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Review of consolidated results and financial position

Consolidated Income Statement

The Rai Group closed year 2006 with a consolidated net loss of 87.4 million Euros compared with a net profit of 22.9 million Euros in 2005.

The difference from Parent Company’s result, which presents a net loss for the year of 78.6 million Euros, is due for the most part to the elimination of dividends distributed by Group companies from prior year results against results realised in 2006.

The following section provides an overview of the main items of the consolidated income statement and the reasons behind the more significant changes with respect to 2005.


Revenues from sales and services

Revenues, consisting of licence fees, advertising revenues and other items of a commercial nature total 3,144.6 million Euros, up 53.6 million Euros on 2005 (+1.7%), largely due to increases in advertising and other revenues, the reasons for which will be explained later.

As indicated in the following table, the incidence of the three components on total revenues from sales and services shows a slight increase for other revenues.




Licence fees
amount to 1,491 million Euros. With the amount of the licence fee remaining unchanged, they show compared with 2005 (1,482.5 million Euros) a slight increase (+8.5 million Euros, or 0.6%) which is wholly attributable to an increase in the number of paying subscribers, this being a direct consequence of efforts expended to contain licence fee evasion and
arrears.

Advertising revenues (1,232.7 million Euros) show an increase of 15.1 million Euros (+1.2%) on 2005. This positive trend was due substantially to the opportunities arising from major sports events (the Winter Olympics and the World Soccer Championships) within an advertising market which was in fact stable (+0.3% – source: Nielsen) which showed signs of weakening in the second part of the year.

Other revenues amount to 420.9 million Euros, up 30 million Euros (+7.7%) on 2005, due mainly to the higher revenues earned for the sale to a sports company of the rights to the exploitation and usage of filmed material relating to it owned by Rai (+28.0 million Euros), the sale of rights by Rai Trade (+3.8 million Euros), the sale of satellite channels by RaiSat (+2.8 million Euros), less a slight decrease in revenues from film distribution and home video sales by 01 Distribution (-2.4 million Euros).
The caption comprises:

• special services under the service agreement (73 million Euros), and sales and other services (115.8 million Euros) performed by the Parent Company;
• sales and services performed by Rai Trade (68.3 million Euros), RaiSat (51.5 million Euros) and Rai Way (36.7 million Euros);
• film distribution and home video sales performed by 01 Distribution (55.7 million Euros);
• other kinds of sales and services amounting to 19.9 million Euros.

A breakdown by individual company of revenues from sales and services, net of intercompany transactions, is given in the following table.

Operating costs

These comprise costs for materials and external services and personnel costs. They total 2,434.0 million Euros, up 170.4 million Euros, or 7.5%, on 2005.

 

Cost of goods and external services. This caption includes external costs (purchase and production of immediate-use programmes, general services, free lances, consultants etc), costs for the use of third-party assets (filming rights, particularly for sports events, copyright, leases and rentals etc), purchases of materials and, finally, the concession fee.
The cost of goods and services totals 1,454.1 million Euros, up 162.2 million Euros on the preceding year, or 12.6%, largely due to the cost of filming rights for major sports events (the Winter Olympics and the World Soccer Championships).
Another item within the cost of external goods and services showing a significant increase (30.3 million Euros, or +11.7%) relates to services for the acquisition and production of programmes, the change in which was due, for 10.0 million Euros, to costs connected with the already-mentioned contract made by the Parent Company with a soccer club.

A breakdown by individual Group company of the cost of goods and services, net of intercompany transactions, is given in the following table.

Personnel costs. These come to 979.9 million Euros compared with 971.7 million Euros at 31 December 2005.
The slight increase over the preceding year (+8.2 million Euros, or 0.8%) was caused by the combined effect of the staff reduction in the Group (the result of resignation incentives) which allowed us to counteract mechanical growth deriving from career development and, especially, the renewal of labour agreements.
A breakdown by individual Group company of personnel costs is given in the following table.

The average number of employees, including those on fixed-term contracts who numbered 1,872, came to 13,308, an decrease of 18 on the previous year due to a drop of 128 in the number of staff on permanent contracts and an increase of 110 in the number of staff on fixed-term contracts.
Personnel on the payroll at 31 December (including fixed-term contracts, work-introduction contracts, apprenticeship contracts and two-year journalist contracts) amounted to 11,328, down 289 on the preceding year. In detail, leavers numbered 772, of whom 479 left under resignation incentives, and engagements numbered 483.
511 employees took advantage of the benefits indicated under Law 243/2004, postponing their retirement and seniority pension rights.

Gross Operating Margin

The Gross Operating Margin, as a consequence of the above, is positive for 727.1 million Euros, down 108.6 million Euros, or 13.0%, on the preceding year.

Amortisation and Depreciation

These items are linked to Capital investment which in 2006 was as follows:

Overall, there has been an increase of 59.4 million Euros in the volume of capital investment relating mainly to:
• an increase in fixed assets (+14.4 million Euros) due for the most part to the project for the construction of the digital terrestrial broadcasting network;
• an overall increase in investment in programmes (+42.1 million Euros) relating to contrasting situations: an increase in investment made by the Parent Company in TV series added to which there is the acquisition of usage and exploitation rights of the library for a soccer team (11.5 million Euros) and a decrease for Rai Cinema in the film genre due to rationalisation in procurement strategies.
The charge for Depreciation and Amortisation shows an increase over the preceding year of 7.9 million Euros, due mostly to the rise amortisation of programme rights related to the increase in the relative investment made in the year.

Other net charges

Other net charges, amounting to 76.5 million Euros (80.9 million Euros in 2005), comprise costs/revenues not directly related to the company’s core business. More specifically, they consist of net prior-year income (43.2 million Euros, of which about 18 million Euros relates to collections of prior year licence fees), provisions for risks and charges (20.4 million Euros),provisions for the company supplementary pension fund for former employees (15.3 million Euros), indirect and municipal taxes (13.6 million Euros), the cost of prize competitions (17.9 million Euros), the contribution to the communications Authority (4.5 million Euros) and other charges.
They also comprise, as was the case in prior years, charges totalling 31.3 million Euros (28.3 million Euros in 2005) recorded in the Parent Company and Rai Cinema financial statements relating to repeat-usage programmes which it is not expected will be used or repeated.

Operating result

The results described above for operating revenues and costs have led to an operating result of 20.1 million Euros, declining by 84.8% from that for the preceding year.

Net financial income

 

The results of financial operations show a net gain of 3.4 million Euros, down 4 million Euros on the preceding year. The change is the result of lower net bank interest (due mainly to the slower pace at which licence fees were settled) and to the drop in foreign exchange differentials on the acquisition of broadcasting rights denominated in US dollars, as a consequence
of the closeness of the exchange rates on transactions to the levels of hedges set up previously.

Bank debt was limited to brief intra-year periods in overdraft, during which use was made of “hot cash” credit lines at very reduced rates (average rate 3.1%). Deposits earned rates close on 2.9%, through the deposit of temporary excess cash with leading banks.

Net exceptional charges

These amount to 31.1 million Euros, mainly regarding, for 15.8 million Euros, to penalties levied on the Parent Company by the Communications Authority in connection with the incompatibility of Mr Meocci’s position as General Manager and, for 14.9 million Euros, to costs deriving from the incentivised staff resignation programmes of the Parent Company and Rai Way.

Income taxes

These amount to 79.5 million Euros, down 3.3 million Euros on the preceding year.
They comprise:
• current taxes for 74.6 million Euros (comprising IRES for 23.2 million Euros and IRAP for 51.4 million Euros), the greater part of which are charged in the financial statements of the Parent Company (42.5 million Euros), Rai Cinema (13.9 million Euros) and Sipra (8.9 million Euros);
• “substitute” tax for 7 million Euros paid by the Parent Company and Rai Way to take advantage of the so-called re-alignment of tax-purpose asset values to statutory values for assets in the 2004 financial statements which were still present in those for 2005;
• the net positive effect on the income statement of deferred taxation coming from the financial statements of Group companies (mainly the Parent Company) totalling 5.3 million Euros;
• the net negative effect on the income statement of deferred taxation on consolidation adjustments totalling 3.2 million Euros.

CONSOLIDATED BALANCE SHEET


Non-current assets

These total 1,583.7 million Euros, up 22.8 on 31 December 2005.

 

Fixed assets amount to 599.7 million Euros, down 43.6 million Euros which is the balance between new assets for 105.5 million Euros (net of eliminations for 3.6 million Euros) commented upon earlier and depreciation for 149.1 million Euros.

Programmes
amount to 912.0 million Euros, up 70.3 million Euros on the preceding year due to the combined effect of new investment for 560.1 million Euros (net of eliminations for 7.8 million Euros), depreciation for 470.6 million Euros and writedowns for 19.2 million Euros.

 

Working capital

This amounts to 549.3 million Euros, down 102.6 million Euros on the preceding year, due mostly to normal developments in the business.

 

Major changes relate to:
• A decrease in Trade receivables (-31.0 million Euros) due to a different cycle in advertising billing which saw a reduction in revenues in the last quarter of the year;

• A decrease in Other assets (-81.0 million Euros) due largely to the recovery of advances made for the acquisition of rights relating to the World Soccer Championships and other sports events and to the recovery of deferred tax assets recorded in prior years;

• An increase in Trade payables (+41.0 million Euros) due to normal developments in the settlement cycle and to recording costs relating to invoices still to be received;

• A decrease in Provisions for risks and charges (-77.8 million Euros) mainly due to the use of provisions set up in the 2005 financial statements by the Parent Company in respect of charges relating to personnel (incentives to resign, resultsbased bonuses and MBO payments) which in 2006, since they could be determined objectively, have been recorded with accounts payable; and the reversal of the provision for deferred tax liabilities due to the so-called re-alignment of asset values for tax purposes with the higher values for statutory purposes. Taking account of the above, the overall risk situation to which the Group is exposed has not undergone any significant change in the year. We therefore confirm that the coverage level in the provisions set up continues to be sufficient to meet future risks and charges.

• An increase in Other liabilities (+27.9 million Euros) mainly coming from the Parent Company financial statements relating to higher amounts due to staff for resignation incentives, results-based bonuses and MBO payments which were recorded in 2005 with Provisions for risks and charges as mentioned above.

Net financial position

The year-end net financial position is positive even though it has fallen slightly from the previous year (72.8 million Euros, compared with 88.8 million Euros in 2005). An analysis follows:

Overall cash flow, which was negative for about 16 million Euros, only partly felt the effects of the worsening in operating margins shown in the income statement, thanks to the positive change in a number of working capital elements, including the recovery of advances already paid in prior years for major sports events in the year. Outflows however increased to meet
ordinary and extraordinary requirements, in particular for the Parent Company (increased investment in fixed and intangible assets, resignation incentives, the penalty levied by the Communications Authority), whereas inflows from licence fees registered a more moderate increase.

The drop in the Group’s financial profile and the postponement of the settlement date by the Ministry of the Economy and Finance for the first instalment account payment for licence fees (from March to May) worsened the average financial position, which is down to 28.8 million Euros from 157.8 million Euros in 2005, with a consequent impact in terms of net financial charges.

The Group uses appropriate computerised and statistical instruments to check financial risks and the efficacy of hedges. In addition, a financial policy (in effect as from 1 January 2007) has been set up to regulate control over financial risks in accordance with best international practice and new accounting principles.

Specifically:

• The exchange risk, which is significant mainly as regards currency exposure generated by the acquisition of sports events rights by Rai (as well as by the loan to the foreign associated company Rai Corporation), and of film and television rights by Rai Cinema, is estimated in the order of about 200 million dollars per year.

The importance of this situation makes it necessary for the Parent Company to exercise constant monitoring, within the sphere of its administrative service, also on behalf of Group companies.
Within the objective of keeping to the exchange rate used in drawing up budgets and economic plans, hedging strategies are created gradually, using financial derivative instruments – such as forward purchases, swaps, and options structures – addressed exclusively to hedging requirements arising from commercial agreements, some covering several years, that have already been signed. Such operations, therefore, are never in the nature of a financial speculation.

• To cover the short and medium/long-term rate risk, appropriate hedging transactions have been entered into to ensure equilibrium in the income statement, even if, at the moment, there are only two hedging operations in place covering the short-term infra-annual requirement. In effect, the Group’s financial position does not contain significant long-term exposures, but sees short periods of operational liquidity alternating with limited overdraft positions, especially over the collection time for licence fee instalments.

• The credit risk on cash deployment is extremely limited in that use is made only of deposits and investment instruments with leading banks.

• Coming to the liquidity risk, it should be noted that short-term credit lines, which are in the order of 600 million Euros, ensure elasticity in cash requirements throughout the course of the year on the basis of current management policies.

 

 

 

 

 

 

 

 

RAI: Rai Radio Televisione Italiana