Final Results

9th Jul 2008 07:00



9 July 2008  

AIR MUSIC & MEDIA GROUP PLC

("AIR GROUP" or "THE GROUP")

RESULTS FOR THE YEAR

ENDED 31 MARCH 2008

The Board of Air Group, the UK distributor of home entertainment products, announces its final results for the year ended 31 March 2008.  The results continue to reflect significant underlying profitability and cash generation throughout the Group

HIGHLIGHTS:

Turnover up 31.5% to £80.9 million (2007: £61.5 million);

PBT before exceptional items increased to £5.7 million (2007: £5.4 million);

£2.9 million of borrowings repaid and cash balances of £1.7 million at 31 March 2008;

New customers at Music Box Leisure deliver £8.3 million sales; and

EPS, before exceptional items of 24.9 pence per share. 

Peter Cowgill, Non-Executive Chairman of Air Group, said: "When I took over as Chairman in 2006 I stated that I was confident that the management team could deliver profitable growth of the Group. I am delighted to report a set of results that demonstrate the growth and sustained underlying profitability of the Group.

"We began the year with clarity over the focus of the Group, having completed the divestment of unprofitable and underperforming business units in 2007. The underperforming businesses were, for the most part, inherited by the current Board. Our distribution business strengthened its market position in the UK commencing supply to several new customers this year and, against a challenging market backdrop, I look forward to continuing with the progress achieved to date.

"We have changed our financial statements to reporting under International Financial Reporting Standards and, as part of our annual review, have reduced the carrying value of goodwill. Due to the size and nature of the reduction, this amount has been reflected as an exceptional item. The write down has no impact on the cash position of the Group."

  

Enquiries:

Air Music & Media Group plc  Tel: 0161 767 1620

Peter Cowgill, Non-Executive Chairman

Bishopsgate Communications Ltd. Tel: 020 7562 3350

Maxine Barnes

Siobhra Murphy

Seymour Pierce Limited Tel: 020 7107 8000

Mark Percy   CHAIRMAN'S STATEMENT 

When I took over as Chairman in 2006 I stated that I was confident that the management team could deliver profitable growth of the Group. I am delighted to report a set of results that demonstrate the growth and sustained underlying profitability of the Group.

We began the year with clarity over the focus of the Group, having completed the divestment of unprofitable and underperforming business units in 2007. The underperforming businesses were, for the most part, inherited by the current Board. Our distribution business strengthened its market position in the UK commencing supply to several new customers this year and, against a challenging market backdrop, I look forward to continuing with the progress achieved to date.

We have changed our financial statements to reporting under International Financial Reporting Standards and, as part of our annual impairment review, have reduced the carrying value of goodwill. Due to the size and nature of the reduction, this amount has been reflected as an exceptional item. The write down has no impact on the cash position of the Group.

Summary of results

In order to present a balanced view of the current year results it is important to recognise the impact of exceptional and non-recurring charges on the results. These consisted of goodwill impairment charges of £12.4 million (2007: £2.2 million) and accelerated amortisation of other intangible assets of £nil (2007: £1.7 million). The table below illustrates the impact of the exceptional and non-recurring charges

	31/03/2008	31/03/2007
	£ million	£ million
	Continuing	Continuing
	activities	activities
Turnover	80.9	61.5
Reported operating (loss)/profit	(6.5)	1.9
Adjustments:
Goodwill impairment charge	12.4	2.2
Accelerated amortisation of other intangible assets	-	1.7
Adjusted operating profit	5.9	5.8
Net interest	(0.2)	(0.4)
Reported (loss)/ profit before tax	(6.7)	1.5
Adjusted profit before tax	5.7	5.4
Basic EPS (pence)	(47.5)p	(8.5)p
Exceptional and non-recurring charges (pence)	72.4p	31.0p
Adjusted basic EPS (pence)	24.9p	22.5p

Adjusted operating profit increased to £5.9 million (2007: £5.8 million). Operating profit decreased by £8.4 million due to the impairment of goodwill.

 

Basic earnings per share was (47.5) pence compared to (8.5) pence in 2007. Adjusted basic earnings per share before exceptional items was 24.9 pence per share compared to 22.5 pence per share in 2007.

Revenue from continuing operations was £80.9 million compared to £61.5 million in 2007. This represents an increase of 31.5%. Sales in our distribution business grew by 49.3% from £48.5 million to £72.4 million while sales in our wholesale business fell by 36.4% from £12.9 million to £8.2 million. The growth in our distribution business, which is heavily weighted towards the supermarket sector, reflected strong performance in the sales of DVD's in addition to the achievement of several new customers. The contraction of our wholesale business continued as the remaining retailers in the music and film specialist sector continued to experience sales and margin pressure arising from the competitive efforts of supermarkets.

Gross margins for the Group fell to 18.1% compared to 18.7% in 2007 (21.5% after adjusting from the accelerated amortisation of other intangible assets). Gross margins have been negatively impacted by the lowering of retail price points and a change in mix to higher value, lower margin products.

Overheads continue to grow in line with the higher activity levels.

Shareholder value and dividends

As a result of its sustained underlying profitability, the Group has continued to generate significant cash. However, the cumulative exceptional charges associated with goodwill balances leave the Group with a significant deficit in distributable reserves which, if left unaddressed will inhibit the ability to pay dividends in the future. In order to rectify this anomaly, the Board is investigating ways in which the Group may be able to distribute cash to its shareholders. The Group expects to announce a proposal to restructure its share premium account and thereby position the Group with distributable reserves in due course. Should the measures the Directors are considering be successful, the Board will seek to embark on a progressive dividend policy.

Directorate

After close to six years working with the Company, Alex Sorrell, Group Financial Director, has indicated his intention to take time out of the business to travel and pursue non work related interests. We would like to thank Alex for his contribution to the development of the business during his period of tenure and we also wish him well on his travels. Alex will leave the Board with immediate effect.

It is intended that Lisa Clarke, the present Group Financial Controller who has been with the Group since August 2006, will be appointed to Group Finance Director shortly and is currently acting as Group Finance Director Designate.

Current trading and outlook

We have made a good start to the financial year and continue to strengthen our position in the markets in which we operate, despite difficult trading conditions in the retail sector in general, while margins remain at a similar level to last year. The economic climate continues to challenge us but we are optimistic that we will be in a position to report a good result for the interim period.

 

Post year end event

On 28 February 2008 the Company announced that it was in discussions which may or may not lead to an offer being made for the Company. On 24 June 2008 the Company announced that talks regarding a possible offer for the Company have been discontinued.

Peter Cowgill

Non-Executive Chairman 

9 July 2008  OPERATING REVIEW

Distribution

Music Box Leisure ("MBL")

MBL is central to the Group. MBL's customers are exclusively in what the industry terms the "non traditional" sector, for example supermarkets, discount retailers, motorway service stations and garden centres, rather than conventional high street CD and DVD shops. The emphasis with customers is about delivering strong sales and margins through targeted promotions. MBL has its own in-house merchandising team which allows it to directly manage the quality of its customers' in-store operations. It combines its customers' sales data with strong buying skills to deliver good retail margins. The key focus of the year was to successfully integrate new customers into our existing business model and to strengthen our employee base in order to manage current growth. Sales at MBL grew by 49.3% from £48.5 million to £72.4 million. Of this growth, £8.3 million was attributed to new customers. The customer base in MBL remains heavily weighted towards the supermarket sector, which the management team believes offers good short to medium term prospects. MBL continues to be affected by the credit insurance industry's lack of confidence in the sector. Credit limits from some of our key suppliers have been significantly reduced and we have secured product supply through discretionary uninsured trading limits supported by substantial advance payments on account.

Wholesale

ESD Wholesale ("ESD")

ESD is a wholesaler primarily to independent and internet retailers. The independent retail sector continues to experience a difficult time. As a supplier, ESD has experienced the problems associated with the credit insurers' views on the market which have resulted in reduced insurance cover available on customers. We operate on a low risk basis and seek to trade within insured limits. We had another year of significant bad debts and associated insurance claims, which has had a negative impact on our credit cover and insurance premiums for the coming year. Accordingly we continue to refuse certain sales opportunities due to lack of insurance cover. Early in the year we integrated the remaining profitable elements of our own label budget CD operation into ESD, comprising largely an export customer base. Overall sales in our wholesale business declined from £12.9 million to £8.2 million, the majority of the decline attributed to the fall in own label budget CD's primarily aimed at export markets. The focus in ESD has been to maintain profitability in the face of a declining domestic market. We have a small but very experienced team running ESD and it remains a low overhead operation that contributes incremental profit to the Group.

Strategy and Risks

The Group's customer base is heavily weighted in the UK supermarket sector, which accounts for approximately 80% of Group turnover. The added value we provide to customers in the non traditional retail sector is our key point of difference compared to our competitors and consequently we achieve our best results by targeting this sector. Our customers are retailers for whom profit margins, as a whole, are continually under pressure and this pressure is in turn placed on the suppliers. We use our buying skills to seek out profitable opportunities to mitigate the pressure on margins. Our buying strategy requires us to maintain a high stock level, although this is spread across a broad range of titles which mitigates the financial risk of specific product obsolescence. We seek to maintain a ready access to finance in order that we may take advantage of inventory buying opportunities when they present themselves.

The pervasive effects of the internet inevitably present risks and offer opportunities to the Group. Music represents less than 15% of our sales and because we are focussed on mainstream product, not new chart releases, we do not feel the effects of music downloading as acutely as other distributors. The market for on-demand movie downloading remains in its infancy and has yet to have any discernible impact on our business. However, as a Board we are conscious that the market for distribution of media by physical product has a finite life and we continue to explore opportunities to enhance the long term future of the Group. We remain focussed on providing our customers with exciting impulse purchase opportunities for the end customer. We continue to build our experience of distributing products direct to customers on-line, which have included selling via established third party websites. Although direct to customer sales currently represents a small minority of total sales, we are pleased to note that we processed over 85,000 orders directly with customers last year and we would expect that to grow further this year.

Trevor Allan

Chief Executive

9 July 2008  FINANCIAL REVIEW

International Financial Reporting Standards (IFRS)

These are our first full year results following the adoption of International Financial Reporting Standards (IFRS) as adopted in the EU and consequently includes reconciliations from UK GAAP to IFRS. As shown in the reconciliation, the primary impacts of the transition to IFRS have been our treatment of goodwill, which is no longer subject to an annual amortisation and our disclosure of discontinued operations, which are presented on a disaggregated basis. As a consequence of the annual review of impairment, an impairment charge of £12.4 million has been charged and is classified as an exceptional write down of goodwill.

Turnover and profitability

Sales for the year were £80.9 million (2007: £61.5 million). Operating profit, before exceptional items, was £5,889,000 (2007: £5,755,000, before exceptional and non recurring charges). Net financing costs were £166,000 (2007: £425,000). Profit before tax and exceptional items was £5,723,000 (2007: £5,330,000, before exceptional and non recurring charges). Earnings per share from continuing operations, before exceptional items, for the year was 24.9 pence per share (2007: 22.5 pence per share, before exceptional and non recurring charges).

A summary of the sales and operating profit of the Group is shown in the table below. Adjusted operating profit excludes the exceptional and non-recurring charges totalling £12.4 million in 2008 and £3.9 million in 2007:

	31-Mar	31-Mar		31-Mar	31-Mar	31-Mar	31-Mar
	2008	2007		2008	2008	2007	2007	2008 adjusted
	Sales	Sales		Operating profit/ (loss)	Operating profit	Operating profit	Operating profit	versus
				reported	adjusted	reported	adjusted	2007 adjusted
Activity	£ million	£ million	Change	£ '000	£ '000	£'000	£'000	%
Distribution	72.4	48.5	49.3%	5,976	5,976	6,430	6,430	(7.1)%
Wholesale	8.2	12.9	(36.4)%	459	459	(215)	(215)	(313.5)%
Other	0.3	0.1	200.0%	87	87	(1,730)	(60)	(245.0)%
Central costs				(13,056)	(633)	(2,537)	(400)	(58.3)%
	80.9	61.5	31.5%	(6,534)	(5,889)	1,948	5,755	2.3%

Sales in our distribution business grew by 49.3% to £72.4 million. The growth in our distribution business, which is heavily weighted towards the supermarket sector, reflected strong performance in the sales of DVD's in addition to the introduction of several new customers. DVD sales represent approximately 78% of distribution sales in 2008 (versus 67% sales in 2007). Sales to new customers totalled £8.3 million in 2008. Sales in our wholesale business fell by 36.4% to £8.2 million. Export sales fell by approximately £2.1 million reflecting the effects of a weak pound against the euro and an overall decline in the low priced music sector. The contraction of our domestic wholesale business continued as the remaining retailers in the music and film specialist sector continued to experience sales and margin pressure arising from the competitive efforts of supermarkets.

Gross margins for the Group fell to 18.1% compared to 18.7% in 2007 (21.5% after adjusting from the accelerated amortisation of other intangible assets). Excluding intercompany trading, gross margins at our distribution business were 18.2% (2007: 23.4%). Gross margins in our distribution business have been negatively impacted by the lowering of retail price points and a change in mix to higher value, lower margin products. Gross margins at our wholesale business were 14.5% (2007: 13.4%), reflecting a change in product mix. 

Operating profit from continuing operations, before exceptional items, was £5.9 million compared to £5.8 million before exceptional and non-recurring charges in 2007.

Cash flow, working capital and borrowing facilities

The Group generated £6.0 million cash from operations before movements in working capital (2007: £5.6 million). Working capital increased by £2.3 million, largely reflecting higher inventory balances and lower trade and related payables. Early in the second half of the year the distribution business noted that supplier credit insurance limits were cut significantly, which had a significant impact on the working capital position of the Group. The distribution business was forced to make advance payments in order to secure product supply; wherever possible negotiating early payment discounts. This position has continued throughout the second half and into the current trading period. Consequently our level of trade payables is not as high as our trading position and current stock position would indicate. The distribution business works closely with the principal credit insurers however our suppliers remain largely unable to obtain adequate credit insurance cover.

The Group repaid £2.9 million of borrowings in the year and ended the year with net cash of £1.7 million and no outstanding borrowings (2007: cash of £2.9 million and borrowings of £2.9 million). Due to its positive cash position, the distribution business has delayed the renewal of its sales finance facility. Although reinstatement of the facility will require credit approval from the Group's bankers, the distribution business has received confirmation from the bank that they do not anticipate that the facility will not be credit approved.

Taxation

The exceptional write-off of goodwill is not deductible for tax. The group's effective tax rate before goodwill write-offs was 25.4% compared to 26.4% in 2007. The 2008 tax charge benefitted from the adjustments in respect of prior years following the resolution of several outstanding matters. The 2007 tax charge benefitted from tax relief on losses from discontinued operations. Under existing tax legislation it is anticipated that the Group's effective tax rate will be marginally above the main UK Corporation Tax rate in future years.

Lisa Clarke

Group Financial Director Designate

9 July 2008  Consolidated Income Statement

for year ended 31 March 2008

	2008	2008	2007	2007
	£000	£000	£000	£000
Revenue		80,853		61,507
Cost of sales - normal	(66,188)		(48,303)
Cost of sales - exceptional: accelerated amortisation of intangibles	-		(1,670)
	________		________
Cost of sales		(66,188)		(49,973)
		________		________
Gross profit		14,665		11,534
Distribution expenses		(1,371)		(1,467)
Administrative expenses - normal	(7,405)		(5,982)
Administrative expenses - exceptional: goodwill impairment	(12,423)		(2,137)
	________		________
Administrative expenses		(19,828)		(8,119)
		________		________
Operating (loss)/ profit		(6,534)		1,948
Operating profit before exceptional items		5,889		5,755
Exceptional items		(12,423)		(3,807)
		(6,534)		1,948
Financial income		86		53
Financial expenses		(252)		(478)
		________		________
Net financing costs		(166)		(425)
		________		________
(Loss)/ profit before tax		(6,700)		1,523
Profit before tax before exceptional items		5,723		5,330
Exceptional items		(12,423)		(3,807)
		(6,700)		1,523
Taxation		(1,454)		(967)
		________		________
(Loss)/ profit from continuing operations		(8,154)		556
Loss from discontinued operations, net of tax		-		(2,010)
		________		________
Loss for the year attributable to equity holders of the parent		(8,154)		(1,454)
		________		________
Basic and diluted loss per share		(47.5)p		(8.5)p

  Consolidated Balance Sheet

at 31 March 2008

	2008	2007
	£000	£000
Non-current assets
Property, plant and equipment	502	326
Intangible assets	17,000	29,423
Deferred tax assets	435	212
	_____	_____
	17,937	29,961
	_____	_____
Current assets
Stocks	9,319	6,650
Trade and other receivables	5,563	6,803
Cash and cash equivalents	1,731	2,269
Assets classified as held for sale	-	1,168
	_____	_____
	16,613	16,890
	_____	_____
Total assets	34,550	46,851
	________	________
Current liabilities
Bank overdraft	12	-
Interest-bearing loans and borrowings	1	2,717
Trade and other payables	9,227	10,300
Tax payable	1,392	1,101
Liabilities classified as held for sale	-	521
	_____	_____
	10,632	14,639
	_____	_____
Non-current liabilities
Interest-bearing loans and borrowings	3	147
	_____	_____
Total liabilities	10,635	14,786
	________	________
Net assets	23,915	32,065
	________	________
Equity attributable to equity holders of the parent
Share capital	12,872	12,872
Share premium	21,454	21,454
Reserves	(2,800)	(2,800)
Retained earnings	(7,611)	539
	_____	_____
Total equity	23,915	32,065
	________	________

  Consolidated Cash Flow Statements 

for year ended 31 March 2008

	2008	2007
	£000	£000
Cash flows from operating activities
(Loss)/ profit for the year - continuing operations	(8,154)	556
Loss for the year - discontinued operations	-	(2,010)
	_	_
	(8,154)	(1,454)
Adjustments for:
Depreciation	167	193
Impairment of goodwill - continuing operations	12,423	2,137
Impairment of goodwill - discontinued operations	-	660
Amortisation of intangibles	-	250
Accelerated amortisation of intangibles	-	1,670
Foreign exchange (gains)/ losses	(29)	38
Financial income	(88)	(69)
Financial expense	252	478
Loss on sale of property, plant and equipment	-	248
Taxation	1,454	1,486
	_	_
	6,025	5,637
Decrease in trade and other receivables	1,399	3,765
(Increase)/ decrease in stock	(2,668)	1,110
Decrease in trade and other payables	(1,075)	(1,825)
Decrease in provisions	-	(226)
	_	_
	3,681	8,461
Tax paid	(1,386)	(1,349)
	_	_
Net cash from operating activities	2,295	7,112
	_	_
Cash flows from investing activities
Proceeds from sale of property, plant and equipment	-	29
Proceeds from sales of subsidiary	72	-
Interest received	89	69
Cash and cash equivalents disposed of with subsidiary	(146)	(36)
Acquisition of property, plant and equipment	(340)	(274)
Acquisition of other intangible assets	-	(1)
	_	_
Net cash from investing activities	(325)	(213)
	_	_
Cash flows from financing activities
Interest paid	(252)	(450)
Repayment of borrowings	(2,860)	(5,744)
Payment of finance lease liabilities	(1)	(11)
	_	_
Net cash from financing activities	(3,113)	(6,205)
	_	_
Net (decrease)/ increase in cash and cash equivalents	(1,143)	694
Cash and cash equivalents at 1 January	2,862	2,205
Effect of exchange rate fluctuations on cash held	-	(37)
	_	_
Cash and cash equivalents held in continuing operations	1,719	2,862
Cash and cash equivalents held in disposal group	-	(593)
	_	_
Cash and cash equivalents at 31 March	1,719	2,269
	_	_

  

Notes to the Financial Statements

For the year ended 31 March 2008

1. Source of Information

The preliminary financial statements for the financial year ended 31 March 2008 were approved by the Board of Directors on 9 July 2008. The financial information set out above does not constitute the Company's statutory accounts for the financial years ended 31 March 2007 or 31 March 2008 but is derived from those accounts. From 1 April 2007, Air Group is required to prepare its consolidated financial statements in accordance with adopted International Financial Reporting Standards (IFRS) as adopted by the European Union ('adopted IFRS').

The comparative figures for the financial year ended 31 March 2007 are not the Company's statutory accounts for that financial year. Those accounts, which were prepared under UK GAAP, have been reported on by the Company's auditors and delivered to the registrar of companies. The report of the auditors was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 237(2) or (3) of the Companies Act 1985. The statutory accounts for the financial year ended 31 March 2008 will be delivered to the Registrar of Companies following the Company's Annual General Meeting. We anticipate that the auditor's report in relation to the 2008 statutory accounts will be (i) unqualified and (ii) will not contain statements under section 237(2) or (3) of the Companies Act 1985.

  

2. Segmental analysis

Income Statement	Continuing operations						Total
	Distribution		Wholesale		Other
	2008	2007	2008	2007	2008	2007	2008	2007
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Revenue from external customers	72,364	48,491	8,201	12,879	288	137	80,853	61,507
Inter-segment revenue	7,140	10,306	488	1,745	989	672	8,617	12,723
Total revenue	79,504	58,797	8,689	14,624	1,277	809	89,470	74,230
Segment result	5,976	6,430	459	(215)	87	(1,730)	6,522	4,485
Impairment of goodwill	(12,423)					(2,137)	(12,423)	(2,137)
Central costs							(633)	(400)
Operating (loss)/ profit							(6,534)	1,948
Net financing costs							(166)	(425)
Taxation							(1,454)	(967)
Discontinued operations							-	(2,010)
Loss for the period							(8,154)	(1,454)
Segment assets	16,120	14,715	1,317	2,107	113	(562)	17,550	16,260
Assets held for disposal							-	1,168
Goodwill	17,000	29,423					17,000	29,423
Total assets	33,120	44,138					34,550	46,851
Segment liabilities	9,285	9,669	961	572	389	3,522	10,635	13,763
Liabilities held for disposal							-	521
Unallocated liabilities							-	502
Total liabilities							10,635	14,786

3. Exceptional item

	2008	2007
	£000	£000
Impairment of goodwill	12,423	2,137
Accelerated amortisation of other intangible assets	-	1,670
	_______	_______
	12,423	3,807
	_______	_______

  

4. Goodwill

The carrying value of goodwill is allocated to the following cash generating units ("CGU"s):

	2008	2007
	£000	£000
Distribution	17,000	29,423
Wholesale	-	-
Other	-	-
	________	________
	17,000	29,423
	________	________

5. Earnings Per Share

The calculation of basic earnings per share has been calculated on the loss after tax of £8,154,000 (2007: loss £1,454,000) and the weighted average number of ordinary shares in issue during the year of 17,162,735 75p shares (2007: 17,162,735 75p shares).

The calculation for diluted earnings per share is identical to that used for the basic earnings per share.

The prior year adjusted earnings per share, as disclosed below, was calculated using the profits after tax for the financial year having added back exceptional items (after adjusting for the effect of tax) and goodwill amortisation charge over the basic and diluted weighted average share in issue during the year.

	2008	2007
	£000	£000
Loss after taxation	(8,154)	(1,454)
Accelerated intangible amortisation	12,423	1,670
Goodwill amortisation	-	2,137
Taxation on exceptionals	-	(501)
		_
Profit for adjusted calculation	4,269	1,852
Loss from discontinued operations	-	2,010
		_
Profit attributable to shareholders from continuing operations	4,269	3,862
	_	_
Basic and diluted loss per share	(47.5)p	(8.5)p
Basic and diluted loss per share from discontinued operations	-	11.7p
Basic and diluted loss per share from continuing operations	(47.5)p	3.2p
Basic and diluted adjusted earnings per share	24.9p	10.8p
Basic and diluted loss per share from discontinued operations	-	11.7p
Basic and diluted adjusted earnings per share from continuing operations	24.9p	22.5p
	_	_

6. Annual report

The Annual Report will be posted to shareholders in late August. Copies of the Annual Report will be available from the Air Music and Media Group plc, Unit 9 Enterprise Court, Lancashire Enterprise Business Park, Centurion Way, Leyland, PR26 6TZ.

FR RPMATMMBMBRP

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