Interim Results
Rank Group PLC
05 September 2003
The Rank Group Plc
Interim Results for the six months ended 30 June 2003
•Earnings per share* of 7.3p (2002 - 7.6p); 3.8p after exceptionals (2002
- 6.6p)
•Profit before tax and exceptionals of £77.4m (2002 - £85.1m); £53.8m
after exceptionals (2002 - £79.4m)
•Gaming operating profit* up 14% to £55.7m (2002 - £49.0m), benefiting
from acquisitions and growth in provincial casinos
•Hard Rock operating profit of £13.3m (2002 - £14.8m) with further
progress on brand development into hotels and casinos
•Deluxe operating profit* of £26.4m (2002 - £31.4m) with a good
performance in Film and further progress in repositioning the Media business
•Net debt increased to £529.6m (2002 - £416.8m) following acquisitions and
contract advances in Deluxe
•Convertible preference shares expected to be redeemed as soon as
practicable
•Interim dividend increased by 5% to 4.6p
* before exceptional items
Commenting on the results, Mike Smith, Chief Executive, said:
'This has been a satisfactory first half for Rank. Whilst trading conditions
have shown some weakness and volatility, particularly for Hard Rock, we have
managed to deliver an acceptable result whilst continuing to position ourselves
for longer term growth.
Overall, the pattern of current trading is similar to that experienced in the
first half and the Group remains well placed to make good progress in the
balance of 2003 and beyond. The deregulation of the UK gaming industry continues
to gather momentum and we look forward to the publication of the draft
legislation in the autumn. We continue to believe that the proposed changes to
the structure of UK gaming, combined with our strong market position, will be a
major source of value creation for our shareholders.'
Enquiries:
The Rank Group Tel: 020 7706 1111
Mike Smith, Chief Executive
Ian Dyson, Finance Director
Peter Reynolds, Director of Investor Relations
Press Enquiries:
The Maitland Consultancy Tel: 020 7379 5151
Angus Maitland
Suzanne Bartch
Analyst Meeting, webcast and conference call details:
Friday 5 September 2003
There will be an analyst meeting to be held at King Edward Hall, Merrill Lynch
Financial Centre, 2 King Edward Street, London, EC1A 1HQ, starting at 9.30am.
There will be a simultaneous webcast and conference call of the meeting.
To register for the live webcast, please pre-register for access by visiting the
Group website, (www.rank.com). Details for the conference call are given below.
A copy of the webcast and slide presentation given at the meeting will be
available on the Group's web-site later today. The webcast will be available for
a period of six months.
Conference call details:
Friday 5 September 2003
9.20am Please call 0845 245 3471 (UK) or +44 (0) 1452 542 300 (international)
quoting The Rank Group
9.30 am Meeting starts
CHIEF EXECUTIVE'S REVIEW
This has been a satisfactory first half for Rank. Whilst trading conditions have
shown some weakness and volatility, particularly for Hard Rock, we have managed
to deliver an acceptable result whilst continuing to position ourselves for
longer term growth.
Gaming
Once again the Gaming Division delivered a strong performance. Bingo remains
robust and we balanced promotional costs and attendance against growing spend
per head to give an outstanding net margin performance. The results in casinos
also showed further improvement despite the partial closure of the Park Tower
for refurbishment since the beginning of the year and the expected losses in the
two new Hard Rock casinos.
Blue Square was successfully integrated with Rank's existing on-line activities
and the promised annual cost savings of £5m have been achieved.
Hard Rock
Whilst Hard Rock is still suffering from a lack of tourism in major cities,
which continues to undermine merchandise sales, there has been a steady
improvement in food and beverage results, which continue to show positive year
on year growth. This reflects a variety of sales and promotion initiatives,
partly aimed at encouraging local customers and repeat business. Just as
important, we are now seeing positive results from franchised and licensing
activities, with earnings from hotels particularly good in this half year.
Deluxe
Deluxe had mixed results. The results for Film were again strong, being
virtually the same as last year, despite absorbing the loss of the Universal
contract announced in 2002. The mitigating factor was the positive impact of the
recent investments in Image, ETS and Capital FX. The results for Media were
weaker than in the first half of 2002, partly reflecting the move from VHS to
lower margin DVD. Growth in distribution and digital services was a very
positive development.
Cashflow and financing
Operating cash flow was positive after absorbing payments for Deluxe contract
advances and capital expenditure across the Group. Acquisitions, principally
Blue Square, contributed to an increase in net debt of £130m.
The Group completed a £336m private placement in the US during May 2003,
securing long-term funding at attractive rates, and we intend to redeem all of
the outstanding convertible preference shares as soon as practicable, following
due consultation with the Group's major lenders.
Development
Development continues apace across the Group.
Within Gaming we continue to reap the benefits of both our investment in new
facilities and the deregulation measures already granted. This particularly
applies to casinos. The enlargement and refurbishment of the Park Tower casino
was completed at the beginning of July and three more casino relocations are
planned over the next six months. In UK Bingo, the club in York relocated in
April and a further four clubs will also be relocated over the next 18 months.
We anticipate further improvement in the results of our international gaming
operations. In Spain, we plan to add another site to the existing portfolio of
nine bingo clubs by the year end. Regulatory changes in Belgium now mean that
slot machines are permitted in casinos and we aim to have 100 machines operating
in our two casinos by the end of 2003.
Whilst the initial integration of Blue Square and Rank.com was completed in the
first half, the more important developments take place from October. By then,
the systems will allow genuine cross-marketing between the two customer bases
from a single customer account. This development will coincide with strong
promotional activity which will include marketing to our existing 1.8 million
casino and bingo customers.
There is still clear intent on behalf of the UK Government to introduce much
needed reform of the Gaming laws and regulations. Whilst timing, and indeed the
details of the deregulation, are still uncertain, we remain convinced that the
essence of the changes represent a substantial opportunity for the Group. The
investments already made, or planned, to improve our casino facilities, combined
with the opportunities to use bingo premises for mixed gaming and the
introduction of sports betting within the estate, all mean that we are uniquely
placed to capitalise on deregulation as it occurs.
Within Hard Rock, three restaurants have opened as we complete this year the
programme of building smaller units, principally in non-tourist locations. The
model is based on smaller footprints with more flexible customer facilities and
lower capital cost. These developments are also encouraging franchisees to seek
similar opportunities within their territories.
The stated objective of moving the Hard Rock brand into activities other than
restaurants is also bearing fruit. As already noted, results in the first half
were helped by a contribution from existing hotel operations. In the first half
of next year we will begin to gain contributions from the two Seminole Indian
Nation hotel/casino developments. The recently announced joint venture with Sol
Melia will accelerate further hotel development and a Hard Rock hotel will open
in Chicago in the New Year as part of the joint venture. We have granted a
licence for the development of a Hard Rock hotel/casino in Biloxi, Mississippi
which, subject to local licensing and financing, will open in mid-2005.
In Deluxe Film, the objective of improving geographic reach was completed last
year. In addition to the processing laboratory in Rome, during 2002 we acquired
Image in Barcelona. This gives us a strong position from which not only to
service our mainstream studio customers in Europe, but also to gain share in the
independent distribution market - an objective we have now achieved. The joint
venture with Atlab, where we are relocating and re-equipping the laboratory in
Sydney, will enable us to be proactive in Asia/Australasia.
Investment in EFILM, ETS and Capital FX has extended our services beyond film
processing and into related services.
We have completed our contract renewal programme in Film with all available
contracts now secure until at least 2005, and the vast majority until 2006 or
beyond. We announced the loss of the Universal film contract last year. We are
also assuming the loss of an additional, albeit much smaller, international
contract from the end of this year. This loss will not have a material impact on
Deluxe Film's future performance. Continued volume growth from our existing
contracts plus the benefits of independent volume, combined with other services,
means that Deluxe Film is better placed for the future than ever before.
In Deluxe Media, we have continued to invest in DVD as market growth
accelerates, particularly in North America. The venture with Ritek announced
last year, which gave us a strong North American presence, has now been
reinforced by the acquisition of Disctronics to give us strength in Europe. We
have also continued to invest in distribution and added services including
compression and authoring. Existing VHS contracts are secure and we now have
three DVD contracts. A priority is to gain additional DVD contracted volume over
the coming months.
Current trading and outlook
Overall, current trading is satisfactory and the pattern is similar to that seen
in the first half. While bingo remains robust, there is some softness in the
London casino market, but the Park Tower is achieving higher levels of both
handle and admissions since the refurbishment was completed in July. Hard Rock
food and beverage sales continue to improve but sales of merchandise remain
below last year. Deluxe Film has been strong. In Media, we anticipate the normal
seasonal increase in both DVD and VHS volumes in the second half.
We continue to believe that the development efforts made across the Group over
the past two years give cause for optimism when assessing Group prospects for
the medium and longer term.
Dividend
We are pleased to announce a 5% increase in the interim dividend, reflecting our
confidence that the Group's long-term prospects remain strong.
SUMMARY OF RESULTS
Turnover Profit before
exceptional items*
2003 2002 2003 2002
£m £m £m £m
Gaming** 422.6 239.7 55.7 49.0
Hard Rock 115.1 121.5 13.3 14.8
Deluxe 324.3 306.5 26.4 31.4
US Holidays 17.9 21.9 3.4 4.8
Central costs and other - - (7.2) (4.6)
-------- -------- -------- --------
Continuing operations including 879.9 689.6 91.6 95.4
acquisitions ======== ========
Net income from associates and 0.1 1.7
joint ventures
Managed businesses' interest (14.3) (12.0)
-------- --------
Profit before tax and 77.4 85.1
exceptional items
Exceptional items (23.6) (5.7)
-------- --------
Profit before tax 53.8 79.4
======== ========
Basic earnings per share before exceptional items 7.3p 7.6 p
Basic earnings per share 3.8p 6.6p
Dividend per share 4.6p 4.4p
* after goodwill amortisation of £2.8m (Gaming - £1.4m, Deluxe £1.4m)
**2002 turnover has been restated following the acquisition of Blue Square (see
Note 1)
Group turnover was up 28%, including the impact of Blue Square, which added
£149.4m. Turnover from continuing operations was up 6%, reflecting first time
contributions from acquisitions made in 2002 and further progress in Gaming.
These positive developments were diluted by adverse currency movements, lower
VHS volumes in Deluxe Media, and the loss of the Universal contract in Deluxe
Film.
Group operating profit was 4% below last year. The first time contributions from
acquisitions made in 2002 and continued growth in Gaming were off-set by adverse
currency movements and the anticipated decline in profits at Deluxe.
The managed businesses' interest charge was £2.3m higher than 2002 due to an
increase in average net debt reflecting acquisitions and contract advances in
Deluxe.
Group profit before tax and exceptional items was £77.4m, 9% below last year.
Earnings per share, before exceptional items, was 7.3p, 4% below last year.
The Group has recorded a net exceptional charge in the first half of £23.6m
comprising integration costs at Blue Square (£6.0m), restructuring costs in
Deluxe Media (£12.2m), a provision of £9.4m in respect of certain long-standing
legal matters in the US (previously disclosed as contingent liabilities), and a
credit of £4.0m from the release of certain disposal provisions which are no
longer required.
The following table sets out the divisional results and profit before tax after
exceptional items.
Profit before tax
2003 2002
£m £m
Gaming 49.7 49.0
Hard Rock 13.3 14.8
Deluxe 14.2 25.2
US Holidays 3.4 4.8
Central costs and other (16.6) (4.6)
-------- -------
Continuing operations including acquisitions 64.0 89.2
Net income from associates and joint ventures 0.1 1.7
Non-operating items 4.0 0.5
Managed businesses' interest (14.3) (12.0)
Profit before tax 53.8 79.4
======== =======
GAMING
Turnover Operating
Profit*
2003 2002 2003 2002
£m £m £m £m
Mecca Bingo
UK 119.2 118.5 36.7 35.3
Spain 11.7 7.8 3.1 1.8
-------- -------- -------- --------
130.9 126.3 39.8 37.1
Grosvenor Casinos
UK 84.3 75.5 15.4 14.3
Belgium 4.2 3.9 (0.1) (0.1)
-------- -------- -------- --------
88.5 79.4 15.3 14.2
Rank Leisure Machine Services 24.0 24.6 1.1 1.0
Blue Square** 179.2 9.4 (0.5) (3.3)
-------- -------- -------- --------
422.6 239.7 55.7 49.0
======== ======== ======== ========
*before exceptional items
**2002 turnover has been restated following the acquisition of Blue
Square (see Note 1)
Gaming had another good half year with operating profit up 14%. The revenue
growth trends experienced in recent years have continued, with further steady
growth at Mecca Bingo and strong growth at Grosvenor Casinos. Blue Square has
been integrated effectively and has continued to develop since its acquisition
in January 2003.
Mecca Bingo
2003 2002 Change
%
UK Bingo statistics
Admissions ('000s) 10,901 11,937 (8.7)
Spend per head (£) 10.93 9.93 10.1
Mecca UK continued to experience the well-established trend of steady revenue
growth and increased profit margin. While attendance fell, Mecca's focus on
higher yielding customers led to an increase in spend per head of 10% to £10.93.
A key factor behind this increase was the continued growth in popularity of
higher margin interval games, together with the benefit from the introduction of
over 300 jackpot machines across the estate.
The split of revenue by activity is shown below.
Analysis of UK bingo turnover 2003 2002 Change
£m £m %
Main stage bingo 19.8 19.3 2.6
Interval games 54.1 52.4 3.2
Gaming machines 28.8 28.8 -
Food, beverage & other 16.5 18.0 (8.3)
-------- -------- --------
Total 119.2 118.5 0.6
======== ======== ========
The continued change in the revenue mix towards higher margin interval games,
together with management's focus on controlling costs, resulted in a further
improvement in operating margin to 30.8% (2002 - 29.8%). The club at York was
relocated in April and is performing well and there are plans for a further four
relocations over the next 18 months at Burton, Glasgow, Ellesmere Port and West
Bromwich.
In Spain, the Group's nine bingo clubs performed well with operating profit
benefiting from a £1.0m contribution from the three clubs acquired during 2002.
Operating margins increased to 26.5% (2002 - 23.1%) and the Group continues to
look for further opportunities in this market.
Grosvenor Casinos
Turnover Operating
profit
2003 2002 2003 2002
£m £m £m £m
UK
London - upper 8.1 9.2 1.8 2.3
London - other 26.2 25.9 4.6 4.8
Provincial 45.6 40.4 13.7 11.4
Hard Rock 4.4 - (0.8) -
Overheads - - (3.9) (4.2)
-------- -------- -------- --------
84.3 75.5 15.4 14.3
======== ======== ======== ========
Grosvenor Casinos in the UK had a solid half year with overall revenues up 12%
and operating profit up 8%. The provincial casinos were very strong, but the
London market was somewhat weaker than last year and, as expected, the two Hard
Rock casinos recorded a loss of £0.8m.
Admissions Handle per head (£) Win %
('000s)
2003 2002 2003 2002 2003 2002
UK
London - upper 21 24 2,017 2,088 19.2 18.0
London - other 300 321 487 447 16.9 16.8
Provincial 1,374 1,287 182 163 15.9 16.8
At London-upper, a good performance at the Clermont was undermined by the
partial closure of the Park Tower where extensive building work to expand the
gaming space by 40% was carried out. In the few weeks since relaunch at the
beginning of July, the Park Tower has seen substantial increases in both
attendance and handle. The three London-other casinos, the Victoria, the
Gloucester and the Connoisseur, experienced lower levels of attendance in the
first half, although an increase in handle per head resulted in revenue and
operating profit being broadly in line with last year.
The provincial casinos enjoyed another excellent half, with continued strong
growth in both attendance and handle per head. Turnover increased by 13%,
despite a near one percentage point reduction in win margin, and operating
profit was up by 20%. Growth has been driven by strong performances at each of
the relocated casinos as well as from the new games introduced during 2002.
Following the relocation of the Huddersfield casino in February 2003, a further
three casinos, in Plymouth, Portsmouth and Cardiff, will be relocated over the
next six months.
The two Hard Rock Casinos, which opened during the second half of 2002, are
performing in line with our expectations and incurred a small loss in the first
half. The London casino is enjoying weekly attendance levels in excess of 4,000
and is now profitable on a monthly basis. Despite being impacted by building
work opposite its location, the Manchester casino is averaging more than 2,500
admissions per week, although a lower spend per head means that, like most
'cold' licences, it will take longer to move into profit.
Rank Leisure Machine Services
Rank Leisure Machine Services' operating profit increased to £1.1m (2002 -
£1.0m).
Blue Square
Blue Square was acquired at the end of January 2003. Since completion, the
business has now been integrated with Rank Interactive Gaming to form one
business. The £5m of annual operating synergies identified at the time of
acquisition have been realised, resulting in an associated cost of £6m which has
been treated as an exceptional item in these results.
The business has performed in line with our expectations and generated operating
profit of £0.9m before goodwill amortisation of £1.4m, compared with a reported
loss of £3.3m in 2002.
The on-line games offering will be relaunched in October 2003 as Meccagames.com,
allowing existing customers to bet and play games using a single account.
Meanwhile, HardRockCasino.com has been successfully relocated from the Isle of
Man to Alderney in the Channel Islands.
HARD ROCK
Turnover Operating
Profit
2003 2002 2003 2002
£m £m £m £m
Owned cafes 109.1 115.2 12.5 15.8
Cafe franchise and other 3.0 3.3 2.8 3.3
income
Hotel franchise and other 2.0 1.9 4.5 1.4
income
Territory sales 1.0 1.1 1.0 1.1
Advertising and promotion - - (0.4) (0.5)
Overheads - - (7.1) (6.3)
------ ------ ------ -------
115.1 121.5 13.3 14.8
======== ======== ======== ========
Further uncertainty in the international travel market during the first half
resulted in a continuation of the difficult trading conditions experienced by
Hard Rock over the last two years. This, together with adverse currency
movements of £1.1m, meant that operating profit fell to £13.3m, down 10%.
Despite a tough operating environment, the Group continues to make solid
progress in extending the brand into non-restaurant activities, principally
hotels and casinos.
Hard Rock like for like cafe sales % Food and Merchandise Total
Beverage
To 30 June 2003
North America 2.6% -10.3% -2.7%
Europe 0.1% -13.2% -5.3%
Total 2.1% -10.9% -3.2%
Nine weeks to 31 August 2003 3.5% -10.6% -2.5%
Like for like sales in the owned cafes during the first half of 2003 were down
3.2%, representing a modest improvement from the position at the time of the
trading statement in May 2003. There was continued success in increasing local
customer traffic, with like for like food and beverage sales up 2.1% in the
period. Reduced numbers of tourists however, meant that merchandise sales were
down 10.9%. During the nine weeks to 31 August these trends have improved with
food and beverage sales up by 3.5% and merchandise down by 10.6%.
Hotel franchise and other income benefited from further dividends from the
Universal Rank Hotel Partnership which continues to perform well. Territory fees
included contributions from the forthcoming Hard Rock casino development in
Biloxi, Mississippi and the cafe planned for the new Foxwoods casino in
Connecticut. Central overheads increased due to one-off redundancy costs of
£1.1m associated with the restructuring announced at the beginning of 2003.
New cafes were opened during the first six months in Cologne, Lisbon and
Choctaw, Mississippi taking the total number of owned cafes to 64, with Detroit
and Cardiff expected to open in the second half. New franchised cafes are also
expected to open in Sicily and Moscow over the coming months.
Extension of the Hard Rock brand into casino gaming and hotels has continued
apace. Both of the developments on Seminole Indian Nation reservation land in
Florida are well advanced, with Tampa already partly open, and both are on
schedule to be fully open in early summer 2004. Following the deals with the
Seminoles and Choctaws, the Group continues to seek further Indian Nation gaming
opportunities. The new cafe planned for the Foxwoods Resort Casino in
Connecticut, the largest resort casino in the world, is expected to open in
2004. Elsewhere, Hard Rock has reached agreement to license the brand for a new
casino and hotel development in Biloxi, Mississippi, where the developers of the
complex are currently seeking the necessary planning approvals and finalising
the financing arrangements for the project.
The hotel joint venture with Sol Melia, announced earlier this year, has already
identified a number of potential properties in the US and Europe to add to the
381 room Hard Rock Hotel in Chicago, which is due to open in early 2004.
DELUXE
Turnover Operating
Profit*
2003 2002 2003 2002
£m £m £m £m
Film Services 180.1 179.3 29.7 29.5
Media Services 144.2 127.2 (3.3) 1.9
-------- -------- -------- --------
324.3 306.5 26.4 31.4
======== ======== ======== ========
Associate investments / joint 0.1 0.8
ventures -------- --------
Total Deluxe contribution 26.5 32.2
======== ========
*before exceptional items
As expected at the time of the preliminary results, while acquisitions and cost
savings in Film were able to off-set the impact of the loss of the Universal
contract, the continued decline in VHS and the on-going transition towards DVD
in Media resulted in an overall decline in operating profit at Deluxe. After a
£2.2m negative impact from currency movements, operating profit in the half was
£26.4m, down 16%.
Film Services
Turnover Operating
Profit*
2003 2002 2003 2002
£m £m £m £m
Film Laboratories 168.9 179.3 25.9 29.5
Other Services 11.2 - 3.8 -
-------- -------- -------- --------
180.1 179.3 29.7 29.5
======== ======== ======== ========
*before exceptional items
Turnover from Film Laboratories (comprising laboratories in Hollywood, Toronto,
London, Rome and Barcelona) was down 6% and operating profit was down 12%,
reflecting the loss of the Universal contract and adverse currency movements,
mitigated to some extent by a first time contribution from the Image laboratory
in Barcelona. Total footage at 2.2bn feet was only slightly below last year
(2.3bn ft), with major titles such as X2: X-Men United, Anger Management and
Charlie's Angels 2. Since the half year, volumes have been very strong and the
outlook for the year remains positive with a number of major titles for the
second half including S.W.A.T., Peter Pan and Lord of the Rings - The Return of
the King.
Of the two film contracts due to expire in 2003, the larger one has been renewed
but the other, which represented 6% of total footage in 2002, is not expected to
be renewed and is due to expire before the end of 2003. The loss of this
contract is not expected to have a material impact on Deluxe Film's future
performance. All other major studio customers are now contracted until at least
2005, with all but one contracted until 2006 or beyond.
Other Services comprise the results of both ETS and Capital FX. Both businesses
have performed in line with expectations.
Media Services
The Group has made good progress in repositioning the Media Services business
for the future, by transforming it into a major player in the fast growing DVD
market. This process has accelerated since the half year with the announcement
of the acquisition of Disctronics, one of the largest independent DVD and CD
manufacturers in Europe, and the gain of a contract with Universal for 20% of
its worldwide DVD production. Whilst the reorientation of the business is now
largely complete, the transition from VHS to DVD has, as expected, resulted in
lower profits in the first half.
Turnover Operating
Profit*
2003 2002 2003 2002
£m £m £m £m
Video duplication 55.1 80.2 (3.2) 3.5
DVD replication 33.9 8.8 (5.2) (1.2)
Distribution services 44.7 36.2 2.5 -
Digital services 10.5 2.0 2.6 (0.4)
-------- -------- -------- --------
144.2 127.2 (3.3) 1.9
======== ======== ======== ========
* before exceptional items
VHS volumes declined by over 23% to 77m units, resulting in a loss of £3.2m. DVD
volumes have benefited from the Ritek acquisition in August 2002, with a total
of 48m units produced in the half (2002 - 4m). The highly seasonal nature of the
replication business and its relatively high fixed cost base (in particular
prior to the closure of the Carson facility in California), coupled with the
additional costs associated with commissioning new DVD equipment in Arkansas,
resulted in a loss of £5.2m in the half.
Distribution has continued to make good progress with Deluxe's state-of-the-art
logistics management and systems ensuring on-time delivery to the customer.
Total volumes increased by 8% and operating profit increased to £2.5m. Digital
Services benefited from the contracts secured in 2002 and from a particularly
strong performance from the compression and authoring business.
DVD replication volumes are expected to grow strongly in the second half and
into next year, reflecting continued market growth and the recent acquisition of
Disctronics. However, as stated at the time of the preliminary announcement of
results in February 2003, the decline in VHS duplication is expected to continue
and the relative margins are such that overall profit for Media Services is
expected to decline in 2003.
US Holidays
US Holidays' operating profit was £3.4m (2002 - £4.8m). The business generated
net cash of £6.9m (2002 - £8.0m).
Central costs and other
2003 2002
£m £m
Central costs* (7.3) (6.3)
Other income 0.1 1.7
-------- --------
(7.2) (4.6)
======== ========
*before exceptional items
Central costs and other increased during the first half due largely to higher
insurance costs and the reduction in other income.
Associates and joint ventures
2003 2002
£m £m
British Land - 0.9
Deluxe associate investments and joint veture 0.1 0.8
-------- --------
0.1 1.7
======== ========
Associate investments principally include the 20% interest in EFILM and the 50%
joint venture with Atlab in Australia. The contribution in 2002 included the 50%
interest in ETS which became a wholly-owned subsidiary at the year end.
Managed businesses' interest
2003 2002
£m £m
Interest payable and other charges 19.2 16.6
Interest receivable (4.9) (4.6)
-------- --------
14.3 12.0
======== ========
Average interest rate 5.1% 5.6%
Managed businesses' interest and other charges was £14.3m, an increase of £2.3m
from the prior year. This reflects higher debt levels following the acquisition
of Blue Square, the payment of deferred consideration for prior year
acquisitions, and contract advances in Deluxe.
Taxation
The effective tax rate, before exceptional items, is 30.3% (2002 - 34.1%) and
the current tax rate is 16.3% (2002 15.5%).
Dividend
An interim dividend of 4.6p per Ordinary share will be paid on 17 October 2003
to those shareholders on the register on 19 September 2003.
Exchange rates
The net translation effect of changes in average exchange rates between 2002 and
2003 was to decrease turnover by £26.5m, profit before tax and exceptional items
by £3.4m, and profit after tax (but before exceptional items) by £2.8m. The
average rates and the impact on divisional results are shown below.
Average Impact on H1 2003
exchange rate
2003 2002 Turnover Operating
profit
£m £m
US dollar 1.61 1.45 (30.3) (4.2)
Canadian dollar 2.39 2.28 (2.5) (0.1)
Euro 1.46 1.58 6.3 0.8
-------- ---------
(26.5) (3.5)
Gaming 1.2 0.2
Hard Rock (8.3) (1.1)
Deluxe (17.4) (2.2)
US Holidays (2.0) (0.4)
-------- ---------
(26.5) (3.5)
Interest 0.1
--------
Net impact on profit before tax (3.4)
=========
Exceptional items
£m
Exceptional items within operating profit
Deluxe Media Services restructuring (12.2)
Blue Square restructuring (6.0)
Legal provisions (9.4)
--------
(27.6)
Non-operating exceptional items
Release of disposal provisions 4.0
-------
(23.6)
========
Deluxe Media Services has made significant progress in repositioning its
business for the future, in particular managing the transition from VHS to DVD.
In North America, the key element of this transition involves the gradual
relocation of DVD replication capacity from California to replace existing VHS
capacity in Arkansas. This relocation programme is well underway and as a
consequence, the DVD plant in Carson, California has been closed. This gave rise
to an exceptional charge of £12.2m comprising redundancy costs of £2.3m, asset
write-offs of £6.0m and property related costs of £3.9m.
Blue Square was acquired for £65m in January 2003. The business was integrated
with Rank Interactive Gaming, generating £5m of annualised operating cost
savings. The cost of achieving these savings was £6m and this has been included
as an exceptional charge in these results. The charge includes redundancy costs
of £3.4m and asset write-offs of £2.6m.
As previously described in the contingent liabilities note to the Group
accounts, the Group has been subject to a number of legal actions in the US,
including class action suits. Since 30 June 2003, one of these actions has been
settled and progress has been made on other actions, such that the Directors are
now in a position to make a reasonable estimate of the possible liabilities
associated with these actions. Accordingly, a provision of £9.4m has been
included as an exceptional item in the results. Additional information required
to be disclosed by FRS 12 'Provisions, Contingent Liabilities and Contingent
Assets' is not disclosed on the grounds that it can be expected to prejudice the
outcome of the outstanding actions concerned.
During the course of 1999 and 2000, the Group made disposals totalling
approximately £1.4 billion. Various provisions which were made at the time of
the disposals are now no longer deemed to be necessary, resulting in a
write-back of £4.0m.
Cash flow
2003 2002
£m £m
Cash flow from operating activities
Before Deluxe contract advances 132.7 122.3
Deluxe contract advances, net of repayments (54.2) (146.8)
-------- --------
78.5 (24.5)
Capital expenditure (48.2) (51.4)
Fixed asset disposals 1.3 18.3
-------- --------
Operating cash flow 31.6 (57.6)
Acquisitions and investments* (89.7) (19.3)
Disposals - (11.9)
-------- --------
(58.1) (88.8)
Interest, tax and dividend payments (85.8) (90.7)
-------- --------
(143.9) (179.5)
Issue of Blue Square convertible loan stock 65.0 -
-------- --------
Cash outflow (78.9) (179.5)
======== ========
* including £65m of Blue Square debt
Cash inflow from operating activities, before taking account of Deluxe contract
advances, net of repayments, was £10.4m higher than 2002. This is largely due to
improvements in working capital.
The net outflow of £54.2m in respect of contract advances reflects the renewal
of a major studio film contract until 2008 and amounts associated with the new
DVD and VHS contract with Universal.
Capital expenditure was £48.2m and is analysed below:
2003 2002
£m £m
Gaming 24.1 19.9
Hard Rock 6.2 15.6
Deluxe 17.3 15.3
US Holidays 0.6 0.6
-------- --------
48.2 51.4
======== ========
Acquisitions and investments comprise:
£m
Deluxe
Ritek - deferred consideration 9.2
ETS 7.0
Other 3.3
Gaming
Spanish bingo - deferred consideration 1.6
Blue Square 64.3
Hard Rock
Hard Rock Hotel, Chicago 1.9
Investment in Rank Group shares 2.4
--------
89.7
========
The investment in The Rank Group Plc Ordinary shares was made in connection with
the Group's long term incentive plan.
Net debt
Net debt at 30 June 2003 was £529.6m compared to £416.8m last year and £399.1m
as at 31 December 2002. Exchange movements reduced net debt by £12.4m reflecting
the Group's relatively high proportion of US dollar debt. Net debt as a
percentage of shareholders' funds was 71% (30 June 2002 - 57%, 31 December 2002
- 53%).
Convertible Preference Shares
Since 30 June 2003, the Company has had the right to redeem at £1 per share,
subject to 14 days' notice being given, any or all of the outstanding 227.5m
convertible preference shares in the capital of the Company. The Company intends
to redeem all of the convertible preference shares as soon as practicable
following due consultation with the Group's major lenders and expects that the
proposed redemption will be completed before the year end. Notice of the
redemption will be given to convertible preference shareholders in accordance
with the Company's articles of association.
GROUP PROFIT AND LOSS ACCOUNT (unaudited)
2003
Before Exceptional Total
Exceptional Items
Items
£m £m £m
---------- ---------- ---------
Turnover (Note 1,2)
Continuing operations 730.1 - 730.1
Acquisitions 149.8 - 149.8
---------- ---------- ---------
879.9 - 879.9
---------- ---------- ---------
Operating profit (loss) (Note
2)
Continuing operations 91.7 (27.6) 64.1
Acquisitions (0.1) - (0.1)
---------- ---------- ---------
91.6 (27.6) 64.0
Share of operating profit in 0.3 - 0.3
associates and joint ventures ---------- ---------- ---------
91.9 (27.6) 64.3
Non-operating items (Note 3) - 4.0 4.0
Profit (loss) before interest 91.9 (23.6) 68.3
Interest:
Managed businesses (14.3) - (14.3)
Associates and joint ventures (0.2) - (0.2)
---------- ---------- ---------
(14.5) - (14.5)
Profit (loss) before tax 77.4 (23.6) 53.8
Tax (Note 4) (23.4) 0.7 (22.7)
---------- ---------- ---------
Profit (loss) after tax 54.0 (22.9) 31.1
Equity minority interests (0.1) 1.8 1.7
Preference dividends (10.5) - (10.5)
---------- ---------- ---------
Earnings (loss) 43.4 (21.1) 22.3
Basic earnings (loss) per
Ordinary share (Note 5) 7.3p (3.5)p 3.8p
Diluted earnings (loss) per
Ordinary share (Note 5) 7.3p (3.6)p 3.7p
Net dividend per Ordinary
share 4.6p
2002
(as restated)
Before Exceptional Total
Exceptional Items
Items
£m £m £m
---------- ---------- ---------
Turnover (Note 1,2)
Continuing operations 689.6 - 689.6
Acquisitions - - -
---------- ---------- ---------
689.6 - 689.6
---------- ---------- ---------
Operating profit (loss) (Note
2)
Continuing operations 95.4 (6.2) 89.2
Acquisitions - - -
---------- ---------- ---------
95.4 (6.2) 89.2
Share of operating profit in
associates and joint ventures 2.9 - 2.9
---------- ---------- ---------
98.3 (6.2) 92.1
Non-operating items (Note 3) - 0.5 0.5
--------- -------- ---------
Profit (loss) before interest 98.3 (5.7) 92.6
Interest:
Managed businesses (12.0) - (12.0)
Associates and joint ventures (1.2) - (1.2)
---------- ---------- ---------
(13.2) - (13.2)
Profit (loss) before tax 85.1 (5.7) 79.4
Tax (Note 4) (29.0) - (29.0)
---------- ---------- ---------
Profit (loss) after tax 56.1 (5.7) 50.4
Equity minority interests (1.0) - (1.0)
Preference dividends (10.5) - (10.5)
---------- ---------- ---------
Earnings (loss) 44.6 (5.7) 38.9
Basic earnings (loss) per
Ordinary share (Note 5) 7.6p (1.0)p 6.6p
Diluted earnings (loss) per
Ordinary share (Note 5) 7.5p (1.0)p 6.5p
Net dividend per Ordinary
share 4.4p
GROUP PROFIT AND LOSS ACCOUNT (unaudited)
6 months to (restated) (restated)
30.6.03 6 months to Year to
30.6.02 31.12.02
£m £m £m
Turnover (Note 1,2)
Continuing operations 730.1 689.6 1,508.5
Acquisitions 149.8 - -
--------- --------- ---------
879.9 689.6 1,508.5
--------- --------- ---------
Operating profit (loss)
(Note 2)
Continuing operations 91.7 95.4 219.6
Acquisitions (0.1) - -
--------- --------- ---------
91.6 95.4 219.6
Exceptional items within (27.6) (6.2) (6.2)
operating profit
Non-operating items (Note 4.0 0.5 5.9
3)
Share of operating profit
in associates and joint
ventures 0.3 2.9 4.8
--------- --------- ---------
Profit before interest 68.3 92.6 224.1
Interest:
Managed businesses (14.3) (12.0) (22.6)
Associates and joint (0.2) (1.2) (3.5)
ventures --------- --------- ---------
Profit before tax 53.8 79.4 198.0
--------- --------- ---------
Profit before tax and 77.4 85.1 200.3
exceptional items --------- --------- ---------
Tax (Note 4) (22.7) (29.0) (59.2)
--------- --------- ---------
Profit after tax 31.1 50.4 138.8
Equity minority interests 1.7 (1.0) (2.1)
Preference dividends (10.5) (10.5) (21.0)
--------- --------- ---------
Earnings 22.3 38.9 115.7
========= ========= =========
Earnings before exceptional 43.4 44.6 117.4
items --------- --------- ---------
Basic earnings per Ordinary 3.8p 6.6p 19.6p
share
- before exceptional items 7.3p 7.6p 19.9p
(Note 5)
Diluted earnings per 3.7p 6.5p 19.5p
Ordinary share
- before exceptional items 7.3p 7.5p 19.8p
(Note 5)
Net dividend per Ordinary 4.6p 4.4p 13.2p
share
GROUP BALANCE SHEET (unaudited)
As at 30.6.03 As at 30.6.02 As at 31.12.02
£m £m £m
Fixed assets
Intangible assets 116.0 5.4 52.3
Tangible assets 789.0 739.2 780.7
Investments 64.4 71.6 67.4
---------- ---------- ----------
969.4 816.2 900.4
---------- ---------- ----------
Current assets
Stocks 83.6 73.3 74.4
Debtors (including amounts falling 683.0 698.2 731.5
due after one year)
Investments 28.2 24.8 24.0
Cash and deposits 162.8 97.1 83.2
---------- ---------- ----------
957.6 893.4 913.1
Creditors (amounts falling due
within one year)
Loan capital and borrowings (70.8) (13.8) (38.8)
Other (351.3) (330.9) (403.5)
---------- ---------- ----------
(422.1) (344.7) (442.3)
Net current assets 535.5 548.7 470.8
---------- ---------- ----------
Total assets, less current 1,504.9 1,364.9 1,371.2
liabilities
Creditors (amounts falling due after
more than one year)
Loan capital and borrowings (649.8) (524.9) (467.5)
Other creditors and provisions (92.3) (89.6) (135.0)
---------- ---------- ----------
762.8 750.4 768.7
========== ========== ==========
Capital and reserves
Called up share capital 104.7 104.7 104.8
Share premium account 15.2 12.0 13.6
Other reserves 626.2 619.6 630.2
---------- ---------- ----------
Shareholders' funds 746.1 736.3 748.6
--------------------------- ---------- ---------- ----------
Equity interests 518.6 510.8 522.0
Non-equity interests 227.5 225.5 226.6
--------------------------- ---------- ---------- ----------
Equity minority interests 16.7 14.1 20.1
---------- ---------- ----------
762.8 750.4 768.7
========== ========== ==========
GROUP CASH FLOW (unaudited)
6 months to 6 months to Year to
30.6.03 30.6.02 31.12.02
£m £m £m
Net cash inflow/(outflow) from 78.5 (24.5) 107.3
operating activities (Note 6)
Returns on investment and servicing of
finance --------- --------- ---------
Interest (net) (7.0) (15.7) (23.1)
Dividends paid to Preference (10.5) (10.8) (20.9)
shareholders and minorities --------- --------- ---------
(17.5) (26.5) (44.0)
Tax paid (net) (16.2) (14.6) (27.1)
Capital expenditure and financial
investment --------- --------- ---------
Purchase of tangible fixed assets (48.2) (51.4) (117.9)
Purchase of investments (2.4) (7.5) (13.7)
Sale of fixed assets and assets held 1.3 18.3 34.8
for disposal --------- --------- ---------
(49.3) (40.6) (96.8)
Acquisitions and disposals
--------- --------- ---------
Purchase of businesses (23.7) (13.0) (38.7)
Net cash acquired 1.4 1.2 3.4
Sale of businesses and investments - (11.9) 5.1
Investments in associates and joint - - (8.5)
ventures --------- --------- ---------
(22.3) (23.7) (38.7)
Ordinary dividends paid (52.1) (49.6) (75.8)
-------- ------- ------
Cash outflow before use of liquid
resources and financing (78.9) (179.5) (175.1)
========= ========= =========
Movements in net debt
Cash outflow before use of liquid (78.9) (179.5) (175.1)
resources and financing
Borrowing and lease obligations - - (10.9)
acquired with subsidiaries
Issue of Ordinary share capital 1.6 3.6 5.2
Increase in finance leases (0.5) (0.4) (0.5)
Blue Square convertible loan stock (65.0) - -
Net increase in loans and borrowings - - 0.5
Gain on bond purchase - - 1.0
Foreign exchange differences 12.3 7.6 28.8
--------- --------- ---------
Increase in net debt (130.5) (168.7) (151.0)
Net debt at beginning of period (399.1) (248.1) (248.1)
--------- --------- ---------
Net debt at end of period (529.6) (416.8) (399.1)
========= ========= =========
GROUP RECOGNISED GAINS AND LOSSES
6 months to 6 months to Year to
30.6.03 30.6.02 31.12.02
£m £m £m
Profit for the financial period 32.8 49.4 136.7
Currency translation differences on (0.3) (9.3) (26.5)
foreign currency net investments
Tax on exchange adjustments offset in - - (0.5)
reserves --------- --------- ---------
Total recognised gains and losses for 32.5 40.1 109.7
period
Prior year adjustment
Deferred tax asset - FRS 19 - 144.5 144.5
--------- --------- ---------
Total recognised gains and losses since 32.5 184.6 254.2
last report ========= ========= =========
MOVEMENTS IN GROUP SHAREHOLDERS' FUNDS
6 months to 6 months to Year to
30.6.03 30.6.02 31.12.02
£m £m £m
Profit for the financial period 32.8 49.4 136.7
Dividends payable (36.6) (35.4) (97.0)
Other recognised gains and losses (net) (0.3) (9.3) (27.0)
New share capital subscribed 1.6 3.6 5.3
Goodwill realised on disposal of - - 2.6
subsidiaries
Amounts deducted in respect of shares - (0.7) (0.7)
issued to the QUEST --------- --------- ---------
Net movement in shareholders' funds (2.5) 7.6 19.9
-------- -------- ---------
Opening shareholders' funds as 748.6 584.2 584.2
previously stated
Prior year adjustment
Deferred tax asset - FRS 19 - 144.5 144.5
--------- --------- ---------
Opening shareholders' funds as 748.6 728.7 728.7
restated ========= ========= =========
Closing shareholders' funds 746.1 736.3 748.6
========= ========= =========
NOTES TO THE INTERIM FINANCIAL STATEMENTS (unaudited)
1. Accounting policies
The interim financial statements have been prepared on the basis of the
accounting policies set out in the Group's statutory financial statements for
the year ended 31 December 2002, with the exception of the change detailed
below.
The Group has amended its interactive gaming revenue recognition policy to show
gross turnover (stakes) rather than gross win, reflecting current industry
standards. The change increases turnover for the 6 months ended 30 June 2002 by
£8.7m and by £43.9m for the year ended 31 December 2002. There is no impact on
operating profit.
2. Segmental analysis by geographical area of origin
6 months to 6 months to Year to
30.6.03 30.6.02 31.12.02
£m £m £m
Turnover
United Kingdom 462.4 282.6 630.3
North America 329.5 334.6 707.6
Rest of the world 88.0 72.4 170.6
--------- --------- ---------
879.9 689.6 1,508.5
========= ========= =========
Operating profit before exceptional
items
United Kingdom 41.4 43.0 100.5
North America 38.7 45.2 98.2
Rest of the world 11.5 7.2 20.9
--------- --------- ---------
91.6 95.4 219.6
========= ========= =========
3. Non-operating items
Non-operating items comprise:
6 months to 6 months to Year to
30.6.03 30.6.02 31.12.02
£m £m £m
Non-operating items:
Profit on disposal of discontinued 4.0 - -
operations
Profit (loss) (including provision for - 1.5 (0.8)
loss) on disposal of continuing operations
Net loss on disposal of fixed assets in - (1.0) (1.0)
joint ventures - discontinued
Profit on disposal of interest in - - 7.7
discontinued joint venture
--------- --------- ---------
Non-operating items before interest and 4.0 0.5 5.9
tax ========= ========= =========
4. Tax charge
The tax charge may be analysed as follows:
6 months to 6 months to Year to
30.6.03 30.6.02 31.12.02
£m £m £m
Rank subsidiaries 23.3 28.3 58.4
Associates and joint ventures 0.1 0.7 1.4
--------- --------- ---------
23.4 29.0 59.8
Exceptional tax credit (0.7) - (0.6)
========= ========= =========
Taxation has been provided at an estimated effective rate of 30.3% (2002 34.1%),
before exceptional items.
5. Weighted average number of shares
The weighted average number of shares used in the calculation of basic earnings
per share is 592.4m (2002 first half: 590.3m, full year: 589.2m). For diluted
earnings per share the weighted average number of shares used in the calculation
is 595.3m (2002 first half: 593.9m, full year: 592.4m)
6. Reconciliation of operating profit to cash flow
6 months to 6 months to Year to
30.6.03 30.6.02 31.12.02
£m £m £m
Operating profit 64.0 89.2 213.4
Exceptional operating costs charged 27.6 6.2 6.2
Cash payments in respect of exceptional (12.7) (9.3) (15.8)
costs and provisions
Depreciation and amortisation 45.0 38.3 80.6
Contract advance payments, net of (54.2) (146.8) (135.0)
repayments
Decrease/(increase) in working 4.8 (1.5) (38.1)
capital
Other items 4.0 (0.6) (4.0)
-------- ------- --------
Net cash inflow/(outflow) from 78.5 (24.5) 107.3
operating activities
========= ========= =========
7. Exchange rates
The US$/£ exchange rates for the relevant accounting periods are:
US$/£
6 months to 6 months to Year to
30.6.03 30.6.02 31.12.02
£m £m £m
Average 1.61 1.45 1.51
Period-end 1.66 1.52 1.61
Independent review report to The Rank Group Plc
Introduction
We have been instructed by the Company to review the financial information which
comprises the profit and loss account, the balance sheet, the cash flow
statement, the statement of recognised gains and losses, the statement of
movements in shareholders' funds and the related notes. We have read the other
information contained in the interim report and considered whether it contains
any apparent misstatements or material inconsistencies with the financial
information.
Directors' responsibilities
The interim report, including the financial information contained therein, is
the responsibility of, and has been approved by, the Directors. The Directors
are responsible for preparing the interim report in accordance with the Listing
Rules of the Financial Services Authority which require that the accounting
policies and presentation applied to the interim figures should be consistent
with those applied in preparing the preceding annual accounts except where any
changes, and the reasons for them, are disclosed.
Review work performed
We conducted our review in accordance with guidance contained in Bulletin 1999/4
issued by the Auditing Practices Board for use in the United Kingdom. A review
consists principally of making enquiries of group management and applying
analytical procedures to the financial information and underlying financial data
and, based thereon, assessing whether the accounting policies and presentation
have been consistently applied unless otherwise disclosed. A review excludes
audit procedures such as tests of controls and verification of assets,
liabilities and transactions. It is substantially less in scope than an audit
performed in accordance with United Kingdom Auditing Standards and therefore
provides a lower level of assurance than an audit. Accordingly we do not express
an audit opinion on the financial information. This report, including the
conclusion, has been prepared for, and only for, the Company for the purpose of
the Listing Rules of the Financial Services Authority and for no other purpose.
We do not, in producing this report, accept or assume responsibility for any
other purpose or to any other person to whom this report is shown or into whose
hands it may come save where expressly agreed by our prior consent in writing.
Review conclusion
On the basis of our review we are not aware of any material modifications that
should be made to the financial information as presented for the six months
ended 30 June 2003.
PricewaterhouseCoopers LLP
Chartered Accountants
London
5 September 2003
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