Business overview
The Haynes Group is the worldwide market leader in the supply of automotive
and motorcycle repair manuals. Each manual is based on a complete vehicle
strip-down and rebuild in one of our workshops, so that the written
and photographic instructions for our customers are inherently practical
and easy to follow. It is this attention to detail and uncompromising
approach to independent and trustworthy instructional advice that has
led to the Group achieving its global market leading position.
As well as our extensive range of automotive and motorcycle repair
manuals, the Group publishes an impressive list of practical, instructional
and easy reading titles aimed at those with an interest in more general
leisure and DIY related activities, motor sport and other transport
related topics. Through its UK subsidiary, Sutton Publishing, the Group
also publishes a wide range of history, biographical and military titles
as well as an extensive collection of local history titles recording
village, town and city life in bygone days.
The Group has two primary geographical business segments. Firstly,
the UK and European markets, which are serviced from its head offices
in Sparkford, Somerset. Secondly, North America and Australia, which
is responsible for the US, Latin American and Pacific Rim and operates
from headquarters near Los Angeles, California. The US business has
its production and principal distribution operations in Nashville,
Tennessee. It also has a branch operation in Melbourne, Australia which
is strategically located to distribute product to Australian and Pacific
Rim markets. Each business segment has its own management structure
and has full vehicle workshop and editorial resources, book manufacturing
facilities and sales and distribution capabilities.
In addition to its core automotive and motorcycle repair manual activities,
the UK and European operation publishes a range of general interest
titles, and prints for external customers.
Operating results overview
For the Group as a whole, trading has been difficult
in both our primary geographical business segments. Despite a slightly
stronger US Dollar against Sterling for the majority of the period,
Group revenue ended the period at £34.2 million, 6% down on the prior year (2005: £36.4
million). Our close relationship with our customer base provides the
Group with a valuable insight into our core market place and the feedback
we are receiving from our customers highlights a marked consumer slow
down. The significant increases in non-discretionary spending caused
by such factors as increased utility bills and the much publicised
rise in fuel costs is having a marked impact on High Street spending.
In the US, billions of Dollars in discretionary spending has been removed
from the retail economy solely as a result of increased gasoline prices
and retailers have acknowledged that their customers have been deferring
repair and maintenance projects. The current decline in consumer DIY
has also been experienced by home DIY stores, who have reported significant
falls in consumer spending in recent months. Tightening in inventory
controls, as retailers seek to address lower like-for-like sales in
their core DIY related activities, has had an impact in all markets.
During the year, we have also seen steady pressure on the cost of
our raw materials, especially paper, and have experienced similar upward
pressure on our utility overheads. In an effort to minimise the impact
of the increasing cost base, management has been tasked with reducing
costs and, while every effort has been made to defer such cost increases
for as long as possible, with a depressed sales channel over which
to spread the additional costs, there has been little alternative other
than to increase our prices to customers. The price increases were
phased during the financial year with North American and Australian
customers receiving an increase in our third quarter and UK customers
mid-way through the fourth quarter. It is anticipated that the increases
in selling prices introduced this year will help to combat the increased
cost of goods as they work their way through inventory in the coming
months. With further cost increases anticipated, the potential need
for additional price increases remains a possibility.
As a result of the above factors, operating profit
ended the year at £8.7 million, a reduction of 7% against the prior year (2005: £9.4
million).
Segmental overview
North America and Australia
At the half year, we pointed to the fact that hurricanes in America
and rising fuel prices, had adversely affected consumer spending. Our
customers responded with tighter inventory controls and this, in turn,
had an adverse impact on our sales. As a result, sales revenue, in
local currency, ended the financial year down 11% at $34.5 million (2005:
$38.8 million). At the same time that we were experiencing softer
trading, our cost base was coming under intense pressure from suppliers
and affected second half performance.
In Australia, market conditions have followed a similar pattern, with
increasing fuel prices leading to a slow down in consumer spending.
This, in turn, resulted in tighter customer inventory monitoring and
more frequent range reviews which had an adverse impact on key customer
purchasing.
The net impact of the above factors left the North
American and Australian segmental profit at $12.5 million which after
translation to Sterling amounted to £7.0 million (2005: £7.5
million), a reduction of 7%.
United Kingdom and Europe
Despite excellent stock availability in our customer
base, the shortfall in sales we experienced in all our key geographical
markets during the first half of the year, continued into the second
six months. In the UK, the impact of weaker High Street spending
has led to a tightening of inventory levels. The automotive DIY aftermarket
is currently experiencing challenging economic conditions as end
users defer activities. In France, trading continues to disappoint
with sales of French manuals performing below last year’s levels. In particular, we have experienced
a marked decline in the trend among younger consumers towards modifying
their vehicles which has had a knock on influence on sales of our vehicle
modifying titles. In our Scandinavian markets, sales ended the
year marginally ahead of last year with a small reduction in Swedish
language manuals being more than offset by higher sales of our English
language titles.
The latest RAC ‘cost of motoring index’, issued in January
2006, highlights that the average annual cost of running a vehicle
grew to nearly £5,000 or £14 a day; whilst during the six
month period to January 2006, fuel prices increased by 11%, raising
the average annual spend on fuel to £1,154. These factors, coupled
with increasing utility bills go someway to explain the lower discretionary
spending, particularly amongst those consumers with properties to maintain
and household vehicles to run. For our part, we continue to publish
service and repair manuals for the most widely driven vehicles and
through our extensive customer base ensure that the manuals are readily
available to end users. ‘Do it Yourselfers’ can increasingly
save a great deal of money by undertaking work themselves and difficult
economic periods tend to lead to increases in DIY activities.
Sales in both of our general publishing operations finished the year
marginally down on the prior period. In the Haynes Book Division, lower
sales of externally bought-in-titles and fewer title releases in our
popular Family Series led to a shortfall in revenue of 7% against the
prior year. Nevertheless, on a positive note, sales of our in-house
originated titles ended the year 4% ahead of the previous year, while
co-edition sales, boosted by overseas sales of the Official Formula
1TM Season Review, ended the year ahead by over 50%.
At Sutton Publishing, sales ended the year 2% down
on 2004/05, largely due to lower sales of Military titles following
last year’s 60th
anniversary of the ending of World War II, which had resulted in an
additional title output programme in this category. Sales of core history
and biographical titles, however, increased by 2%, the second consecutive
year of growth from this category.
It has been particularly encouraging in both of the general publishing
divisions to see the development of the title publishing programme,
which can be evidenced by increasing volume sales of the top selling
titles. In the Haynes Book Division, volume sales of the top 10 selling
titles increased by 24% over the prior year, whilst in Sutton Publishing,
the increase was 26%.
Sales of third party printing services to external customers increased
by 17% during the year, a third consecutive year of double digit growth.
Whilst not significant in a Group context, this revenue stream does
provide an important contribution to the UK and European business and
the continued growth in this area, particularly from repeat business,
helps to demonstrate the ability of Haynes to deliver quality printing
to tight deadlines.
Taxation
The charge to taxation for the year was £2.8 million (2005: £3.3
million). As an international business with over 80% of the consolidated
profits being earned in the US, where the rate of corporate tax is
higher than that in the UK, there is a corresponding impact on our
effective rate of tax, which for the financial year ended 31 May 2006
was 33% (2005: 35%).
Net debt and cash flows
During the year, the cash generated from operations
was £7.6
million (2005: £9.7 million) and represented 87% of Group operating
profit (2005: 102%). The reduction in cash generated by operations
can be partly explained by the 7% reduction in Group operating profit.
In addition, there was a 9% increase in inventories, as the operating
entities increased their holdings of raw materials and products in
light of the increasing cost of materials, coupled with lower levels
of obsolescence provisioning in both our general publishing divisions.
With a reduction in tax paid to Revenue authorities and lower finance
costs, the net cash generated from operating activities was £5.1
million (2005: £6.2 million).
Capital expenditure on new equipment of £0.7 million (2005: £0.6
million) remained in line with last year, while the deferred Chilton
acquisition costs fell by £0.1 million to £0.3 million.
Distributions to shareholders increased by 15% to £2.5 million
(2005: £2.1 million) and with the final pay down of the bank
loans shortly before the end of 2004/05, the net movement in cash and
cash equivalents was £1.7 million, an increase of £1.2
million (2005: £0.5 million).
The net impact of the above factors left the Group
with cash and cash equivalents of £3.1 million (2005: £1.8 million), an increase
of £1.3 million over the prior year.
Treasury management & procedures
The Group’s treasury policies seek to reduce and minimise financial
risk and ensure sufficient liquidity for the Group’s future needs.
The Group operates strict controls over all treasury transactions including
dual signatories and appropriate authorisation limits. The Group’s
principal financial instruments comprise bank loans and overdrafts,
lease financing arrangements and cash. The main purpose of these instruments
is to finance the Group’s working capital requirements as well
as funding its capital expenditure programmes. No trading in financial
instruments is undertaken.
The main currency exposure results from trading
transactions between our operating businesses and with our global
customer base. Approximately 52% of our revenue streams are derived
in US Dollars, 37% in sterling, 2% in Euro’s and the balance is a mix of currencies across our
operating entities.
Pensions
The Group has a number of different retirement programmes in the countries
within which it operates. The principal pension programmes are a contributory
defined benefit scheme and a smaller contributory money purchase scheme
in the UK and a non-contributory defined benefit plan in the US.
It has been evident over the past couple of years
that deficits in defined benefit schemes have been adversely affected
by a number of factors that have increased scheme liabilities including,
increasing life expectancy and a reduction in bond yields. The impact
of these factors has been most acutely felt in the UK scheme. Following
the outcome of the latest triennial valuation on the UK scheme, which
highlighted a scheme deficit of £3.5 million against the previous triennial
valuation deficit of £2.1 million, the UK trustees, on advice
from the scheme’s financial advisers, have reduced their holdings
in index-linked securities in favour of property based assets which
should help improve the return on assets over the period of the next
triennial valuation. As a result of the increase in the deficit, the
company has agreed to increase its contributions into the UK scheme
from 1 July 2006, by approximately £120,000 per annum.
The Group recognises the importance of the work
undertaken by its staff and also of the importance placed on the
Group’s pension
arrangements by its employees. It is, therefore, keen to maintain such
arrangements provided that it remains commercially viable to do so.
Accounting standards
The Annual Report and Accounts for the financial
year ended 31 May 2006 are the first the Group has reported in accordance
with International Financial Reporting Standards (IFRS). As a result
of the move to IFRS the consolidated profit before tax has increased
by £0.7 million (2005: £0.8 million) principally as a result of the non-amortisation
of goodwill (IFRS 3) which increased profit by £0.5 million (2005: £0.5
million) and the inclusion of a residual value when depreciating freehold
property (IAS 16) which increased profit by £0.3 million (2005: £0.3
million). In addition, following the introduction of IAS 19, the standard
covering defined benefit pension schemes, the current year profit has
been reduced by £0.2m in comparison with the prior year.
Group Outlook
The current year has been challenging and the message coming through
from our customers around the world is that this is a situation that
is likely to continue into the coming months. Furthermore, although
we benefited from a stronger US Dollar against Sterling during the
early and mid part of our financial year, the US Dollar weakened significantly
in the latter part of our financial year and current forecasts expect
the US Dollar to remain weak during the first half of the next financial
year. Despite this note of caution, management enters the new financial
year with a degree of optimism.
In the UK, the focus will continue on those areas of the business
where trading has remained consistently below management expectations
and strategic reviews into these areas should be concluded before the
half year. In the core activity initiatives, already underway to utilise
our technical information in adjacent market segments and new formats,
will continue. While not anticipated to be significant in the next
financial year, management believe the potential exists for the generation
of significant revenue streams from these activities in future years.
Also, in the UK, the focus will continue on driving
value from the strength of the Haynes brand. In March of this year
we were delighted to be appointed by the Ministry of Defence as official
publisher for the RAF and the first titles in this exciting new partnership
are due for publication in the autumn of 2007. This is a prestigious
appointment for Haynes and sits alongside our official publisher
status for the Formula 1TM and MotoGP season reviews. In addition,
a new licensing arrangement covering a range of gift and stationery
products was launched into certain leading High Street stores shortly
after the end of our financial year. The “Haynes Classic” range includes leisure
bags, belts and wallets as well as a other gift and stationery products
and will help to raise the awareness of the brand, particularly amongst
the younger consumer. Early signs are encouraging and indeed, the range
recently won the prestigious “Licensed Gift of the Year Award” which
is awarded by the Gift Association.
In the UK, the previously mentioned plan to introduce new IT systems
is progressing well and management hope to commence implementation
during the latter part of our second quarter. Whilst such things are
extremely difficult to quantify, we do anticipate efficiencies of some
magnitude.
In the US, despite disappointing sales during our current financial
year, we are optimistic in respect of the opportunities for growth.
The average age of passenger vehicles on the road is now 9.5 years,
a figure that is increasing and statistics show that Americans are
now driving longer distances and own more vehicles per household than
ever before. While consumers are currently deferring essential repair
and maintenance work, as the global economy adjusts to higher energy
prices, we expect that much of this work will have to be undertaken
and as a result, sales will return to more normal levels.
Whilst the last financial year has been difficult, the results, to
a certain degree, hide the measured progress that is being made to
drive the business forward. The current global economic and political
environment does not breed confident predictions and the duration of
these difficult times is far from clear, however, with the completion
of restructuring projects due to commence in the second half of the
year, I am confident that the outlook for future revenue and profit
growth from existing business operations is encouraging.
Eric Oakley
Group Chief Executive
16 August 2006
