HMV Group PLC Interim Results -3-

HMV Hong Kong and Singapore saw sales up GBP0.7m on last year, despite a like for like decline of 10.7%. This like for like performance reflected similar issues to the UK together with the impact of a new iTunes visual rental business. Operating loss of GBP0.4m was GBP0.2m worse than last year.

Exceptional costs of GBP3.3m (2011: GBP4.7m) have been incurred to cover restructuring, including store closures, central support functions and the relocation of an internet distribution centre from Guernsey to the UK.

HMV UK closed six stores and opened one in the period. The total retail estate stood at 247 stores at 27 October 2012.

Discontinued operations

In the current period discontinued operations consists entirely of the results of HMV Live, as discussed in further detail below.

In the comparative period discontinued operations has been restated to include HMV Live and the joint venture, aNobii. In the 26 weeks ended 29 October 2011 HMV Live had sales of GBP31.2m and operating profit of GBP3.4m and aNobii contributed a loss of GBP0.6m. The previously reported results comprised HMV Canada and Waterstone's for the two months of that financial year before they were sold when they reported total sales of GBP78.4m and made a combined loss before tax of GBP10.2m. The net profit on disposal was GBP5.6m.

HMV Live

Sales at HMV Live for the period were GBP25.4m, down from GBP31.2m in the prior year. This primarily reflects the disposal of Hammersmith Apollo Limited in August, the cancellation of the Vintage festival and disappointing performance of the Lovebox festival. The remaining venues business performed largely in line with expectations.

Exceptional charges of GBP0.6m were incurred in respect of redundancies and other restructuring costs. The disposal of Hammersmith Apollo Limited gave rise to an exceptional profit of GBP11.6m, however this is largely offset by the impairment of the remaining Live business by GBP10.4m resulting in a net gain of GBP1.2m. See Note 7 for further details.

Joint ventures and associates

At the period end the Group's continuing investments in joint ventures and associates accounted for using the equity method comprise only the digital media company, 7digital. The Group's share of 7digital's post tax losses was GBP0.5m (2011: GBP0.1m). On 10 October 2012 7digital completed a successful refinancing with a $10m investment from two new strategic partners and consequently the Group's equity stake was diluted from 50% to 35%, resulting in a gain on revaluation of GBP1.1m which has been recognised as an exceptional item.

On 11 June 2012 the Group sold its stake in its associate, aNobii, an eBook venture, to J Sainsbury's plc for GBP1. In addition, various investments of the Live division have been classified as discontinued operations as they will be disposed of with that business.

Net finance costs

Net finance costs from continuing operations increased in the period to GBP10.6m (2011: GBP6.0m) due to higher average net debt and higher interest rates payable on the amended facility. This includes non-cash charges of GBP4.1m for exit fees (2011: GBPnil), GBP1.3m for amortisation of deferred financing fees (2011: GBP0.9m) and GBP0.4m for the accretion of warrants (2011: GBPnil), partially offset by non-cash income of GBP0.2m (2011: GBP1.3m) representing the movement in the fair value of warrants issued as a component of the bank facility (see Note 13).

Exceptional finance costs of GBP0.4m (2011: GBP4.6m) have been charged relating to the costs of refinancing in August 2012. In addition, fees totalling GBP8.8m have been deferred and are being amortised over the 39-month term of the amended facility to September 2014.

Taxation

The taxation credit for continuing operations for the period of GBP0.1m reflects the impact on the deferred tax liability of the reduction in the UK corporate income tax rate from 24% to 23% with effect from 1 April 2013.

A tax charge of GBP0.1m (2011: GBPnil) has been recognised in respect of the operating profit of discontinued operations.

No current tax credit has been recognised in the income statement in respect of continuing operations for the period.

Earnings per share

Adjusted earnings per share from continuing operations, excluding the effect of exceptional items, were a loss of 8.1p, an improvement of 11% on last year. Basic earnings per share for continuing operations were a loss of 8.8p, (2011: 11.3p). Adjusted earnings per share for the total Group were a loss of 8.0p and basic earnings per share were a loss of 8.5p.

Dividend

The Board is not recommending the payment of a dividend (2011: GBPnil).

Cash flow and net debt

 
                                          26 weeks to   26 weeks to 
                                           27 October    29 October 
                                                 2012          2011 
                                                 GBPm          GBPm 
---------------------------------------  ------------  ------------ 
 EBITDA                                        (14.3)        (30.0) 
 Capital expenditure                            (3.4)        (11.6) 
 Working capital (outflow) inflow               (5.7)          26.6 
 Provision spend and other                      (4.8)        (12.1) 
 Special pension contribution                   (1.7)         (4.2) 
 Net interest paid                              (4.3)         (4.6) 
 Taxation                                         0.7           7.5 
---------------------------------------  ------------  ------------ 
 Free cash flow                                (33.5)        (28.4) 
 Net proceeds from disposal of 
  businesses                                     25.7          36.6 
 Cost of raising debt                           (0.4)         (6.3) 
 Payments to non-controlling interests          (0.2)         (0.5) 
 Other                                          (1.0)           5.2 
 Effect of exchange rate changes                    -           0.4 
---------------------------------------  ------------  ------------ 
 Net cash (outflow) inflow                      (9.4)           7.0 
---------------------------------------  ------------  ------------ 
 Underlying opening net debt                  (166.7)       (170.7) 
---------------------------------------  ------------  ------------ 
 Underlying closing net debt                  (176.1)       (163.7) 
---------------------------------------  ------------  ------------ 
 

EBITDA - Earnings before interest, taxation, depreciation and amortisation

Free cashflow - Cashflow from operating activities after capital expenditure and net interest

Underlying net debt - Underlying net debt is stated before unamortised deferred financing fees

Closing underlying net debt of GBP176.1m was GBP12.4m higher than at October last year. This includes the benefit of GBP25.7m net proceeds received from the disposal of Hammersmith Apollo Limited during the period. Underlying free cash outflow of GBP33.5m reflects the trading loss in the period, capital expenditure on IT and refitting stores, a working capital outflow, spend on exceptional items to restructure the business, contributions to the pension scheme and interest payments.

On 7 August 2012 the Group amended its GBP220m bank facility, the details of which are given in Note 13 to these interim financial statements.

Pensions

The Group has a number of pension schemes in operation. These primarily include various defined contribution arrangements and a defined benefit scheme which closed to future service accrual on 31 March 2011.

Under IAS 19 'Employee Benefits', the HMV defined benefit scheme had a deficit at 27 October 2012, net of deferred tax, of GBP26.0m (October 2011: GBP20.8m, April 2012: GBP16.2m). The most recently completed actuarial valuation was at 30 June 2010, where a funding deficit of GBP65.2m was identified. A deficit recovery plan was agreed with the Trustees and payments have been made in accordance with the schedule. Future payments are primarily due as follows:

- GBP5.0m per annum (payable monthly) from 1 July 2011 until the close of any agreed recovery plan;

- GBP0.5m per annum from 1 May 2013 to 30 April 2021 and GBP3.0m on 1 January 2014; and an additional share of annual cash generation capped at GBP1.0m.

Principal risks and uncertainties

The Board has a policy of continuous identification and review of key business risks and uncertainties. After appropriate review the Board considers that the principal risks affecting the Group in respect of the current financial year together with the mitigating actions being taken, are summarised as follows;

- the Group's ability to operate depends on access to adequate short and medium-term funding predominantly from the bank lending market. There is a regular review and stress testing of liquidity, interest rate and foreign exchange exposures and covenant headroom. Open discussions are maintained with the Group's bankers;

- the ability to trade is dependent of continuity of supply. The revenues from the Group are correlated to the quantity and quality of content from third party suppliers and the release dates of significant new products. The recent developments regarding supplier terms increases the certainty of continuing support from key suppliers, but any variation, reduction or withdrawal of support may reduce the Group's margins which may materially adversely affect the Group's business, financial condition, results, operations and prospects. This is managed by ongoing active engagement with suppliers, building strategic relationships with key suppliers, using the Groups retail platforms and digital business, as well as a flexible supply chain with contingency and disaster recovery plans that are regularly tested.