The year to 31 July 2007 was another year of significant achievement. Net revenue grew by 6% to £59.3m, which would have been 11% growth had exchange rates remained the same as the previous year. Adjusted pre-tax profit grew by 27% to over £5.6m (see note 7) and the adjusted EPS rose 33% to 7.08p (see note 11). The Group also grew EBITDA by 33% to £7.2m and this helped reduce net debt to only £68,000, from £1.4m at the previous year-end. Before the impact of acquisitions, the Group generated cash of £3.7m of which £691,000 was paid as an increased dividend to shareholders.
IFRS and new accounting policies
As an AIM Company, Next Fifteen will be adopting IFRS for its consolidated accounts for the first time in the year ending 31 July 2008. The Group’s policy under UK accounting rules requires the goodwill arising from acquisitions to be amortised over its estimated life. This resulted in an £826,000 charge against profits in the year, compared with £727,000 last year. The increase comes from the purchase of a further stake in Lexis, referred to below. When the Group adopts IFRS in 2008 there will be no annual amortisation charge for goodwill, which is why the charge is added back when calculating adjusted profit and adjusted EPS. In the year ended 31 July 2007, the Group reported under FRS 20, “Share-based payment”, which requires the fair value of share options to be calculated and charged against profits over the vesting period. The total charge for the year relating to share-based payments was £262,000 and this is a non-cash item that builds up as a balance sheet reserve.
Reorganisation costs
The reorganisation costs of £295,000 result from the decision to transfer the trade of August One Communications Limited into Text 100 Limited. This creates a stronger consumer capability in Text 100 in Europe but resulted in a small number of redundancies and the need to exit from an office building. These costs are one-off and have been excluded in the calculation of adjusted profits.
REVENUE BY REGION
PROFIT BY REGION
Geographic and client analysis
The Group has 39 offices in 18 countries and a further four licensed partners. During the last year the proportion of the Group’s net revenue outside the UK reduced to around 69%, following the purchase of a controlling interest in Lexis. North America remained the largest region, accounting for 44% of net revenue. With the UK increasing its share of revenue to 31%, the Group continues to generate 75% of its revenue in the two strongest markets for public relations services. In Europe and Africa the businesses continued to experience mixed fortunes but overall revenue increased 2% to £8.6m. The Asia Pacific region grew by 14% to £6.3m, thanks in particular to the strong results posted by our operations in China, India and Singapore.
It is also pleasing to note that the spread of the Group’s key clients has further broadened following the acquisitions of OutCast and Lexis in the last two years. The top ten clients now represent approximately 33% of the net revenue of the business, and no single client accounts for more than 8% of the total.
Margin performance
The adjusted operating profit margin of the Group rose to 9.9%, from 8.1% last year. This improvement came from better utilisation of staff resources, with staff costs falling from 69.2% of revenue to 67.4%. Excluding head office costs, the adjusted operating profit margin was 13.7%, compared with 11.9% last year. The medium-term goal is to get this figure up to 16%. The US is already operating at this level and the UK is moving towards it. There is pressure on salary levels and the key to achieving margin growth is to continue to find productivity improvements, and the Group is beginning to introduce smarter resourcing tools to help achieve this.
Cash flow
The underlying cash conversion from operating profit was strong once again, with a £6.1m increase in turnover requiring only £0.4m increase in net working capital. The two significant investment activities in the year requiring a cash payment, were a further 25% of Lexis purchased in November 2006 and a deferred-consideration payment for OutCast, in total £2.0m. Without these acquisition-related cash flows the Group would have generated £3.0m from trading and investing activities. In addition, during the year employees exercised share options which generated a further £1.0m from the Employee Share Ownership Plan, which owned these shares. These funds are now available to the Group for investment.
Balance sheet
The Group balance sheet reflects the further goodwill arising from the further 25% stake in Lexis acquired in the year. The fixed-asset investment in the Group balance sheet is the 40% stake in 463 Communications. The increase in cash balances principally reflects cash held in Lexis, which is not yet part of the Group banking arrangements, explained below. Net assets at 31 July 2007 were £18.1m, (2006: £14.7m).
Treasury, funding and exchange risk
The Group has a revolving-credit facility from Barclays Bank of £5m until March 2011, which it used to fund the purchase of Lexis, the Bite minorities and OutCast. The facility is available in a combination of Sterling, US Dollar, and Euro at an interest rate of 1.25% over LIBOR. In addition, in November 2006 the Group negotiated a new £8m three-year revolving-credit facility with Barclays Bank, to help fund any future acquisitions, at a rate of 1% over LIBOR, of which £0.5m has been used to help fund the further stake in Lexis purchased in November 2006.
Also available is an overdraft facility of £1.5m at a rate of 1.2 % over base rate, available in Sterling, US Dollar and Euro. All of the UK businesses except Lexis, are part of a composite accounting system which allows the offset of UK overdrawn and credit balances. In 2006, following the reorganisation of the US businesses, the Group agreed consolidated facilities with Wells Fargo for all its US businesses, supported by a $2m credit line for working-capital purposes. The Group aims to return any surplus cash to the UK subject to any local transfer restrictions, and as far as possible to hold only moderate non-deposit cash balances in overseas subsidiaries, subject to working-capital needs.
The Group has established treasury policies and procedures which ensure that foreign currency exposure in the major currencies is continually monitored. The majority of trade is denominated in the functional currencies of the jurisdiction in which trade is conducted. Where this is not the case the directors monitor the exposure to ensure that the foreign currency risk is not material to the Group. To protect profit-translation exposure from businesses denominated in US Dollar and Euro, the Group purchases treasury products designed to give some protection against a weakening of these currencies.
Taxation
The total tax charge for the year is £1.7m on consolidated profit before tax of £4.5m. After adjusting for goodwill amortisation costs, the underlying effective rate is 34%, 9% lower than last year. The reasons for the reduction in the tax rate are two-fold. Firstly, the increase in the Group’s shareholding in Lexis Public Relations Limited to 76% in November 2006 brought Lexis within Next Fifteen’s UK tax group for group-relief purposes, resulting in UK tax efficiencies. Secondly, tax efficiencies were generated in the US following the reorganisation of our US business in May 2006. We anticipate that having Lexis within the UK tax group for a full twelve months, together with ongoing maintenance of the US structure, will result in a further small reduction in the Group’s underlying effective-tax rate in the current year.
Earnings
Basic earnings per share, adjusted for goodwill amortisation charges, reorganisation costs, profit on sale of a non-core business and discount on deferred contingent consideration, rose 33% to 7.08p (see note 11). This growth rate was helped by the improvement to the tax charge in the year and is above the medium-term target required by the Group’s Long-Term Incentive Plan.
Dividends
The proposed final ordinary dividend per share is 1.1p, which takes the total for the year to 1.5p, compared with a total dividend of 1.365p last year. It will be paid on 1 February 2008, assuming that it is approved at the AGM on 29 January 2008. The Board continues to view its dividend policy over the medium-term and aims to strike a balance between the relevance placed on dividends by shareholders and the needs of the Company to invest for future growth.
David Dewhurst
Finance Director
13 November 2007