GfK Group looks back on a record year

Financial figures 2007

  • Organic sales growth up 5.8% to EUR 1,162.1 million

  • Adjusted operating income rises to EUR 157.6 million

  • Margin increases to 13.6%

  • Consolidated income grows 28.3% to EUR 91.4 million

  • Cash flow from operating activity up by more than 50% to EUR 168.1 million

  • Marked increase in dividend of 25.0% to EUR 0.45
    (2006: EUR 0.36)

  • Good start to 2008: order book covers 42.2% of the anticipated annual sales by the end of February

Nuremberg, March 31, 2008 – Financial year 2007 was very successful for the GfK Group. Record sales, increased operating income, a sharp rise in consolidated income and excellent cash flow confirm that Germany’s largest market research organization and the No. 5 worldwide, is superbly well positioned.

The GfK Group is established as a full service institute delivering data on consumers and consumption. In this way, the Group provides the essential knowledge needed by GfK’s clients to improve their market opportunities. Over the last year, specifically targeted acquisitions have again expanded the network and with a current staff complement of 9,000 and 115 companies across 100 countries, GfK has greatly sharpened its profile within the market research industry.

To allow the stakeholders to share the benefits of the company’s growing success, the Supervisory and Management Boards will be recommending a marked increase in the dividend of 25.0% to EUR 0.36 to EUR 0.45 per share at the forthcoming Annual General Meeting taking place on May 21, 2008. This is the eighth successive increase in the dividend since the IPO in 1999 and represents by far the largest rise.

Sales and income

In 2007, GfK sales were up by EUR 49.9 million (+4.5%) to EUR 1,162.1 million.

Adjusted operating income rose by 4.7% from EUR 150.5 million to EUR 157.6 million. The margin was up from 13.5% in the prior year to a very good 13.6%. In a direct peer-group comparison, the GfK Group is at the top of the rankings and is the undisputed leader.

The adjusted operating income is the indicator used to measure the success of the GfK Group. Adjusted operating income is reconciled with the operating income by taking into account the highlighted items, which are deducted from the adjusted operating income.

The highlighted items are the amortization and depreciation of disclosed hidden reserves from the purchase price allocation amounting to EUR 30.1 million (2006: EUR 22.5 million). This relates to the balance of scheduled amortization and appreciation totaling EUR 14.8 million, impairments and value adjustments amounting to EUR 15.3 million. In addition, the highlighted items include expenses for share-based employee payments and long-term variable remuneration systems of an order of magnitude of EUR 1.7 million (2006: EUR 2.9 million), as well as other operating income and operating expenses, which netted out at EUR +10.6 million (2006: EUR -2.6 million).

Compared with the prior year, operating income rose by EUR 17.9 million (15.1%) to EUR 136.4 million.

The personnel cost ratio, which expresses the ratio of personnel expenses to sales remained virtually unchanged compared with the previous year at 40.0%. In absolute terms, personnel expenses totaled EUR 465.2 million (2006: EUR 442.3 million).

Depreciation and amortization amounted to EUR 59.6 million (2006: EUR 51.2 million) after netting out against additions to fixed assets. The scheduled depreciation this includes, in particular, in relation to software and office equipment, fell slightly from EUR 45.5 million in 2006 to EUR 44.2 million in the year under review.

The GfK Group increased its EBIT significantly by 14.3% from EUR 121.9 million in the prior year to EUR 139.4 million in 2007.

Income from participations dropped back slightly from EUR 3.4 million the previous year to EUR 3.0 in 2007.

Other financial income, which is the balance accruing from other financial earnings and expenses, amounted to EUR -22.3 million in the year under review. This equates to a significant improvement compared with the previous year’s level of EUR -28.4 million. This effect stems primarily from the lower interest expenses attributable to the reduction in financial liabilities coupled with positive income generated by financial instruments.

Overall, this led to a marked rise in income from current business activities, which was up by 25.2% from EUR 93.5 million to EUR 117.1 million in 2007.

The income tax ratio dropped again from its level the previous year of 23.8% to 21.9%. In 2007, three factors, in particular, contributed to the reduced tax ratio: first, the tax free income from the reduction of liabilities posted in the balance sheet associated with the out-of-court settlement with UBM, second, income from tax relating to the prior year, and third, the income tax cuts coming into force in several countries, including Germany, the UK and the USA.

The GfK Group consequently increased its consolidated income by EUR 20.2 million from EUR 71.2 million in 2006 to EUR 91.4 million in 2007, which corresponds to a rise of 28.3%. EPS improved from EUR 1.86 in 2006 to EUR 2.33 in 2007.

Asset and capital position

In spite of the company expansion, the GfK Group’s total assets dropped back by EUR 25.4 million compared with 2006 to EUR 1,470.8 million. On the assets side of the balance sheet, the decline in non-current assets totaling EUR 32.5 million was due, in particular, to a currency-related reduction in goodwill, which is posted in US dollars or pounds sterling, and the depreciation on intangible assets. The change in current assets is comprised in the main of an accumulation of receivables relating to goods and services and current income tax liabilities.

Changes on the liabilities side were accounted for by the further reduction of financial liabilities totaling EUR 79.3 million (2006: EUR 68.3 million). In total, financial liabilities amounting to EUR 74.2 million were repaid in the year under review. The purchase price obligations relating to future acquisitions included under the current and non-current interest-bearing financial liabilities rose by EUR 8.8 million to EUR 70.2 million, a rise predominantly attributable to the positive business development of the companies concerned.

As at December 31, 2007, the equity ratio had risen from 31.2% the previous year to 34.6%.

Finance and investment

In 2007, the level of GfK investment totaled EUR 73.7 million (2006: EUR 56.6 million). The major share of investments totaling EUR 49.2 million related to the purchase of software, office equipment and other tangibles, with EUR 22.8 million invested in the acquisition of consolidated companies and other business units.

The cash flow from current operating activities amounted to EUR 168.1 million (2006: EUR 110.3 million), which fully financed current investments in maintenance and expansion. Although sales increased, working capital fell by EUR 12.8 million in 2007. This is clear evidence of the positive impact of measures taken to optimize working capital and the overall high cash conversion rate, which is the ratio of cash flow from current operating activities to EBITDA.

Taking into account investment in maintenance and replacements totaling EUR 49.2 million, the free cash flow generated amounted to EUR 118.9 million (2006: EUR 67.7 million), which was used to finance acquisitions carried out in the year under review. The balance of cash flow was used to repay bank loans.

The level of net indebtedness, which is defined as the balance of cash equivalents and current securities less interest-bearing liabilities and pension provisions, was reduced by EUR 69.6 million to EUR 472.9 million. This effect is mainly attributable to the repayment of bank loans.

Gearing, defined as the ratio of net indebtedness to equity, fell to 92.8% (2006: 116.3%) in the year under review. This positive trend was also reflected in the ratio of net indebtedness to key performance indicators EBIT, EBITDA and free cash flow, all three of which dropped back significantly in the year under review. This gives GfK an investment grade credit rating, on which basis the company can obtain advantageous funding allowing it to actively pursue potential acquisitions.

Business divisions: new record for sales and income

Custom Research: Despite the difficult market environment in the US and the UK, the Custom Research division was able to further expand its sales. At EUR 538.2 million, Custom Research, which is the business division generating more sales than any other GfK Group division, achieved an increase of 4.0% on the prior year. In every quarter, the sales recorded by Custom Research outperformed their level for the same period the previous year and in the final quarter of 2007, in particular, sales were far ahead of their 2006 level. Organic growth amounted to 4.5 percentage points and acquisitions contributed 1.7 percentage points to growth. At -2.2 percentage points, currency effects impacted overall growth adversely.

Custom Research division income amounted to EUR 42.9 million, which is just below the 2006 level. While acquisition-related growth recorded an increase of 1.4 percentage points, organic growth fell by 0.8 percentage points. In addition, currency effects of 1.6 percentage points contributed to the slight drop in income. The somewhat lower income recorded compared with the previous year can be attributed to the result for the second quarter 2007, which was adversely affected by the fact that some contracts in the syndicated automotive research were not extended. However, it is pleasing to report that business subsequently recovered and on this basis, the profits for the first six months in 2007 are almost at their level for the previous year. In the financial year under review, Custom Research achieved a margin of. 8.0%. 

Retail and Technology: The division recorded overall growth of 10.8%, which is the highest in the entire GfK Group to record sales totaling EUR 260.8 million. Organic sales growth accounted for 11.6 percentage points, another record among all GfK business divisions. While consolidation effects were of minor importance only, currency effects reduced growth by 1.4 percentage points. The springboard for this sustained success is the strategy of consistent worldwide implementation of StarTrack, a production and reporting system now in global use. Retail and Technology is offering an increasingly wide range of harmonized, global and topical reporting for consumer goods in particular, which is tailored to suit specific client needs. Business performance worldwide was pleasing.

This division also achieved the highest growth of any division within the GfK Group, with income rising by 13.8% to EUR 67.3 million. This was due, in particular, to organic growth amounting to 14.5 percentage points. Acquisition-related changes from 2006 were of negligible importance, where income is concerned and the impact of currency effects was reflected by -1.0 percentage points. At 25.8%, the margin was the highest among all five business divisions, even outperforming the high level of the previous year.

Consumer Tracking: This division was able to increase its sales by 3.2% to EUR 102.9 million. Apart from minor currency effects, growth was almost exclusively organic in origins. On the German market in particular, GfK’s Consumer Tracking division was able to further consolidate its lead with innovative products and standard panel business. In addition to winning new customers, business with existing clients was significantly increased by the new "Advanced Business Solutions” advisory team. Beyond Germany, Consumer Tracking business developed extremely well in many Eastern European countries. Growing client demand for Fact-based Consultancy was actively met by customized surveys.

The Consumer Tracking business division recorded income totaling EUR 8.6 million, representing growth of 10.2%, all of which was purely organic. In addition to higher sales, the increase in lucrative, panel-based studies and continuous online sampling contributed to the rise in income. The margin rose from 7.9% in 2006 to 8.4%.

Media: Sales in this business division increased by 6.4% to EUR 124.5 million, with 10.1 percentage points attributable to organic growth. This marked organic growth was due to a great extent to major contracts obtained in the Western European/Middle Eastern/African and North American regions. In the Media Consumption segment, new multi-year contracts or contract extensions were obtained. The contract for TV audience research in the Netherlands, which was signed in 1964, was extended for a further three years. GfK Romania and GfK Ukraine have created the necessary conditions to start measuring TV audience in their respective countries from January 2008. Together with the existing contracts, such contracts form the basis for further sales growth in this business division. However, the weak US dollar meant that overall growth had to absorb negative currency effects totaling 3.7 percentage points.

The Media division increased its income by 1.3% to EUR 27 million, with 6.9 percentage points of organic growth. At the same time, currency effects reduced this growth by 5.5 percentage points. The higher income achieved results in particular for the pleasing development of business in the Western European/Middle Eastern/African region. In the year under review, the margin totaled 20.6%, which, although slightly below the previous year’s level, is still the clear runner-up in terms of yield in the GfK Group. This very good margin was achieved in spite of the increased costs associated with Evogenius production and analysis software. The new broadcast technologies and TV trends as a result of digitization, the Internet and mobile terminals have produced some very complex challenges on the market. GfK has developed a timely strategic response to these market developments in the Media sector and is implementing this successfully.

HealthCare: Sales in this business division amounted to EUR 131.9 million. Currency effects totaling 5.2 percentage points adversely affected overall growth. Since the majority of HealthCare sales is generated in North America, the effects of the weak US dollar were evident. Organic development reduced overall growth by 0.2 percentage points. In particular, growth in the Central and Eastern European region was partly able to offset some of the decline in other regions. Company acquisitions contributed 1.1 percentage points to sales growth.

The HealthCare business division recorded income totaling EUR 14.7 million, which was around 8.4% below the 2006 level. 4.6 percentage points of this decline are attributable to organic development and another 4.6 due to currency effects. Acquisition-related factors served to add a further 0.8 percentage points to growth. The generally difficult market environment in the healthcare industry caused business to decline in this area. Most affected out of the Group was UK business, although a glance at the individual quarterly figures shows that the sales and income figures for the UK in the last quarter of the financial year hardly differ from those of the previous year. This is an indicator that the restructuring measures have been successful. Conversely, the North American region recorded a marked increase in organic income growth. Despite the challenges described above, the margin in this business area was 11.1%, which is virtually the same as the previous year.

Other: Sales recorded in this area were EUR 3.7 million, which was below the figure for the previous year, which was EUR 4.6 million. Income in this field dropped slightly by comparison with the previous year from EUR -1.1 million to EUR -1.5 million.

Regions: a global presence on local markets

The GfK Group has a network of its own companies covering more than 100 countries all over the world. Geographically, its business is divided into six regions:

Germany: The GfK Group continues to be the undisputed market leader in Germany. In 2007, GfK increased its sales in Germany by 7.7% to EUR 290.3 million (2006: EUR 269.6 million). This corresponds to a quarter of the total sales recorded by the GfK Group. Sales growth was exclusively organic.

Western Europe/Middle East/Africa: With sales totaling EUR 480.5 million, Western Europe/the Middle East/Africa is the best performing region of the GfK Group. Out of sales growth amounting to 5.0%, 4.5 percentage points were generated organically. Acquisitions added 1.1% to sales, however, currency effects reduced growth by 0.7 percentage points.

Central and Eastern Europe: GfK increased its sales by 13.4% to EUR 73.1 million (2006: EUR 64.4 million). Organic growth accounted for 12.4 percentage points and currency effects added a further 1.0 percentage points.

North America: The accelerated weakening of the US dollar reduced sales in the region by 8.2%, cutting the total sales by 6.5% from EUR 257.3 million to EUR 240.7 million. Organic growth accounted for 1.8% of sales. GfK is now ranked seventh of the top ten market research institutes in North America.

Latin America: The distinguishing feature of the Latin American region was its extraordinarily dynamic growth. Compared with the previous year, the GfK Group recorded a 12.9% increase in sales in the region to EUR 26.7 million (2006: EUR 23.7 million). With organic growth of 14.4 percentage points, GfK companies in this emerging region registered the second-highest organic growth rates within the Group. Currency effects reduced sales by 1.5 percentage points.

Asia and Pacific: With a rise of 28.4% from EUR 39.6 million in 2006 to EUR 50.8 million in financial year 2007, GfK recorded the highest percentage sales growth of all its regions in Asia and the Pacific. The majority of this, 15.9 percentage points, was of non-organic origins. At 17.9 percentage points, Asia and the Pacific also achieved the highest organic growth rate of the GfK Group. Currency effects reduced sales growth by 5.5 percentage points.

Significant changes occurring after year-end 2007

At the beginning of 2008, the GfK Group expanded its Custom Research network with the following acquisitions: on January 1, GfK acquired a 100% shareholding in the Blue Moon Group in Australia and on March 1, the acquisition of a 100% stake in market research institute, Bileşim International in Turkey, will be completed.

In January 2008, the Supervisory Board of GfK AG extended the service contract of Management Board member, Dr. Gérard Hermet, who is responsible for the Retail and Technology sector, by a further five years to December 31, 2013.

On March 27, 2008, the Management and Supervisory Boards of GfK AG resolved to propose changing the legal form of the GfK Aktiengesellschaft (German form of PLC) into an SE to the Annual General Meeting. An SE, or Societas Europaea, is a contemporary legal European form which supports an open and international corporate culture. It is the expression of a corporate European outlook and as such, the GfK Group would be documenting its ongoing development in Europe, the continent in which its roots lie. As an SE, the company would be creating the conditions for intensifying the involvement of its European employees.

The change of form would not change the legal or commercial identity of the company. Consequently, the rights of shareholders, stock exchange listing and registered headquarters of the company would remain unchanged. The dual corporate management structure of Management and Supervisory Boards would also be retained.

Outlook

In the past, the market research sector has achieved regular growth rates which were markedly above those for the economy as a whole and which have proved comparatively crisis-resistant even in difficult economic times. It is to be assumed that the robust nature of the market research sector will be maintained in the future, even if macro-economic developments are taken into account as influential factors. It is to be anticipated that the long-term growth of the market research sector will continue in 2008 and according to expert opinion, the growth rate is likely to be between four and five percent.

Potential opportunities for the GfK Group have been identified, particularly in relation to the further expansion of its global network and the availability of an innovative product portfolio incorporating state-of-the-art technology and which responds optimally to client needs. 

In 2008, GfK will continue to pursue the aims and objectives defined in its 5-Star Initiative. The first "Fact-based Consultancy” initiative concerns the consistent establishment of a service package of high-grade fact-based and continuous consultancy services for the top management of clients. The second objective, known as "top 3” enshrines GfK’s vision for its positioning in the global consumer research market. GfK is aiming to be the number 3 in the industry and at the same time, the number 3 in every major market research country throughout Europe, the Americas and Asia and the Pacific, as well as in each of its three sectors. This will be achieved with the aid of further acquisitions, particularly in the growth regions of the emerging markets of Central and Eastern Europe, Latin America and Asia and the Pacific. Third, under the terms of its "Global Initiative”, GfK is planning on expanding its global network still further and establishing its own subsidiaries in all relevant countries, and fourth, the "Full Service” initiative is aimed at the continuing establishment of GfK as a full service market research group. A fifth initiative, "Superb financial position”, is targeted at achieving sales of EUR 1.5 billion in the medium-term.

GfK anticipates it will be able to increase its sales in financial year 2008 by more than 5.5% in organic terms with the companies forming part of the scope of consolidation at the beginning of the year. This does not take into account the effects of exchange rate fluctuations. This will mean that once again, the GfK Group will be growing at a faster pace than the market in general.

The margin of the GfK Group will be above 13.0%. Due to its balanced business model, GfK anticipates that it will be able to maintain its margin at a high level, even in the face of a decline in the global economy. In this context, it is worth noting that even in the difficult economic climate of 2002-2004, the GfK Group was able to significantly increase both sales and income levels.

GfK expects highlighted items for 2008 to be in the EUR 20 to 25 million range, including the anticipated cost of conversion to Societas Europaea (SE).

Income from participations is anticipated to be at the level of the prior year in 2008.

Net financial expenses are expected to fall to around EUR 20 million. Tax changes were introduced in Germany on January 1, 2008 and one of the results of these is that corporation tax has been lowered. At the same time, a raft of tighter regulations and limitations became effective. The GfK Group is not anticipating its tax liability to be reduced as a consequence of the new fiscal legislation.

Beyond this, the effect of the German tax ratio on the group tax ratio is limited. Overall, GfK is anticipating a Group tax ratio of below 30% for 2008.

Development of the sectors: use of synergies

For 2008, GfK is assuming positive growth in all of its sectors. Taking scheduled investments in network expansion, new products and services into account, the margins achieved by the sectors are anticipated to be in the range of the prior year.

GfK has started off well in 2008. At the end of February, the order books had already reached 42.2% of the anticipated sales for the year (2007: 41.1%). This represents an improvement of 1.1 percentage points compared with the prior year.

Provisional key dates in the financial calendar

May 15, 2008
Quarterly report as of March 31

May 21, 2008
Annual General Meeting, Fürth

August 14, 2008
Interim report as of June 30

November 14, 2008
Quarterly report as of September 30

The GfK Group

The GfK Group is the No. 5 market research organization worldwide. Its activities cover the three business sectors of Custom Research, Retail and Technology and Media. In financial year 2007, the Group achieved sales totaling EUR 1,162.1 million. The Group has 115 companies covering over 100 countries. Of a total of approximately 9,070 employees (as of December 31, 2007), 81.1% are based outside Germany. For further information, visit our website: www.gfk.com

Responsible under press legislation
GfK AG, Corporate Communications
Marion Eisenblätter
Nordwestring 101
D-90319 Nuremberg
Tel. +49 911 395-2645
Fax +49 911 395-4041
public.relations@gfk.com

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Financial figures 2007

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