9th Mar 2005 07:01
ITV PLC09 March 2005 9 March 2005 ITV plc results for year ended 31 December 2004 Operating profit* up 49% and final dividend up 30% Successful multichannel strategy Financial highlights • ITV plc net advertising revenue in 2004 up 4.7%#• ITV2, ITV3 and ITV News Channel net advertising revenue up 76% Pro forma ReportedOperating EBITA* £325m +49% £324m +64%Pre-tax profit* £340m +57% £341m +58%EPS* 6.3p +76% 6.6p +16% Reported numbers compare ITV plc 12 months to 31 December 2004 with Granada plc for 15 months to31 December 2003. • Net cash inflow from operating activities £321m - £354m returned to shareholders plus ITV dividends - Net debt at year-end reduced to £280m• Dividend for the 12 months to 31 December 2004 up 20% at 2.4p Operating highlights • Strong growth from top five categories of advertisers• Operating margin increased by 45%• £120m cost saving plan delivered ahead of schedule• ITV Family of Channels multichannel viewing share in 2004 held at 28.1% (2003 28.1%)• ITV driving digital performance - ITV2 adult viewing share up by 27% in 2004 - ITV3 launched 1 November 2004 - Ratings performance a year ahead of plan• Good progress on regulation• Evening News hour viewing share up 4% in 2004• ITV is home of top UK programmes - Top programme of the year Coronation Street - Eight out of top ten UK dramas - Top entertainment I'm a Celebrity - Get Me Out of Here• Granada commissions for other broadcasters: - US network re-commission Nanny 911 - Australia's highest-rating new entertainment series Dancing with the Stars - Germany's highest-rating new entertainment series Ich bin ein Star Outlook • ITV plc net advertising revenue from ITV1, ITV2, ITV3 and the ITV News Channel in quarter to March 2005 up 12%• In the three months since the launch of ITV3 in November 2004: - ITV Family of Channels delivered a 3% increase in share of multichannel adult commercial impacts to 41.5% - ITV2 and ITV3 accounted for 55% of total growth in multichannel adult impacts Three strategic objectives • Lead and grow UK commercial TV market - Promote effectiveness of TV advertising - Strengthen ITV Family of Channels• Develop content production - To be Europe's leading commercial content provider - Create new content for new technologies• Increase revenue streams beyond spot advertising Commenting, Charles Allen, Chief Executive of ITV said: "ITV has had an outstanding first year, delivering substantial growth inturnover which combined with cost savings has delivered a 49% increase in proforma operating profit. We have built a vibrant multichannel proposition andhave a clear strategy for future growth." For further enquiries please contact: ITV plc Tel: 020 7620 1620 Press enquiriesCharles Allen - Chief ExecutiveHenry Staunton - Finance DirectorBrigitte Trafford - Communications Director Analysts' enquiriesJames Tibbitts - Company SecretaryGeorgina Blackburn - Head of Investor Relations Citigate Dewe Rogerson Tel: 020 7638 9571 Jonathan ClareSimon RigbyAnthony Kennaway Website: www.itv.com, investor information www.itvplc.comAn analysts presentation will be held at 09.00hrs on 9 March 2005 at the CityPresentation Centre, 4 Chiswell Street, London EC1Y 4UP. *Proforma figures are prepared as if the merger took place on 31 December 2002and are presented for continuing operations before exceptional items andamortisation (2004 excludes £9 million (2003: £4 million) of operating profitfrom assets held for resale). # NAR for ITV plc's share of ITV1 plus ITV2, ITV3, ITV News Channel and a firsttime contribution from GMTV Chairman's statement The past year has been an historic and busy one for ITV. In January theshareholders of Carlton and Granada approved the merger of their two companiesto create ITV plc; and since then the senior team has been shaping anddeveloping the business for the future. Charles Allen, in his Chief Executive'sreview, gives more detail on that activity, and I focus on some of the majorachievements and strategic initiatives in which we are involved. 2004 Results The combination of rising turnover and rapidly reducing costs following themerger has contributed to sharply increased profits. Your Board is proposing a final dividend of 1.3 pence per share. This reflectsthe improving profits and strong cash flow and results in a full year dividendof 2.4 pence per ordinary share, an increase of 20% on the dividend paid byGranada plc for the equivalent 12 month period last year. Business development We are concentrating on two areas in developing ITV: First to improve our current business This has been very much the focus for 2004. Our actions have been based onachieving a number of the goals that we identified in our report at thebeginning of 2004. These included increasing efficiency, reducing regulatorycosts and placing news at the centre of ITV's public service programming. We will continue to lead and grow the UK TV advertising market, promoting thepower of the medium to advertisers. Secondly to build new businesses for the future Whilst continuing to improve the current business, our focus is on creating newbusinesses and new revenue streams for the future. We have been active already,building interactive revenue streams around our programmes and developing apackage of new channels like ITV2, ITV3 and ITV News Channel. We continue towork on: - developing our production business to be Europe's leading commercial content provider and creating new content for new distribution media;- increasing our channel line-up and seeking revenues from additional sources;- building our non-advertising revenues. Corporate Governance and CR Our detailed processes for maintaining compliance with the Combined Code onCorporate Governance are set out in the Governance section of the annual report.As a new company we have been able to adopt processes reflecting current bestpractice and we are very pleased to have won the "Best for Corporate Governance"in 2004 Award from Legal Week magazine. We have been able to use our unique regional presence for the benefit of boththe local communities in which we operate and for national campaigns such as "Britain on the Move." We have published a separate Corporate Responsibilityreport which is also available on our website at www.itvplc.com People Etienne de Villiers retired from the Board during the year and I thank him forhis contribution to ITV. I am delighted to welcome to the Board two newnon-executive directors who were appointed in February 2005. Baroness UshaPrashar CBE and Sir Robert Phillis both have significant relevant mediaexperience that will be invaluable to us as we plan ITV's future. During my first year as Chairman I have visited a number of ITV's sites aroundthe country and have been impressed by the enthusiasm and professionalism of mycolleagues at all levels. They understand the need to improve efficiency and todrive ITV forward as a single unified business. On behalf of my fellow Boardmembers, I thank all of our management and employees for their hard work andcontinuing commitment. I look forward to meeting the challenges of 2005 andbeyond in the knowledge that we have the best people to take the businessforward successfully in a period of rapid change. Sir Peter BurtChairman Chief Executive's review In 2005 ITV is celebrating two anniversaries: • we are entering the year of ITV's 50th anniversary, with ITV1 firmly established as the UK's number one commercial channel, and with ITV2 and ITV3 rapidly growing both audience and revenues; and • we have just completed our first year as a single, unified company and during that period we have streamlined and improved our operations and delivered cost savings ahead of expectations in both speed and amount. I am very pleased that we have, with the support of the Board, achieved so muchover the last 12 months since completing the merger, which created ITV plc on 2February 2004. In the Operating Review the annual report there is a lot moredetail on the programming successes and the development of the business over thelast year. Here I will focus on the principal factors affecting the Company, ourpeople, and the outlook for the future. Results and advertising revenue The 49% growth in pro forma operating EBITA in 2004 has resulted from acombination of growing revenues and reducing costs which have significantlyincreased our operating margin. ITV plc's advertising revenue in 2004 across theFamily of Channels (ITV1, ITV2, ITV3 and the ITV News Channel) including GMTVwas up 4.7% at £1,588 million with ITV2 revenue rising strongly. ITV3 commencedbroadcasting in November 2004, and its revenue contribution will rise in 2005 asadvertisers are attracted by its excellent ratings performance. Each of our topfive advertiser categories was up in 2004 - retail, food, entertainment andleisure, cars and finance. Sponsorship revenue was also improved at £37 million in the year. Operating profit (on a pro forma basis before amortisation and exceptionalitems) was up by 49% to £325 million for the year. After tax and minorityinterests, earnings per share on the same basis were up by 76% to 6.3 pence perordinary share. The improved profits resulted in a strong, positive cash flowwith net cash inflow from operating activities of £321 million. We have disposed of a number of non-core businesses raising more than £270million which, together with good operating cash flow, results in our having astrong balance sheet with closing net debt of £280 million. The final dividend of 1.3 pence per share will be paid on 1 July 2005 toshareholders on the register on 22 April 2005 and the ex-dividend date will be20 April 2005. The interim and final dividends for 2004 are 1.1 pence and 1.3 pencerespectively (excluding the first interim dividend of 0.5 pence per share paidon 1 July 2004 in respect of the three months to 31 December 2003). Over themedium term, the Company intends to re-balance the respective levels of interimand final dividend such that the interim represents approximately one-third ofthe total dividend. Increases in the final dividends, such as this year's, inthe absence of any unforeseen circumstances, are therefore likely to be greaterthan increases in interim dividends in order to achieve that objective. Schedule performance ITV's viewing performance is dependent upon the quality and popular appeal ofits programmes, both those produced internally and those commissioned fromindependent producers. For ITV1 we remain committed to commissioning the bestpossible programmes to attract our mass audiences. For ITV2 and ITV3 we intendto develop our programme offering, increasing the level of investment andtargeting additional acquired material over the coming months. In the two months following the launch of ITV3 at the beginning of November 2004the combined ITV1, ITV2, ITV3 and ITV News Channel attracted a 45.0% share ofall commercial impacts on UK television, compared to 44.7% in the same period in2003 (one commercial impact being one person viewing one 30 secondadvertisement). The very rapid take-up of digital multichannel television inthe UK, especially the spectacular growth of Freeview, helped the strong growthof ITV2 and ITV3 during that period. We are embracing the rapid change towards a fully digital multichannelenvironment, and are most supportive of Freeview which offers the simplestupgrade route for our viewers. The development of our ITV Family of Channelswill strengthen our business in that digital environment. Our autumn schedule on ITV1 performed well, as we had expected, with a strongline-up of returning hits including another series of I'm A Celebrity...Get MeOut Of Here! in late November. ITV2 has been achieving a 2.4% average viewingshare of its important 16-34 target demographic. ITV3, which targets a 35+demographic, has been attracting an average 1.1% share of ABC1 adults during itsfirst three months of transmission. ITV overall screened six of the top ten performing programmes in 2004, or sevenof them excluding sports programmes. The all time commercial viewing share of the ITV Family of Channels inmultichannel homes over the first six weeks of 2005 was 29.5%. Compared to thesame period in 2004 this was 4% lower mainly as a result of the very highviewing shares achieved in 2004 for the third series of I'm A Celebrity...Get MeOut Of Here! Programming Granada, ITV's production arm, continued to be the most significant supplier ofprogrammes internally to ITV1, ITV2 and ITV3, and is a major supplier to manyother broadcasters in the UK and internationally. In 2004 total external sales were £267 million made up of: original productionsfor the UK and overseas markets of £102 million; the distribution andexploitation of rights and products of £109 million; and facilities andeducation turnover of £56 million. We have improved our profit margins by concentrating on high value programmes,and we have substantially increased our international production slate with anumber of returning shows and formats such as Nanny 911 in the US and Hell'sKitchen. Regulation At the same time that ITV plc was being created, so too was our regulator Ofcomas five separate regulators became one on 29 December 2003. We have developed aworking relationship with Ofcom during 2004 which is essential for the manyregulatory processes and reviews due in 2005 and beyond. Following the grant inDecember 2004 of our new digital broadcasting licences for ITV1 (replacing theold analogue licences) these processes now include: • the review of the financial terms of our ITV1 licences from 2005; • Ofcom's review of Public Service Broadcasting ("PSB") and their forthcoming review of television advertising; and • Ongoing discussions about how the regulation of television generally should develop to be appropriate to the changing media landscape. The first issue - the review of the financial terms of our ITV licences - is duefor decision in the summer and will be effective from 1 January 2005. Thelicence fee structure dates from the time that ITV1 was the UK's sole commercialtelevision station, and there was value in the scarcity of spectrum allocatedfor television broadcasting. Today there are many hundreds of TV channelsavailable in the UK and yet in 2004, ITV1 paid a licence fee (net of the digitallicence rebate), of £204 million. Channel Five by contrast paid less than £20million and none of C4, the BBC, BSkyB nor any other broadcaster paid any suchamount at all. Achieving an equitable outcome to this review is one of our shortterm priorities for 2005. Many of the potential regulatory opportunities, however, lie beyond 2005. Weexpect the review of Public Service Broadcasting to be ongoing, with progressivereductions in the level of our mandated programming. This reflects anacknowledgement that, as we move to a digital multichannel world, there is morechoice already available to viewers and less reason to require such PSBprogramming of one commercial broadcaster and not of others. A first step thisyear will see the mandated hours of non-news regional programming reduced by 1.5hours per week in the English regions and reducing further in 2008. We remaincommitted to producing much of our network programming in the regions, but ourviewers do not recognise the benefit of non-news regional programmes as aseparate product. The Contract Rights Renewal ("CRR") remedy, under which we operate, governs thesale of ITV1 airtime. Airtime in the UK is sold via the Station Average Pricemechanism, which was established by the market, not ITV alone. Ofcom have indicated that they are planning to hold a review of the airtimesales market, and we are keen to work with them in identifying other airtimesales models. Alongside those reviews we are also seeking to promote discussions about otherareas of regulation. Firstly, there are already significant differences betweenthe form of advertising and sponsorship that is currently permitted in Americaon one hand and in the UK and Europe on the other. Secondly, television is anevolving medium and the effects of interactivity, PVRs, broadband and mobiledistribution, all create possibilities which the current regulation neverenvisaged. We will work with our regulators to ensure that the regulatoryenvironment evolves at the same rate as the medium and technology themselvesevolve. Outlook 2005 has started strongly. With Easter falling in March this year rather thanApril in 2004, March revenues have benefited from those advertisers who seekEaster airtime. This has contributed to ITV plc's first quarter revenues acrossall the ITV Family of Channels, including a first time contribution from GMTV,being up by £56 million which is a very encouraging start to the year. Within that, ITV2 advertising revenues have grown very strongly in the quarterto March 2005, up by 90% on 2004, whilst ITV3 has made a first timecontribution. Under the CRR remedy we have been engaged with our advertising customers incompleting their advertising contracts for 2005. We have been very pleased withthe level of support from many of those customers in renewing their contracts. Summary We have achieved a great deal during 2004 having made One ITV a reality. Wehave now delivered increased revenue, reduced costs, a more efficient structureand a very significant improvement in both profit and cash flow. Our executivesand employees have been key to that process, both achieving the aggressivetargets set for them and identifying further actions that have helped to exceedthose targets in many areas. I would like both to thank them for that, and to say how pleased I am that, aswe now move to the next phase of developing ITV's business for the future, wewill continue to have such talented people supporting us in those efforts. Charles Allen CBEChief Executive Financial review The merger of Granada plc and Carlton Communications Plc to form ITV plc wascompleted on 2 February 2004. As Carlton has been treated as an acquisition foraccounting purposes, the statutory results for the year to 31 December 2004include the trading results of Granada from 1 January and following the merger,the trading results of ITV plc from 2 February. The statutory results for theyear ended 31 December 2004 for ITV have comparative information for the 15month period ended 31 December 2003 relating to Granada only. As the comparativedisclosed is for a different time period and includes only the results ofGranada, pro forma results of the Group are also shown for the years ended 31December 2003 and 2004 (as if the merger had taken place on 31 December 2002). Turnover On a pro forma basis turnover for the year to 31 December 2004 increased by 3%to £2,083 million (2003: £2,025 million). Published turnover on continuingoperations less joint ventures was up 18% at £2,053 million (2003: £1,746million) following the inclusion of Carlton from 2 February 2004. Net advertising revenue ("NAR") NAR (including a first time contribution of £18 million from GMTV for the periodfrom October 2004 when it became a subsidiary) increased by 4.7% during the yearto £1,588 million (2003: £1,517 million) on a pro forma basis as the overall UKadvertising market was favourable. This reflects growth of 1.9% from ITV1 (ITV plc share) and 76% from ITV2, ITV3and ITV News (ITV3 launched on 1 November 2004 and NAR is included from thatdate). We have been in negotiation with many of our advertisers on the terms of theirnew contracts from 1 January 2005. Our negotiations are within the framework ofthe Contracts Rights Renewal ("CRR") remedy agreed with the Office of FairTrading as a condition to the merger creating ITV plc. ITV's NAR is partly a function of audience share which is measured in terms ofcommercial impacts. In 2004, ITV's total share of commercial impacts on UKtelevision was 42.7% (2003: 44.5%). It is this level of impact delivery thatprovides advertisers with the ability to achieve fast effective coverage fortheir brands. The reduction in 2004 was principally the result of the veryrapid take-up of digital multichannel television in the UK and the increasingnumber of channels available to viewers. We have experienced a very encouraging start to the year; currently, we estimatethat for the quarter to 31 March 2005 our ITV1 NAR will be approximately £369million, reflecting ITV1 NAR up by some 9% on last year. Our combined NAR forother ITV channels (ITV2, ITV3 and ITV News and a first time contribution fromGMTV) is estimated at £36 million, up from £10 million in 2004. Other sales On a pro forma basis other broadcasting sales of £216 million (2003: £200million) comprise principally cinema advertising, sponsorship income, fees forairtime sales on behalf of third parties, sales of ITV programming by theNetwork Centre to Channel 3 licencees not owned by ITV plc and increased premiumrate telephone income. Production turnover includes original productions for the UK and internationalmarkets, the distribution and exploitation of internally generated acquiredrights, studios and facilities turnover and sales by the education business.Programming made by Granada for ITV channels is not included in turnover aboveas it represents an internal programming cost of sale. In 2004, total externalsales of £267 million (2003: £293 million) included original productions forother broadcasters of £102 million, distribution and exportation sales of £109million and facilities and education turnover of £56 million. A decrease infacilities turnover since last year is the result of the closure of a number ofstudios in 2004 and increased internal usage of facilities on programmesproduced for ITV. ITV schedule The cost of the ITV1 schedule (ITV plc share) in 2004 on a pro forma basis was£796 million (2003: £783 million). The launch of ITV3 and increased investmentin ITV2 and ITV News programming resulted in a further increase of £12 millionover 2003. This further investment has been key in attracting new advertisersand viewers to ITV resulting in a NAR increase of £53 million since last year. GMTV schedule costs since the date of acquisition were £7 million. Integration synergy savings The synergy savings delivered as a result of the merger between Carlton andGranada are £110 million on a full year run rate basis at 31 December 2004. Atthe 2004 interim results we increased the original target of £100 million ofmerger savings to £120 million run rate by 31 December 2005. The synergies havebeen delivered as a result of savings in property, systems, people and improvedefficiencies across our businesses. Profit On a pro forma basis Group operating profit from continuing operations beforecharges for amortisation and exceptional items was up 49% to £325 million (2003:£218 million). Profit from our continuing operations before tax, amortisationand exceptional items was up 57% to £340 million (2003: £217 million). On a published basis Group operating profit from continuing operations beforecharges for amortisation and exceptional items was £324 million (2003: £198million). Profit on continuing operations before tax, amortisation andexceptional items was £341 million (2003: £216 million). A reconciliation of pro forma operating EBITA for 2004 with 2003 is shown below. A reconciliation of 2004 pro forma operating EBITA with 2003 is shown below: £m £m £mEBITA for 2003 218Increase in NAR and sponsorship (exc. GMTV) 54Licence fees (10)Increase in digital dividend 23 13Increased investment in programming (exc. GMTV) (25)Increase in telephony and other non-advertising revenue 11GMTV contribution 8Increased investment in ITV News Channel (4)Granada production profitability 11Reduction in programme sales and leaseback (4) 7Cost savings 49Other movements (6) 107EBITA in 2004 325 Exceptional items The operating exceptional items in the period total £69 million and primarilyrepresent merger integration and restructuring costs including employeeredundancy, outplacement costs and asset write-offs. The £17 million gain from non-operating exceptional items reflects a gain fromthe sale of our 18% stake in Village Roadshow during the period. Investment income Investment income of £7 million comprises dividend income from holdings in SMG,Channel 7 in Australia and Thomson. Our stake in Thomson has now been sold. Profit on sale of fixed assets The £7 million profit arises from the sale of surplus properties in the period,primarily in central London. Interest The net interest charge of £13 million includes interest income of £22 million,mainly on bank deposits, offset by £35 million of interest payable on ourprincipal debt instruments and interest payments under finance leaseobligations. ITV has adopted a policy of amortising the fair value of its interest rate swapson a straight line basis over the remaining life of the swaps. Tax The effective rate of tax on PBT is 29%, which reflects the beneficialsettlement of tax related issues and the release of provisions of £10 millionfollowing the settlement of prior years' group relief with United Business Mediaplc, offset by non-deductible amortisation costs. However, the underlyingeffective rate is 27% as shown below: Underlying effective rate of tax: Operating profit, before goodwill amortisation and exceptional items £m • Profit before tax as reported 207• Amortisation charge 82• Exceptional items 52 341Underlying tax charge• Tax charge as reported 61• Credit for exceptional costs 14• Credit in respect of prior year items 17 92 Underlying effective rate of tax 27% Licence fees and corporation tax Licence fees, paid in addition to corporation tax, comprise both a fixed annualsum and a variable element representing a percentage of our NAR and sponsorshipincome relating to homes which receive ITV1 in analogue and not in digitalformat. As the number of homes receiving digital television via satellite, cableor terrestrial increases, so the variable licence fee reduces with a digitallicence rebate. In the year the fixed sum paid was £67 million and the netamount of variable licence fee was £137 million, some £137 million less than itwould have been without the digital licence rebate. This reflects an averagedigital TV penetration in the year of some 50%. The benefit from the digitallicence rebate of £137 million was £23 million more than the previous year dueto the increase in digital penetration. In addition £3 million was paid inlicence fees since acquiring a controlling interest in GMTV in October 2004. Together with the tax charge of £61 million on our continuing businesses, thisadditional licence fee of £207 million produces a combined tax and licence feerate of 54% on our profit before tax, licence fees and amortisation of £496million as set out below. An analysis of combined licence fee and corporation tax is set out below: £m £m Profit before tax 207Amortisation 82Licence fees:Cash bid payment 67PQR payment 274Digital dividend benefit (137)GMTV payment (since October 2004) 3Licence fees net 207 4962004 tax charge 61Licence fees net 207Total "tax" 268 Tax charge and licence fees of £268 million as % of above, £496 million profit =54% Dividend The Board is proposing a final dividend of 1.3 pence per share. This reflectsimproving profits and strong cash flow and results in a full year dividend of2.4 pence per ordinary share, an increase of 20% on the dividend paid by Granadaplc for the equivalent 12 month period last year (this excludes the firstinterim dividend of 0.5 pence per share paid on 1 July 2004 in respect of thethree months to 31 December 2003). Earnings per share Pro forma adjusted earnings per share on continuing operations, beforeexceptional items and amortisation, were up 76% at 6.3 pence (2003: 3.6 pence).On the same basis published earnings per share are 6.6 pence (2003: 5.7 pence).Basic reported earnings per share are 3.5 pence (2003: 0.3 pence loss pershare). Acquisition of businesses As required by FRS 7, Fair Values in Acquisition Accounting, Carlton assets havebeen adjusted to reflect the fair value of the acquired net assets at the dateITV assumed effective control. The total fair value adjustments are £86 million. This has resulted in areduction in goodwill of £13 million on the figure included in our half yearresults following further review and developments such as the sale of the MovingPicture Company. The table below shows the principal fair value adjustments.These are explained below. As at 2 February 2004The principal fair value adjustments are shown below: £m £mOpening Carlton net liabilities (78)Fair value adjustments:-Film libraries (39)-Assets held for resale 59-Borrowings and interest rate swaps (42)-Pension deficits (96)-Other (mainly taxation) 32 (86)Fair value of Carlton net liabilities acquired (164) - Film libraries: revaluation to amortised replacement cost andaccounting policy alignment of the ITC and Rank film libraries. The librariesare now amortised over 20 years. This resulted in a charge to ITV approximately£3 million higher for 2004 than the charge booked by Carlton for 2003. - Assets held for resale: Carlton businesses which have been soldwithin a year of the merger (Carlton Books, Moving Picture Company andSuperhire) are shown at expected net proceeds discounted to present value at 2February 2004. The profits made by these businesses in the year up to the dateof disposal of £9 million (2003: £4 million) have been excluded from theconsolidated results of the Group and the pro forma financial information. - Borrowing and interest rate swaps: Carlton used a series of debtinstruments as a source of funding. Its £200 million 7.625% 2007 bond wasissued at a time of higher interest rates compared to those at the date of themerger. This has resulted in an increase in the market value of the bond(increasing the fair value of the liability to ITV) by £12 million. Fair valueadjustments on other bonds amounted to a £3 million decrease in borrowings. Atmerger the market value of the swap liabilities to ITV was £33 million higherthan book value, reflecting higher sterling rates and embedded options. - Pension deficits: inclusion of Carlton pension schemes (calculated ona SSAP 24 basis) at the date of acquisition in accordance with FRS 7. - Other: principally deferred taxation provided as appropriate on thefair value adjustments. ITV acquired a further 25% stake in GMTV in October 2004 bringing ITV's totalshareholding in the business to 75%. The estimated fair value of the net assetsof GMTV was £3 million. ITV also acquired a further 49.5% shareholding in GSkyB in November 2004bringing the total shareholding to 100%. The estimated fair value of the netassets of GSkyB was £1 million. Goodwill Total goodwill additions amounted to £2,288 million as a result of the mergerbetween Carlton and Granada and a further £82 million arose from the increasedshareholdings in GMTV and GSkyB. The total operating amortisation charge in theyear is £78 million (2003: £46 million). The goodwill relating to the digitalbroadcasting business is considered to have an indefinite useful life and assuch is not amortised but is subject to annual impairment reviews. Analoguebroadcasting goodwill is amortised over the period until the likely analogueswitch off in 2010. Cash flow and net debt The principal movements in net debt in the period are shown in the table below: £mOperating profit before depreciation, amortisation and exceptional items 359Movements in working capital 22Cash flow relating to exceptional items (60)Cash flow from operating activities 321Taxation, interest and dividend receipts (34)Capital expenditure less sale of fixed assets (1)Purchase of investments and businesses (56)Sale of investments and businesses 267Cash returned to shareholders excluding dividends (354)Equity dividends and other movements (42)Net debt acquired with subsidiary undertakings (508)Movement in net debt (407)Opening net funds 127Closing net debt (280) The cash inflow from operating activities was £321 million reflecting strongtrading and a working capital inflow which is stated after a payment of £27million for the rights for the 2006 Football World Cup. Exceptional cashpayments of £60 million reflect the merger integration costs and payments inrespect of the exit from ITV Digital. Capital expenditure was £36 million (broadly in line with our depreciationcharge) and £35 million was raised from property sales. The £56 million ofpurchases of investments and businesses were principally to buy Sky's stake inGSkyB and an additional 25% stake in GMTV (bringing ITV's ownership to 75%). The sale of businesses and investments included the disposal of the MovingPicture Company and our stakes in Village Roadshow and Thomson. In addition to normal dividend payments, £200 million was paid to Granadashareholders as part of the terms of the merger. A further £154 million was paidto purchase Carlton preference shares in the year. Net debt acquired of £508million was from Carlton and new subsidiary companies (ITV2, ITV News Channel,ITFC, London News Network, ITV Network Centre, GMTV and GSkyB). Treasury operations and policies A central department in London following policies and procedures laid down bythe Board, manages the Company's treasury operations. The most significanttreasury exposures faced by ITV are raising finance, managing interest rate andcurrency positions and investing surplus cash in high quality assets. Treasurypolicies have been approved by the Board for managing each of these exposuresincluding levels of authority on the type and use of financial instruments.Transactions are only undertaken if they relate to underlying exposures. Thetreasury department reports regularly to the Audit Committee and treasuryoperations are subject to periodic independent reviews and internal audit. ITV has established and retains strong relationships with a number of banks toensure a balanced spread of risk and to facilitate future funding requirements. Set out below are ITV's principal treasury policies: - Financing: ITV's financing policy is to fund itself long term usingdebt instruments with a range of maturities. It is substantially funded from theUK and European capital markets and has bank facilities from the UK syndicatedmarket. - Interest rate management: the Group's interest rate policy is to havefixed interest rate debt of between 30% and 70% of its total net indebtednessover the medium term in order to provide a balance between certainty of cost andbenefit from low floating rates. ITV uses interest rate swaps and options inorder to achieve the desired mix between fixed and floating. - Currency management: the Group's foreign exchange policy is to hedgeforeign currency denominated costs at the time of commitment and to hedge aproportion of foreign currency denominated revenues on a rolling 12 month basis.The policies significantly reduce the Group's earnings and balance sheetexposures to changes in exchange rates. - Investment in cash: ITV operates strict investment guidelines withrespect to surplus cash and the emphasis is on preservation of capital.Counterparty limits for cash deposits are largely based upon long term ratingspublished by the major credit rating agencies. Deposits longer than threemonths require the approval of the Management Committee of the Board. Pensions The Group's pension schemes are run independently by the schemes' Trustees. TheTrustees, as advised by the schemes' actuaries are funding the schemes on a longterm basis. All pension scheme assets are held in separate Trustee administeredfunds. A valuation of the schemes' assets is carried out by the scheme actuaries forthe Trustees every three years. The most recent valuation of the main schemewas carried out on 1 October 2001. A current valuation as at 31 December 2004is in progress and the Trustees will be reviewing the results in due course. The Company, together with the Trustees, keeps the schemes under review. Likemany UK listed companies the main ITV pension scheme has a funding deficit. TheTrustees will review future funding requirements once the 31 December 2004valuation is complete. The FRS 17 disclosures, which are not directly relevant for the ongoing fundingof the schemes, show a deficit, net of deferred tax, of £448 million (2003: £278million deficit). The 2004 operating cost under FRS 17 would have been £23million (2003: £20 million) after a curtailment gain of £4 million compared to aSSAP 24 charge of £26 million. The total FRS 17 charge including the net returnon scheme assets and liabilities is £28 million compared to a combined Granadaand Carlton total for the 15 months to 31 December 2003 of £48 million. The principal reasons for the increase in the reported FRS 17 net deficit arepensions deficits in businesses acquired and revised mortality rate assumptionsas advised by the schemes' actuaries, partly offset by increases in assetvalues. The changes to mortality assumptions reflect an industry widerecognition of increased life expectancy. International Financial Reporting Standards ITV plc is complying with IFRS for reporting periods commencing from 1 January2005. A project team reporting to the Audit Committee has undertaken theconversion process to ensure that appropriate accounting policies and proceduresare in place for a smooth transition. Conversion has a low impact on ITV's core operating results with no anticipatedeffect on revenue recognition. The main areas impacting operating profit are: IFRS 2 - Share based payments. ITV will capture and value all share options, SAYE schemes and share awards inaccordance with this standard. This will result in an increase in the chargeunder IFRS. Our schemes will be expensed based on a fair value approach andinclude share options and SAYE schemes which are not captured under UK GAAP.ITV has not taken the IFRS 1 option to value schemes dated pre 7 November 2002.This will result in an increased charge from 2004 to 2005 as more schemes arecaptured. IAS 19 - Employee benefits. ITV will be required to recognise its full pensions deficit on defined benefitschemes in the balance sheet and charge the current service cost and netinterest to the profit and loss account. If approved by the EU, ITV intends totake the option under the amendment to IAS 19 to take actuarial gains or lossesthrough the statement of recognised income and expenses. The impact on theaccounts will be broadly in line with the current FRS 17 disclosure requirement(which will replace the current SSAP 24 charge on the defined benefit schemes)and as a result of a curtailment gain, will show a reduced pensions charge in2004. At the EBITDA level the additional charge from share payments is approximatelymatched by the reduced pensions charge in 2004. IFRS 3 - Business combinations. ITV will no longer amortise goodwill but will subject it to an annual impairmentreview. Intangible assets arising on acquisition accounting for Carlton andother companies will be recognised and amortised. The principal intangible assets acquired on the acquisition of Carlton and othercompanies are the ITV brand name, customer contracts/relationships, broadcastinglicences and programme and film libraries. The shorter useful economic lives ofcustomer contracts/relationships will result in a higher amortisation charge inearlier years but a lower charge in 2006 and later years. ITV has taken the IFRS1 exemption from applying IFRS 3 to business combinations before 1 January 2004. The main impacts to the interest charge are from: IAS 39 - Financial instruments: Recognition and measurements. ITV will be required to mark to market a number of interest rate and foreigncurrency swaps and contracts. This results in potential volatility in theinterest line from those instruments which do not meet the IAS 39 hedgingcriteria. Additionally, fixed asset investments, such as SMG, will be marked tomarket with movements being taken through reserves. ITV has taken the IFRS 1exemption from applying IAS 39 and IAS 32 to the 2004 comparative period. IAS 19 results in a notional charge to interest from the net of an interestcharge on pension scheme liabilities and an expected return on scheme assets.In 2004 this amounts to £5 million. IAS 12 - Taxation. The increase in the number of fair valued items on the balance sheet will impactthe deferred tax charge and the effective rate of tax under IFRS. IAS 12 isexpected to have no impact on the tax payments to the Inland Revenue. ITV's first published financial reporting under IFRS will be for the half yearto 30 June 2005. This will include the results for the period to 30 June 2004and the 2004 full year under IFRS. The opening balance sheet for the start ofthe comparative period (1 January 2004) will also be shown under IFRS.Reconciliations will be provided to explain the adjustments made. In themeantime, we are planning to update investors in the second quarter of 2005 onthe impact of IFRS. Henry StauntonFinance Director ITV pro forma trading financial information for year ended 31 December 2004(unaudited) The merger of Granada plc and Carlton Communications Plc to form ITV plc wascompleted on 2 February 2004. Pro forma results have been prepared to show theresults of the new Group for the year ended 31 December 2004, with a comparativefor the same period in 2003, as if the merger had taken place on 31 December2002. Basis of preparation of pro forma trading results The pro forma results for the years ended 31 December 2003 and 2004 have beenprepared on the following basis: 1. They incorporate the results of Granada and Carlton. They alsoconsolidate the results of new subsidiaries London News Network, ITV NewsChannel, ITV2 and ITFC which were previously treated as joint ventures orassociates, as well as the ITV Network Centre. 2. The full results of GMTV and GSkyB have been consolidated from the timethey became subsidiaries (October and November 2004 respectively). Prior tothis ITV's share of the results of GMTV are included within joint ventures andGSkyB within associates. 3. The results have been presented under the accounting policies that havebeen adopted by ITV plc. 4. Transactions between Granada, Carlton, the ITV Network Centre andsubsidiary companies previously reported as joint ventures or associates (listedin notes 1 and 2) have been eliminated as inter-company transactions. 5. The results are shown only for continuing operations before amortisationand exceptional items. 6. The results exclude any former Carlton businesses which ITV plc has soldsince the merger date (2004: £9 million, 2003: £4 million). 7. The 2003 interest charge has been adjusted to exclude one-off ornon-recurring items including gains on the sale of derivative instruments andthe impact of foreign exchange. 8. The 2003 tax charge uses ITV plc's current 2004 underlying effective taxrate of 27% on profit before tax, prior year items and disallowable items. 9. The EPS figure for both periods uses the average number of shares in issuefor the year to December 2004 (4,085 million) as if the merged company had beenin existence for the whole of this period. Published Remove Remove Add Consolidation Pro forma Pro forma Growth 2004 amortisation exceptional Carlton items (inc. January adjustments 2004 2003 % £m £m tax effect) trading £m £m £m £m £mGroup turnover 2,053 - - 55 (25) 2,083 2,025 3%Group operating profit 177 78 69 1 - 325 218 49%Joint ventures 8 2 - (1) - 9 10Associated undertakings 4 2 - - - 6 4Investment income 7 - - - - 7 8Profit on sale of fixed 7 - - - - 7 -assetsGain on sale of investments 17 - (17) - - - -Profit before interest and 220 82 52 - - 354 240 48%taxNet interest payable (13) - - (1) - (14) (23)Profit/(loss) on ordinary 207 82 52 (1) - 340 217 57%activities before taxationTax on profit/(loss) on (61) - (14) - - (75) (59)ordinary activitiesProfit/(loss) on ordinary 146 82 38 (1) - 265 158 68%activities after taxationMinority interests (7) - - - - (7) (11)Profit/(loss) for the 139 82 38 (1) - 258 147 76%financial period Pro forma earnings per share before exceptional items and amortisation 6.3p 3.6p 76% Turnover Turnover of £2,083 million (2003: £2,025 million) is up 3%. Net advertisingrevenue of £1,588 million (2003: £1,517 million) is up 4.7% reflecting growth of1.9% from ITV1, 76% from ITV2, ITV News Channel and ITV3 and the first timecontribution of GMTV from October 2004 of £18 million. Other Broadcasting salesprincipally comprising cinema advertising, sponsorship income, fees for airtimesales on behalf of third parties, and sales of ITV programming by the ITVNetwork Centre to Channel 3 licencees not owned by ITV plc amounted to £216million (2003: £200 million). The majority of sales by Granada production of£402 million (2003: £351 million) are to ITV Broadcasting and therefore excludedfrom the above figures. External production turnover includes originalprogramme production for the UK and international markets, the exploitation anddistribution of rights and products, studios and facilities turnover and salesby the education business. Profit Operating profit of £325 million (2003: £218 million) is up 49% benefiting fromincreased advertising revenue and cost savings following the merger. Jointventure income is from ITV's 50% holding in GMTV (prior to October 2004) and theScreenvision businesses in the US and Europe. Associate income is from stakesin TV3, GSkyB (prior to November 2004) and ITN. Investment income representsdividend receipts from investments in Thomson (since sold), Channel 7 inAustralia and SMG in the UK. Profit on sale of fixed assets is from thedisposal of properties which were sold as part of the merger restructuringprocess. Minority interests reflect dividend payments to external preferenceshareholders in Carlton Communications Plc (over 90% of which were redeemed inthe second half of 2004). Consolidated profit and loss account 12 months ended 15 months ended 31 December 2003 31 December 2004 Total Continuing Discontinued Total operations operations restated restated restated Note £m £m £m £mTurnover:Group and share of joint ventures' turnover 1,297 1,746 176 1,922Less share of joint ventures' turnover (79) - (169) (169)Acquisitions 835 - - -Group turnover 2,053 1,746 7 1,753Operating costs before depreciation, amortisation (1,694) (1,510) (4) (1,514)and exceptional itemsOperating costs - exceptional items 1 (69) (16) - (16)EBITDA 290 220 3 223Depreciation of tangible fixed assets 7 (35) (38) (3) (41)EBITA 255 182 - 182Amortistion of intangible fixed assets 6 (78) (46) - (46)Total operating costs (1,876) (1,610) (7) (1,617)Operating profit - before exceptional items 174 152 - 152and acquisitionsOperating loss - exceptional items before 1 (37) (16) - (16)acquisitionsOperating profit - before acquisitions 137 136 - 136Operating profit - acquisitions before 72 - - -exceptional itemsOperating loss - acquisitions exceptional 1 (32) - - -itemsOperating profit - acquisitions 40 - - -Group operating profit 177 136 - 136Share of operating profit/(loss) in:Joint ventures before exceptional items and 10 - 47 47goodwill amortisationJoint ventures - goodwill amortisation (2) - (18) (18)Joint ventures - exceptional items 1 - - (10) (10)Joint ventures 8 - 19 19Associated undertakings before goodwill 6 7 - 7amortisationAssociated undertakings - goodwill (2) (2) - (2)amortisationAssociated undertakings 4 5 - 5Investment income 7 5 - 5Profit on sale of fixed assets 7 3 - 3Gain on cessation of Boxclever - exceptional 1 - - 9 9itemsGain on sale of investments - exceptional items 1 17 - - - Amounts provided in respect of fixed assetinvestments - exceptional items 1 - (109) (10) (119)Profit before interest and tax 220 40 18 58Net interest (payable)/receivable and similar(charges)/income:Group (12) 4 4 8 Joint ventures and associated (1) (1) (35) (36)undertakingsNet interest (13) 3 (31) (28)Profit/(loss) on ordinary activities before 207 43 (13) 30taxationTax on profit/(loss) on ordinary activities 5 (61) (58) 21 (37)Profit/(loss) on ordinary activities after 146 (15) 8 (7)taxationMinority interests - equity (1) - - -Minority interests - non-equity (6) - - -Profit/(loss) for the period 139 (15) 8 (7)Dividends 4 (98) (76)Amount transferred to/(from) reserves 41 (83) Earnings/(loss) per share (basic) 3 3.5p (0.6)p 0.3p (0.3)pEarnings/(loss) per share (diluted) 3 3.5p (0.6)p 0.3p (0.3)pAdjusted earnings per share: before exceptional items (basic) 3 4.5p 4.0p before exceptional items and amortisation 3 6.6p 5.7pof intangible assets (basic)Related Shares:
ITV