12th Apr 2007 07:01
SMG PLC12 April 2007 SMGPreliminary Results 2006 Financial Highlights Group Underlying Results* 2006 2005 ChangeRevenue £147.3m £159.3m - 8%Operating Profit £18.1m £29.0m - 38%Profit Before Tax - Continuing £9.7m £17.8m - 46%Profit Before Tax - Discontinued £0.3m £2.2m - 87%Profit Before Tax - Total £10.0m £20.0m - 50%Earnings per Share 3.0 pence 4.8 pence - 38%Dividend 1.2 pence 2.9 pence - 59% *Underlying results exclude exceptional items. Strategic Developments • New leadership team in place • Financial stability, agreement signed with banking covenants • Focus on TV as core business - turnaround underway, details in June • Virgin IPO - strong prospects, much investment recently, poised for growth • Current Primesight sale stopped - excellent business, price too low due to legacy process Operational Highlights • Successful stv rebrand • New commissions for Rebus & Taggart • Virgin Radio launched on Freeview • Future media developments - stv.tv; peopleschampion.com; all new virginradio.co.uk • Settlement agreed with pension schemes' Trustees Richard Findlay, Chairman said: "SMG now has a new leadership team with the backing of the shareholders and thebenefits of stability that brings. I am very excited about both the prospectsfor Virgin Radio as an independent company and the turnaround in our core TVbusiness." Rob Woodward, Chief Executive: "I believe passionately in the future of SMG and I am confident that with ournew strategy, our strengthened leadership team, our enthusiastic staff and aperiod of financial stability we will deliver for all our stakeholders." 12 April, 2007 There will be a presentation for analysts at the offices of ABN AMRO, 250Bishopsgate, London EC2 today at 9.00am. Further enquiries: SMG plc Richard Findlay, Chairman Tel: 020 7882 1199 Rob Woodward, Chief Executive George Watt, Group Finance Director Brunswick Group LLP James Hogan Tel: 020 7404 5959 Simon Sporborg Ash Spiegelberg SMG plc Preliminary Results 2006 CHAIRMAN'S STATEMENT Introduction I begin my first report to shareholders by saying how pleased I am to be leadingthe new Board of SMG, a company we have long believed to have enormous potentialwithin a changing media landscape that brings both challenges and excitingopportunities. SMG has underperformed the UK media sector for some time. It has had a weakstrategy weakly executed; leading to excess debt, a lack of focus, instabilityin the leadership, dissatisfaction amongst the shareholders and poor staffmorale. These problems can and will be solved, because the underlyingbusinesses, the people who work for them and our relationships with audiencesand advertisers are strong. The first step in this turnaround took place a few weeks ago: SMG now has a newleadership team with the backing of the shareholders and the benefits ofstability that brings. The second step was announced recently: we have signed an agreement with ourbanking syndicate that removes the financial uncertainty and pressure thebusiness has suffered from. Our strategy is now simple and focused. TV is our core business and our new CEO,Rob Woodward has begun to execute his turnaround plan. He will give you moredetails about this in June. I am delighted to say that Rob has already succeededin strengthening the leadership team in TV, and I welcome the proven skills andexperience he has added to the business. In this context, we announced separately today that we intend to float VirginRadio in the coming months. There has been a considerable investment in VirginRadio over the last year: in broadcast talent and online content, in sales andmarketing, and in platform expansion and digital rollout. We anticipate thatVirgin Radio's IPO will create a strong and focussed radio business, with agreat brand, that will provide an attractive, pure-play investment opportunity.The Board and I believe that this will provide both a strong platform for VirginRadio's future growth and the right strategic focus and balance sheet structurefor SMG's TV business. The sale of Primesight and Pearl & Dean has been running for 6 months, and SMGhas been in a weak position as a vendor for much of that time. We haveterminated the Primesight sale, because we judged the price, although in therange of market expectations, as too low. SMG now has the financial andleadership stability to initiate a fresh sale, when appropriate. In themeantime, we are happy to have this highly profitable business as part of ourcompany. The sale of Pearl & Dean continues, and we will apply a similarrationale in our decision-making as this progresses. Let me now turn to the financial results that are being announced today, whichcover the period 1 January to 31 December, 2006, and predate my appointment asChairman. 2006 Performance Overall, the advertising climate in the UK has remained difficult, and this hadan unavoidable effect on SMG's performance in 2006, particularly in televisionand cinema. Group revenue fell by 8% to £147.3m (2005: £159.4m) as network televisionadvertising sales revenues were further impacted by reduced audience levels. Thestatutory Pre-Tax Loss of £76.7m includes exceptional costs and write-downstotalling £86.7m. Pre-Tax Profit, excluding exceptional items and includingdiscontinued operations, was £10.0m (2005: £20.0m), which represents ayear-on-year fall of 50%. Earnings per share, calculated on the same underlyingbasis, reduced by 38% to 3.0 pence (2005: 4.8 pence). Exceptional items included goodwill impairment write downs to the carryingvalues of Virgin Radio - written down by £58.8m to £105.0m - and Pearl & Dean -written down by £18.0m to £nil. In addition, there was a write down oftelevision programme stock of £6.5m, an OFCOM settlement relating to VirginRadio licence costs of £0.8m and a re-organisation charge, to reduce centralfunction costs, of £2.6m. Only the re-organisation charge is a cash item. The Group also made a significant step forward through the resolution of thefuture funding of the Group's pension schemes, as announced on 29 January, 2007.The product of several months of discussions with the schemes' Trustees, theseproposals have been implemented from 6 April, 2007. Bank Facilities On 20 October, 2006, the SMG Board reported that the Group would potentiallybreach certain of its financial covenants at the end of 2006. On 10 April, 2007,following detailed discussions with our lenders, who have remained supportivethroughout, we announced that the Group was granted a waiver of the relevantcovenants and has now negotiated an amended £193m bank facility until 30September, 2008. Dividend In view of the deterioration in performance in the second half of 2006, and theongoing pressure on the Group's balance sheet, the Board has decided not torecommend a final dividend for 2006 (2005: 1.7 pence). This will result in afull year dividend, as per the interim dividend, of 1.2 pence (2005: 2.9 pence). People The Group's long serving Chief Executive, Andrew Flanagan, stepped down from hisposition and from the Board in July, 2006. Following the cessation of the morerecent merger talks with UTV plc in February 2007, the previous Non-ExecutiveDirectors and the Chairman, Chris Masters, decided to resign, leading to theimmediate appointment of myself and Rob Woodward, as Chief Executive, and ournon-executive colleagues. Donald Emslie, Executive Director, resigned yesterday. The new Board comprises - in addition to myself and Rob Woodward - George Watt(Group Finance Director), David Shearer (Senior Independent Non-ExecutiveDirector), Waheed Alli (Non-Executive Director), Vasa Babic (Non-ExecutiveDirector), Jamie Matheson (Non-Executive Director) and Matthew Peacock(Non-Executive Director). Of paramount importance to the success of any Company is its staff and I wouldlike to pay tribute to the fortitude and dedication of SMG's people across thebusiness for whom the last few years, and particularly months, have beenturbulent and unsettling. I want to assure them of their new Board's bestefforts in returning the Company to the position we all wish to see it occupy. Outlook Advertising markets have been varied in the early part of 2007. Televisionairtime revenues have declined by 5% over the same period last year, but thisrepresents an outperformance against ITV1 as a whole which was down by 7% yearon year. Radio revenues have grown by 8% in Q1, also outperforming the market,and displaying particularly strong online revenue growth. Pearl & Dean has alsoseen strong Q1 revenue growth of 13%, outperforming its 5% increase in screens,while Primesight has grown Q1 revenues by 15% through increased focus on panelyield. We see these trends broadly continuing into April and, as a result, the Boardviews advertising markets for the year ahead with cautious optimism. Richard FindlayChairman 12 April, 2007 CHIEF EXECUTIVE'S REVIEW Introduction This is my first opportunity to formally communicate with shareholders sincejoining SMG and to introduce myself to the many constituencies that are focussedon seeing a recovery in SMG's performance. I believe passionately in the futureof SMG and I am committed to leading the turnaround of the business. I amconfident that with ambition, an aligned and motivated leadership team, anenthusiastic and professional staff, a focussed strategy and a period offinancial stability, we can deliver for shareholders. As Richard mentioned, we believe that the conditions for an IPO of Virgin Radioare particularly good. The flotation announced today will create a powerful,branded pure-play Radio business, and, leave SMG as a television business thatcan better focus on the needs of its viewers and advertisers. It will alsosignificantly improve our balance sheet, because we will use the float proceedsto pay down debt. I am currently in the process of reviewing every detail of the televisionbusiness in order to refine my plans for the future. After 100 days in office, Iwill agree with my colleagues on the newly-formed SMG Board a realistic buthighly challenging turnaround plan to restore SMG's position in UK media,focussing on producing and delivering compelling content, serving communities ofinterest and capitalising on the stv brand. The financial results being reported in today's announcement relate to 2006, theGroup's financial year prior to my appointment as Chief Executive. Divisional Performance Television revenues fell 8% across 2006 to £125.6m (2005: £137.0m), broadly inline with ITV1 as a whole and reflecting the effects of Contract Rights Renewal,multichannel competition and continuing weakness in the television advertisingmarket overall. This was partially offset by cost savings - including reducedheadcount - and by higher levels of overseas sales, repeats of networkprogrammes and a marginal increase in turnover at SMG Solutions. stv's share of ITV1's net advertising revenues (NAR share) was 6.6%, in linewith 2005 and supplemented by an improved performance from the local salesoperation in Scotland. The high operational gearing of this business resulted in operating profit forthe division as a whole falling 34% to £15.8m (2005: £24.1m). Virgin Radio outperformed the UK radio market with turnover down only 3% at£21.7m (2005: £22.4m). Reduced airtime revenues were substantially offset by avery strong performance in sponsorships & promotions, online and concert ticketsales. However, 2006 saw significant investment at Virgin Radio in presenters,engineering developments, marketing, online and digital platforms and costs atthe station increased by £2.6m over 2005. As a result, operating profit fell by53% to £2.3m (2005: £4.9m). Cinema advertising turnover at Pearl & Dean, while down 31% to £20.6m at aheadline level as a result of the loss of the UGC contract, was broadly flat(down £0.1m) when viewed on an underlying basis. This represented anoutperformance against the cinema market overall, which was down in 2006.However, Pearl & Dean recorded an operating loss of £4.2m (2005: £0.8m loss) asa result of the loss of the UGC profit contribution and increased rental costs. The focus on inventory management and the continued growth of the six sheet andBacklights estate at Primesight, the outdoor advertising division of SMG, sawturnover increase by 13% to £23.3m (2005: £20.7m). Six sheet panels andBacklights recorded increases in both revenue and yields and operating profitgrew by 50% to £4.5m (2005: £3.0m). Last year during the sale process,Primesight identified some planning issues relating to a number of itsadvertising panels. This is an industry-wide issue and I'm pleased to say thatwe have agreed a satisfactory way forward in order for us to address this. Operational Matters SMG's operational performance in 2006, while predating my appointment, providessome important indicators of the potential of SMG's businesses going forward.Equally, it demonstrates the weakness of the past strategy for the business.Going forward we will use our strengths in: Audiences; Content; and Future Mediato all play a pivotal role in the Group's recovery. Audiences Audiences represent the lifeblood of all media businesses and they will be aprimary focus for us as we move forward. stv is an underexploited brand and wemust find new opportunities to super serve the numerous communities of interestin Scotland. stv has an unparalleled advantage. Our starting point is strong. We remain themost popular peak-time station in Scotland and across 2006 enjoyed a peak-timeaudience share of 28.3% - some six percentage points ahead of our closest rival,BBC1 Scotland (22.6%), and fully 20 percentage points ahead of our nearestcommercial rival, Channel 4 (8.7%). 49 of the UK's 50 most popular programmes oncommercial television in 2006 were broadcast to the Scottish audience on stv,and while some erosion of the audience is inevitable up to digital switchover in2010/2011, we anticipate reaching this significant watershed retaining stv'sposition as Scotland's most popular television station. It is up to us toexploit this unique platform and to build stv's relationship with Scottishviewers and advertisers. Last year saw significant investment in the business. Virgin Radio's audienceslipped by 2.1% across 2006 as a result of the effects of schedule and presenterchanges, alongside continued AM erosion. Nonetheless, Q4 2006 listeningstatistics, released in February 2007, showed quarter on quarter growth in bothreach (+4.0%) and listening hours (+3.6%), suggesting an improvement in thistrend. Virgin Radio is now available to listeners on all available platformsfollowing its July launch on Freeview, that made the station available in afurther 9m digital television homes. This development means that Virgin Radiolisteners can now tune in via analogue, DAB, satellite TV, digital terrestrialTV and online - and we view this continued multiplatform stance as vital to thestation's ongoing connection with its audience. In pursuit of this strategy,Virgin Radio last month announced its application, in partnership with Channel 4amongst others, for the D2 (DAB) Multiplex when it is granted by the Governmentin 2008. Cinema audiences were down 4.9% in the UK in 2006 and up 8.9% in Ireland, whichcontributed to Pearl & Dean's flat revenue performance in 2006. 2007 has a muchstronger film slate with the inclusion of proven film product such as Pirates ofthe Caribbean, Harry Potter, Shrek, The Fantastic Four and Spiderman. Content Content is at the heart of all broadcast and online businesses and I believethat SMG's television businesses have the potential to differentiate themselvesusing entertaining and informative programming that will excite viewers. Thiswill be a key area of opportunity for us in the future. I have already takensteps to enhance the strengths of our television content leadership team and, inaddition, I am delighted to have Waheed Alli as a Non Executive Director of thecompany. In 2006, ITV1's programme schedule was supplemented by a number of changes toour output in Scotland. In May, SMG's previous Board decided to re-brand SMG'stwo licences as stv, enabling the business to capitalise on the combinedschedule and shared resources, while retaining their distinct identities inregional news. News regularly attracts a larger combined audience than the BBC'sregional evening news programme. In January 2007 split news services were launched within our early evening newsprogrammes giving viewers more localised services from Edinburgh or Glasgow inthe south and Dundee or Aberdeen in the north. This service has proved popularwith viewers and is one example of how stv can differentiate itself in a crowdedmarket. We have a good opportunity to grow our production base. The quality of SMGProductions' network programme output was recognised at the Scottish BAFTAAwards with Best Children's programme award going to Uncle Dad, produced forCITV, and our long-running detective series, Taggart, receiving the prestigiousBAFTA Award for special contribution to Scottish broadcasting, in recognition ofits long-lasting international success. Taggart continued its domestic successwith six commissions from ITV1 in 2006, alongside Rebus' further fourcommissions. The Christian O'Connell Breakfast Show, launched in January 2006, represented asignificant change to Virgin Radio's weekday schedule. While the showexperienced an inevitable element of audience turnover, the most recent (Q42006) listener research revealed an upturn in listening and we are optimistic ofthis trend continuing in 2007. The Virgin Radio weekday schedule has beenfurther enhanced in 2007 with the introduction of Madness front man, Suggs, tothe afternoon slot, with Ben Jones taking over the important drive time show andstation favourite, Geoff Lloyd, moving to early evenings. Future Media SMG has taken some initial steps to reduce the Group's reliance on spotadvertising through drawing on the strength of its broadcast brands. While thisis a start, I am not convinced about SMG's current strategy. We will thereforeset out a clearer and more focussed approach to future media and I anticipate asignificant re-appraisal of this activity going forward. In July the Group launched stv.tv, an information and entertainment site thatcapitalises on the strength of the stv brand. Peopleschampion.com, a pricecomparison site, founded and fronted by the well-respected internet bankingpioneer, Jim Spowart, followed in September. An experimental IPTV site,scotlandontv.tv, was test-launched in November 2006 providing viewers worldwidewith the opportunity to download programmes from stv's extensive archive. Earlier this year SMG launched smartycars.com, an online car retail andinformation site aimed at winning a share of the classified car advertisingmarket, initially in Scotland. In addition, in 2006 the award-winningvirginradio.co.uk was refreshed and the Group also launched pearlanddean.com. Summary 2006 was a troubled year for SMG. It is clear that the past strategy was badlyflawed. However, the Group has significant untapped potential and I am committedto rebuilding the company using the core strengths referred to above. The flotation of Virgin Radio will create a great standalone business and leaveSMG as a much more sharply focused Group, with a balance sheet that willsupport, rather than hold back, our development. In addition, ending the currentsale process for Primesight will allow us to achieve full value for thisbusiness in due course. I believe that the new leadership at SMG, the financing we have agreed, thesenior executives joining us and the outline strategy articulated todayrepresent important, positive progress for the Group. I look forward tocommunicating the details of our turnaround plan in June. Rob WoodwardChief Executive 12 April, 2007 Consolidated income statementfor the year ended 31 December 2006 2006 2005 Note Underlying Exceptional Results for Underlying Exceptional Results for results items year results items year £m £m £m £m £m £mCONTINUING OPERATIONSRevenue 2 147.3 - 147.3 159.4 - 159.4 Net operatingexpenses beforeexceptional costs (129.2) - (129.2) (130.4) - (130.4)Reorganisationcosts 3 - (2.6) (2.6) - (2.7) (2.7)Writedown ofstock 3 - (6.5) (6.5) - - - Ofcomsettlement 3 - (0.8) (0.8) - - - Goodwillimpairment 3 - (58.8) (58.8) - - - -------- --------- -------- -------- -------- --------Net operatingexpenses (129.2) (68.7) (197.9) (130.4) (2.7) (133.1) -------- --------- -------- -------- -------- -------- Operatingprofit/(loss) 18.1 (68.7) (50.6) 29.0 (2.7) 26.3 Gain ondisposal ofinvestment 3 - 0.4 0.4 - 2.3 2.3Loss ondisposal ofproperty 3 - (0.4) (0.4) - - - -------- --------- -------- -------- -------- -------- - - - - 2.3 2.3 -------- --------- -------- -------- -------- -------- Profit/(loss)beforefinancing 18.1 (68.7) (50.6) 29.0 (0.4) 28.6Interest 0.2 - 0.2 0.6 - 0.6incomeFinance costs 4 (8.6) - (8.6) (11.8) - (11.8) -------- --------- -------- -------- -------- -------- Profit/(loss)before tax 9.7 (68.7) (59.0) 17.8 (0.4) 17.4Tax (charge)/credit 6 (0.2) 2.7 2.5 (4.6) 0.2 (4.4) -------- --------- -------- -------- -------- -------- Profit/(loss)for the yearfromcontinuingoperations 9.5 (66.0) (56.5) 13.2 (0.2) 13.0 DISCONTINUED OPERATIONS(Loss)/profitfor the yearfromdiscontinuedoperations 2,3 - (18.0) (18.0) 2.0 (0.6) 1.4 -------- --------- -------- -------- -------- --------Profit/(loss)attributableto equityholders 9.5 (84.0) (74.5) 15.2 (0.8) 14.4 -------- --------- -------- -------- -------- -------- Earnings perordinary share- basic and diluted 8 3.0p (23.6p) 4.8p 4.6pEarnings perordinary share fromcontinuingoperations- basic and diluted 8 3.0p (17.9p) 4.2p 4.2p Consolidated statement of recognised income and expensefor the year ended 31 December 2006 2006 2005 £m £m (Loss)/profit for the year (74.5) 14.4 -------- -------- Actuarial gain recognised in the pension schemes 4.1 45.0Deferred tax charge to equity (1.2) (14.8)Cash flow hedges 0.8 (0.5)Recognition of equity component of CULS - 2.5 -------- --------Net profit recognised directly in equity 3.7 32.2 -------- --------Total recognised (expense)/ income for the year (70.8) 46.6 -------- -------- Consolidated balance sheetat 31 December 2006 Note 2006 2005 £m £mASSETSNon-current assetsGoodwill 9 113.5 222.1Property, plant and equipment 10 18.2 36.0Deferred tax asset 14.8 16.7 --------- -------- 146.5 274.8 --------- --------Current assetsInventories 36.1 33.8Trade and other receivables 42.6 56.2Cash and cash equivalents 8.7 28.0Short-term bank deposit 11 2.5 5.0Derivative financial instruments 13 0.3 - --------- -------- 90.2 123.0 --------- -------- Non-current assets classified as held for sale 5 76.7 - --------- -------- Total assets 313.4 397.8 --------- -------- EQUITYCapital and reserves attributable to the Company'sequity holdersShare capital 14 7.9 7.8Share premium 14 60.2 59.0Merger reserve 173.4 173.4Equity reserve 2.5 2.5Other reserve 14 3.2 5.3Hedging reserve 14 0.3 (0.5)Retained earnings 14 (202.0) (125.1) --------- --------Total equity 45.5 122.4 --------- -------- LIABILITIESNon-current liabilities Borrowings 149.3 149.1Convertible unsecured loan stock 12 - 22.2Derivative financial instruments 13 - 0.5Other financial liabilities 1.1 0.8Retirement benefit obligation 16 46.7 53.0 --------- -------- 197.1 225.6 --------- --------Current liabilitiesTrade and other payables 35.6 36.5Convertible unsecured loan stock 12 22.5 -Current tax liabilities 1.5 10.0Provisions 1.4 3.3 --------- -------- 61.0 49.8 --------- -------- Liabilities directly associated with total assetsclassified as held for sale 5 9.8 - Total liabilities 267.9 275.4 --------- -------- Total equity and liabilities 313.4 397.8 --------- -------- Consolidated cash flow statementfor the year ended 31 December 2006 Note 2006 2005 £m £mOPERATING ACTIVITIESCash generated by operations 15 11.8 26.7Taxes paid (4.0) -Interest paid (10.6) (9.0)Pension deficit funding - (2.8) --------- ---------Net cash (used)/ generated by operating (2.8) 14.9activities --------- --------- INVESTING ACTIVITIES Interest received 0.2 0.3Disposal of investment - 2.7Purchase of property, plant and equipment (9.7) (11.2) --------- --------- Net cash used by investing activities (9.5) (8.2) --------- --------- FINANCING ACTIVITIESDividends paid (5.3) (11.6)Net borrowings drawn 0.2 10.1Release of cash on deposit 2.5 2.5Net repayment of loan notes/stock - (0.2) --------- --------- Net cash (used)/ generated by financing (2.6) 0.8activities --------- --------- Movement in cash and cash equivalents (14.9) 7.5 Net cash and cash equivalents at beginning of 28.0 20.5year --------- --------- Net cash and cash equivalents at end of year 16 13.1 28.0 --------- --------- ---------------------------------- -------- --------- ---------Reconciliation of movement in net debtfor the year ended 31 December 2006 Note 2006 2005 £m £m Opening net debt (139.1) (134.8)Movement in cash and cash equivalents in the (14.9) 7.5yearIncrease in debt financing (0.2) (10.1)IFRS (increase)/ decrease in CULS liability (0.3) 0.6Movement in loan note liabilities (0.3) 0.2Net movement in Escrow cash (2.5) (2.5) --------- ---------Closing net debt 16 (157.3) (139.1) --------- ------------------------------------------- -------- --------- --------- Notes to the preliminary announcement for the year ended 31 December 2006 1. Basis of preparation The financial information set out in the preliminary announcement does notconstitute the Group's statutory accounts within the meaning of Section 240 ofthe Companies Act 1985 and has been extracted from the full accounts for theyears ended 31 December 2006 and 31 December 2005 respectively. The informationfor the year ended 31 December 2005 does not constitute statutory accounts asdefined in section 240 of the Companies Act 1985. A copy of the statutoryaccounts for that year has been delivered to the Registrar of Companies. Theauditors' report on the financial statements was unqualified and did not includea statement under section 237(2) or (3) of the Companies Act 1985. The statutoryfinancial statements for the year ended 31 December 2006 have yet to be signed.They will be finalised on the basis of the financial information presented bythe directors in this preliminary announcement and will be delivered to theRegistrar of Companies in due course. The accounting policies adopted in thepreparation of the preliminary announcement are consistent with those applied inthe preparation of the Group's statutory accounts for the year ended 31 December2005. 2. Business segments For management purposes the Group is currently organised into four operatingdivisions - Television, Radio, Cinema and Outdoor. These divisions are the basis on which the Group reports its primary segmentinformation. Principal activities are as follows: Television - the production and broadcasting of television programmes andassociated enterprises. Radio - the operation of commercial radio in the UK. Cinema - the provision of advertising space within cinema complexes. Outdoor - the provision of advertising solutions across various outdoor media. On 13 September 2006, the Group put its Outdoor and Cinema businesses up forsale. The disposal groups meet all the conditions to be classified as held forsale and are therefore classed as discontinued operations. Segment information about these businesses is presented as follows: SEGMENT REVENUES External sales 2006 2005 £m £mContinuing operationsTelevision 125.6 137.0Radio 21.7 22.4 -------- -------- 147.3 159.4 -------- --------Discontinued operationsOutdoor 23.3 20.7Cinema 20.6 29.9 -------- -------- 43.9 50.6 -------- -------- -------- -------- 191.2 210.0 -------- -------- Independent Television Commission ("ITC") qualifying revenue was £97.0m (2005:£109.0m) Turnover in 2006 includes £2.2m of revenues from sources outside the UK (2005:£2.1m). SEGMENT RESULTS Underlying Exceptional Segment result segment result items 2006 2005 2006 2005 2006 2005 £m £m £m £m £m £m ContinuingoperationsTelevision 15.8 24.1 (6.9) (2.7) 8.9 21.4Radio 2.3 4.9 (59.6) - (57.3) 4.9 -------- -------- -------- -------- -------- -------- 18.1 29.0 (66.5) (2.7) (48.4) 26.3 -------- -------- -------- -------- -------- -------- Reorganisation costsattributable to Group (2.2) - -------- -------- Operating(loss)/profit (50.6) 26.3Gain on disposal ofinvestment 0.4 2.3Loss on disposal ofproperty (0.4) -Financing (8.4) (11.2) -------- -------- (Loss)/profit before tax (59.0) 17.4Taxcredit/(charge) 2.5 (4.4) -------- -------- (Loss)/profitfor the year fromcontinuing operations (56.5) 13.0 -------- -------- DiscontinuedoperationsOutdoor 4.5 3.0 - (0.4) 4.5 2.6Cinema (4.2) (0.8) (18.0) (0.4) (22.2) (1.2) -------- -------- -------- -------- -------- -------- 0.3 2.2 (18.0) (0.8) (17.7) 1.4Tax(charge)/credit (0.3) (0.2) - 0.2 (0.3) - -------- -------- -------- -------- -------- --------Profit/(loss)for the yearfrom discontinued - 2.0 (18.0) (0.6) (18.0) 1.4operations -------- -------- -------- -------- -------- -------- Net(loss)/profitattributableto equityshareholders (74.5) 14.4 -------- -------- Operating profit in 2006 includes £1.3m arising outside the UK (2005: £1.1m). Note In 2006, the exceptional items in Television division relate to £6.5m for stockwritedown and £0.4m of reorganisation provision (2005: £2.7m relates toreorganisation provision) and in Radio division the exceptional items relate tothe Ofcom settlement of £0.8m and goodwill impairment of £58.8m. The exceptional items in Outdoor and Cinema division in 2005 relate toreorganisation provisions. 3. Exceptional items i) Reorganisation costs In July 2006 the Group initiated a further restructure following the move of stvto new premises in Pacific Quay, Glasgow. In December 2006, the Group alsoannounced plans to restructure the corporate function in light of theannouncement of the sale of both the Outdoor and Cinema businesses in September2006. Both decisions culminate in a reduction in headcount within theorganisation, resulting in the creation of a provision for exceptional costs of£2.6m. In December 2005, the Group announced plans to reorganise the Televisionbusiness in light of reduced Public Service Broadcasting licence requirementsand the impact of new technology which will arise from the move of stv to newpremises in Pacific Quay, Glasgow. In the same month, the Group committed to areorganisation of the structure of the Out of Home division, resulting in thecreation of separate Outdoor and Cinema divisions. Both decisions culminated ina reduction in headcount within the organisation, resulting in the creation of aprovision for exceptional costs of £3.5m. ii) Writedown of stock A stock writedown of £6.5m has been provided during the year. £5.4m relates tonetwork stock that has not been transmitted and will not be transmitted on ITV1in the future. £0.8m relates to regional drama stock following Ofcom's decisionto reduce the future annual commitment for regional transmission. The remaining£0.3m relates to a writedown of deficit funded stock following a review of thefuture sales prospects for the deficit funded material. iii) Ofcom settlement In previous years the Group believed that £0.8m of analogue licence fees hadbeen overpaid to Ofcom. During the year the Group decided to write this amountoff following a decision to accept the revised analogue licence terms. iv) Goodwill impairment Goodwill impairment losses of £76.8m have been recognised in the year inaccordance with IAS36 on the carrying value of Virgin Radio (£58.8m) and Pearland Dean (£18.0m). These writedowns are due to the weaker trading performanceexperienced in both businesses in 2006. v) Gain on disposal of investment On 20 October 2005, the Group announced the sale of its 19.9% stake in Heart ofMidlothian plc ("Hearts") to Heart of Midlothian 2005 Limited, a company whollyowned by UAB Ukio Banko Investicine Grupe ("UBIG") at a consideration of £0.9m,or 35p per share. The Group also entered into an agreement for the disposal ofits entire holding of convertible loan stock in Hearts to UBIG for aconsideration of £1.8m plus accrued interest. The disposal resulted in a netgain of £2.3m to the Group after disposal costs of £0.4m. In 2006, the write back of a provision for legal and professional fees relatingto the sale resulted in a net gain of £0.4m. vi) Loss on disposal of property In 2004, the Group disposed of its property at Cowcaddens, Glasgow. In line withthe sale agreement an additional amount of £0.8m was receivable when planningconsent was given for the site. This amount was received during the year and hasbeen offset by a writedown of tangible fixed assets of £1.2m resulting in a netloss on disposal of £0.4m. 4. Finance costs 2006 2005 £m £mInterest expense:Bank borrowings 9.8 9.3CULS and loan note interest 1.5 1.7 ---------- ---------- 11.3 11.0Pension finance (credit)/ cost (2.7) 0.8 ---------- ----------Finance costs 8.6 11.8 ---------- ---------- 5. Discontinued operations 2006 2005 £m £m Post tax results from discontinued operations (18.0) 1.4 ---------- ---------- Cash flows from discontinued operations Net cash flows from operating activities 3.3 2.5Net cash flows from investing activities (2.0) (5.0) ---------- ---------- 1.3 (2.5) ---------- ---------- The major classes of assets and liabilities comprising the operations classifiedas held for sale are as follows: 2006 £m Goodwill 32.4Property, plant and equipment 20.4Inventories 0.2Trade and other receivables 19.3Cash and cash equivalents 4.4 -----------Total assets classified as held for sale 76.7 ----------- Trade and other payables 8.3Tax liabilities 1.5 -----------Total liabilities associated with assets classified as held for 9.8sale ----------- Net assets of disposal group 66.9 ----------- 6. Tax 2006 2005 £m £mThe (credit)/charge for tax on continuing operations is asfollows: Tax on profit on ordinary activities excluding exceptionalitems at 3% (2005: 26%) 0.2 4.6Tax effect of exceptional items (2.7) (0.2) --------- --------- (2.5) 4.4 --------- --------- The effective tax rate for the Group excluding exceptional items is 5% (2005:23%). The tax charge is lower than the standard rate of 30% due to adjustmentsfor prior year provisions and certain tax planning initiatives. 7. Dividends 2006 2005 £m £mAmounts recognised as distributions to equity holders inthe period:Final dividend for the year ended 31 December 2004 of - 4.71.5pInterim dividend for the year ended 31 December 2005 of - 3.81.2pFinal dividend for the year ended 31 December 2005 of 5.3 -1.7p ----------- --------- 5.3 8.5 ----------- --------- The proposed interim dividend of 1.2p per share to be paid on 19 January 2007was approved by the Board on 8 September 2006 and has not been included as aliability as at 31 December 2006. 8. Earnings per share Earnings 2006 Per share Earnings 2005 Per share £m Weighted Pence £m Weighted Pence average number average number of shares (m) of shares (m)Basic underlying EPSEarningsattributableto ordinaryshareholders 9.5 315.3 3.0p 15.2 314.5 4.8p ------- -------- ------- ------- -------- --------Earnings per sharefrom continuingoperationsBasic EPS 9.5 315.3 3.0p 15.2 314.5 4.8pPre tax(profit)fromdiscontinued operations (0.3) (0.1p) (2.2) (0.7p)Tax relatingtodiscontinuedoperations 0.3 0.1p 0.2 0.1p ------- -------- ------- ------- -------- --------BasicunderlyingEPSfromcontinuing 9.5 315.3 3.0p 13.2 314.5 4.2poperations ------- -------- ------- ------- -------- -------- Basic EPSEarningsattributableto ordinaryshareholders(includingexceptionalitems) (74.5) 315.3 (23.6p) 14.4 314.5 4.6p ------- -------- ------- ------- -------- --------Earnings per sharefrom continuingoperationsBasic EPS (74.5) 315.3 (23.6p) 14.4 314.5 4.6pPre tax loss/(profit) from discontinuedoperations 17.7 5.6p (1.4) (0.4p) Tax relatingtodiscontinuedoperations 0.3 0.1p - - ------- -------- ------- ------- -------- --------Basic EPSfromcontinuing (56.5) 315.3 (17.9p) 13.0 314.5 4.2poperations ------- -------- ------- ------- -------- -------- Earnings per share from discontinuedoperationsBasic EPSPre tax(loss)/profitfromdiscontinued (17.7) 315.3 (5.6p) 1.4 314.5 0.4poperationsTax relatingtodiscontinuedoperations (0.3) (0.1p) - - ------- -------- ------- ------- -------- --------Basic EPSfromdiscontinued (18.0) 315.3 (5.7p) 1.4 314.5 0.4poperations ------- -------- ------- ------- -------- -------- There is no difference between basic and diluted EPS as there is no materialimpact from dilutive share options. 9. Goodwill £mCostAt 1 January 2006 293.0Recognised on acquisition of a subsidiary 0.6Classified as held for sale (65.9) --------At 31 December 2006 227.7 -------- Accumulated amortisationAt 1 January 2006 70.9Impairment losses 76.8Classified as held for sale (33.5) --------At 31 December 2006 114.2 -------- Net book amount at 31 December 2006 113.5 -------- Net book amount at 31 December 2005 222.1 -------- Goodwill comprises capitalised goodwill on acquisitions completed since 1January 1998. 10. Property, plant and equipment Land and Plant, Total buildings technical leasehold equipment £m and other £m £m Cost At 1 January 2006 0.8 88.0 88.8Additions 1.7 8.0 9.7Disposals - (3.7) (3.7)Classified as heldfor sale - (38.7) (38.7) --------- ---------- ---------At 31 December 2006 2.5 53.6 56.1 --------- ---------- --------- Accumulated depreciation and impairmentAt 1 January 2006 0.6 52.2 52.8Charge for year 0.4 5.5 5.9Disposals - (2.5) (2.5)Classified as heldfor sale - (18.3) (18.3) --------- ---------- ---------At 31 December 2006 1.0 36.9 37.9 --------- ---------- --------- Net book value at 31December 2006 1.5 16.7 18.2 --------- ---------- ---------Net book value at 31December 2005 0.2 35.8 36.0 --------- ---------- --------- 11. Short-term bank deposit The short-term bank deposit relates to £2.5m placed in Escrow for a further oneyear (£10.0m in 2003 reducing by £2.5m each year) in respect of certain of SMG'spension related indemnity obligations given under the sale and purchaseagreement of the Publishing division disposed of on 4 April 2003. 12. Convertible unsecured loan stock The CULS as at 31 December 2006 is convertible on 30 April in each of the years1999 to 2007 inclusive. The CULS are convertible into new SMG plc shares on thebasis of 50.2808 SMG shares per £100 nominal of SMG CULS. The CULS are unsecuredobligations of SMG and bear interest at a rate of 6.5% per annum. An immaterialamount of CULS was converted during both the current and prior year. In accordance with the requirements of IAS 39, an adjustment of £0.3m was madeduring the year to reflect the debt to equity split of the CULS balanceoutstanding. As at 31 December 2006, the outstanding CULS balance was £22.5m(2005: £22.2m). 13. Derivative financial instruments The derivative financial asset of £0.3m (2005: liability of £0.5m) has arisen asa result of an interest rate swap. The notional principal amount of theoutstanding interest rate swap contract at 31 December 2006 was £60.0m. At 31December 2006 the fixed interest rates are 4.94% (fixed until 2007) and floatingrates are 5.31% (3 month LIBOR). Any net gain or loss deferred in equity willreverse during the next year, being the life of the swap. 14. Statement of changes in shareholders' equity Share Capital Share Premium Other Hedging Retained reserve reserve earnings £m £m £m £m £m At 1 January 2006 7.8 59.0 5.3 (0.5) (125.1) Net loss - - - - (74.5) Dividends - - - - (5.3) Shares issuedduring the period 0.1 1.0 - - - Movement in IFRS2 reserve - 0.2 (2.1) - - Actuarial gain - - - - 4.1 Deferred taxthereon - - - - (1.2) Fair value gainon interest rateswaps - - - 0.8 - -------- -------- --------- -------- ---------At 31 December2006 7.9 60.2 3.2 0.3 (202.0) -------- -------- --------- -------- --------- There have been no movements in the merger reserve and equity reserve during theyear ended 31 December 2006. 15. Cash flow from operating activities 2006 2005 £m £mContinuing operationsOperating profit (before exceptional items) 18.1 29.0Depreciation and other non-cash items 2.2 3.2 --------- -------- Operating cash flows before movements in working capital 20.3 32.2 Increase in inventories (9.0) (8.3)(Increase)/ decrease in trade and other receivables (5.4) 4.3Increase/ (decrease) in trade and other payables 6.7 (3.5)Reorganisation costs (4.1) (0.5) --------- --------Cash generated from continuing operations 8.5 24.2 --------- -------- Discontinued operationsOperating profit (before exceptional items) 0.3 2.2Depreciation and other non-cash items 2.8 3.4 --------- -------- Operating cash flows before movements in working capital 3.1 5.6 Decrease/(increase) in trade and other receivables 0.2 (2.6)Increase/ (decrease) in trade and other payables 0.4 (0.5)Reorganisation costs (0.4) - --------- --------Cash flow for discontinued operations 3.3 2.5 --------- -------- Cash generated from operations 11.8 26.7 --------- -------- 16. Analysis of movements in net debt At At 1 January 2006 Cash flow 31 December 2006 £m £m £m Cash and cash equivalents 28.0 (19.3) 8.7Cash and cash equivalents included inthe disposal groups held for sale (note5) - 4.4 4.4 ---------- --------- ---------- 28.0 (14.9) 13.1 Bank borrowings (149.1) (0.2) (149.3)Short-term deposits 5.0 (2.5) 2.5Convertible unsecured loan stock (22.2) (0.3) (22.5)Unsecured loan notes (0.2) - (0.2)Secured loan notes (0.6) (0.3) (0.9) ---------- --------- ----------Net debt (139.1) (18.2) (157.3) ---------- --------- ---------- 17. Retirement benefit schemes The Group operates two defined benefit pension schemes. The schemes are trusteeadministered and the schemes' assets are held independently of the Group'sfinances. Pension costs are assessed in accordance with the advice of anindependent professionally qualified actuary. The schemes are the Scottish and Grampian Television Retirement Benefit Schemeand the Caledonian Publishing Pension Scheme. They are closed schemes andtherefore under the projected unit method the current service cost will increaseas the members of the scheme approach retirement. A full actuarial valuation of the schemes was carried out at 1 January 2006 andupdated to 31 December 2006 by a qualified independent actuary. The majorassumptions used by the actuary were: At 31 December At 31 December 2006 2005 Rate of increase in salaries 3.30% 3.25%Rate of increase of pensions in payment 2.80% 2.75%Discount rate 5.10% 4.80%Inflation 2.80% 2.75% Assumptions regarding future mortality experience are set based on advice,published statistics and experience in each territory. The average life expectancy in years of a pensioner retiring at age 65 on thebalance sheet date is as follows: At 31 December At 31 December 2006 2005 Years Years Male 15.0 15.0Female 17.9 17.9 The fair value of the assets in the schemes, the present value of theliabilities in the schemes and the expected rate of return at each balance sheetdate was: At 31 December At 31 December 2006 2005 £m £m Equities 8.4% 145.9 8.0% 146.2Bonds 4.6%- 5.2% 114.7 4.1% - 4.9% 109.6 ------ ------Fair value of schemes' assets 260.6 255.8 Present value of defined benefitobligations (307.3) (308.8) ------ ------Deficit in the schemes (46.7) (53.0) ------ ------ A related offsetting deferred tax asset of £13.9m is shown under non-currentassets. Therefore the net pension scheme deficit amounts to £32.8m at 31December 2006 (£36.7m at 31 December 2005). 18. Reconciliation of underlying results Continuing Discontinued Group underlying results 2006 2005 2006 2005 2006 2005 £m £m £m £m £m £m Turnover 147.3 159.4 43.9 50.6 191.2 210.0Operating profit 18.1 29.0 0.3 2.2 18.4 31.2Profit before tax 9.7 17.8 0.3 2.2 10.0 20.0 19. Mailing A copy of the annual report is being sent to all shareholders on 24 April 2007and will be available for inspection by members of the public at the Company'sregistered office at Pacific Quay, Glasgow, G51 1PQ. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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