WORLD TELEVISION
DMGT
Half Year Results Presentation 21st May 2015
DMGT - Half Year Results Presentation - 21st May 2015
DMGT
Martin Morgan, Chief Executive
Stephen Daintith, Finance Director
QUESTIONS FROM
William Packer, Exane BNP Paribas
Gareth Davies, Numis
Steve Liechti, Investec
Nick Dempsey, Barclays Capital
Alex DeGroote, Peel Hunt
Ian Whittaker, Liberum Capital
Patrick Wellington, Morgan Stanley
Chris Collett, Deutsche Bank
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DMGT - Half Year Results Presentation - 21st May 2015
Introduction
Martin Morgan, Chief Executive Well good morning everybody it’s a pleasure to see you here and welcome you back to this marvellous hall. I hope you will find the presentation as equally enjoyable as the surroundings. So this is our presentation on the half year results up to the period to March the 31st.
And this morning we have a simple agenda, I will touch on the highlights of the results following which Stephen Daintith our Finance Director will take you through the details and I’ll return to give you a brief update of what’s going on in the operating companies and then of course we’ll have Q&A.
So as to the highlights. Group underlying revenue was up 1% with underlying operating profit down 7% and we came in at an operating margin of 16%. Adjusted operating profit before tax was down 4% but EPS was up 7%. And the interim dividend was 6.5p up 5%.
We continued to be an active manager of our portfolio of businesses, as you know that’s very much a priority for us. Acquisitions were made within dmg::information, dmg::media and Euromoney and we completed the disposal of Jobsite which was the last remaining business in the former Evenbase digital recruitment company and we disposed Lewtan.
Net debt to EBITDA ratio was 1.9 and Stephen will explain why that is expected to come down towards the end of the year. And we completed a bond buyback in October 2014. We made good progress with a £100m share buyback programme we announced last November with £71m of shares being purchased to date.
And importantly the outlook for the full year is unchanged and in line with market expectations; although EPS - our expectations of EPS are somewhat ahead of current market expectations. So that concludes the highlights and it’s now my pleasure to hand over to Stephen.
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Financial Performance
Stephen Daintith, Finance Director Thank you Martin, morning everybody. I think and Martin mentioned this, one of the key messages for today is that the first half was very much in line with our expectations and indeed the full year remains in line with our expectations.
This is a slide that we put up back in November of last year and just to remind ourselves of the things that we flagged then which very much hold true today, some of the key things that are happening in the first half numbers, and there’s a lot of thing happening in our first half numbers, but this slide just sort of summarises those one by one. So the investment in RMS(one) and the reduction in margin and profit in RMS as a
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consequence, the absence of the Gastech event which took place in March 2014 has not taken place in this fiscal year.
The Evenbase disposal, Martin mentioned that, but we have a reduced stake in Zoopla, we IPO’d Zoopla back in June last year and our share went from 52% down to 32% of Zoopla so that’s a driver of the numbers that we see today. We have a reduced finance charge, we’ve bought in quite a lot of our bonds over the last 18 months or so and reduced our interest charge as a consequence. Other M&A, Martin mentioned that. And finally the exchange rate, last year’s average was 1.66 and as we’ll see later on the average so far this year has been somewhat lower than that.
So a quick summary of the numbers before I get into the detail, underlying revenue growth of 1% and operating profits down 7%, the profit declined despite the revenue growth driven by the absence of Gastech and the investments in RMS.
And then I just highlight down the bottom here that if we were to adjust the operating profits for the timing of events in Euromoney in fact the underlying decline would be somewhat smaller at 5%. It’s a small point but Euromoney do not adjust in their underlying calculation for the timing of events whereas we do. So I’m just pointing that out, it’s a slight point of detail but it’s just useful to know.
Profit before tax down 4% and then earnings per share growing by 7%, I’ll get into that later explaining why there’s a difference there between the 4% decline and the 7% growth. And we are happy to declare a 5% growth in our dividends which is of course in today’s days of zero inflation CPI is a 5% real growth as well.
So as we look at DMGT it is important I think just for a little while just to reflect on the diversity of the group and this is something we’ve been pursuing over the last, you know quite some time now. We are very much a good balance I think of B2B and consumer. B2B representing 59% of our revenues and 67% of our profits. B2B is growing its revenues at 2%, we’ll get into the detail of that shortly. Consumer down 2% and we’ll understand that a little better later on as well.
What’s happening within the profits is interesting, B2B up until recently has represented a higher proportion of our profits than consumer; but one of the things that we are seeing today in our numbers is a resurgence in the profitability of our UK consumer business and the 15% margin that we’re reporting today, and again we’ll get into that detail as we progress through this presentation. B2B declining at 20% in profits largely driven by Gastech and RMS, so again not surprised by that number but just highlighting its impact, and consumer growing by a very healthy 33%.
So I think what this also demonstrates is the importance of a portfolio like DMGT where one part of the group for whatever reasons sees a decline in its profits the other part can take up that slack and that works well for us right now and has done for quite some time.
Similarly the geographical diversity of DMGT often seen as a UK business with just 51% of our revenues are out of the UK, 49% from the rest of the world. And you can see there in the UK on the profit side whilst 50% of the profits, the underlying growth of the
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UK profitability up by 23%. So a very nice performance from our consumer business in the UK. North America down, driven by RMS largely.
And again going back to the diversity of the portfolio very much diverse and well balanced revenue streams as well. Print advertising is now just 16% of our portfolio, that’s the one that we know and expect to decline over the years ahead, it’s just 16% of our Group revenues. And we’ve highlighted here that what we are doing across the group, this is taking into account the Euromoney print advertising revenues and the Daily Mail and Metro, the declines there, albeit Metro is in fact growing, but the declines there are being equally offset by the growth in digital advertising that we get from a small portion from Euromoney but from Mail Online in the UK, US, rest of the world and also from Wowcher which has grown very well as we’ll see later.
So moving through our divisions one by one, first of all B2B, RMS again there are no surprises in these numbers, very much in line with our expectations. The core business flat year on year, the 2% decline that we see in RMS revenues, Group revenues, very much driven by the absence of RMS(one) consultancy revenues where we saw around $3m of consultancy revenues in the first half of fiscal ’14 in anticipation of the then planned launch for April 2014. It's been pretty much a complete absence of those in fiscal ’15 and that’s the big driver of the 2% decline across the board.
We do expect an acceleration in the growth of the core business and we’ll get into the reasons for those I’m sure during the Q&A. Essentially driven by RiskLink 15.0 and two new versions of North American Hurricane and European Windstorm.
2% revenue decline I’ve just mentioned that. And the operating margin of 14%, we gave guidance back in November of between 10 and 15% so we’re very much in the range of our guidance that we gave, what is it now, 6/7 months ago.
Dmg::information, revenue growth of 6% in dmg::information, good revenue growth. Growth a little bit below perhaps what one might have expected at the half year largely driven by a decline in UK mortgage approvals in the first half of this year down 14% on the same period last year. Just as a reminder the same period last year was up 34% on the first six months of fiscal ’13 so they were always going to be tough comparatives.
The second half of ’14 grew by only 4% so we are expecting an improvement in growth rates in mortgage approvals and implicitly therefore in the UK property information business in the second half of this year. And I’m talking there especially about Landmark and SearchFlow. Notwithstanding that though good growth in Education and even more impressive growth in Energy as we’ll see in a second.
Profits down in dmg::information largely on the back of increased investment in Xceligent which is growing very well, its revenues but the investment we’re putting in there is largely driving down that operating profit decline in the first half of the year. We do see some seasonality in Hobsons, as a reminder of that the profits in the second half in Hobsons, the profits sorry within Hobsons are very much more aligned to the second half than the first half.
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So look at the margin of last year at 14% for the first half which subsequently improved to a 17% on the full year basis, we’re expecting much the same for the 13% margin in the first half.
This breaks down dmg::information into a little more detail, there’s the 2% growth, the European property businesses which is largely a reflection of that Landmark and SearchFlow revenues driven by UK mortgage approvals. US however growing very well at 11% and you can see there the stand out performance by Energy, that’s the Genscape business growing at 17%. And the growth in Education will accelerate in the second half for the reasons that I just mentioned earlier through our Hobsons business.
Dmg::events continue good growth in dmg::events with 13% underlying growth largely driven by very impressive performance out of two large events that took place in the first half in the Middle East, ADIPEC and Big 5. What else would I say about this one, again good profit growth 27%, operating margin of 30%. That shouldn’t be taken as a guide for the full year of course because the big events taking place in the first half are very much the high margin events so that we will see, we’re maintaining our margin guidance of 20 to 25% on the full year basis, notwithstanding that 30% margin in the first half.
Euromoney, Euromoney reported its numbers last week, 1% growth of revenues across the portfolio and an operating margin of 27%. Euromoney continues to operate in challenging markets, you’ll have read their statements, some of you may have attended their release so I won’t add much more to that.
Dmg::media so stand out performance for us I think in the portfolio on a profit basis, underlying revenue growth of 2%, this is very much in line with our expectations, you’ll recall that we used the word stable when we described our expectations for revenue in dmg::media and we give that as a range as either minus 2 or plus 2. Advertising, print advertising remains volatile and of course cover price increases, if we were to introduce any, can result in big spikes in growth when they, or if, they were to take place.
The Mail on Sunday’s increased £1.50 to £1.60 recently, on a half year basis that gives us around £2m so a slight impact on revenue trajectory for our UK consumer business. There a 15% margin, very pleased with that, it’s a reflection of the continued cost reductions that we’re able to find in the business. We very much streamlined the portfolio of dmg::media, not so long ago we had probably over 20 businesses within dmg::media, we’re very much now down to the stable of 4 or 5 businesses.
At the same time our printing and distribution has rationalised significantly down to two printing plants, we had eight. Our marketing spend is not what it once was, we found more better and more effective ways of marketing Daily Mail and growing market share as a consequence. So put all those things together we’re pleased with the 15% margin that we see today.
A bit more detail on the revenue streams in dmg::media, circulation revenues down 4% that’s in the absence of the cover price increase so holding up pretty nicely actually particularly compared to the rest of the market. And then on the advertising side, digital growth exceeding the print decline, digital growth coming from MailOnline and Wowcher
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and the print essentially from the Daily Mail and Metro, 2% revenue growth across the consumer business.
And then looking at it by business, a little bit more detail there, Daily Mail down 6% but MailOnline growing strongly 20% and indeed in the US growing at 46% so a very good growth that we expected out of the US and introducing new blue chip brands to the advertising customer list in the US which we’ll talk about a little later. 4% across the Mail businesses decline by Metro, really pleased with Metro’s first half performance of 4%, traditionally it’s very strong in retail and telecoms and that’s been reflected in that first half performance.
Wowcher very good growth again out of Wowcher, it’s now got a subscriber database of seven million people that we have information on for Wowcher that have accessed Wowcher and registered for Wowcher. Wowcher in the first half moved into profitability that we expected so we’re pleased about that, it’s a small profit but we’re in profitable territory and we will be on a full year basis so we’re very pleased with the way Wowcher is progressing, 2% across dmg::media.
And then just a little bit of clarity on the profit growth. Mail businesses growing 21% so for a business that is you know one might think with the challenges for the print industry really pleased with this performance. And on the expected profitability to remain at these sorts of levels for at least a little while. And it will very much depend on how print advertising plays out; our circulation revenues go up and down depending on cover price increases, but also on the resilience and growth of our digital advertising play as well. Sorry I should have said Metro, 7 days, Wowcher, Elite Daily growing at 30%.
And then this slide and the next slide really just summarises all the numbers we’ve just gone through it’s just a nice convenient snapshot of the revenues across the Group and profits.
Corporate costs we see that number in there for the first time, down £4m on a half year basis, I wouldn’t read that as a permanent rebasing of corporate costs, a large chunk of our corporate costs are driven by professional fees and it can often be around the timing of those fees and timing of the consultancy exercises that take place that are a large driver of that sort of intrinsic cost.
Joint Ventures and Associates, Zoopla, Property Group, £7m or as that reduction reflects that reduced proportion of profits of Zoopla, it went from 52% to 32%, we remain strong supporters of Zoopla, we were happy to support the uSwitch acquisition and we remain very hopeful for Zoopla’s prospects in the future.
Just a quick word on Local World, Local World just a reminder that used to be called Northcliffe combined with the Iliffe Newspapers and continues to be a resilient generator of profits and cash, in fact growing its profits during the half year compared to last year. And that reflects our 39% holding in Local World. There's the Zoopla change in holding.
Net finance costs have come down nicely from 26 down to £19m, a reflection of our reduced net debt, but also our restructuring of debt. You’ll recall that over the last 18 months we’ve bought in about £250m worth of bonds and we’ve largely replaced that as
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we’ll see in a second with less expensive bank facilities so a good reduction in interest costs in the first half of the year.
Pretty good altogether, you’ll recognise those numbers, I think the one number that may be the pleasant surprise this morning is earnings per share growing at 7%. That is largely a reflection of two things; number one a more simple one to explain is a reduction in the number of our shares as we continue our share buyback programme. But also in reduction of the effective tax rate which is now at 14.1%.
Driven on the back of three factors, number one - the proportion of our UK profits is higher in this half than it was last year, driven by the decline in RMS but also the growth out of our UK consumer business. Two, we’ve had the two big events businesses in the Middle East which have attractive tax rates attached to them. And thirdly as we look at our UK profits and the trajectory for UK profits we can take a less cautious view than we did last year on the use of our deferred tax assets and the usability of that asset to offset the chargeable tax profits in our UK business.
Put all those things together we’re down to 14%, we still expect to head towards 20% over the next three or four years, but as it we’re happy to take that number right now.
Exceptional items down a little bit on last year £11m, this is the only cash number in this table and largely driven by headcount reductions in dmg::media, a little bit of refurbishment of Northcliffe House, but also as preparation for new tenants coming in on an empty floor, a bit of detail but there you go and we expect this number to be lower in the second half of the year.
Net debt finishing the half at 1.9 times, no surprises there the end of March is traditionally our highest net debt situation. We still remain on track to be no more than two times at the end of the year. Cash conversion during the first half is just 47%, it will be higher on a full year basis. We tend to see items like our incentives schemes and bonus schemes paying out in the first half of the year and that’s largely one of the key drivers for the reduced conversion for the first half of the year, EBITDA 1.9 times.
Just a reminder where we are, our trajectory we target less than two times of the year at the year end, the last two years we’ve comfortably achieved that and I expect to do the same again.
Just a couple of words on buy-backs, the share buyback programme that we announced in September of last year, we’ve progressed through this at a fair old pace, £71m all the way through at an average price of £8.24. It remains a good and effective use of capital where M&A remains our priority but rather than having cash sitting on our balance sheet when we look at our share price we think it represents a good investment and so we’ve been very happy with the progress we’ve made so far.
And again bond buy-backs we had £149m bond buyback in October 2014, we did one again a little earlier than one around £100m or so the year or so before and that has resulted in that reduced interest charge that we saw a little while ago which is a pretty useful bridge to explain the first half of last year to the first half of this year.
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Again highlighting the negative impacts of RMS(one) investments and Gastech on our half year numbers, £17m investment in RMS(one) largely due to reduced capitalisation of software development spend. But also the introduction of the data centre costs that we’ve brought onto the books that we plan to be using right now for RMS(one) and waiting for RMS(one) to become available as it will do in the final quarter of calendar 2015 and in the absence of the Gastech even as well.
But aside from that you can see good growth elsewhere across the Group. So those are those two big stand out numbers.
So what are the considerations you ought to have on your mind for the second half of the year? I think we would expect to see a stronger year on year performance for RMS profitability and dmg::i UK property information business. We expect to see a revenue growth of the core business is RMS driven on the back of that RiskLink 15.0 release but also the new versions of those two big models, which coincidentally represent about a quarter of RMS’s catastrophic risk modelling business, those two models alone.
We do however have a smaller global petroleum show which is on an annual basis versus the biannual from beforehand. We sold the Jobsite business, cover price increase, the reduced financial charge will continue, the reduced tax charge that we saw in the first half. And of course whatever happens with the exchange rate will have an impact as well, right now the average is 1.54 to where we are yesterday and 1.66 on a full year basis last year.
Just reiterating a very key message this is the slide that we showed back in November and it is unchanged so we’re pleased to maintain our guidance. That’s it from me, back to Martin.
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Business Update
Martin Morgan, Chief Executive Thanks Stephen. It is our custom to talk quite extensively about strategy at the time of the full year results and I will certainly be doing that when we come to next November. But I thought just as a quick reminder what our priorities are I’ve listed them out here and those of you who follow us regularly will recognise them.
Our priority in terms of investment is to drive organic growth through innovation in the company and I’ll touch on a number of those initiatives that are going on right now. I’ve already mentioned rigorous and active portfolio management and I’m going to show you a table next to talk a little bit about the M&A and disposals that have taken place in the first half.
And we continue to be very focussed on DMGT becoming an ever more international business, I’m glad to say we’ve made good progress in Asia recently. Technology we see actually as an enabler of growth, that’s a high priority for us and of course attracting and developing entrepreneurial talent which we think thrives in the way we operate DMGT on a light touch decentralised basis.
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So enough on strategy so let’s come to active portfolio management. You’ll be familiar with the layout of this slide but just to remind you those companies that are mentioned here that are on a green background we consider bolt-on acquisitions to existing businesses and the red indicates investments or adjacent investments, which really are companies that operate in markets where we already have a business and therefore have extensive market knowledge but aren’t directly bolt-on.
So you see we made four bolt on acquisitions in the first half, Starfish was added to Hobsons a really excellent acquisition I think, which provides additional customers and product to help universities and colleges and America deal with a very difficult problem they have which is to do with low retention rates. And as funding in American universities and colleges moves more to an output or a results based system rather than simply by headcount it becomes crucial for universities to hold on to students because after all that’s their revenue and it’s a very nice addition to the Hobsons business.
Energy Fundamentals and Petrotranz are two further acquisitions for Genscape and Stephen has already called out how fast Genscape is growing on an underlying basis and we continue to see a great pipeline of small entrepreneur earlier stage businesses that can actually add to that growth rate and build our product for Genscape.
Gulf Glass and GulfSol were two small bolt-on acquisitions for our Middle East Events business which is a very successful business indeed and so those are nice additions and add to our sort of construction portfolio.
In the adjacent category we invested and acquired Elite Daily which is a US based business and its focus in terms of demographics very much at the millennials and therefore is a very good complement to the demographic profile of MailOnline. And the two businesses joining together to sell advertising across both platforms where advertisers are looking for a broader and bigger reach. So I think a very interesting and exciting investment acquisition there.
Dealogic you will have heard of from Euromoney, Euromoney now has a 15.5% stake in Dealogic and I think we are very enthusiastic about that because it takes Euromoney another step into being involved, if you like, in the digital work flow, in this particular case for investment banks on a pretty global basis and it’s a very impressive business and we have a seat, well Euromoney has a seat on the board.
And finally dmg::i made an investment in an early stage business in property information in the US called Compstak. And actually sticking with property for a minute since the half year close in fact earlier this week dmg::i completed its first investment in a Chinese business, an early stage Chinese business which is also in the real estate information sector. And I don’t want to tempt fate but we’re looking forward to actually closing one at least of a similar style of transaction in India in a property information business there. And India has very exciting prospects I think in the coming sophistication of how real estate is dealt with in that country.
So a very nice set of acquisitions and investments I think the first half. And if you look right down the bottom of the page where we’ve referred to the disposals we actually
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raised more money through disposals in the first half than we spent on acquisitions which is something we’ve done in previous years.
So let me know just move on to talking about each of the main operating businesses in DMGT starting with RMS. News out of RMS is good, Stephen’s referred to the roll out of RiskLink 15 which is the latest iteration of the RiskLink software that delivers the models for RMS. It’s an important upgrade dealing with US Hurricane and European Wind, it also includes very extensive updates to databases to do with hazard and geo information across I think 46 countries, it’s been very well received by the industry, adoption rates are good.
And interestingly enough many, many clients are now taking the software online and downloading and inviting the software online which is a nice precursor to what RMS(one) will do.
Now talking of RMS(one) very much on track for the scheduled roll out that we have laid out previously with the first HD models coming by the end of the calendar year, further models going into ’16, exposure manager, risk manager, other components of the RiskLink platform - excuse me, the RMS platform to be rolled out through ’16.
So that all led to the latest RMS Client Conference which we attended in Miami recently, being a very successful and no doubt that clients are reassured and pleased by the progress RMS is making. So I think we’re quietly confident that we are on firm foundations, significantly firmer foundations than we were this time last year.
I did mention in November that RMS was facing some headwinds in the reinsurance industry, it’s been well written about since then that premiums are under a lot of downward pressure amongst re-insurers. And that does put sort of budgetary constraints on them in terms of their ability to increase their expenditure on models and data and other such things so that is a continuing factor in the marketplace.
However on the upside and it’s early days here of course, the primary insurers are obviously benefiting from the falling insurance rates and the growth of capital markets and I think those are new opportunities for RMS to actually increase potentially in the time its revenues coming in from primary insurers as compared to the re-insurers. But as I say that is a potential future trend on the upside.
Let me turn to dmg::information, we feel very pleased that dmg::information that that strategy we had for investing in organic growth supplemented by well-chosen acquisitions is really working. There were some special factors that affected growth rates in the first which Stephen has taken you through and I won’t repeat. But in terms of innovation a lot of innovation in the property information businesses, Stephen has mentioned Xceligent which is in the process of building out a national database of properties and information about tenants in the US, that’s growing very quickly but it is an investment business.
In the UK Landmark recently launched a new product and service for dealing with flood insurance to residential properties and of course it’s a pretty big issue in the UK, those being just two examples.
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Hobsons we’ve mentioned the acquisition but in terms of innovation it’s had a very successful launch of a new platform to deal with their higher education service and products for those customers, major upgrades and contents to the Naviance school system where we are market leader by a very long shot. So I think Hobsons growth rate prospects are very sound and as Stephen said I think we expect them to pick up in the second half.
Genscape is just a hive of entrepreneurial activity with lots more products, in fact a very small acquisition we didn’t list here that’s also been completed over a business called Vessel Tracker which helps us monitor what’s happening on the seas in terms of the movement of liquid national gas and oil and so on. And it’s ever adding to the richness of the information that Genscape can provide traders as they figure out the balance between supply and demand.
I won’t go over the acquisitions again because I’ve already talked about them, which takes me to dmg::events, the highest growing business of course in DMG at the moment and continues its excellent track record of the last few years. And with the Global Petroleum Show which is coming in Calgary I think in July it will be the last of the changes to increasing the frequency of our large events. And as Stephen has indicated it will therefore be a somewhat smaller event given the change of frequency.
I’m sure you’re interested in our view on the impact of the lower oil price on our energy events. So far stand bookings have held up very well for the Global Petroleum Show, it’s just too early to tell what’s going to happen with visitor numbers, we have no indications yet that they’re going to be majorly affected but we can’t bank that yet it’s too early. Stand sales for Gastech which this year will take place in October in Singapore equally stand sales are looking pretty good. But again there’s inevitably this far out some uncertainty about visitor numbers and then we’ll have ADIPEC again Abu Dhabi in I think it’s November.
But I think we have to be a little bit cautious about how '15/'16 is going to play out in terms of growth rates in the energy business, I just think it’s prudent to be cautious and I’ve got no firm numbers to give you at this early stage.
We continue to expand geographically and you will know that one of our big events is called Big 5, it takes place, it’s the largest trade show in the Middle East, it’s been geo cloned into Saudi Arabia and other locations. And now had also moved into Indonesia, which is a nice step forward in our ambitions to do more trade shows in that part of the world, in Asia in general.
Euromoney well you will have had information directly from them and I suppose we all know that Euromoney continues to face rather challenging markets in the investment banking capital markets sector of their business. I hope I’m not clutching at straws and I know there are some investment bankers in this room but it’s been somewhat encouraging to see some of the investment banks actually producing some pretty good results I think at the end of the first quarter. Again, it’s not something we can, no pun intended, bank, but maybe one can start hoping there might be a bit of an upturn in that part of Euromoney’s business to come.
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Very pleased with the way Euromoney is handling its technology, the Delphi platform has been very successfully rolled out initially to BCA the international research business and new products have been launched, customers are buying them and Delphi has been rapidly rolled out in many other parts of the business. We remain very excited about the prospects for the Institution and Investor network, there was an extensive presentation in September on that and investment has continued to go in there and building out the staff and the talent to underpin their ambitions.
And of course Euromoney remains on the lookout for acquisitions and we support that and it’s a very competitive M&A market out there and we very much respect Euromoney’s tradition of being a disciplined buyer, but of course with a very strong balance sheet they’re in a good position to buy companies when they find them.
And finally we were delighted to be able to announce that Andrew Rashbass is going to join as Euromoney Executive Chairman when Richard Ensor retires at the end of September. He’s a man obviously with a tremendous track record and I’m sure that he will be a tremendous addition to the Euromoney team and we look forward to meeting Andrew, if you haven’t already in his other careers when he steps up at Euromoney.
So finally to the sort of star performer I suppose in the first half dmg::media. Our papers continue to be really resilient and increasing market share, which I think is a very good sign of how good and how strong they are and the effectiveness of the marketing programmes that Stephen alluded to that we bought in recently and which we were able to successfully introduce a cover price increase with very little adverse effect on the circulation of the Mail on Sunday.
And we are seeing the benefits of those cost reductions and the efficiency initiatives that you know we started a few years ago flowing fully into the results in the first half. MailOnline continues to make terrific progress I think growing its international audience very strongly around the world advertising is following, I think rates of advertising increase are obviously down a little but that is obviously because of a larger number and we’re very much on track I think to achieve our objectives in terms of advertising revenue this year and into next year.
And I’ve talked about Elite Daily so perhaps I’ll say no more about that other than it does strengthen the advertising story for a combination of MailOnline, now called Dailymail.com in the US and Elite Daily.
So just to wrap up notwithstanding the sort of specific factors that we’ve gone into that have impacted certain parts of the group in the first half I still think we’re very well placed to deliver good consistent growth looking out. And we see no reason to change our strategy which we’ve laid out to you before.
I think the portfolio is pretty nicely balanced and our balance sheet is in good shape and has enabled us and will continue to enable us to focus on driving shareholder returns which is of course at the end of the day what we’re all interested in.
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So that brings to an end the formal part of our presentation and Stephen and I will be delighted to take your questions.
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Questions and Answers
William Packer, Exane BNP Paribas Just a couple of questions from me please. Firstly in terms of the dmg::media profitability in H2, if we look back in previous years there hasn’t been a huge amount of seasonality. Could you just take me through why we shouldn’t expect an upgrade to full year guidance for that division?
Secondly I think you covered it at the previous trading update but apologies, could you just refresh us in your thinking as to what the sustainable growth rate at the MailOnline is going forward? Obviously there's been a bit of a slowdown versus previous quarters. It would be good to get your thoughts on where it can go from here?
And then finally on RMS(one) you've made it very clear that you don’t want to talk about financial specifics looking forward. One element from here is the rollout of a couple of HD models in H2. Just can we have a kind of qualitative flavour of the kind of requirements for a client that they need to make in order to take the jump with those models? How significant an investment is it? How big a risk for them is it moving to those models? And how big a take up do you think there’ll be?
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Martin Morgan, Chief Executive Do you want to do the margin one first?
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Stephen Daintith, Finance Director Yeah. Okay so on the margin it’s a fair question. I think the one key thing to remember is that dmg::media sees 2% underlying revenue decline at the moment and of course we expect that decline to continue into the second half. So you would naturally see a deterioration in margin with revenue decline, so we have that very much on the horizon.
I think it is a fair point though that when you look back the guidance that we have given, you know the outlook - the actual outlook number isn’t likely to be more - it’s slightly ahead of that rather than behind it if anything. So I wouldn’t expect the 15% but it might be something that’s not far short of that.
Next question was on MailOnline growth.
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Martin Morgan, Chief Executive Well I think we’ve indicated before a sort of target to get to £100m in ‘16, end of ‘16, and I would say that given the current trajectory that looks like a pretty fair target still.
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I think it would be a brave person in the changing world of digital media to forecast much beyond that but yeah, I think if we hit this year’s number it’s a nice step forward towards that.
In terms of RMS that’s a really interesting question about the cost to the client. Well our analysis continues to show that actually moving to the software as a service model will reduce client costs. Will there be transition costs for some clients? Yes I suspect there will be. I'm struggling a bit to know quite how to generalise across a diverse client base that has quite different internal IT systems. I think with the nature of now the sort of rollout being sort of in stages, I think we will see clients adopting in different stages. I think you'll see for example some clients continuing to run RiskLink and embrace RMS(one) for other reasons, and some of them will move much more quickly. So I think the cost profile is going to vary.
What we will do to your question is RMS are going to be presenting at our investor day in September. I suggest we make sure that we address that question in a bit more depth then.
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William Packer, Exane BNP Paribas And so just to confirm, if someone does decide to take the European flood model they’d take RMS(one), and if they kept the hurricane Florida model they'd have RiskLink as well?
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Martin Morgan, Chief Executive Yeah.
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William Packer, Exane BNP Paribas They'd take both?
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Martin Morgan, Chief Executive Yeah.
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William Packer, Exane BNP Paribas Okay thanks.
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Stephen Daintith, Finance Director Yeah I mean I think one of the key goals of RMS is to make it as easy as possible for its customers to migrate onto RMS(one) and as straightforward as possible. And they will
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need RMS(one) if they are to use the high definition models that become available starting with European flood in the final quarter of this year.
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Martin Morgan, Chief Executive That’s final calendar quarter.
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Stephen Daintith, Finance Director Yeah, calendar year. And then I think you've got Japan typhoon into 2016 and New Zealand earthquake beyond that. That’s the rollout plan.
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Martin Morgan, Chief Executive Just commenting on that, the significance of that rollout is so the net first period you'll have each of the major perils on an HD platform. So some people have said well New Zealand earthquake, you know that doesn’t sound like a particularly significant one, although it’s a big deal, earthquake is a big deal in New Zealand obviously for the New Zealanders. But actually it’s proving that technology can work because the science is broadly similar earthquake to earthquake so you'll have flood, hurricane, wind and quake all onto the new platform in ‘16.
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William Packer, Exane BNP Paribas Thank you.
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Gareth Davies, Numis Morning. Two for me. Just going back to dmg::media again, in terms of investment certainly the wording in the statement implies that you’re still putting quite a lot of investment into the US. Can you talk around the investment, the specific sort of projects you've got going on there? And is that something we should expect to sort of ease off through ‘16 and ‘17 and give additional margin benefit? Or - just a little bit around that dynamic.
And then secondly sort of another margin related question. dmg::information are looking to pick up quite a bit in H2, can you talk about some of the specifics driving that? And then also specifically on Hobsons. I think from memory it’s sort of been a standout laggard really in margin terms relative to the rest of the Group and I know you had some initiatives ongoing there that could sort of help drive that. Can you give us an update around that?
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Martin Morgan, Chief Executive
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Yeah well in terms of investments in MailOnline and the US it’s really people. And don’t want to be a hostage to fortune but it looks as though that substantial step up in people is really behind us. I mean there might be some additional people but I'm not hearing any great demands for any significant increases in headcount there.
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Stephen Daintith, Finance Director No I mean it’s essentially the desire for a true US product requires US journalists writing US stories. So naturally you would expect a pickup in headcount to achieve that.
And the other big driver is video of course. The CPMs, the yields on video advertising are much higher than the static display advertising. So developing the video capabilities requires the investment to get to that stage. So those are the two big things really.
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Martin Morgan, Chief Executive Dmg::i margin?
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Stephen Daintith, Finance Director Dmg::i margin. Yeah last year we moved from 14% first half to 17% full year. This year we’re at 13% so we expect a similar sort of improvement. Big drivers of that as I mentioned the Hobsons higher education revenues are very much towards the second half of the year driven by the seasonal marketing activity that takes place in Hobsons in the universities for of course the applicants during the summer and into enrolment in the sort of September, October time as it is in the UK.
Similarly we expect the benefits of the Radius software platform that’s been introduced in Hobsons to flow through into the second half. And also the - shall we say Xceligent revenue growth being sufficient to see some sort of say decline in its investment phase if that makes sense, in the second half of the year as well.
So you put all those things together and then add onto that what we expect [gap in audio] was quite rightly a little bit of uncertainty about the prospects of a coalition government and the uncertainty that might bring. That’s been removed and the early signs are that UK consumers are now ready to start applying for mortgages and moving house and so on. So put all those things together, kind of explain why we expect to see an improved margin in the second half.
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Steve Liechti, Investec Morning. Two questions please. First of all on RMS(one) you've talked about the HD model rollout. It looks to me as though two of those models slipped a quarter, in that you said at the pre-close update you expected three HD models launched in calendar fourth quarter. Are my notes incorrect? And if they have slipped why have they
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slipped? And I know you’re saying RMS(one) is on track, but is there anything sort of I should be worried about by that slippage?
Second question is on RMS core. You talked about the reinsurance market and the pressure there on the margins; obviously one of the effects there is the cap bond sort of coming through there. I'm just trying to understand why you are not getting a benefit from the cap bond side in terms of assessing risk? And I believe your competitor is outperforming in that area. Can you explain to me why I guess you’re missing that opportunity?
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Martin Morgan, Chief Executive I'm just checking, is it a slip in terms of what we said before?
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Stephen Daintith, Finance Director There's no slippage on RMS(one).
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Martin Morgan, Chief Executive No, I didn’t think so.
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Stephen Daintith, Finance Director I mean I think the point is we’ve got more detail now as to how we think it’s going to roll out and we think it’s sensible to do a big model, European flood first, and then the other two to follow shortly after. I mean they really are, I don’t want to say back to back but not too far apart. So we’re talking - you know this is detail so there's no slippage, very much on track. And this is what we think is a sensible plan for the rollout of those high definition models.
And indeed if you were to take a longer view and look at the two, three year horizon, the amount of activity in those two, three years, it will outweigh anything of the last sort of ten years in terms of model rollout, HD model rollout, assuming all goes well with the RMS(one) software platform.
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Martin Morgan, Chief Executive Yeah in terms of RMS’ sort of market share in the cap bond market yeah it’s true that going back a few years ago, I hate to have to raise it, we had considerable difficulties when we had version 11 of RiskLink. The market didn’t like the view of risk we took. But to a certain extent we were definitely vindicated when Hurricane Sandy came.
And in that case the market, in terms of the cap bond market, chose at that time to move more to a competitor that had a view that the risk was low, i.e. prices were low for
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the risk. Well you can take a view of what makes most sense from the point of view of the insured, but anyway RMS has been somewhat in a catch up in terms of participating in cap bond securitisations.
We have a pretty strong product there. We also have a licensed product which is doing very well which is helping people who hold the securities to actually manage them once they have bought them and, you know, as they increase the size of the portfolio and that’s doing pretty well and that’s a subscription product. And cap bonds are fine but they’re kind of one off consultancy fees that you get to do a model for an investment bank who’s putting out a bond. It’s kind of nice business to have, but it’s not really - because it’s not licensing revenue, it’s fine, but it’s not the high grade revenue you get from a licensed product.
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Nick Dempsey, Barclays Capital Just two questions left please. So just in terms of the tax I understand the benefits are mostly non-cash, so if we were talking about theoretical cash EPS would you not be upgrading your expectations on EPS?
And second question, at Hobsons did you have any exposure to the Corinthian for profit college chain which had to close a bunch of university campuses?
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Martin Morgan, Chief Executive Yeah I’ll do the second one first. Actually Hobsons has not been active in terms of selling to the private education market. And the market has tended to bifurcate between the sort of non-profit university sector which can be private and public, and we’d not actually focused on the full profit sector. So that’s a long winded answer saying we weren’t affected.
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Stephen Daintith, Finance Director And the first one yeah there would be a modest additional benefit there on a cash basis for the tax rate so you’re not wrong.
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Alex DeGroote, Peel Hunt Thanks guys, morning. Two quick questions please. Firstly just on the cash funding into the pension, have you overpaid or brought forward some funding there? That 38 looks a bit higher I think than the full year guidance so a bit of a heads up there would be great.
And then secondly just on Zoopla actually acquiring uSwitch. I seem to recall about seven years ago DMGT dipped its toes in the price comparison market. I think SimplySwitch was the asset and I think that was closed fairly short order after the purchase. So I just wondered if you have any observations about what might be different this time round? Thanks.
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Martin Morgan, Chief Executive Well because of the corporate memory being as good as yours, when it was first proposed by Alex it caused us to pause for a moment. But given the - given his strategy if you like for, you know, providing people who are homeowners moving home, people who are interested in home with a range of services if you like that are relevant to the home I think it’s pretty compelling.
And you know that’s one that DMGT got wrong for a variety of reasons. I'm afraid I wasn’t CEO at the time so I really don’t know the ins and outs of it, but that was then and now is now. And you know obviously we have a tremendous respect of Alex and his very strong management team and I think a very interesting strategy that he's put together that’s justified the buying of uSwitch.
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Stephen Daintith, Finance Director Yeah very much so. And then on the pensions, yeah our recovery plan and we continue paying that in line with what we’ve agreed with the trustees of the pension fund. And what we shouldn’t forget is there is often a little top up to that in respect of any share buybacks that take place. So the difference is the agreement that we have with the trustees to pay in a proportion of any share buybacks into the pension fund to reflect that effectively sort of leakage of cash out of the Group.
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Ian Whittaker, Liberum Capital Good morning. Just two questions. First of all just in terms - coming back on the tax rate. You mentioned in terms of you decided to sort of look at more optimisation of some of your losses. Was that down - a direct result of the UK general election result?
Laughter
And if so is that something that could be sustained moving forward?
And then the second question just has to do with events. If you look at the sort of longer term oil price, there's increasingly a question as to whether there is sustained deflation in that market, whether oil prices will ever increase significantly again at least in the medium term. Is that changing your view of whether you want to be in the events business or not?
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Martin Morgan, Chief Executive No it’s definitely not. But I'm certainly not willing to make forecasts in terms of where energy prices are going to be. I mean I think the benefit of our position in energy is that we have very successful, very substantial trade shows and I think it’s - would typically be the case that secondary shows, more marginal shows, are the ones that are going to
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be in more difficulties. Because there's also politics involved. You know in a show like Abu Dhabi, it’s a showcase for Abu Dhabi in the whole energy industry there and what they’re doing, very strong conference programme for example. So it certainly wouldn’t change our view about being in events generally, no.
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Stephen Daintith, Finance Director And then on the first question no, the tax rate had nothing to do with the outcome of the UK election. It was very much the growth in UK profits and our ability to use tax losses that we thought would previously be more difficult to use. And then as we looked to the near future our ability to continue to use those tax losses. And the drivers there are you know continued growth in MailOnline as it moves out of its investment phase and into that sort of £100m of revenue in fiscal ‘16 that we’ve guided to for quite a while now. As we look at Wowcher moving into profitability, look at the resilience of Metro but also in particular the improved margin in the newspaper business. All of those things put together make us feel more confident about the use of those tax losses that we have stored up.
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Question On Elite Daily, first of all how much overlap is there between MailOnline and Elite Daily’s audience? Are you planning to integrate the two and does it offer a significant monetisation opportunity?
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Martin Morgan, Chief Executive Yeah I think I'm right in saying that the overlap in terms of traffic is only 10%.
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Stephen Daintith, Finance Director That’s right, less than 10%.
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Martin Morgan, Chief Executive So it’s highly complementary. I think the audience is still predominantly female, yeah?
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Stephen Daintith, Finance Director It’s affluent females.
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Martin Morgan, Chief Executive Yeah, the younger so that’s very good. And yes we do believe and it’s one of the main justifications for the acquisition is that you can buy in the traffic that you’re getting from
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Elite Daily with the traffic from Dailymail.com and the demographic complementarity, there are advertisers who want to buy large numbers across a broad demographic. That’s not going to suit all advertisers but there's plenty of advertising opportunities and that’s really one of the fundamental rationale for doing the investment.
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Stephen Daintith, Finance Director They’re very much sort of different audience sets to Martin’s point. And one of the key stats is that when you look at MailOnline in the US and Elite Daily combined, together they reach over half of the 18 to 40 year olds in the US. So there's a good sort of advertising yield play there with that. But we’re learning a lot from them on their social networking skills.
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Martin Morgan, Chief Executive Yeah, and video.
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Stephen Daintith, Finance Director And video capabilities. So it’s -
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Martin Morgan, Chief Executive So we didn’t really answer your question. In terms of the way the businesses are run, they’re run sort of day to day and certainly from a content perspective they’re run by two different management teams, two different editorial teams, but they’re joined together at the hip in terms of the sort of B2B side of the business which is dealing with advertisers and agencies.
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Patrick Wellington, Morgan Stanley Morning. I'm going to plug away at RMS. Hemant Shah at Exceedance was quoted as saying the first RMS HD model would come in the fall. I don’t know whether the fall is the same as the end of the year, and I kind of agree with Steve on the other two models as well. So it does look as though there has been a degree of movement on those model production.
Secondly on RMS when we have seen some big new models in the past it has caused a bit of customer disruption as customers got used to the different findings of those models. You seem very confident that that’s not going to happen this time round.
And then just an easy one. On the tax charge does it pop up, you know, 16, 18, 20 or do we move further back towards 20? Give us a bit of a feel for that.
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And corporate costs, I mean you’re still on the full year guidance although you had the big half year. Are you leaving yourself a bit of spare on corporate costs for the full year?
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Martin Morgan, Chief Executive Well in terms of - you’re right and I alluded to it before, we had problems with version 11. Well there was a lot of hard learnings from that. One is preparing the industry better and more in advance for any significant change in the view of risk, and that’s sort of become practice with RMS now. And it’s just a fact that the version 15 rollout is going very well. And that’s because the product was well designed, Q&A was done, the testing, the clients were prepared; it’s been well organised and well received.
Well I don’t know if we’ve got anything further to say on the timing difference. I think you know quite frankly in the scheme of things I don’t think there's any real slippage to RMS. We want to make sure that the - in terms of the rollout of the HD models that they come at a pace that the clients can adopt. It’s the same thing, they have to be sold in, the view of - I mean there is this transitioning needs to be handled. I'm much rather it was done at a steady, well organised pace, you know and a few weeks here or there I don’t think is material. I really don’t think it’s material. I don’t see any significant slippage at all.
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Stephen Daintith, Finance Director Yeah you’re dead right. Hemant said fall but that’s autumn so final quarter calendar. I think we’re splitting hairs.
Tax charge 14.1% now, I think sort of 15% on the full year is more likely. And I think we ought to see that sort of trajectory heading towards 20% over the next three, four years. But just to make the point though that it might be more spiky and a bit more volatile in light of that usability of those UK losses. So I'm not suggesting this is going to happen but if there were a dramatic decline in print advertising for example, profits would naturally come down and therefore the usability would be less and the tax rate might go higher. So I'm just flagging that that volatility may exist, but that’s the broad trajectory that we’re expecting to increase over time to that level.
And then was the final question around corporate costs I think? Yeah, so £17m for the half year compared to £21m or so last year. I think we may come in slightly lower than we did last year, but there will be that pickup in the second half so I wouldn’t necessarily just double the £17m to get to the full year basis. I think we’ll be closer to last year’s full year number, but maybe slightly lower than that.
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Chris Collett, Deutsche Bank Just two questions. One was just on Dealogic and really what your aspirations are along with Euromoney to really expand in work flow solutions in the investment banking space?
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And then second again on RMS. Can you just remind us about the timing of the additional investment in the data centres and the product development? Is there additional step up in the second half of this year compared to the second half of last year?
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Martin Morgan, Chief Executive Well in terms of Dealogic interesting question. I think if you think about investment, the investment network, investor intelligence network that I talked about earlier on, you know taking what an institutional investor has done traditionally and the relationships they have with both asset owners and asset managers and turning that into a digital system whereby assets can be transacted in terms of owners finding managers, you know that’s a workflow application. So Dealogic is not the only example of that.
They’re perhaps less headline grabbing examples even at a company like BCA using the Delphi platform. You know if you think about where the research was previously published, well it used to be in printed form but then it was a PDF, and of course what a lot of clients want, I imagine some of you in the room, is often you actually just want to imbibe the data and you want to be able to manipulate and do things with the data so you now through the application of the Delphi content management system etc. you know you can start to offer clients a whole variety of services where you’re putting - you know you’re allowing the client to be in control of how they use the information you have. So I think the sort of workflow development and being more engaged in the workflow, we’re going to see it in multiple businesses at Euromoney over time.
Are you going to deal with the other question about the developments?
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Stephen Daintith, Finance Director I don’t think you’re going to see in the second half a pickup in the RMS cost base. It’s pretty much as it is now and those investments in data centres were first started - where are we now - first started towards the back end of fiscal ’13. And as we’ve got to the stage that we’re at now, there is capital that’s on the balance sheet in respect of those which is now being released to the income statement. And there are lease costs which are being incurred that were - those leases being set up in anticipation of the launch in April ‘14 so they’re costs that we’re incurring effectively in respect of the postponement or the delay of RMS(one).
Any more questions?
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Martin Morgan, Chief Executive Well thank you very much for your questions and thank you very much for coming. Good morning.
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END
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