Annual Report 2006
GfK Group: www.gfk.com
Outlook*
Macro-economic situation: slowdown followed by recovery in the global economy
The macro-economic situation will remain positive in 2007 and global growth is forecast to be slightly lower than 2006 at 4.4%. Despite the economic uncertainties currently depressing the US dollar, analysts at major banks and economic research institutes are expecting a tangible recovery in the global economy from summer 2007 onwards. This is most likely to be the result of further expansion in the economies of China and India. These highly dynamic emerging states will be able to offset the anticipated economic slowdown in the USA with growth in GDP of only 2.6%.
Optimistic forecasts assume that based on a robust income situation for US consumers and companies, the economy in the USA will recover after a rather poor winter. The anticipated slow stabilization of the crude oil price in the commodities market at USD 60 per barrel supports this development as does ongoing low inflation in line with the long-term trend. Experts believe that the European Central Bank still has scope for interest rate hikes in 2007, while the US Central Bank will initially take a break from its cycle of interest rate increases in order to boost consumption. A key lending rate of 5.75% is anticipated in the USA and 4% in the euro-zone. Should signs increase that the US economy is back on track and several central banks in Europe take a break from their historically gentle interest rate rise cycle, the US dollar would benefit slightly from its interest rate advantage. The US dollar, which is undervalued against the euro and other European currencies, could therefore strengthen again in the second half of the year.
Europe is increasingly becoming a growth center in the global economy and will contribute its share to the overall positive development. The domestic economy will perform particularly well in this respect as an engine of growth.
In conjunction with a positive but on the whole slightly weaker international environment, the generally more restrictive German financial policy could result in a marginal slowdown in economic growth of 2.3% in 2007. This will not be without impact on exports which have driven growth in Germany for many years. In contrast, further easing is generally expected in the labor market, which should lead to a rise in the number of income recipients and further strengthen private consumption.
Market research sector: growth potential for the future
The market research sector is a growth market with above-average potential. For 2007, experts expect sector growth of between 3% and 5%. Key growth drivers for the next few years are:
- tougher competition in many national markets between global and locally-based companies following globalization
- increasing demand for market research services in the Central and Eastern European countries as well as in the emerging markets of Latin America and Asia
- continued growing demand from small and medium-sized companies for market information
- tougher competition as a result of the deregulation of markets and the associated increased demand for market and customer information
- demand for information on new products and service markets, especially based on innovative communications and information technology.
Opportunities: taking on and exploiting challenges
With the anticipated consolidation among the world’s major market research companies, industry insiders expect greater differentiation between traditional data gatherers and those market research companies which interpret data and use it in client-specific consultancy offers. There is much to indicate that market research companies with a high level of consultancy expertise would be among the real winners in the process of global consolidation in the sector.
Growth drivers in market research
The large number of new technical possibilities in data gathering and evaluation are not just rapidly increasing data volumes. “Fast” market research tools such as online surveys are increasingly driving growth in the whole sector. Online surveys generate a higher number of samples. Bigger, specialized panels offer the opportunity to record niche markets in detail. Modern data processing evaluates the data collected more quickly and delivers results promptly. International market research is therefore faster and more cost-efficient than ever before.
Research and development: consistent further development
In order to continue to meet the needs of its clients in the future, the GfK Group is committed to continually further develop market research methods and services. Here the focus is on tools which use virtual reality methods to gather data, on improving panel modeling, illustrating purchase behavior more accurately as well as on new opportunities for transferring results from questionnaire data direct to markets. As well as GfK Methoden- und Produktentwicklung, all divisions are called upon to successfully fulfill these tasks. The development of innovative information systems for clients continues to be a top priority. With the help of online portals, clients can gain flexible access to GfK databases and thereby benefit more quickly from the relevant information.
Human Resources: supporting global growth
GfK assumes that there will be moderate growth in the number of employees in 2007 with the same scope of consolidation.
As before, the focus is on the integration of the acquired companies and business units. The necessary process is based on international networking of experienced managers and specialists as well as structured knowledge transfer. This is achieved by sending employees on secondments and stepping up international development programs as well as by establishing more international management bodies for business divisions. In this regard, GfK offers its employees the opportunity of participating in the growth of the company through personal further development as well as by building up international careers on the basis of broad experience.
Organization and administration: driving streamlining forward
The decentralized corporate structure will be maintained in 2007. Project teams are working on streamlining the company structures. Through mergers, the number of companies in the Group has fallen. The company expects this to reduce costs and further improve efficiency.
Marketing and corporate communications: implementing a global communications strategy
The focus in 2007 is on implementing the global communications strategy. This will improve networking and the alignment of international communications activities across all business divisions and regions. Outside Germany, the corporate communications measures will center especially on the USA, the UK and France in 2007.
Investment and financing: focus remains on debt reduction
Again in 2007, GfK plans to use most of its free cash flow to reduce debt in order to come closer to the target in the 5 Star Initiative of net indebtedness of around double EBITDA.
GfK will also continue to invest further in its own competitiveness in 2007. Examples of such investment include the measurement and evaluation technology, Evogenius, in the Media division, the launch of the StarTrack software in Asia and the set-up and expansion of additional online panels. The majority of acquisitions are planned for Asia. Credit limits and authorized capital provide the GfK Group with sufficient equity and outside capital.
Development of the GfK Group: increase in sales and income
GfK anticipates it will be able to increase its SALES in 2007 by 5% in organic terms with the companies that formed part of the scope of consolidation at the beginning of the year. This does not take exchange rate changes into account. The company expects it will again outperform average growth in the sector. The MARGIN is set to exceed 13.5%.
The integration of NOP World has been successfully completed. Consequently, there will be no integration costs relating to the NOP World acquisition in 2007. The impact from DEPRECIATION AND AMORTIZATION on disclosed hidden reserves as part of purchase price allocation will comprise two elements again in 2007: scheduled depreciation and amortization on the one hand and necessary impairments, which are not determined until the end of the current financial year, on the other. Overall, GfK expects this figure to come in at less than the level of 2006 of EUR 23.2 million.
PERSONNEL EXPENSES for share-based payment systems are reported in the income statement in accordance with IFRS. The stock option program was last offered in 2004 and expires in 2011. The successor system, the 5 Star Incentive Program, is reported by GfK as two elements. The waiver amount is recognized in personnel expenses. The fluctuation amount, which essentially depends on the development in company results and share price, is shown under a separate highlighted item. The expenses for the remuneration components “shares and options” and “5 Star Incentive Program” are again likely to amount to around EUR 3 million in line with the prior year.
FOREIGN CURRENCY RESULTS will have a negligible effect on income for the GfK Group as a result of the internal corporate structures and currency hedges.
INCOME FROM PARTICIPATIONS in 2007 will be on a par with the level in 2006.
Interest expenses will be increased by the interest on future purchase price obligations for shareholding acquisitions. Including this effect, the GfK Group is forecasting NET FINANCIAL EXPENSES of EUR 20 million.
Although the majority of its sales volume is generated in countries with a high tax ratio, such as Italy, the USA and Germany, GfK is expecting a GROUP TAX RATIO excluding one-off effects of around 30%.
Agreements and contract renewals after year-end 2006
After the financial year-end, GfK announced new contracts and contract renewals in Media in particular.
TV ratings of 1,200 households have been measured in Romania since the beginning of the year. All national and foreign TV programs which can be received locally are measured as well as the use of video recorders, DVD players, set-top boxes and games consoles. The contract runs for four years.
Intomart GfK and the Dutch Audience Research Association have extended the contract that has been in place since 1964 by three years. In addition to the usual data on ratings for all TV stations, new technology is also being tested which can record data for time-delayed or mobile TV consumption.
In the Ukraine, GfK has again won the tender for TV audience measurement. The contract runs for five years. The panel was increased to over 2,500 households.
In addition, GfK increased its shareholdings in the following companies in the first months of 2007.
Divisional trends: consistent optimization continues
On the whole, GfK assumes that good levels of growth will be achieved in all divisions and that margins will be further improved in each division. Despite investment in new products and regional expansion, Retail and Technology will largely maintain its outstanding margin.
In detail, GfK expects the following trends:
In the CUSTOM RESEARCH division, GfK expects sales to increase by between 4% and 5% with a margin of around 8.5%. After dynamic growth in Latin America, India and China, attention is now centered on expanding business operations in Asia. Furthermore, there are plans to support the highly successful Business & Technology, Automotive, Finance and Consumer sectors with even more effective global key account management.
In the RETAIL AND TECHNOLOGY division, GfK intends to increase sales by more than 6% with an anticipated margin of around 25%. Expansion is to be driven forward in Latin America, the Middle East and Africa. The focus is on “digital convergence” – the coming together of consumer electronics and information technology.
In the CONSUMER TRACKING division, GfK assumes that sales will rise by between 4% and 5% with a margin of around 8%. A major operating milestone will be the launch of the new generation software, AnalyzeIT. The expansion of online panels also makes a major contribution to further optimizing processes and increasing data speed.
In the MEDIA division, GfK anticipates that sales will rise by between 4% and 5% with a margin of around 22%. These financial targets reflect the ambition in the division to build on the good performance of past years. The future development of premium hardware and software demonstrates that the division aspires to meet the needs of the global media markets at the highest level.
In the HEALTHCARE division, sales are expected to increase by between 5% and 6% and the margin is expected to stand at around 12%. The continual expansion of activities in Asia and the European network should give this business division critical depth in new countries.
GfK is not expecting sales to rise in the OTHER division. Given the increased size of the GfK Group, the income from Other will play an increasingly subordinate role.
GfK has started off well in 2007. At the end of February, the order books already covered 42.3% of the anticipated sales for 2007 as a whole, compared to 39.7% in 2006.
The GfK Group is confident that it is excellently placed as a specialist market research company and regards its focus on the provision of related services as a crucial competitive advantage. The Group will therefore continue to fully exploit and extend market opportunities in the sector.
Nuremberg, March 16, 2007
GfK Annual Report 2006