Preliminary Results (1363H)

TIDMMSQ

RNS Number : 1363H

Media Square PLC

24 May 2011

Media Square plc

Preliminary results for the 12 months ended 28 February 2011

Media Square plc (AIM:MSQ), the international marketing communications group, today reports its preliminary audited results for the 12 month period ended 28 February 2011.

Overview

-- Strong revenue growth in a competitive environment

-- Significant improvement in profitability

o Year-on-year headline operating profit increase of GBP3.3 million

o Average agency operating margin now in line with industry norms

-- Small reduction in underlying net debt

Key financial data

-- Revenue of GBP45.4 million (2010 restated: GBP39.6 million), representing a 15% year-on-year increase.

-- Headline EBITDA of GBP2.9 million (2010 restated: loss of GBP0.3 million).

-- Headline operating profit of GBP2.1 million (2010 restated: loss of GBP1.2 million).

-- Underlying net debt of GBP19.5 million (2010: GBP19.9 million).

-- Loss before tax of GBP0.4 million (2010: loss of GBP13.3 million)

Operational highlights

-- New bank facility signed

-- arken and twentysix New York sold

-- CST and The Gate merged

-- Launch of 26 Mobile - specialist mobile unit

-- New CFO appointed

Roger Parry, Chairman of Media Square plc comments:

"The results for the past year show a healthy growth in revenues, mostly from organic new business, and a significant improvement in profitability. The Group is now stable and well positioned for further growth; however, the level of debt and finance costs remain unacceptably high and the Board plans to take steps to address this in the coming year."

Peter Reid, Chief Executive Officer of Media Square plc comments:

"The Group has made a solid start to the new financial year and, after two months, remains on budget, and on track to deliver a further year of operating profit growth. However, the Board's optimism remains tempered by the uncertain impact of spending cuts on consumer confidence in the UK in particular and hence the medium term outlook for marketing budgets."

- ends -

Enquiries to:

 
 Media Square plc               www.mediasquare.co.uk 
-----------------------------  ---------------------- 
 Roger Parry/Peter Reid/Dean 
  Wright                        020 3026 6600 
-----------------------------  ---------------------- 
 Collins Stewart Europe Ltd 
-----------------------------  ---------------------- 
 Adrian Hadden/Adam Miller      020 7523 8350 
-----------------------------  ----------------------

CHAIRMAN'S STATEMENT

Dear Fellow Shareholder,

Over the past twelve months the Media Square Group has made substantial progress towards our goal of being a focused and profitable group of marketing communications agencies. The painful and long period of restructuring is over. The emphasis now is on continuing to win new business, improving margins and reducing debt.

For the twelve month period revenues were GBP45.4 million, which represents an increase of 15% over the previous twelve months, much of this growth was new business wins. Headline operating profit was GBP2.1 million compared to a loss of GBP1.2 million last year. This substantial improvement reflects the closure or sale of loss-making businesses and an improvement in margins on the back of revenue growth. Over the period, many individual agencies have demonstrated a solid performance, winning new accounts, creative awards and praise from clients, industry peers and trade media.

During the year we agreed new bank facilities with Lloyds Banking Group, which run until July 2013. However, the Group continues to carry an unacceptably high burden of debt and associated finance costs, reflecting past acquisition activity and losses made by certain agencies which have now been sold or closed. The top priority remains getting this debt level down. In this context, a dividend will not be paid and the Group will be exploring the options available to strengthen its balance sheet and to add additional scale to the Group.

At the end of the period, we sold our point-of-purchase manufacturing business, arken, for GBP750,000 and the buyers have been granted the option to acquire the freehold premises which arken occupies for GBP3.25 million. If this option is not exercised by its expiry date on 31 December 2011, then the Group will explore the sale of the property on the strength of the 10 year lease entered into by arken at the time of the sale. The proceeds from the freehold property disposal will be used to reduce bank debt.

The Board

Bruce Winfield, the Group's Chief Operating Officer and Chief Financial Officer, passed away in March 2011 after a lengthy illness. He has been succeeded as CFO by Dean Wright who was the Group's Financial Controller. The role of COO is now being performed by Peter Reid, the Chief Executive Officer. Bruce played a major part in the successful turnaround of Media Square which was his final job in a long and successful career. He was widely respected and liked in the Media Square Group and the broader marketing services industry. He will be greatly missed.

Prospects

The Media Square Group now consists of ten marketing communications agencies, each of which has a clearly focused service proposition. In the first two months of the year the Group has traded profitably and in line with budget.

The turnaround of Media Square has been achieved under the most difficult conditions as the reconstruction process started in late 2007 just before the collapse of Northern Rock and continued throughout the period of the credit crunch which proved to be a particular challenge for Media Square as a number of our agencies are focused on financial services clients.

The Group's staff, bank and professional advisers have been hugely supportive during the restructuring and, on behalf of the shareholders, I would like to take this opportunity to thank them.

Roger Parry

Chairman

23 May 2011

BUSINESS REVIEW

Chief Executive Officer's Review

The 2010/11 financial year was an important period for Media Square, marking a return to growth after the period of the turnaround and recession.

Against a market backdrop that remained challenging, the Group's agencies delivered strong revenue growth and a significant increase in profitability over the prior year.

At the same time, the sale of arken was an important step in completing the Group's strategic transformation which has been underway for the past three years. The Group is now solely comprised of marketing communications agencies, each with their own clear and differentiated positioning across the disciplines of advertising, public relations, research, marketing and design.

Set against these positive developments, the primary issues for the Group remain the high level of debt and the overall level of profitability.

The challenge now is to build on the positive momentum of the past year and to drive further sustained increases in profitability (on the back of continued revenue growth and the current high level of operational gearing), while at the same time strengthening the Group's balance sheet, which is a priority for the current financial year.

Overview: Strong growth in revenue and profitability

The most pleasing aspect of the Group's performance over the past twelve months was the return to a strong level of top line growth. The Group delivered a like-for-like revenue increase of 15% over the prior year.

Moreover, given the high level of operational gearing that exists within the Group, this revenue growth resulted in a disproportionately strong growth in headline operating profit and headline EBITDA. Headline operating profit and headline EBITDA over the year represented an increase of GBP3.3 million and GBP3.2 million respectively over the prior year to February 2010. At the same time, the headline operating profit margin from continuing operations (i.e., before central costs) increased from 3% in the prior year to 10%.

At a PBT level, the Group also made progress, reducing the loss before tax to GBP0.4 million from GBP13.3 million in the prior year.

However, it is recognised that the absolute level of both the operating profit and PBT figures remain materially below the Group's longer-term aspirations. This is especially true at a PBT level, where the current level of debt and associated financing costs remain a significant burden, and this will continue to depress the Group's results until the overall level of debt is reduced.

Segmental Summary: Strong growth in advertising and marketing

Media Square consists of ten agencies which have historically been reported in three segments, the breakdown of their revenue and headline operating profit by segment is shown below:

 
                                                   Year ended 
                        Year ended                 28 February 
                     28 February 2011                 2010 
                                 Headline                   Headline 
                                operating                  operating 
                 Revenue    profit/(loss)   Revenue    profit/(loss) 
                    GBPm             GBPm      GBPm             GBPm 
 Advertising*       27.3              3.2      22.1              0.8 
 Marketing          11.0              0.8      10.3              0.3 
 Design              7.1              0.3       7.2              0.3 
 Central               -            (2.2)         -            (2.6) 
 Total              45.4              2.1      39.6            (1.2)

*Advertising includes Market Research and Public Relations.

The advertising and marketing segments performed strongly over the past year.

The core agencies within these segments grew at approximately 20% over the prior year, although the average revenue growth within the marketing segment was adversely affected by a weaker performance at the London office of twentysix, which was closed midway through the year.

Advertising benefited from the recovery in financial services spend and strong new business wins, as well as the acquisition of CST. The marketing segment benefited from the trend of strong growth within digital marketing and associated new business wins in this area. Both segments continue to be well placed for future growth.

Compared with advertising and marketing, the design segment had a less strong year, with essentially flat revenue and operating profit over the prior year. However, over the past six months we have taken a number of steps to refine our overall design offering, both in improving our digital capabilities and in increasing the level of shared resources across the design agencies.

Geographical Summary: Strong Asian growth

 
 Year ended February       2011      2010 
                        Revenue   Revenue 
                           GBPm      GBPm 
 United Kingdom            34.9      31.6 
 Rest of Europe & 
  World                    10.9       8.1 
 Eliminations             (0.4)     (0.1) 
 Total                     45.4      39.6

The majority of the Group's business continues to be in the UK, from where approximately 75% of its revenues are derived. Against the backdrop of a flat overall market, the performance of the Group's agencies in the UK was strong. Overall the agencies delivered a 10% year-on-year revenue increase, a level which very few of our peers were able to match.

The performance of our overseas businesses was perhaps even more pleasing, with an overall revenue increase of 35%. Our Asian businesses in particular had a very encouraging year and, over the course of the year, we both strengthened our businesses in China and have developed a fledgling presence in India. In line with the more positive Asian macro environment, these agencies are particularly well positioned for further growth over the coming years.

Client Spending / New Business: Recovery in spending and new business wins

The Group's growth in new revenue over the year was a function both of a rebound in client spending (where clients, in previous years, had been retained but had materially reduced their level of spend) and a strong new business performance over a number of the Group's agencies.

Recovery in spend has been particularly marked in the financial services sector which is a key sector for the Group. This improvement was partially offset by the reduction in public sector spending over the year.

At the same time new business momentum was maintained throughout the year, with major new client wins over the second six months of the year including 1MDB, Bennetts, Franklin Templeton, Friends Life, Kuehne + Nagel, McCain, Office Depot, Orange, RBS, Siemens, Skandia, Wella and Unilever.

Looking forward, new business will remain an absolute priority for the Group and its agencies, with a particular focus on improving our ability to win larger transformational pieces of business as well as to derive greater value from cooperation across the Group.

Agency Portfolio: Focused group of marketing communications agencies

Following the sale of arken in February 2011, the Group has now completed its transformation into a coherent set of marketing communications agencies focused around the disciplines of advertising, public relations, research, marketing and design.

Each of the Group's ten agencies has its own clear and distinctive positioning within one of these discipline areas and an established digital offering. Similarly, each agency places excellence in client service at the heart of its offering and increasingly this will be emphasised at a Group level as a common point of differentiation.

The majority of the Group's agencies are now at least at a minimum level of scale in terms of profitability, number of staff and breadth of clients, which in turn strengthens their overall proposition to clients. This process of building scale within our agencies has continued in recent months with the merger of CST and The Gate to form CST The Gate, which has strengthened our overall advertising proposition, and an increase in the level of integration between our two design and branding agencies, Holmes & Marchant and Lloyd Northover.

There remain a limited number of agencies or offices which are below an ideal level of scale and/or overly dependent on a small number of large clients; however, the Group continues to make progress in this area.

Goal: Delivering sustained operating profit growth

Having built a stable agency portfolio and a track record of profitability, the Group's focus will now be on driving sustained operating profit growth within each of its agencies. This growth will be driven by the successful execution of individual growth strategies, tailored to the individual agency's position and prospects. Generally, they will combine a mix of organic growth (driven by both new business and geographic expansion) and limited tuck-in acquisitions to bolster this growth.

At the same time, these strategies will be supplemented by a greater focus on more proactively deriving benefits from inter-agency cooperation, and improving the ability of the Group's agencies to work together in areas where clients desire them to do so.

In parallel, at a corporate level, the Board will look to strengthen the Group's balance sheet as a matter of priority, as well as considering selected opportunities to expand the scale of the Group's operations to better leverage its central costs. This reflects the fact that there are only limited opportunities to derive further reductions in the Group's central costs (after the radical reductions of the past three years); however, the Group's existing infrastructure could comfortably cope with a materially larger organisation.

Remuneration: Reinforcing the growth imperative

One area that will be critical in helping to drive the successful implementation of the Group's new strategy will be enabling its senior managers to share in the value that they create by delivering sustained operating profit growth within their agencies.

As such, we are currently in the process of implementing an innovative, new long term incentive plan which will replace the existing restricted stock scheme and which will provide key senior managers across the Group with a compelling reward for delivering high levels of operating profit growth over the next four years. The scheme will only begin to pay out if minimum levels of annual operating profit growth are achieved, with the Group retaining a level of flexibility to settle awards in either cash or shares at the end of the period.

Current Trading and Outlook: Cautious Optimism

Building on the progress of the past twelve months, the Group has made a solid start to the new financial year and, after two months, remains on budget and on track to deliver a further year of operating profit growth.

However, the Board's optimism remains tempered by the uncertain impact of spending cuts on consumer confidence in the UK in particular and hence the medium term outlook for marketing budgets. At the same time, the Group's prospects are likely to remain constrained until the Group's balance sheet has been successfully strengthened.

Peter Reid

Chief Executive Officer

23 May 2011

Chief Financial Officer's Statement

Financial Review

During the financial year to February 2011, the Group delivered strong revenue growth and a significant increase in profitability over the prior year. Revenue for the period was up 15% to GBP45.4 million, headline EBITDA increased by GBP3.2 million to GBP2.9 million and headline operating profit increased by GBP3.3 million to GBP2.1 million.

Over the course of the year the Group made material progress in improving the underlying profitability of the Group. For the year under review the Group's headline operating profit margin from continuing operations (i.e. before central costs) was 10%. This represents a significant improvement over the prior year figure of 3%, although it remains short of the Group's long-term goal of 15% as the economic environment improves. At a Group level, after central costs, the operating margin was 5%. Looking forward, we would expect that the gap between the operating profit margin from operations and the operating profit margin at a Group level would narrow as the overall scale of the Group's operations increases.

Income Statement

During the year under review, the Group achieved revenue of GBP45.4 million (2010 restated: GBP39.6 million), headline EBITDA of GBP2.9 million (2010 restated: loss of GBP0.3 million) and headline operating profit of GBP2.1 million (2010 restated: loss of GBP1.2 million).

After inclusion of share-based payments the operating profit is GBP1.8m (2010 restated: loss of GBP11.5m).

The Group made a loss on closure of subsidiary undertakings of GBP479k, which relates to the closure of twentysix London (the small London office of the Group's digital agency twentysix). In addition, the Group made a profit on the sale of investment of GBP0.2 million, relating to the sale of the 1,080,000 Ordinary shares in Rivington Street Holdings plc held at 28 February 2010, and a fair value movement on warrant derivative of GBP0.1 million, which has arisen from the annual fair value review of the warrants granted to Lloyd Banking Group as part of the bank facility refinancing.

As discussed above, the Group has a significant financing burden relating to its high level of debt. As such, the net finance costs for the year to 28 February 2011 were GBP2.1m (2010: GBP1.7m). Included in the finance costs for the year was a one off non-cash finance cost of GBP0.2 million relating to the accelerated amortisation of loan arrangement fees (incurred in 2005), which was triggered when the existing facilities were terminated and replaced by the new bank facilities in July 2010.

Taking the above into account, the Group made a loss before tax of GBP0.4 million (2010 restated: loss of GBP13.3 million - a figure which included a non-cash goodwill writedown of GBP7.8m).

Disposals / Discontinued Operations

The Group continues to follow a strategy of increasing the scale of its core agencies and exiting from any businesses that do not fit with the Group's overall marketing communications focus or that are below a minimum scale. In the year under review, the Group completed the disposal of three subsidiaries: twentysix New York, a Microsoft-focussed software consultancy company, on 20 August 2010 to Tallan Inc.; arken, a point-of-purchase and manufacturing business, on 28 February 2011 to Writtle Holdings Limited; and the Hong Kong office of Lloyd Northover on 28 February 2011 to existing management.

The results of these operations in the period, a loss of GBP0.5 million, were classified within discontinued operations in the income statement, and the results for the prior year, a loss GBP7.6 million (including goodwill impairments of GBP8.1 million), have been restated to discontinued operations (see note 5 for further details). The loss on disposal of these operations was GBP2.0 million (including a goodwill write-off of GBP0.5 million) and this has also been classified within discontinued operations.

Net Debt and Debt Facilities

Underlying net debt was GBP19.5 million (2010: GBP19.9 million) at the period end, excluding GBP5.1 million (2010: GBP6.0 million) of restricted cash which is included in the reported net debt of GBP14.4 million (2009: GBP13.9 million). This cash represents advanced receipts from clients and in the Board's opinion underlying net debt is a more representative figure of the position at the year end.

The Group's net debt balance represents gross debt of GBP22.3 million (2010: GBP22.5 million) less cash of GBP7.9 million (2010: GBP8.6 million) held by the Group, of which GBP5.1 million (2010: GBP6 million) represents advanced receipts from clients.

In addition to the proceeds from the sale of arken, the Group has also entered into an option agreement to sell the freehold property which is occupied by arken for GBP3.25 million. If this sale is completed, these proceeds would be used to further reduce debt. This option expires at the end of December 2011. If the purchaser chooses not to exercise this option, then the Group would explore the sale of the property on the strength of the 10 year lease entered into by arken at the time of the sale.

As has previously been disclosed, the Group entered into a new bank facility with Lloyds Banking Group in July 2010. These facilities run until July 2013. In addition, the Group has recently agreed a further increase to its revolving credit facility from GBP4 million to GBP6 million which the Board believes provides the Group with a more appropriate facility to support growth and execute the Group's strategic plan.

Balance Sheet and Cash Flow

Net assets reduced by GBP2.3 million from GBP4.0 million at February 2010 to GBP1.7 million at February 2011. This reflects a decrease in assets of GBP4.1 million, partially offset by a decrease in liabilities of GBP1.8 million and predominantly relates to the effects of the disposal of arken and twentysix New York and the closure of the twentysix London office.

The freehold property which is occupied by arken has been reclassified in the balance sheet from property, plant and equipment to investment property in line with accounting requirements.

In the period there was a movement in share-based payment reserves and investment in own shares which primarily reflects the vesting of restricted stock units issued to senior managers and executives during the year which were satisfied by a transfer from the shareholding of Tenon (IOM) Corporate Services Ltd, sole trustee of the Group's employee benefit trust.

Over the year, the Group produced cash inflow from operations of GBP1.4 million (2010: outflow of GBP1.1 million) and after financing and capital expenditure costs are taken into account, there was a small overall cash outflow of GBP0.3 million (2010: GBP2.1 million). This small overall cash outflow includes the impact of a net unwind of GBP0.9 million of the GBP6.0 million cash held for use on specific client projects at 28 February 2010, which was spent as these projects completed. On an underlying basis, excluding the effect of the unwind of cash held for use on specific client projects, there was a cash inflow from operations of GBP2.3m, and an overall cash inflow of GBP0.6 million over the period.

Capital expenditure continued to be carefully managed and kept to 76% of depreciation. In the new financial year, the Group will have one material capital expenditure commitment relating to the new office of Illuminas, the Group's research agency, following the expiration of its existing lease, which will likely result in capital expenditure being slightly in excess of depreciation for the year. Beyond this year the Group would expect capital expenditure to remain below the annual depreciation charge for the foreseeable future.

The finance costs paid in the period, as shown in the cash flow statement, were GBP1.7m (2010: GBP1.6m).

Other significant cash flow movements in the period include cash inflows from acquisition, disposal and closure of subsidiary undertakings of GBP0.5 million, relating to net proceeds from the disposals discussed above, the closure of twentysix London (the small London office of the Group's digital agency twentysix) and the finalisation of the CST acquisition. A further cash inflow from sale of investment of GBP0.6 million, relates to the sale of the 1,080,000 Ordinary shares in Rivington Street Holdings plc held at 28 February 2010.

Working capital management remains strong. Over the period, there was a modest reduction in creditor days and a corresponding decrease in debtor days, leaving the overall position largely unchanged.

Property

In December 2010 the Group agreed a deal with Airline Services to take on the lease of the Group's one excess property lease, which related to the former operations of Symmetry in Manchester, and released the property provision associated with this property. As a result, the Group's portfolio of property is now highly utilised, with no significant excess space.

Financial Risk Management

As part of the new bank facility agreement with Lloyds Banking Group, the Group terminated its existing interest rate hedge over GBP18.75 million at a rate of 4.78% and entered into new interest rate hedging arrangements over GBP15m for the duration of the facility with rates fixed at 2.00% to 30 April 2011, 3.55% from 1 May 2011 to 30 April 2012 and 4.68% from 1 May 2012 to 31 July 2013.

The Group has some currency risk, with approximately 25% of its revenues being generated outside of the UK. The Group does not currently enter into any currency hedging arrangements other than on short term intercompany loan balances where cash movements are probable.

Taxation

The total tax credit for the year was GBP0.1 million (2010: charge of GBP0.6 million). During the year the Group received net tax refunds of GBP58,000 (2010: paid GBP43,000).

For the immediate future, the Group expects to have limited tax liabilities since it continues to hold significant deferred tax assets. At the end of the financial year it held on its books a deferred tax asset of GBP1.8 million (2010: GBP1.5 million). However, in addition to this figure it has unrecognised deferred tax assets of GBP2.6 million.

Dean Wright

Chief Financial Officer

23 May 2011 CONSOLIDATED INCOME STATEMENT