Chief Executive Officer's Report

To have emerged stronger from the toughest media environment in recent times, as the group has demonstrably done, is encouraging. Most of our strategic objectives have been accomplished, record operating cash flows (operating income before depreciation less capital expenditure and adjusted for changes in working capital) have been generated and the focus of our management team – which has performed with dedication in the face of very challenging circumstances – could not be clearer. Excellent performance from our South African operations has reinforced our belief, learned the hard way, that the greatest opportunities reside at home.

Longer-term gain has come with short-term pain. In the past year’s results, the group has paid the penalty for over-allocating capital to cinema exhibition. The damaging impact on the group’s earnings, cash flow and balance sheet have now been largely cleaned from the system. The results of the coming year should reflect the benefit of corrective actions taken during the 2002 fiscal year, including the disposal of certain Ster Century Europe (SCE) territories, which was concluded in June/July 2002, and further downsizing and restructuring of the UK one to one marketing businesses.

Vastly improved operating performance and cash flow from locally based Ster-Kinekor Theatres (SK Theatres) more than offset particularly depressed results from the one to one marketing businesses in the UK. Complemented by a steady contribution from our local advertising businesses, the group’s cash flow generation was exceptional and this has allowed the group to buy back a proportion of its own shares.

Achieving its strategic objectives, tidying its profile and moving closer to its stated vision, the group is well positioned to increase earnings and continue to generate good cash flow. This, in turn, will allow the company to pay dividends to shareholders in the 2003 financial year, pursue further share buybacks and contemplate earnings-enhancing acquisitions on a selective and low-risk basis.

VISION AND POSITIONING
Simply stated, Primedia intends to be recognised as a world-class South African media group consisting of a balanced portfolio of media businesses. To do this, it will concentrate on the local marketplace where it enjoys critical mass, good profitability and depth of quality management. This is also where the group can be most competitive for sustainable growth in cash flow and earnings.

What does a "balanced media portfolio" mean? The envisaged media portfolio should comprise an appropriately constituted mix of entertainment and advertising businesses to enable entertainment partially to counter the economic cycles which drive advertising. The more balanced the mix, the greater the opportunities for synergistic leverage and efficiencies to enrich competitive offerings. This crucial combination is achievable in South Africa, certainly more so than abroad. Already it characterises several of our South African operations and largely accounts for their success. It invites higher margins and lower risk to the earnings stream.

The basic business criteria, as we have defined them, are for the portfolio businesses to:

  • Enjoy high rights exclusivity in the platforms owned or managed and/or in the content created or distributed;
  • Lead their market sectors; and
  • Have critical mass.

    Given the group’s experience in the entertainment sector, over the short term it will focus less on proprietary content. Rather, it will be invested in businesses where the content risk is carried by third parties.

    We are confident in our expectation that the desired mix of advertising and entertainment businesses will begin to deliver improvements in operating margins, and a predictable level of superior profit growth. The conversion ratio of profits into cash should also continue to remain high.

    Our vision to be a world-class South African media group already has solid foundations from which this potential can be realised. Whilst the financial results of these businesses are compelling in terms of earnings quality and cash flow, the way we reach and touch the South African consumer is equally impressive:

    Advertising

  • 94.7 Highveld Stereo, 702 Talk Radio and 567 Cape Talk reach 1,5 million listeners in the key LSM 7-10 income groups throughout the most lucrative Gauteng and Western Cape markets;
  • The leading internet portal, iafrica.com, has 350 000 unique online users;
  • Primedia Outdoor offers 20 000 advertising opportunities with national reach;
  • Through its representative universe of 600 hypermarkets and supermarkets, Primedia Instore reaches shoppers who purchase over R30 billion of consumer goods annually;
  • All the township and rural areas of South Africa are covered by Primedia Face2Face, a leading provider of alternative media services;
  • Access to over 15 million daily commuters is provided by Comutanet’s transit media services covering taxis, buses and trains;
  • Some 25 million domestic cinema admissions are captured by CineMARK, South Africa’s only onscreen advertising company;
  • Some 7 million households (representing 70% of formal and informal homes) are exposed to Primedia @ Home’s direct-to-home pamphlet, leaflet and sample distribution service;
  • A targeted universe of over 300 000 readers collectively receive Primedia Publishing’s 13 specialist magazines;
  • Megapro Marketing, the undisputed leader in sports marketing and the exclusive commercial agent for all major South African sporting codes, ensures exposure on national television for many marketers using the medium of sport; and
  • Kaizer Chiefs, South Africa’s top soccer team and brand, is followed by 12 million soccer fans.

    Filmed Entertainment

  • SK Theatres, South Africa’s largest cinema exhibition operator, has over 1 million Movie Club members and nearly 16 million annual customer attendances;
  • Ster-Kinekor Pictures (SK Pictures), a leading distributor of films in South Africa, distributes quality filmed entertainment across a range of media platforms, including theatrical and television; and
  • Ster-Kinekor Home Entertainment (SK Home Entertainment), a leading distributor of videos, DVDs and Sony PlayStation, is nationally represented in all rental and major chain stores that distribute its videos, DVDs and interactive games.

    STRATEGIC REVIEW
    Our metamorphosis over the past two years has required careful corporate re-engineering and operational excellence. In August 2000, we codified a number of objectives to refocus our strategic profile. Our progress in the execution of these objectives is summarised as follows:

    Objective 1: The re-balancing of our media portfolio

  • As market conditions changed, our strategies to rebalance the group’s media portfolio has had to change to keep pace. Previously, we had intended to split the group’s main businesses into two listed entities, housing the advertising and filmed entertainment interests separately. However, after refinancing SCE, it became evident that an outright sale of its assets would realise greater value. The recent disposal of certain of SCE’s territories for US$47 million, being 28 times their cash flow, has been extremely favourable for the group. Cash realised from these disposals has expunged all third-party bank debt in SCE and eliminated the group’s associated R118 million contingent liability. Also, the group has been released from R60 million of contingent liabilities relating to parent company lease guarantees.

  • The restructuring of Ster Century Middle East (SCME) has progressed satisfactorily with a number of leases being renegotiated, thereby reducing operational start-up losses. A disposal of this business can now be considered.

    Objective 2: Improvement in the group’s quality of earnings

  • The turnaround at SK Theatres has been magnificent. Having lost 25 percent of its volume in the year to June 2001, representing the lowest level of attendance in the past 10 years, we have overhauled an ailing business model and reconfigured it for growth in earnings and cash flow. Our efforts over the last two years to reduce costs, improve catering margins and spend per customer, implement flexible labour costs and reorganise our real estate portfolio have yielded approximately R50 million per annum of sustainable efficiency gains.

    Objective 3: The sale of non-core assets

  • The sale of other non-core assets was designed to give more weight to our activities in South Africa and enable us to focus on our core media portfolio. To date, R275 million of capital has been realised mainly from the ongoing disposals of the one to one marketing businesses in the UK.

    Objective 4: The simplification of the group’s capital structure

  • The conversion of the group’s debentures has begun to simplify our capital structure. Both the balance sheet and cash flow have also been strengthened: the former by R402 million of permanent equity; the latter by eliminating the requirement to pay interest on the debentures. We intend to start paying dividends to shareholders to compensate for this loss of income.

    Objective 5: The strengthening of the group’s empowerment credentials

  • The last, and by no means least, of our strategic objectives has been to augment the group’s empowerment credentials, which is a prerequisite for the group’s future prosperity in South Africa. True empowerment is measurable by the inextricable link between share ownership, control and workplace transformation. Through the group’s relationship with the broad-based Mineworkers Investment Company (MIC), we are progressing successfully on all these fronts. As a major owner of Primedia’s ordinary shares, MIC exerts significant influence at board and operational level, most specifically evidenced by Paul Nkuna’s chairmanship of the Primedia Board and the recent appointment of Kuben Pillay as Chief Executive Officer of the group’s advertising businesses.

    Our challenge now is to meaningfully extend Primedia ownership to the historically disadvantaged. The group has therefore set itself the objective of achieving at least a 25% empowerment shareholding as soon as practicable.

    Concurrent with these main objectives, the group has been actively pursuing a range of shorter-term strategies to enhance earnings and cash flow:

    South Africa
    Innovation
    In keeping with our culture of entrepreneurship and innovation, which is encouraged by our structures, exciting progress has been made in establishing low risk/high return "greenhouse" opportunities. Prominent amongst these are Rank TV and Rank Branding, subsidiaries of Comutanet, which are profiled in more detail in the operational review of the advertising businesses. Also notable, are the exclusive rights to the 2003 World Cup Cricket hospitality, secured by Megapro Marketing, which should positively impact on our second half results for 2003. These initiatives have secured over R75 million of revenue to the group over the next two years.

    Turnaround of underperformers
    After disappointment with a number of non-traditional media companies, a sharp operational focus has resulted in a R10 million turnaround at Megapro Marketing and Product Marketing Services (PMS), now known as Primedia Face2Face. Cartad In-store (Cartad) and Direct Response Marketing (DRM) have, however, been less successful. As part of the ongoing turnaround efforts, these companies have also been re-branded to embrace and capitalise on the strong Primedia brand – Cartad is now known as Primedia Instore and DRM as Primedia @ Home. Furthermore, we have decided to franchise out the distribution network of Primedia @ Home so that it can concentrate on its core competence, being media sales.

    Internet
    Having originally ring-fenced and downsized our internet businesses in Metropolis*, we delisted the company to reduce the operating losses from iafrica.com and to enable it to capitalise on integration opportunities within the Primedia stable. Monthly operating losses have consequently been reduced.

    International
    In November 2001, we secured joint management control of SCE and SCME. This made it possible for us to introduce best practices learnt from SK Theatres. Some of the gains achieved have crystallised in the recent disposals at SCE.

    At Primecom, the fragmented one to one industry in the UK was severely affected by the worldwide slowdown in internet and technology spending, including advertising spend. Contraction, particularly in the online communications sector, was acute. Against this backdrop:

  • C3 was sold for R13 million (cash plus assumed debt), bringing the total capital released from Primecom disposals to R250 million over the past 18 months;
  • Wheel and Foresight were merged in order to effect a rationalisation of facilities and infrastructure. In addition, a more competitive market proposition was codified and successfully introduced;
  • Operations across most of the Primecom companies were further downsized and annualised payroll costs were reduced significantly. Against this, however, an exceptional charge of R15,5 million for redundancy costs, was booked in the current year under review.

    LEADERSHIP
    As part of the ongoing evolution of Primedia and to align management structures with group strategy, both the filmed entertainment (under Ferdi Gazendam) and advertising businesses (now under Kuben Pillay) were re-grouped during the year. In turn, the advertising businesses were split into five operational divisions, namely: Broadcasting and Internet; Out of Home; Cinema and Print; Commuter Media; and Sport. From this we intend to effect back-office savings, facilitate a greater spirit of working together as a group and strengthen our culture of entrepreneurship. In the UK, Barry Stiefel, has been appointed as CEO of one to one marketing in order to strengthen operations and facilitate disposal.

    FINANCIAL REVIEW
    While Primedia’s earnings per share were low, with the exceptional write offs relating to international cinema operations contributing to the significant loss attributable to shareholders, operating cash flow was the highest in the company’s history. The latter, coupled with the group’s ongoing disposal programme of non-core assets, has enabled the group to maintain its gearing within very prudent levels. Another important feature in our pursuit of growing shareholder value creation is improving our operating margins, and we are pleased to report an improvement in our core South African operations and the near maintenance of overall margins, notwithstanding the very poor showing of the one to one businesses in the UK.

    PROSPECTS
    Our strategy for 2003 has been developed in the context of our achievements to date as well as the opportunities and challenges that lie ahead.

    International
    Top priority is the ongoing disposal of the remaining international assets. Once completed, it will have positive consequences:

  • Expected realisation of a material amount of capital. This will either be returned to shareholders or, where appropriate, used to fund South African acquisitions;
  • Elimination of remaining contingent liabilities;
  • Improved operating margins and quality of earnings.

    South Africa
    The key strategies for our local businesses in 2003 are:
    Advertising

  • Ongoing innovation of new high return/low risk media ventures;
  • Growing market share through superior media sales;
  • Retaining existing exclusive media rights, which underpin the group’s cash flow and acquiring new rights. Proper empowerment credentials are essential in achieving this;
  • Pursuing selected acquisitions, preferably in radio broadcasting, subject to regulatory constraints;
  • Using the group’s existing infrastructure and customer network for phased expansion into Africa. At present we have operations in Botswana, Namibia and Tanzania whose contributions are not material; and
  • Building on group synergies to exploit unsold inventory.

    Filmed Entertainment

  • Continued growth in audiences and market share by driving frequency through SK Theatre’s 1 million-strong loyalty club and by tapping into new markets, notably the black consumer market;
  • Expanding the SK Theatre’s franchise into Africa through management contracts and/or with limited capital investment;
  • Bolstering SK Home Entertainment through additional exclusive studio representation rights; and
  • Growing SK Pictures through a renewed focus on television sales.

    Overall, further refinements to our media mix are necessary. This is to mitigate risks from the overreliance on 94.7 Highveld Stereo and SK Theatres. Within our existing core portfolio, their contributions to revenue and profit are disproportionately large.

    Insofar as our financial prospects are concerned, a rebound in earnings per share and further enhancements to operating income are expected in the year ahead. Good cash flow generation is also anticipated. The sale of SCE’s loss-making territories will have a positive impact on earnings. However, this will be partially offset by a reduction in the earnings contribution from 94.7 Highveld Stereo as the geared structure that has funded our empowerment partners is paid down. The earnings per share dilution was 2 cents in the 2002 financial year and is anticipated to rise to 7 cents in the 2003 financial year. However, due to the funding structure, Primedia will continue to access 100% of 94.7 Highveld Stereo’s cash flows for at least the next two years.

    Operating income and cash flow will benefit from the group’s various innovations and cost-reduction initiatives, described above, as well as an anticipated improvement in trading conditions.

    CORPORATE CITIZENSHIP
    Primedia aims for best practice in everything it does. Embracing the second King report, we’ve moved swiftly to reconstitute our board and sub-committees in line with its recommendations.

    A group with a big heart, through Primecare, we are active in a broad range of social upliftment programmes including skills training, bursaries and services and upliftment for the police. In addition, our individual businesses make meaningful contributions on an ongoing basis. Notably, our community-orientated radio stations have helped raise over R6 million for organisations such as The Nelson Mandela Children’s Fund, Children’s Haematology and Oncology Clinics, Child Welfare and many other worthy causes.

    CONCLUSION
    Under particularly trying circumstances, Primedia has conclusively shown its ability to adapt and succeed. We now own businesses that generate a material amount of unencumbered cash flow. Shareholders will be rewarded by dividends, share buybacks and selected earnings-enhancing acquisitions.

    In having established this favourable position, we thank our many friends, directors, management and staff for the support that enables us to proceed with enhanced confidence.

    Wiliam Kirsh
    Chief Executive Officer

    Print this page