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GfK Results Show Progress of NOP Integration
The GfK Group has announced results for the third quarter of 2005. The integration of NOP World is said to be proceeding according to plan, and the group has already achieved 95.6% of its order volume forecast for 2005. Sales for the first 9 months are up 28.8% vs Q1-3 2004 to EUR 627.5m.
EBIT after income from participations rose 84.6% to EUR 107.6m, not including non-recurring costs of EUR 5.9m attributable to the integration of NOP World. GfK cites four factors in the healthy results:- 'pleasing' growth in its core business, up EUR 7.7m, or approx. 13.3 percentage points, on the previous year.
- proceeds from the sale of the 50% stake in IHA-IMS Health, Switzerland, contributing EUR 24.1m, accounting for 41.4 percentage points of the increase.
- the consolidation of NOP World, contributing EUR 11.2m to the results before integration costs of EUR 5.9m (19.1 percentage points).
- profits relating to the revaluation of loans for the financing of the NOP World acquisition as a result of positive currency effects - EUR 6.3m (10.8 percentage points).
At 17.1% the margin, i.e. EBIT after income from participations in relation to sales, was also considerably higher than in the same period for the previous year. Consolidated total income after minority interests rose from EUR 34.6m to EUR 62.3m.
The group's sales showed organic growth of 5.5% to 5.7% depending on the interpretation of certain long-term contracts. Acquisitions accounted for 23.5 percentage points of sales growth, primarily as a result of the acquisition of NOP World.
Cost of sales and admin expenses rose faster than sales, reflecting integration costs for the NOP World companies. GfK borrowed around EUR 550m to finance the acquisition and shortly after the transaction, part of the authorized capital was used to increase equity - as a result the equity ratio dropped accordingly to 27.6 per cent (same period in the previous year: 44.3 per cent). Current assets stood at EUR 399.7m while current liabilities amounted to EUR 588.5m.
GfK's net indebtedness rose from EUR 31.7m at the end of 2004 to EUR 533.0m as at 30 September 2005. The acquisition of NOP World was largely funded by borrowings.
Business Divisions
All GfK's business divisions increased their sales compared to the first nine months of 2004. Retail and Technology achieved the highest level of organic growth - strong sales increases recorded in Custom Research, Media and HealthCare stemmed primarily from the acquisition of NOP World. Media and HealthCare also benefited from this.
Four of the company's five business divisions increased their operating profit compared to the same period in the previous year. Only in Consumer Tracking was there a year-on-year fall in results - GfK says this is due to the nonrecurring effects relating to the panel business at Swiss subsidiary IHA-GfK.
The Custom Research division, GfK's largest, increased its sales in the first nine months of the year by 47.8% overall to EUR 269.2m, or by 4.2% if the newly acquired companies are excluded. EUR 200.8m was attributable to the GfK Group and EUR 68.4m to the NOP World companies - both have high margins (over 8%).
The Retail and Technology division showed very good sales growth of 10.6%, mostly organic. Operating profit rose 21.5% to EUR 37.3m and the current margin is 24.8%.
The Consumer Tracking division increased sales by 4.6%, all organic. At EUR 1.3m, operating profit came in below the figure for the same period in the previous year. Restructuring of the retail panel business in Switzerland dented these results - without it, sales growth would have been 8.3% and profit would have risen by 18.6%.
The Media division added US subsidiary, Mediamark Research Inc. (MRI), operator of the American Consumer survey; and GfK Eurisko, based in Italy, makers of on of the competing electronic Media-Monitor technologies in the UK's current RAJAR audience research trials. The division achieved a sales increase of 43.1% of which 36.7 percentage points are attributable to the acquisition of the NOP World companies and 6.1% to organic growth. Operating profit was up 92% to EUR 8.8m.
The Healthcare division - restructured and amalgamated in the US following the acquisition of NOP World, saw sales of EUR 68.5m, up almost 34% on the previous year (31% from NOP World companies and 4.6% organic growth with currency effects reducing the figure by 1.6%). Operating profit was just up, at EUR 6.8m. Growth was hampered by disappointing development at GfK Martin Hamblin in the UK - excluding this company, operating profit would have risen almost 23%.
GfK's Other division, which includes GfK Group Services, GfK Data Services and GfK Business Solutions & Processing, experienced a slight decline in sales, as in previous years, due mainly to the lower volume of services provided by GfK Business Solutions & Processing for Information Resources GfK.
Regional trends
With the acquisition of NOP World, the share of total sales attributable to the Northern Europe and America regions has risen considerably.
As a result of the first-time consolidation of NOP World, Germany's share of GfK's total sales has fallen from 35.2% to 29.6%, but it remains the largest single national market for GfK. Mostly organic growth increased German sales by 7.6% in the first nine months of 2005.
Western and Southern Europe, the second largest region in the GfK Group, saw sales up 13.8%, over half of which was due to NOP World companies. In Northern Europe sales were up 90.1% on the same period in the previous year, exclusively due to NOP World - organic sales growth was down -0.4%. In Central and Eastern Europe, sales growth was 29.4%of which 20.1 percentage points are attributable to organic growth.
In GfK's America region, including subsidiaries in Brazil, Chile, Canada, Mexico and the USA, sales have almost doubled, virtually all from acquisitions (97.8% growth). Organic growth for GfK in this region was only marginal and GfK says operations in the USA failed to meet its expectations.
In Asia and the Pacific, sales increased very slightly year-on-year by 0.1%. Organic growth amounted to only 1.3 percentage points, mainly because of weaker business performance in Japan. This effect was exacerbated by the fact that more global contracts originating in Japan are being processed from Germany. Currency effects reduced sales by 1.2%.
In the first nine months, mostly due to the acquisition of NOP, the number of employees at the GfK Group rose by 1,972 to 7,511 full-time staff.
NOP Integration
GfK on June 1st started the integration process for the companies it acquired as part of the NOP World transaction - the group says the intensive integration process is proceeding to schedule.
By the end of the year, both groups of companies will have taken significant measures towards the creation of one joint organization. The costs for integration were originally estimated at around EUR 18m to EUR 20 million, but GfK now estimates that the costs will come in around one quarter lower than forecast, totalling approximately EUR 15m. GfK has already spent EUR 5.9m.
Among the restructuring, the companies based in North America are now managed by the GfK Custom Research Board North America, while in the UK, following its restructuring in 2005, GfK Martin Hamblin is to be integrated into the ad hoc research company trading in future as GfK NOP; in Italy, active GfK subsidiaries in the Custom Research division became part of GfK Eurisko; and in the HealthCare division, activities in North America have since been pooled in the GfK U.S. HealthCare Board.
Forecast
Excluding NOP World, but including the companies acquired to date in 2005, GfK expects sales totalling approximately EUR 720m - up more than 7%. Including the pro rata consolidation of the sales by NOP World, GfK expects to achieve sales in excess of EUR 900m in 2005. The forecast for operating income stated in the last Interim Report is confirmed: excluding NOP World, EBIT after income from participations at GfK will reach around EUR 110m, including EUR 24.2m from the sale of the 50% stake in IHA-IMS Health, Switzerland. This equates to a margin for GfK of over 15%.
Including NOP World, GfK is set to achieve a margin of at least 12.5%. Included in this margin are integration costs totalling approximately EUR 15m. GfK is confident that 'so much progress in the integration process will have been made by the end of 2005, that it will have only a negligible effect on the figures for financial year 2006'.
As previously, GfK will finance its investments for ongoing business in full from the cash flow and will use any remaining cash flow for debt paydown. 28 February 2006 has been set as the provisional date for preliminary results for financial year 2005.
Full details and further discussion of the results should be consulted before acting on any of the above, via the group's web site at www.gfk.com ..
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