111.4 ======= ======= *the depreciation charge associated with RLMS in 2003 was £17.8m Like-for-like capital expenditure (i.e. after adjusting for RLMS) was £20.5mhigher than 2003. This largely reflects an increase in Gaming, following theacquisition and development of new properties in Bolton and Stoke-on-Trent, aswell as the relocation of a number of bingo clubs. Acquisitions and investments 2004Acquisitions £m Gaming- Acquisition of Spanish Bingo 2.3Deluxe Film- EFILM 15.1- Softitler 7.1- DVCC 2.5Deluxe Media ServicesBuyout of Ritek minority interest 4.1 OtherDeferred consideration 19.4Settlement with Serena Holdings Limited 18.8Other items 0.3 ------- Purchase of subsidiaries (net of cash acquired) 69.6Purchase of investments- Investment in Hard Rock Hotels 5.1 -------Total 74.7Related Shares:
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