Final Results

7th Mar 2007 07:02

ITV PLC07 March 2007 ITV plc results for year ended 31 December 2006 Strengthening ITV1 the key to success 2006 Financial highlights • Solid revenue performance despite soft advertising market and lower ITV1 revenues • Total revenue of £2,181m (2005: £2,196m), adjusted for disposals £2,173m (2005: £2,159m) • Revenue outside ITV1 NAR up 23% at £900m almost balancing reduction in ITV1 NAR • Digital Channels NAR exceeds £150m target a year early • Operating EBITA £375m* (2005: £460m*) • Adjusted EPS 6.4p* (2005: 8.0p*) • Disposals £0.5 billion since merger • Full Year dividend 3.15p • Pension fund deficit reduced by £247m to £285m (after £207m deficit funding). • Non-core asset disposals delivered £189m cash in 2006 * Before exceptional items, amortisation and tax adjustments Operating highlights Strengthening ITV1 and growing digital revenues • Digital channels growing strongly with revenue up 41% at £157m, partly offsetting ITV1 NAR down 12% at £1,281m • ITV1 is the only UK commercial channel regularly attracting big audiences - 442 shows broadcast with more than 8m viewers in 2006 • Over the first eight weeks of 2007, ITV1 adult SOCI is down 5.4% on the same period in 2006 and the ITV family is down 3.0% • Accelerated commissioning of new programmes with focus on longer running, more contemporary, drama and new entertainment formats Expanding our content business • Producer/broadcaster model is key - ensuring ownership of intellectual property to leverage/exploit beyond ITV1 • Produced Oscar winning film The Queen with Helen Mirren • ITV Content external sales up 18% at £282m in 2006: • UK production revenue outside ITV up 12% • International production up 16% • Distribution and exploitation up 24% • Focus on high value genres • Increase content for multichannels and made-for-broadband content • Building MPEG digital 'content store' for programmes - target 20,000 hours by end 2007 Growing consumer revenues • Consumer revenues growing strongly - up 129% to £142m • Developing online initiatives: • New ITV broadband service will build mass audiences using high-quality 'click and watch' content • Roll out for ITV Local regional broadband operations with London and Central going live today. • Friends Reunited, set for further growth in 2007 with 5 new censuses to be integrated and new mobile, texting and video facilities built into the sites • Freeview growth helping drive 56% increase in SDN revenue. Freeview set to overtake Sky in 2007 as the most popular digital platform Commenting on the results Michael Grade, Executive Chairman, ITV said: "Our overall strategy is right, but we need to improve our allocation ofresources in order to accelerate the rate of improvement across all ourbusinesses. ITV is a hugely popular brand with the UK's largest family of commercialchannels, driven by quality programmes from the biggest and most successfulcommercial production business in the UK. This in turn enables us to extend ourvalue chain with online distribution. These unique strengths in brand, contentand distribution are cause for considerable optimism in our ability to deliverreal value for our viewers, advertisers and shareholders." Ends. For further enquiries please contact: ITV plcTel: 020 7843 8000 Press enquiriesBrigitte Trafford Group Communications DirectorJim Godfrey Director of Corporate Affairs Analysts' enquiriesJames Tibbitts Company SecretaryGeorgina Blackburn Head of Investor Relations Citigate Dewe RogersonTel: 020 7638 9571 Jonathan ClareSimon RigbyGeorge Cazenove Website: www.itv.com, investor information: www.itvplc.comAn analysts presentation will be held at 09:30hrs on 7th March 2007 at the CityPresentation Centre, 4 Chiswell Street, London EC1Y 4UP Message from the Executive Chairman Michael Grade On Monday, 8 January, 2007 I returned to work for ITV. From the moment I wasapproached by the Board last year, I had no doubt that I would accept this moststimulating and challenging position in British broadcasting. ITV has not had an easy time in recent history, operating in the highlycompetitive and technology driven media sector. It faced a challengingadvertising market and speculation over both its leadership and its ownership. My brief is to restore the fortunes of the Group and thus return the business togrowth. Having been in post for two months it is too soon to conclude definitive plansfor the business, but generally I have developed more positive impressions thannegative ones, and the latter are mostly within our control to remedy. On the positive side: - There are talented and dedicated people across all areas of the Company; - ITV Productions is a superb business of real scale with the ability to deliver outstanding content, from the Oscar winning film "The Queen" starring Dame Helen Mirren, to Coronation Street and Emmerdale, to Dancing on Ice; - ITV remains a much-loved brand and ITV1 is still the UK's most popular television channel in peak-time with the England v Sweden game during the football World Cup achieving the highest audience (18.5 million) on any channel in 2006; - Our strong regional presence is a greater asset than is recognised and the growth in regional advertising has been particularly buoyant against a depressed national TV advertising market. We need to find ways to sustain and even enhance this valuable public service. It is part of what binds ITV to its audiences throughout the UK and distinguishes us from our competitors. - Our digital channels are the most successful free to air commercial family of digital channels in the UK, each with distinctive branding and programming. We must ensure that they have the investment they need to grow their leading market position as we approach digital switchover; - The Consumer businesses represent an area of proven growth which we will seek to accelerate; and - The Board's strategy which I inherit is essentially sound. The businesses that have been recently acquired and developed are all natural extensions of the core operations. On the negative side: - Whilst the strategy is sound, we are playing catch up in many areas, no doubt due to the efforts required to 'bed in' the successful Carlton/Granada merger. We have a valuable multichannel offering and exciting web opportunities - but still a long way to grow; - There is a lack of innovation in our programming, partly resulting from a fear of ratings failure and the punitive consequences that follow under the Contract Rights Renewal (CRR) remedy; - The Company has developed a tendency towards bureaucracy. The cure for this lies with the example set by the leadership team within the businesses. I will improve delegation, and place emphasis on the need to make the ITV values a reality in our actions; - We need to continue strengthening the relationship between our commissioning teams and both internal and external producers. This is critical to ensure that the commissioning pipeline is filled with the high-quality programmes that deliver the audiences which in turn our commissioning team need to fulfil our advertisers' and viewers' aspirations; and - Our regulatory environment needs to reflect the reality of our 21st century structure and the developing market in which we operate these days. ITV may have consolidated, but it is a long way from the advertising monopoly of yesteryear. The regulatory burden has yet fully to reflect this. My task, after the recent distractions - together with ITV's senior managementteam - is to build a sense of confidence in our people and the wider creativecommunity to ensure that together we deliver more consistently for our viewers,our customers and our shareholders. My immediate priorities are developing the strength of our programming and newmedia businesses, and working to reduce overly onerous regulatory constraints. Raising our creative sights On the programming side we must raise our creative ambition. We must be moreinnovative and take more risks. We must be more relevant and we must be ahead ofaudience tastes. In particular we must regain our pre-eminence in drama serieson ITV1 at 9.00 pm. I am definitely encouraged by what I have heard and seen sofar from the new commissioning team headed by Simon Shaps. They have alreadystarted to cull some of the older programmes which were past their sell by date,and we are introducing a range of new programmes in 2007. I am now working with them on the plans that are being formulated for 2008 andbeyond. Content creation is at the core of our future High quality, home produced, popular content attracts the mass audiences whichonly ITV can offer advertisers, thus generating value. Content creation istoday, and will remain, at the heart of ITV. I am committed to the continuingdevelopment of ITV Productions. It is already one of Europe's most successfulcommercial production companies supplying programmes in many different genresboth for ITV and other UK broadcasters. Our licensing, distribution andinternational production businesses which are also important to our contentdevelopment strategy, are growing and moving into new markets and territories,providing important additional revenue streams. The value chain for content isgetting longer and more lucrative thanks to the digital present - and future. New media platforms Increasingly our viewers are demonstrating a desire to move beyond a simplepassive viewing experience and expect to interact with, and participate in, ourprogramming. People are also accessing our content from a much wider range ofmedia platforms. Our Consumer team has responded, developing ways of enablingviewers to do this. Technology creates new opportunities for contentconsumption, and we must ensure that we exploit the opportunities that thisbrings, delivering new services that viewers can access whenever, wherever, andhowever they want. The launch of our new broadband proposition this Spring willsignificantly enhance our online offering. I will be promoting the accelerationof our new media businesses. With our high-quality content and services forviewers, I believe that 2007 will be the year that ITV comes of age as adeliverer of online entertainment with real commercial opportunities. Appropriate regulation for the digital age ITV is subject to a high degree of regulation, some of it the legacy of an ageof analogue broadcasting and an oligopolistic commercial broadcasting structure.This regulatory burden is not entirely compatible with the increase incompetition driven by digital technology and new media, and by the public'sappetite to access new distribution platforms as they appear. One of ourpriorities is to seek some alternative to the Contracts Rights Renewal remedy(CRR). The CRR undertakings were given in 2003 as a pre-condition to the mergerof Carlton and Granada to create ITV, and the effect is to link ITV1'sadvertising share (Share of Broadcast) directly to its commercial viewing sharemeasured by Share of Commercial Impacts (SOCI). It has become apparent that thisnot only prevents ITV from receiving fair value for the mass audiences itdelivers, and which are so sought after by advertisers, but it is also damagingto the overall UK television advertising market. A number of well respectedfigures in media and advertising now accept that CRR needs urgent review, and weare lobbying hard for that process to begin. We continue to look for operating efficiencies across the business. We announcedin June 2006 an operational review with plans to save £40 million over threeyears. We are on track to deliver these efficiency savings. Conclusion During 2006, ITV was the subject of much bid speculation, with potentialofferors being forced on two occasions to make public statements about theirintentions. In neither case was a formal offer tabled, and in both cases theBoard carefully considered firstly the limited information provided by thepotential offerors, and secondly detailed internal and external valuation work.On both occasions the Board concluded that it was in all ITV shareholders'interests that such proposals should be rejected. On 17 November 2006, British Sky Broadcasting (BSkyB) acquired a 17.9% holdingin ITV at a price of 135 pence per share. At the present time, BSkyB's holdingis subject to regulatory reviews by Ofcom, the OFT and the DTI in relation toboth competition and broader public interest issues; Ofcom is also separatelyreviewing "change of control" under the Broadcasting Act. ITV has madesubmissions in response to the authorities, at their request, and has noted theconcern that BSkyB (as a competitor) may be able, with the size of its holdingand given historic voting patterns, to block a shareholder resolution requiringa 75% majority and that this may not be in the interest of ITV's shareholders asa whole. The authorities will consider whether there should be any form ofrestriction on BSkyB in respect of their holding in the Company. The Board willcontinue to act in the interests of all shareholders. In reviewing the level of the final dividend to propose at the forthcoming AGMyour Board has considered a number of factors. The UK television advertisingmarket deteriorated over the late Summer and Autumn of 2006, resulting in a near5% fall for the calendar year. It was in part as a result of this that the Boardof ITV plc decided to halt the share buy-back programme at £251 million. Marketestimates for 2007 were that the UK television advertising market would beeither flat or decline a little further, with the first half of 2007 likely tobe more adversely affected as a result of comparative 2006 monthly revenuepatterns. Over the first quarter of 2007 we believe that the UK televisionmarket will be approximately 0.5% higher than 2006, and ITV's total advertisingrevenue will be down by approximately 4.5% as the effect of CRR and SOCI declineon ITV1 reduce the channel's share of advertising. Whilst we expect this declineto slow and stabilise as multichannel digital television fully replacesanalogue, it is probable that ITV1 revenues will decline in 2007, and may not bewholly made up by the growing advertising revenue from our successful digitalchannels. Having regard to this, your Board has decided to propose that thefinal dividend for the year ended 31 December 2006 should be held at the samerate as for 2005 of 1.8 pence, to be paid on 2 July 2007 to shareholders on theregister on 20 April 2007. My Board colleagues and I would formally like to record our thanks to Sir PeterBurt and Charles Allen for their contributions to ITV. The creation of "one ITV"from 11 separate regional ITV companies owes much to Charles' vision anddetermination. Under Sir Peter's steady stewardship through an unsettlingperiod, Charles directed the integration of Granada and Carlton ahead ofschedule and produced greater synergies than originally forecast. I would like to thank all of my new colleagues within ITV for their warmwelcome, and to express my belief that together we can lift our game and createnew and valuable content for our viewers and uniquely effective airtime for ouradvertisers. Michael GradeExecutive Chairman Operating review Introduction 2006 was a year of significant change for both the sector and the Company. Ourtraditional core business, ITV1, continued to be affected by a number ofnegative factors and we continued to develop new businesses and revenue streams. 2006 has seen ITV continue to adapt to the demands of the digital world. Ourprogramming consistently delivers mass audiences on ITV1 and we have launchedmore new channels to add to our successful family of digital channels. Ouronline presence will achieve a significant step forward with the launch of ournew itv.com broadband portal in the Spring of this year. The Board of ITV have made significant changes to the leadership of the Companyin recent months. In November the Board announced the appointment of MichaelGrade as its new Executive Chairman. He took up his position on 8 January 2007and assumed the responsibilities of the Chairman, Sir Peter Burt, who resignedon the same day, and the executive responsibilities of the former ChiefExecutive, Charles Allen, who left the company on 4 January 2007. Although theappointment of an Executive Chairman is not consistent with the provisions ofthe Combined Code, the Board considered the circumstances within which it wasmade justifiable in terms of restoring strategic leadership to the Company. Theappointment has been warmly welcomed by ITV's leading investors, thebroadcasting industry, media commentators, the advertising community and otherkey stakeholders. In 2007 John Cresswell, ITV Finance Director, was also appointed to the role ofChief Operating Officer. He takes on all operating responsibility and theexecutive team report directly to him. Operating review Broadcasting In 2006 we put in place the strategies we believe will deliver long-termsustainable growth in our broadcasting business. These include: - a new commissioning team and continued investment of approximately £1 billion per annum in our programme schedule;- investing in new programming and channel brands;- optimising schedule efficiency; and- working to modernise our regulation including CRR and our Public Service Broadcasting (PSB) obligations. We maintain tight control on costs and are one of the most efficientbroadcasters in the UK as measured by the relationship between programme spendand audience share. Highly efficient UK broadcaster UK channels programme efficency (2005) Share of total Total programme audience spend share Efficiency (%) (%) ratioFive 4.0 6.6 1.65ITV1 17.3 21.3 1.23BBC1 19.2 23.1 1.20BBC2 8.0 9.5 1.19C4 10.4 9.8 0.94 Source: 1 Ofcom Communications Market 2 BARB, Ofcom Communications Market, BBC Annual Report 2005 In 2006, ITV remained the leading free to air commercial broadcaster in the UK,and ITV1 was the most popular channel in peak time between 7.00pm and 10.30pm inthe evening. In our programming, we broadcast a mixed portfolio of genresincluding high budget entertainment and drama, major sporting events, popularfactual programming and agenda setting news and current affairs. Whilstlong-running popular shows such as Coronation Street, Emmerdale and The Billhave seen some overall audience decline during 2006, we are working hard torevitalise them. ITV had significant rating successes in 2006 with newerprogrammes such as Dancing on Ice, Wild At Heart, Soapstar Superstar and Lewis.In 2006, ITV produced more new programmes with an audience in excess of 5million viewers than all other UK broadcasters combined including the BBC. In 2006, ITV News opened a bureau in Beijing to expand its coverage from one ofthe world's largest economies and, in October, China correspondent John Raymarked the opening with a week of special reports from the region. In March2006, ITV News launched the highly acclaimed Three Degrees from Disaster series,assessing the evidence of climate change around the world. This has beenfollowed up in January 2007 with Mark Austin providing the first ever livecoverage from Antarctica for ITV News, with film of the melting glacial ice cap.ITV News also managed to secure exclusively the only phone video footage of thepolice raids in Forest Gate on 2 June. In the week that marked the anniversaryof the 7/7 London bombings, ITV News set the news agenda after undertaking thebiggest ever survey of British Muslims. Digital channels We increased our investment in our digital channels by £14 million to £75million in 2006, with a further £25 million projected for 2007 to increase ouraudience reach, and we launched a number of new channels. Because of thestrength of ITV's family of digital channels, we were able to keep high-valueaudiences within the ITV family through cross-promotion, complementaryscheduling and strong distinctive branding for each of our channels. Weincreased audience reach using the ITV Family of channels to target valuable,but distinct, demographics at different times of day. For example, our youngeraudiences were attracted to programmes on ITV2 or ITV4, when ITV1 was showingprogramming with more appeal to older viewers. The success of this approach in2006 was that ITV2, ITV3 and ITV4 produced 29% of all year on year multichanneladult impact volume growth and 50% of all year on year multichannel advertisingrevenue growth. Overall advertising revenue from our digital channels grew by41% to £157 million in 2006, exceeding our target of £150 million p.a. a fullyear ahead of plan. Delivering for our advertisers In 2006, ITV1 broadcast all the programmes on any commercial channel achievingover 8.2 million viewers (2005 - all programmes over 7.5 million). With thisscale, ITV helped advertisers achieve their brand building objectives of highimpact delivery and viewer engagement. In 2006, ITV created a new Integrated Planning team to build strongerrelationships with strategic planning advertising agencies. They work alongsidethe airtime Trading team, who focus on ITV's portfolio of programming anddigital channels and negotiate directly with media buying agencies. The twoteams work closely with our advertisers to offer them bespoke multimediasolutions for both mass audiences with ITV1, and targeted audiences across ourdigital channels and new media platforms such as mobile and online. We are alsounique in our competitive environment in having regional and local advertisingsales capabilities, and our ability to offer regional and sub-regionaladvertising solutions has driven regional advertising revenue growth by 14% in2006. SOCI performance in 2006 A number of factors have contributed to the decline in ITV SOCI during 2006. ForITV1 the decline in adult SOCI was 10% to 33.1%. Under the CRR mechanism ouradvertisers would be able to reduce the share of their total UK TV advertisingcommitted to ITV1 by a proportionate 10% in 2007 whilst retaining their previousdiscount and pricing structure. This loss will be partially offset through thecontinued investment and growth in our digital channels' revenue and throughsome outperformance against CRR on ITV1, where for instance regional advertisinghas been performing strongly. Content ITV Productions is one of Europe's largest and most successful commercialproducers, creating more than 3,000 hours of original programming each year. ITV Channels 2006 all time adult impact share and volume in all homes Share of Volume of impacts commercial (billion) impacts (%)Channel 2006 2005 2006 2005 ITV1 33.1 37.0 234.8 258.2ITV2 3.0 2.8 21.5 19.3ITV3 2.3 1.6 16.7 11.3ITV4 0.7 0.1 5.0 0.6M&M 0.4 0.4 2.6 2.6Citv 0.1 - 0.8 -ITV News - 0.1 - 1.1GMTV 2.5 2.6 17.3 17.8GMTV2 0.1 - 0.4 0.3 Total 42.2 44.6 299.1 311.2 (Source: BARB) ITV Productions has dominated ITV1's list of top ten most popular programmes interms of viewing share in 2006 with eight of the top ten programmes (2005: sixof the top ten). Five of the top ten shows on all UK television were made by ITVProductions (2005: four of the top ten). ITV Productions made seven of the topten dramas on all UK television (2005: five of the top ten). Moving forward, as part of ITV's strategy for growth, ITV Productions isfocusing on high-value genres, such as high-end contemporary drama and factualentertainment, and exiting low-growth and low-margin businesses. It is almost impossible for all programmes to be instant successes, and ITVProductions during 2006 did make a number of programmes that did not deliver theexpected audiences. Whilst acknowledging that there will continue to be someprogrammes, including well made and presented programmes, that do not achievethe ratings expected of them, we are working hard to improve the hit rate forboth new and returning shows and recognise that we must not be risk averse. As a producer-broadcaster ITV generates a significant amount of contentin-house. There are clear synergies involved in combining our broadcasting andproduction operations. For broadcasting, the advantages are that we can secure development andinnovation in-house, keep programme inflation costs to a minimum, and gainaccess to rights and key talent. For our production team the advantages include; a high volume of productionattracting and supporting key talent both in front of and behind the camera, theability to develop formats for ITV that can then be produced for and sold tobroadcasters in other countries, and increasingly the opportunities in digitaland new media to exploit the rights that are created when programmes arecommissioned. We continued to grow our production for other broadcasters, in the UK, with hitslike The Street for BBC. Worldwide Internationally, our ITV Worldwide production businesses increased theirturnover by 16% in 2006. Growth at Granada America, Granada Germany and GranadaAustralia was fuelled by a strong year for returning formats such as Nanny 911and Hell's Kitchen with Gordon Ramsay in America, Das Perfekte Dinner (Come DineWith Me) in Germany, and Dancing on Ice and Dancing with the Stars (StrictlyCome Dancing) in both Australia and Germany. In 2006 Granada America producedprogrammes for major cable television and US networks including Hit Me Baby OneMore Time (NBC), Gameshow Marathon (CBS) and Nanny 911 (Fox). Granada International increased its sales by 31% in 2006 to TV broadcasters,home entertainment partners and new media platforms in more than 200 countriesworldwide. Particular successes included TV movies, and format sales includingDancing On Ice to 12 territories including Russia, Belgium and Holland. Granada Ventures increased revenue in 2006 by 13%, particularly from DVD sales.Key programming included box sets for Cracker and Agatha Christie's Poirot, thelaunch of Pocoyo on DVD, and a range of interactive DVD games launched atChristmas. Two of these interactive games featured in the Top 10 releases in theUK, with Little Britain the fourth best selling title in the UK active charts. Consumer Throughout 2006, ITV continued to develop its presence and pursue growthopportunities in new markets and on new platforms. ITV's expanding Consumer teamraised our business-to-consumer capability through a range of innovative marketofferings, and 'new pay' revenue opportunities. In 2006 ITV Consumer made anumber of senior appointments to help drive this growth forward in the comingmonths. The performance of its separate businesses are set out below. Platforms Our platforms business focuses on exploiting and managing ITV's interests inbroadcasting platforms. Our Freeview multiplex SDN - one of the six multiplexescarrying digital channels on Freeview - will deliver increasing revenues as thedigital terrestrial platform grows in popularity and our contracts with channeloperators come up for review from 2008 onwards. Broadband Our online presence has three key components. In 2006 we started the planningand preparation for itv.com to be re-launched with improved functionality,content and design. In Spring 2007, we will re-launch the new itv.com, havingcommitted more than £20 million to the development of a fully interactivebroadband platform and content digitisation. The site will enable viewers towatch all of ITV's channels live, catch up on any programme from the last 30days, and access ITV's extensive archive. Revenues will initially be deliveredthrough advertising, and the ITV brand and cross-promotional capability will beused to drive traffic to the site. Alternative revenue models such assubscription and pay per view will be trialled in due course, building on thesuccess of the on-demand Champions League service launched in September 2006. Our wholly-owned community website, Friends Reunited, is the second key part ofour online strategy and builds on user-generated content. Friends Reunited hasgrown under ITV's ownership with EBITA of £8.8 million in 2006 up 52% on 2005. Integration of Friends Reunited moved apace during the year, with workundertaken to maintain its leading market positions in schools reunion andgenealogy, improve the consumer proposition, and increase functionality throughthe upload of user-generated content. Advertising sales for the sites are nowhandled in-house at ITV, and Friends Reunited provides dating and jobs servicesfor itv.com and ITV Local. Friends Reunited also provides itv.com with theinfrastructure and traffic to leverage a host of significant, related commercialopportunities, including targeted advertising, the provision of enriched onlinecontent, and interactive services, to drive further growth. These are some ofthe ways that Friends Reunited and our other operations can leverage off eachother's core competencies. ITV Local is the third business in our online portfolio. Following a successfultrial in the Meridian area, we have identified a strong consumer demand forlocal information, news and services that are accessible online. ITV Localblends two key ITV strengths, our regional news brands, and our relationshipswith advertisers. In 2006, ITV acquired business directory specialist EnableMedia (currently operating as Scoot) which gave us an immediate and significantfoothold into the online business directory listings sector, a market which isestimated to be worth approximately £150 million, and is projected to grow by20% in 2007 and strongly thereafter. Intended as a richer video-led, moreinteractive, version of a local paper, ITV Local is now adding London andCentral regions to its service, with other regions to follow throughout theyear. Transactional In 2006 we launched ITV Play, our participation TV brand. This has provedpopular with both viewers and those who participate. In 2006 we have given awaynearly £12 million to over 26,000 winners. ITV Play has a well-used andwell-publicised free route through which comes one in five entries. The vastmajority of viewers enjoy ITV Play without phoning in - three quarters ofviewers typically watch the show on ITV1 during the night without participating.Viewers generally play in moderation. When they do play, 77% of entrants playfewer than five times a day and typically play once every five weeks. We await the result of the current enquiry into participation TV formats and weare ensuring that our own systems are robust and our programmes are compliant. ITV Play Viewer Care Participation TV is a new sector, and we will continue to work with all relevantregulatory bodies to ensure that standards of viewer care across the industryare appropriate. Examples of measures ITV Play has in place include: - Reminder phone alerts every 10 calls- On-screen information about all available entry routes, referred to regularly by the presenters- An in-house viewer care team- Caller activity monitoring with pro-active calls to high-volume players- Daily limit on all entry routes- Entry limited to over 18s- A code of conduct in place with our production company suppliers Mobile 2006 saw some strategic developments for ITV's mobile presence. We re-launchedour entertainment portal, which offers news, entertainment, TV listings,weather, ring-tones and wallpapers, and many other services for mobile users.ITV also agreed content partnerships with Virgin Mobile and 3, becoming thefirst UK terrestrial to stream its channels on 3G phones. Within a month ofoperation more than 100,000 sessions took place on the 3 mobile TV simulcastservice, demonstrating a real demand for ITV's mobile TV services. We willcontinue to work with mobile network operators as they experiment with newofferings. Summary The Operating Review highlights how the strengths of ITV's operations helped usdeliver programmes and services to satisfy our viewing and advertisingcustomers. Many of our successes have been significant peaks of performance inthe face of ever more challenging competitive pressures. However, our aim is toachieve more consistency in our on-screen performance. The degree of structural market change, especially the move to digital andchannel proliferation, has meant that some areas of performance have declined,as shown by some of our non-financial KPIs. Some of these pressures will reduce,as the move to digital nears completion. The Financial Review that follows explains how these factors have translatedinto the financial results. FINANCIAL REVIEW Statutory results for the year ended 31 December 2006 Total revenue for the year ended 31 December 2006 was slightly lower at £2,181million (2005 restated: £2,196 million) whilst revenue before disposedbusinesses was slightly up at £2,173 million (2005 restated: £2,159 million).Operating profit decreased to £264 million (2005: £329 million) with underlyingoperating profit before amortisation and exceptional items down 18% at £375million (2005: £460 million). Profit before tax, amortisation and exceptionalitems decreased by 19% to £364 million (2005: £452 million). Revenue 2006 2005 £m Restated £m Broadcasting 1,665 1,783Content 652 672- less internal (370) (432) 282 240Consumer 126 61Other revenues 12 20Producer/Broadcaster segment 2,085 2,104Other segment 96 92Total 2,181 2,196 PRTS restatement (19) Total previously reported 2,177 The table above includes the results of disposed businesses (021 and GranadaLearning) of £8 million in 2006 and £37 million in 2005. These businesses weresold in 2006. Broadcasting Broadcasting sales comprise net advertising revenues, sponsorship income andother revenues. Total ITV NAR decreased by 8% during the year to £1,494 million (2005: £1,631million). 2006 2005 Change £m £m £m ITV1 1,281 1,462 (181)ITV2, ITV3, ITV4, ITV News Channel,M&M, Citv 157 111 46GMTV 56 58 (2) Total NAR 1,494 1,631 (137) ITV1's NAR in the year was £1,281 million (2005: £1,462 million), £181 millionlower than 2005, however, this reduction was partially offset by the strongperformance of ITV2, ITV3 and ITV4 which, together with Men and Motors and Citvcontributed 41% year on year growth of £46 million resulting in total NAR of£157 million (2005: £111 million) across these channels. ITV's NAR is a function of audience share which is measured in terms ofcommercial impacts, prevailing advertising market conditions and television'sshare of that market. 2006 was a difficult year for the television advertising market, with a declineof 4.9% compared to growth of 2.6% in 2005. Coupled with the effect of CRR(following the 11% decline in ITV1 SOCI in 2005), this results in ITV1's 2006NAR being down 12% on 2005. In 2006, ITV's total share of commercial impacts on UK television was 42.2%(2005: 44.6%). The 2007 advertising trading season is now substantially complete, with themajority of agency deals agreed. Our ITV1 negotiations are within the frameworkof the Contracts Rights Renewal ("CRR") remedy agreed with the Office of FairTrading as a condition to the merger creating ITV plc. Sponsorship income increased by 29% in 2006 to £53 million (2005: £41 million)due to price increases as the cost of sponsorship moves closer to airtime valueand also the successful sponsorship of new programmes and events such as the2006 World Cup. Other broadcasting revenues of £118 million (2005: £111 million) include airtimesales on behalf of third parties, sales of ITV programming by the Network Centreto Channel 3 licences not owned by ITV and interactive transactions from GMTV. Content Content revenue includes original productions for the UK and internationalmarkets, the distribution and exploitation of internally generated and acquiredrights, and studios and facilities revenue. Programming made by ITV for ITVchannels is not included in Group revenue as it represents an internalprogramming cost of sale and in 2006 this internal programming amounted to £370million of ITV network programme spend (2005: £432 million). In 2006, totalexternal sales of £282 million (2005: £240 million) included originalproductions for other broadcasters of £139 million (2005: £122 million),distribution and exploitation sales of £123 million (2005: £99 million) andrevenue from the hire of studio and technical facilities of £20 million (2005:£19 million). Consumer Consumer revenues include interactive and online transactions of £47 million(2005: £44 million), income from the first full year of ITV Play of £54 million(2005: £1 million) and revenues from our digital terrestrial multiplex SDN of£25 million (2005: £16 million). Other revenues Other revenues include property rental income and 021 (sold in 2006). Other segment Revenues from outside of the main producer/broadcaster segment include those forCarlton Screen Advertising of £72 million (2005: £61 million), Friends Reunitedof £16 million (2005: £1 million) and Granada Learning of £8 million (2005: £30million). Restatement During the period the Group has reviewed its revenue recognition policy forpremium rate telephony services acknowledging the increasing significance ofthis revenue stream. The Group's policy has consequently been revised to reflectrevenue as the amount billed net of operator costs. Previously revenue was shownnet of other costs, such as production costs, in addition to operator costs.2005 revenue and operating costs have therefore been restated, reflecting anincrease in both of £19 million. The impact of this change in accounting policyin 2006 was that revenue and operating costs are both £16 million higher thanunder the previous accounting policy. 2006 was the first full year of operationof ITV Play which also earns revenues from premium rate telephony services. ITVPlay's revenues and operating costs in 2006 would have been £34 million lower ifthe new accounting policy had not been adopted. There is no impact on eitherprofit or balance sheet. Broadcasting schedule costs 2006 2005 £m £mITV1 (plc share) 783 776Regional news and non-news 119 125 902 901ITV2 36 38ITV3 14 9ITV4 18 6GMTV 36 36Other channels 7 8 Total schedule costs 1013 998 Cost of programmes sold to minorities 57 53 Total Broadcasting schedule costs 1,070 1,051 The £6 million savings in regional programme costs are from increasedefficiencies across our regional production centres and the greater use ofco-productions. The increased investment in ITV's digital channels has been akey factor in attracting new advertisers and viewers to our channels offering. Licence fees Licence fees comprise both a fixed annual sum (the cash bid) and a variableelement representing a percentage of our ITV1 NAR and sponsorship income (PQRLevy). The PQR Levy is reduced by the percentage of homes which receive ITV1 indigital format. The digital licence rebate for 2006 is based on a digitalpenetration of 70% (2005: 61%). 2006 2005 Change £m £m £m Cash bid payment 4 4 -PQR Levy 175 192 (17)Digital rebate (128) (121) (7) Total 51 75 (24) The payment will continue to fall as digital penetration increases and willreduce to around £4 million in constant prices by the time analoguetransmissions cease. Exceptional items The operating exceptional items in the year total a net £35 million and includecosts associated with takeover approaches, the departure of senior managementand the £40 million efficiency programme. Net financing charge Financing income 2006 2005 £m £m Expected return on pension scheme assets 144 112Interest income 23 21Net gain on remeasurement of interest rate swaps to fair value - 11 167 144 Financing costs 2006 2005 £m £m Interest cost on pension scheme liabilities (126) (125)Interest expense on debt instruments and finance leases (66) (54)Net loss on remeasurement of interest rate swaps to fair value (1) - (193) (179) Net finance charge (26) (35) The decrease in the net finance charge in 2006 is primarily due to a higherexpected return on pension scheme assets as a result of the deficit fundingpayments. The increase in interest expense on debt instruments and financeleases is due to the bonds issued in October 2005 and 2006. Investment income Investment income of £3 million comprises dividend income principally fromholdings in SMG and Seven Network in Australia. Gain on sale of property The £4 million profit from the sale of properties in the year principally arosefrom a gain on the sale of the Newcastle site. Gain on sales of fixed asset investments During the period, as part of the ongoing process to dispose of non-corebusinesses and investments, the Group sold 021 and Granada Learning and itsinvestments in Seven Network and TV3. The disposal of the 021 business for £4million resulted in a nil gain or loss being booked. The sale of GranadaLearning took place in April for a potential maximum consideration of £53million. This comprises £17.5 million in cash, £17.5 million in loan notes (ofwhich £28 million was received in 2006) and a further £18 million which iscontingent on the future performance of the business. The fair value of expectedproceeds has been taken as £31 million for accounting purposes resulting in a£12 million loss on disposal. The interest in Seven Network was sold for total consideration of £87 millionresulting in a profit of £29 million booked through the income statement. Theinterest in TV3 was sold for a total consideration of £70 million resulting in aprofit of £40 million booked through the income statement. Offsetting thesedisposal profits is a £22 million impairment relating to our interest in SMGwhich has experienced a significant decline in the share price since July 2006. After the year end ITV announced that it had given an irrevocable undertaking tosell its 9.99% shareholding in The Liverpool Football Club and Athletic Groundsplc, for proceeds of £17 million. The profit booked through the income statementis forecast to be £7 million in 2007. Tax The effective rate of tax on PBT is 23%. The underlying rate of tax on operatingprofits is 30% as shown below: Underlying rate of tax £mOperating profit before exceptional items, amortisationand share of profits of joint ventures and associates- Profit before tax as reported 288- Exceptional items (net) -- Amortisation 76- Share of profits of joint ventures and associates (8) 356Underlying tax charge- Tax charge as reported 66- Net charge for exceptional items (2)- Credit in respect of amortisation 17- Credit in respect of prior period items 36- Other irregular tax effects (11) 106Underlying rate of tax 30% Earnings per share Basic earnings per share are 5.5 pence (2005: 5.4 pence). Adjusted earnings pershare before exceptional items, amortisation and tax adjustments are 6.4 pence(2005: 8.0 pence). Dividend The Board is proposing a final dividend of 1.8 pence per share which isunchanged on the 2005 final dividend. The total dividend proposed for the periodis therefore 3.15 pence which is an increase of 1% over 2005 and is covered 2.03times by the adjusted earnings per share (before exceptional items,amortisationand tax adjustments) of 6.4 pence. Acquisitions of businesses In November, ITV acquired Enable Media Limited (formerly trading as Scoot) whichprovides online business directories, for a total cash outflow in 2006 of £3million. Intangible assets Total intangible assets at 31 December 2006 are £3,895 million being principallygoodwill and acquired intangible assets. Goodwill balances are not amortised butare instead subject to annual impairment testing. An impairment charge of £20million has been recognised in 2006 relating to Carlton Screen Advertising as aresult of reduced profitability following structural changes in the cinemaadvertising market. Other intangible assets are amortised over their usefullives. The total amortisation charge for the year including the £20 millionimpairment is £76 million (2005: £102 million). Cash flow and net debt The cash generated from operations was £342 million (2005: £456 million) and wasdown on the prior period due to a £85 million decrease in operating profitbefore exceptional items and amortisation and a working capital outflow in 2006of £36 million versus a £10 million outflow in 2005. In 2005 the working capitalbenefited by £34 million from the exercise of a currency option hedging theExchangeable Bond which was no longer required. Net cash interest paid on the Group's net debt position was £47 million.Taxation paid reflects payments on account during the period. The equitydividends paid comprise the 2005 interim and final dividends of £54 million and£74 million respectively. Expenditure on property, plant and equipment totalled£79 million. During the period the Group brought three properties that werepreviously held under long-term leases with the intention of subsequentlydisposing of them. Two of these are shown in the balance sheet as assets heldfor sale. Cash received from the sale of the investment in Seven Network (£87million) and TV3 (£70 million) totalled £157 million. Cash received from assetsheld for sale of £40 million included the proceeds from the sale of 021 (£4million), Granada Learning (£28 million) and three properties (£8 million). As announced in November 2006, the Group has suspended its share buy-backprogramme at £251 million. As described in more detail under pensions, a £207 million deficit fundingpayment into the defined benefit schemes is reflected in cash flows. In October 2006, the Group issued a €500 million Eurobond with a 2011 maturityand a £250 million Eurobond with a 2017 maturity. The interest coupons currentlypayable on these instruments are 4.75% pa and 6.125% pa respectively. The principal movements in net debt in the year are shown in the table below: £m £mNet debt at 31 December 2005 (481)Cash generated from operations 342Net interest paid (47)Taxation paid (50)Equity dividends paid (128)Expenditure on property, plant and equipment (79)Proceeds from sale of investments and assets held for sale 197Other movements (30) 205Share buy-back (251) Defined benefit pension deficit funding (207) Net debt at 31 December 2006 (734) Pensions The Group's pension schemes are run independently by the schemes' trustees. Allpension scheme assets are administered separately by the trustees using a numberof external fund managers and custodians. The defined benefit schemes are funded on a long-term basis with advice from thescheme actuaries. Actuarial valuations of the assets and liabilities of theschemes are carried out every three years with the most recent valuation of themain scheme having been conducted by the scheme actuaries at 31 December 2004.Following the scheme merger referred to below, actuarial funding valuations ofcertain sections of the merged scheme are being prepared as at 1 January 2005. i) Scheme merger At the beginning of 2006 there were six separate defined benefit pension schemesin the Group, a legacy of the company mergers that created ITV. Terms wereagreed with the trustees to merge those into a single scheme and that processcompleted at the end of January 2006, with the merged scheme comprising threeseparate sections. This will save significantly on the costs of administrationand professional advice, and also enable a clearer focus on the issues for asingle scheme than was possible with separate schemes. ii) Deficit funding It was announced in September 2005 that ITV plc would make a £325 millioncontribution into the defined benefit pension schemes as part of a plan toaddress the deficit. The amount had been calculated so that, together withestimated future investment returns on the schemes' assets, it would enable theschemes to move towards being fully funded (on an ongoing basis) over anappropriate period of time. The funding was made in cash with £118 million paid in December 2005 and £207million in January and February 2006. iii) IAS 19 IAS 19 accounting for the Group's defined benefit schemes values the annual costand assets and liabilities of the scheme on disclosed bases and includes thosein the Company's consolidated income statement and consolidated balance sheet. In 2006 the IAS 19 operating charge for defined benefit schemes was £25 million(2005: £24 million). The charge within net financing costs for the net result ofthe expected return on scheme assets less the interest cost on liabilities was acredit of £18 million (2005: £13 million). The Group's defined contributionschemes gave rise to an operating charge of £2 million (2005: £2 million). The IAS 19 deficit at 31 December 2006 was £285 million (2005: £532 million). Anet actuarial gain of £29 million has been recognised as a credit to reserves. The reduction in the IAS 19 deficit during 2006 is primarily due to the fundingpayments made as described above and the £29 million of net actuarial gains. The funding of the defined benefit pension schemes is based upon the actuarialfunding valuations conducted by the scheme actuaries. iv) Pension tax simplification The new tax regime for pension funds came into effect on 6 April 2006. Thischange, referred to as "A" Day, has significant consequences for seniorexecutives for whom tax relief on pension accruals changed from that time. ITVtook professional advice and concluded that it should not separately compensateany executives for this change, but should establish alternate pensionarrangements for those immediately impacted which leave both the individual andthe Group in positions broadly similar to the past. v) Proposed changes to future defined benefit scheme accruals During 2006 ITV concluded that the future cost of defined benefit pension schemeaccruals was too great, being approximately 24% of salary as the employer'scontribution in the main section of the scheme, and that the wide range ofbenefit levels across the merged scheme should be standardised. ITV started a consultation with employees proposing possible changes from April2007. This consultation has involved many presentations and meetings with staff,and consideration of the changes that might be made. Members will be notified ofchanges prior to implementation. International Financial Reporting StandardsITV plc has adopted EU endorsed IFRS for group reporting. Forward look This Business Review has set out the reasons why we believe that, despite achallenging market environment, ITV has the strengths and strategy to regain andgrow market share beyond the ITV1 channel. The media industry changes at an ever swifter pace: - New channels continue to be launched;- Digital switchover is approaching, starting in 2008;- New distribution platforms develop: broadband, mobile, portable devices; and- Interactivity increases and viewers expect their content to be delivered when and where they want it, not simply within a broadcast schedule. These changes offer ITV opportunities for our broadcasting, content and consumerteams. We believe we have the right strategy, and the execution skills, todevelop our business within these new areas. In a world of fragmented viewing, the channels that are able to offer a sharedviewing experience for viewers and a mass audience to advertisers become evermore valuable. ITV1 remains the most-watched channel in peak-time and is stillthe most effective way for advertisers to build awareness and brands in a shortspace of time. We also believe that ITV's regional presence, an intrinsic partof the Company's history and identity, will increasingly be a point ofdifference and a competitive advantage as other commercial players will beunable to match our "local" connection with viewers or our regional advertisingopportunities. Our estimates for net advertising revenue in the first quarter of 2007 are: - UK television market +0.5%- ITV1 (reflecting CRR effect) -9.2% at £291.8 million- ITV plc excluding ITV1 +28.2% at £58.8 million- Total ITV plc -4.5% at £350.6 million While it is difficult to predict how and where people will choose to watch orconsume content in the long-term, as one of Europe's leading commercialproduction companies we can be confident that we will find more outlets andchannels for our content, both in the UK and internationally. We are alsogrowing our consumer businesses which will provide ITV with new and sustainablerevenue streams in the future. Our new broadband portal, itv.com, will launch inthe Spring of 2007 and we believe will help drive the way consumers usebroadband to access top quality content. Consolidated income statement 2005 2006 RestatedFor the year ended 31 December: Note £m £m Revenue 2,181 2,196Operating costs before amortisation of intangible assets and exceptional items (1,806) (1,736)Operating costs - exceptional items 1 (35) (29)Earnings before interest, tax and amortisation (EBITA) 340 431Amortisation and impairment of intangible assets 6 (76) (102)Total operating costs (1,917) (1,867)Operating profit 264 329Financing income 167 144Financing costs (193) (179)Net financing costs (26) (35)Share of profits of joint ventures and associated undertakings 7 8 11Investment income 3 5Gain on sale of properties 4 11Gain/(loss) on sale and impairment of subsidiaries and investments (exceptional items) 1 35 (10)Profit before tax 288 311Taxation 4 (66) (85)Profit for the year 222 226 Attributable to:Equity shareholders of the parent company 219 222Minority interests 3 4Profit for the year 222 226 Basic earnings per share 2 5.5p 5.4pDiluted earnings per share 2 5.4p 5.3p Operating exceptional items during the year comprise reorganisation andintegration costs and expenditure relating to the two takeover approaches (seenote 1 for details). Consolidated balance sheet 2005 2006 RestatedAt 31 December: Note £m £m Non-current assetsProperty, plant and equipment 193 235Intangible assets 6 3,895 3,947Investments in joint ventures and associated undertakings 7 66 93Equity investments 8 37 181Distribution rights 11 13Net deferred tax asset 4 - 74 4,202 4,543Current assetsAssets held for sale 132 63Programme rights and other inventory 400 388Trade and other receivables due within one year 405 362Trade and other receivables due after more than one year 7 7Trade and other receivables 412 369Cash and cash equivalents 9 961 663 1,905 1,483Current liabilitiesLiabilities held for sale - (9)Borrowings 9 (471) (288)Trade and other payables due within one year (706) (734)Trade and other payables due after more than one year (9) (4)Trade and other payables (715) (738)Current tax liabilities (159) (217)Provisions (9) (23) (1,354) (1,275) Net current assets 551 208 Non-current liabilitiesBorrowings 9 (1,224) (856)Defined benefit pension deficit 5 (285) (532)Net deferred tax liability 4 (7) -Other payables (56) (29)Provisions (18) (29) (1,590) (1,446) Net assets 3,163 3,305 Attributable to equity shareholders of the parent companyShare capital 10 401 423Share premium 10 120 98Merger and other reserves 10 2,690 2,666Translation reserve 10 (3) (1)Available for sale reserve 10 17 33Retained earnings 10 (69) 74Total attributable to equity shareholders of the parent company 10 3,156 3,293Minority interest 10 7 12Total equity 10 3,163 3,305 Consolidated cash flow statement 2006 2005For the year ended 31 December: £m £m £m £mCash flows from operating activitiesOperating profit before exceptional items 299 358Depreciation of property, plant and equipment 32 34Amortisation and impairment of intangible assets 76 102Increase in programme rights and other inventory, and distribution rights (10) (30)(Increase)/decrease in receivables (33) 23Increase/(decrease) in payables 7 (3)Movement in working capital (36) (10)Cash generated from operations before exceptional items 371 484Cash flow relating to operating exceptional items: Operating loss (35) (29) Increase in payables and provisions* 6 1Cash outflow from exceptional items (29) (28)Cash generated from operations 342 456Defined benefit pension deficit funding (207) (118)Interest received 22 20Interest paid on bank and other loans (66) (42)Interest paid on finance leases (3) (4)Investment income 3 5Taxation paid (50) (120) (301) (259)Net cash from operating activities 41 197Cash flows from investing activitiesAcquisition of subsidiary undertakings, net of cash and cash equivalents acquired and debt repaid on acquisition (3) (208)Proceeds from sale of assets held for sale 40 3Proceeds from sale of property, plant and equipment - 29Acquisition of property, plant and equipment (79) (46)Acquisition of intangibles (4) -Acquisition of associates and investments (1) (30)Loans repaid by joint ventures 2 -Proceeds from sale of subsidiaries - 2Proceeds from sale of investments and associates 157 -Net cash from/(used in) investing activities 112 (250)Cash flows from financing activitiesProceeds from issue of ordinary share capital - 50Purchase of US held shares - (42)Bank and other loans - amounts repaid (13) (88)Bank and other loans - amounts raised 581 322Capital element of finance lease payments (3) (3)Dividends paid to minority interest (8) -Redemption of preference shares - (8)Share buy-back (251) -Purchase of own shares via employee benefit trust (31) -Equity dividends paid (128) (98)Net cash from financing activities 147 133Net increase in cash and cash equivalents 300 80Cash and cash equivalents at 1 January 663 582Effects of exchange rate changes and fair value movements on cash (2) 1 and cash equivalentsCash and cash equivalents at 31 December 961 663 * Includes £6 million (2005: £4 million) relating to expenditure againstprovisions held in respect of activities which have been previouslydiscontinued. Consolidated statement of recognised income and expense For the year ended 31 December: Note 2006 2005 £m £mExchange differences on translation of foreign operations (2) 1Revaluation of available for sale investments 4 20Disposal and impairment transferred from available for sale reserve to income statement (20) -Movements in respect of cash flow hedges - (1)Actuarial gains and losses on defined benefit pension schemes 5 29 35Taxation on items taken directly to equity 4 (4) (8)Net income recognised directly in equity 7 47Profit for the year 222 226Total recognised income and expense for the year 229 273 Attributable to: Equity shareholders of the parent company 10 226 269 Minority interests 10 3 4 Total recognised income and expense for the year 10 229 273 Notes to the accounts 1 Exceptional items 2006 2005 £m £mOperating exceptional items: Reorganisation and integration costs (23) (40) Receipt from liquidators 2 11 Fees in relation to takeover approaches (14) - (35) (29) Non-operating exceptional items: Gain on sale of subsidiaries and investments 57 - Impairment of investments and revaluation of disposal groups held for sale (22) (10) 35 (10) Total exceptional items before tax - (39) In 2006 a charge of £23 million, including £17 million staff costs, was incurredin respect of reorganisation and restructuring costs including the closure ofthe Bristol and children's programme production centres, the continuation of theregional news consolidation programme and redundancy and share costs arisingfrom the restructuring of the senior management team. A liquidation settlementof £2 million was received from the liquidators of the Shop! Channel. Fees of £14 million were incurred in respect of the two takeover approachesreceived in 2006. A £35 million net gain has been recognised from the sale of subsidiaries and thesale and impairment of investments. This includes the profit on disposal of thestakes in Seven Network (£29 million) and TV3 (£40 million), the loss on sale ofthe education business (£12 million) and an impairment of the holding in SMG,which is held within our producer/broadcaster segment, (£22 million) following asignificant decline in its share price. 2005 exceptional items included a charge of £40 million incurred in respect ofreorganisation and integration costs including the consolidation of regionalnews production centres and technical facilities and redundancy and share costsarising from the restructuring of the senior management team. The largestelement of this (£25 million) was staff related. Also included in 2005 was an£11 million receipt from the liquidators of ONdigital. A £10 million loss wasrecognised in relation to the education business after its classification as adisposal group held for sale. 2 Earnings per share 2006 2005 Basic Diluted Basic Diluted £m £m £m £mProfit for the year attributable to equity shareholders of the parent company 219 219 222 222Exceptional items (including related tax effect of an expense of £2 million, 2005: credit of £4 million) 2 2 35 35Profit for the year before exceptional items 221 221 257 257Amortisation and impairment of intangible assets (including related tax 59 59 71 71Prior period tax adjustments (36) (36) (7) (7)Other tax adjustments 12 12 4 4Profit for the year before exceptional items, amortisation and impairment of intangible assets and prior period tax adjustments 256 256 325 325Weighted average number of ordinary shares in issue - million 4,017 4,017 4,082 4,082Dilution impact of share options - million - 34 - 46 4,017 4,051 4,082 4,128 Earnings per ordinary share 5.5p 5.4p 5.4p 5.3pAdjusted earnings per ordinary shareBasic earnings per ordinary share 5.5p 5.4p 5.4p 5.3pAdd: Loss per ordinary share on exceptional items 0.0p 0.0p 0.9p 0.9pEarnings per ordinary share before exceptional items 5.5p 5.4p 6.3p 6.2pAdd: Loss per ordinary share on amortisation and impairment of intangible assets 1.5p 1.5p 1.7p 1.7pSubtract: Profit per ordinary share on prior period tax adjustments (0.9)p (0.9)p (0.1)p (0.1)pAdd: Loss per ordinary share on other tax adjustments 0.3p 0.3p 0.1p 0.1pEarnings per ordinary share for the year before exceptional items, amortisation and impairment of intangible assets and prior period tax adjustments 6.4p 6.3p 8.0p 7.9p An adjusted earnings per share has been disclosed because in the view of thedirectors this gives a fairer reflection of the results of the underlyingbusiness. 3 Dividends Dividends declared and recognised through equity in the year were: 2006 2005 £m £mEquity shares: Final 2004 dividend of 1.3 pence per share - 53 Interim 2005 dividend of 1.32 pence per share - 54 Final 2005 dividend of 1.8 pence per share 74 - Interim 2006 dividend of 1.35 pence per share 53 - 127 107 A final dividend of 1.8 pence per share, totalling £70 million, has beenproposed after the balance sheet date in respect of the year ended 31 December2006 (2005: 1.8 pence per share, totalling £74 million). As is required by IAS10 (Events after the balance sheet date) this amount has not been provided forat the balance sheet date. 4 Taxation Recognised in the income statement: 2006 2005 £m £m Current tax expense: Current tax before exceptional items (37) (129) Current tax (expense)/credit on exceptional items (2) 4 (39) (125) Adjustment for prior periods 48 9 9 (116)Deferred tax: Origination and reversal of temporary differences (63) 33 Adjustment for prior periods (12) (2) (75) 31Total taxation expense in the income statement (66) (85) Reconciliation of taxation expense: 2006 2005 £m £mProfit before tax 288 311Taxation expense at UK corporation tax rate of 30% (2005: 30%) (86) (93)Non-taxable/non-deductible exceptional items (2) (8)Non-taxable income/non-deductible expenses (7) (5)Effect of tax losses utilised 4 18Over provision in prior periods 36 7Other (11) (4) (66) (85) In the year ended 31 December 2006 the effective tax rate on profits is lower(2005: lower) than the standard rate of UK corporation tax primarily as a resultof adjustments in respect of prior periods due to progress in the agreement withrevenue authorities of prior period's tax liabilities (2005: utilisation of taxlosses in respect of which deferred tax assets were not previously recognised).The underlying tax rate on profits, after adjusting for the irregular taxeffects caused by issues such as exceptional items, impairments, joint venturesand associates and adjustments in respect of prior periods, is 30% (2005: 28%). The current tax expense for the year is reduced primarily as a result of thereversal of temporary differences on which deferred tax assets previously wererecognised relating to pension scheme deficits and funding payments. A tax expense totalling £4 million (2005: expense of £8 million) has beenrecognised directly in equity representing a current tax credit of £2 million(2005: credit of £2 million) and a deferred tax expense of £6 million (2005:expense of £10 million). Deferred tax assets and liabilities recognised and their movements are: Recognised At in the At 31 1 January Business income Recognised Business December 2006 combinations statement in equity sales 2006 £m £m £m £m £m £mProperty, plant and equipment (3) - (2) - 1 (4)Intangible assets (155) (1) 17 - - (139)Programme rights 5 - 2 - - 7Pension scheme deficits 160 - (65) (9) - 86Pensions funding payments 29 - (8) - - 21Interest-bearing loans and borrowings, and derivatives 3 - (7) - - (4)Share-based payments 32 - (9) 3 - 26Unremitted earnings of subsidiaries, associates and joint ventures - - (3) - - (3)Other 3 - - - - 3 74 (1) (75) (6) 1 (7) Recognised At in the Transfer At 31 1 January Business income Recognised to held December 2005 combinations statement in equity for sale 2005 £m £m £m £m £m £m Property, plant and equipment (3) - (2) - 2 (3)Intangible assets (151) (35) 31 - - (155)Programme rights 7 - (2) - - 5Pension scheme deficits 202 - (31) (11) - 160Pensions funding payments 2 - 27 - - 29Interest-bearing loans and borrowings, and derivatives (6) - 10 (1) - 3Share-based payments 8 18 4 2 - 32Tax losses 5 - (5) - - -Other 4 - (1) - - 3 68 (17) 31 (10) 2 74 At 31 December 2006 total deferred tax assets are £143 million (2005: £232million) and total deferred tax liabilities are £150 million(2005: £158 million). Deferred tax assets estimated at £600 million and £100 million (2005: £600million and £100 million) in respect of capital losses and loan relationshipdeficits respectively, have not been recognised due to uncertainties as toamount and whether gain or income will arise in the appropriate form andrelevant territory against which such losses could be utilised. For the samereasons, deferred tax assets in respect of overseas losses of £10 million (2005:£10 million) which time expire between 2017 and 2026 have not been recognised. 5 Pension schemes The Group operates a number of defined benefit and defined contribution pensionschemes. The pension scheme assets are held in a separate trustee-administered fund tomeet long-term pension liabilities to past and present employees. The trusteesof the fund are required to act in the best interest of the fund'sbeneficiaries. The appointment of trustees to the fund is determined by thescheme's trust documentation. Defined contribution schemes Total contributions recognised as an expense in relation to defined contributionschemes during 2006 were £2 million (2005: £2 million). Defined benefit schemes The Group provides retirement benefits to some of its former and approximately31% of current employees through defined benefit schemes. The Group's mainscheme was formed from a merger of a number of schemes on 31 January 2006. Thelevel of retirement benefit is principally based on basic salary at retirement. The liabilities of the defined benefit scheme are measured by discounting thebest estimate of future cash flows to be paid out bythe scheme using the projected unit method. This amount is reflected in thedeficit in the balance sheet. The projected unit method is an accrued benefitsvaluation method in which the scheme liabilities make allowance for projectedearnings. The accumulated benefit obligation is an actuarial measure of thepresent value of benefits for service already rendered but differs from theprojected unit method in that it includes an allowance for early leaverstatutory revaluations rather than projected earning increases. At the balancesheet date the accumulated benefit obligation was £2,580 million. The statutory funding objective is that the scheme has sufficient andappropriate assets to pay its benefits as they fall due. This is along-term target. Future contributions will always be set at least at the levelrequired to satisfy the statutory funding objective. The general principlesadopted by the trustees are that the assumptions used, taken as a whole, will besufficiently prudent for pensions and benefits already in payment to continue tobe paid, and to reflect the commitments which will arise from members' accruedpension rights. The most recently completed triennial actuarial valuations in respect of theschemes forming the largest section of the Group's main retirement benefits fundwas performed by an independent actuary for the trustees of the scheme and wascarried out as at 1 January 2005. As part of the merger exercise, the Group paid£325 million into the scheme towards the current deficit. The first triennialvaluation of the merged scheme is due to be completed as at 1 January 2008 inrespect of the largest section and 31 December 2006 in respect of othersections. In the interim the Group will monitor funding levels annually. The levels of contributions are based on the current service costs and theexpected future cash flows of the defined benefit scheme.The Group estimates the duration of UK scheme liabilities will on average falldue over 18 years. The movement in the present value of the defined benefit obligation for theseschemes is analysed below: 2006 2005 £m £mDefined benefit obligation at 1 January 2,604 2,357Current service cost 23 26Curtailment loss/(gain) 2 (2)Interest cost 126 125Net actuarial loss 3 184Contributions by scheme participants 4 5Benefits paid (105) (91)Defined benefit obligation at 31 December 2,657 2,604 The present value of the defined benefit obligation is analysed between whollyunfunded and funded defined benefit schemes in thetable below: 2006 2005 £m £mDefined benefit obligation in respect of funded schemes 2,619 2,573Defined benefit obligation in respect of wholly unfunded schemes 38 31Total defined benefit obligation 2,657 2,604 The movement in the fair value of the defined benefit scheme assets is analysedbelow: 2006 2005 £m £mFair value of assets at 1 January 2,072 1,685Expected return on assets 144 112Net actuarial gain 32 219Employer contributions 225 142Contributions by scheme participants 4 5Benefits paid (105) (91)Fair value of assets at 31 December 2,372 2,072 The assets and liabilities of the scheme are recognised in the balance sheet andshown within non-current liabilities. The total recognised is: 2006 2005 2004 £m £m £mTotal defined benefit scheme assets 2,372 2,072 1,685Total defined benefit scheme obligations (2,657) (2,604) (2,357)Net amount recognised within the balance sheet (285) (532) (672) Amounts recognised through the income statement are as follows: 2006 2005 £m £mAmount (charged)/credited to operating costs: Current service cost (23) (26) Curtailment (loss)/gain (2) 2 (25) (24) Amount credited/(charged) to net financing costs: Expected return on pension scheme assets 144 112 Interest cost (126) (125) 18 (13) Total charge in the income statement (7) (37) The amounts recognised through the statement of recognised income and expenseare: 2006 2005 £m £mActuarial gains and (losses): Arising on scheme assets 32 219 Arising on scheme liabilities (3) (184) 29 35 The cumulative amount of actuarial gains and losses recognised through thestatement of recognised income and expense since 1 January 2004 is an actuarialloss of £59 million (2005: £88 million). Included within actuarial gains and losses are experience adjustments asfollows: 2006 2005 2004 £m £m £mExperience adjustments on scheme assets 32 219 56 Experience adjustments on scheme liabilities (12) 9 (70) At 31 December 2006 the scheme assets were invested in a diversified portfoliothat consisted primarily of equity and debt securities. The scheme assets are shown below by major category along with the associatedexpected rates of return. Expected long Market Expected Market term rate value long term value of return 2006 rate 2005 2006 £m of return £m % 2005 % Market value of assets - equities and property 7.6 1,436 7.5 1,421 Market value of assets - bonds 4.5 - 5.2 898 4.1 - 5.6 618 Market value of assets - other 5.0 38 4.5 - 4.9 33 Total scheme assets 2,372 2,072 The expected return on plan assets is based on market expectations at thebeginning of the financial period for returns over the life of the relatedobligation. The expected yield on bond investments with fixed interest rates canbe derived exactly from their market value. Some of these bond investments areissued by the UK Government. The risk of default on these is very small. Thetrustees also hold bonds issued by public companies. There is a more significantrisk of default on these which is assessed by various rating agencies. The trustees also have a substantial holding of equity investments. Theinvestment return related to these is variable and they are generally consideredmuch "riskier" investments. It is generally accepted that the yield on equityinvestments will contain a premium ("the equity risk premium") to compensateinvestors for the additional risk of holding this type of investment. There issignificant uncertainty about the likely size of the risk premium. The expected return for each asset class is weighted based on the assetallocation for 2007 to develop the expected long term rate of return on assetsassumption for the portfolio. The fair value of the scheme assets as a percentage of total scheme assets as at31 December 2006 and 31 December 2005 and target allocations for 2007 are setout below: The benchmark for 2007 is to hold broadly 60% equities and 40% bonds. Themajority of the equities held by the scheme are in international blue chipentities. The aim is to hold a globally diversified portfolio of equities, witha target of 40% of equities being held in UK and 60% of equities held overseas.Within the bond portfolio the aim is to hold 50% of the portfolio in governmentbonds (gilts) and 50% of the portfolio in corporate bonds. The actual return on plan assets in the year ended 31 December 2006 was £176million (2005: £331 million). Planned 2006 2005 2007 (as a percentage of total scheme assets) Equities and property 60% 61% 69% Bonds 40% 38% 30% Other 0% 1% 1% The principal assumptions used in the scheme valuations at the balance sheetdate were: 2006 2005 Rate of general increase in salaries 4.25% 4.00% Rate of increase in pension payment (LPI 5% pension increases) 2.90% 2.75% Rate of increase to deferred pensions 3.00% 2.75% Discount rate for scheme liabilities 5.12% 4.90% Inflation assumption 3.00% 2.75% IAS 19 requires that the discount rate used be determined by reference to marketyields at the balance sheet date on high quality fixed income investments. Thecurrency and term of these should be consistent with the currency and estimatedterm of the post-employment obligations. The discount rate has been based on theyield available on AA rated corporate bonds of a term similar to theliabilities. The expected rate of inflation is an important building block for salary growthand pension increase assumption. A rate of inflation is "implied" by thedifference between the yields on fixed and index-linked Government bonds.However, differences in demand for these can distort this implied figure. TheBank of England target inflation rate has also been considered in setting thisassumption. The Group has used PA92 tables with mortality projected to 2015/2020 forpensioner members and to 2030/2035 for non-pensioner members. Using thesetables, the assumed life expectations on retirement at age 60 are: 2006 2005 Retiring today Males 24.4 24.0 Females 27.4 27.0 Retiring in 20 years Males 25.5 25.2 Females 28.4 28.1 The Group reflected this recognition that mortality rates have reduced in its2004 valuation. The tables above reflect published mortality investigation datain conjunction with the results of investigations into the mortality experienceof scheme members. The allowance for future mortality improvement has beenincreased from that incorporated for 2005 when mortality was projected to 2015for pensioner members and to 2030 for non-pensioner members. The sensitivities regarding the principal assumptions used to measure theschemes liabilities are set out below. The illustrations consider the singlechange shown with the other assumptions assumed to be unchanged. In practice,changes in one assumption may be accompanied by offsetting changes in anotherassumption (although this is not always the case). The company liability is thedifference between the scheme liabilities and the scheme assets. Changes in theassumptions may occur at the same time as changes in the market value of schemeassets. These may or may not offset the change in assumptions. For example, afall in interest rates will increase the scheme liability, but may also triggeran offsetting increase in the market value so there is no net effect on thecompany liability. Assumption Change in Assumption Impact on scheme liabilitiesDiscount rate Increase/decrease by 0.5% Decrease/increase by 8%Rate of inflation Increase/decrease by 0.5% Increase/decrease by 7%Rate of salary growth Increase/decrease by 0.5% Increase/decrease by 1%Rate of mortality Increase by 1 year Increase by 3% Normal contributions into the schemes in 2007 are expected to be in the regionof £20 million assuming current contribution rates continuing as agreed with thescheme trustees. 6 Intangible assets Goodwill Brands Customer Licences Film Total £m £m contracts and £m libraries £m relationships and other £m £m Cost At 1 January 2005 3,296 173 319 48 82 3,918 Additions 174 26 17 73 4 294 Reclassification as assets held for sale (45) - - - (7) (52) Disposals - - - - (1) (1) At 31 December 2005 3,425 199 336 121 78 4,159 Additions 18 - 2 - 4 24 At 31 December 2006 3,443 199 338 121 82 4,183 Amortisation and impairment At 1 January 2005 5 15 86 4 11 121 Charge for the year - 17 72 7 6 102 Reclassification as assets held for sale (5) - - - (5) (10) Disposals - - - - (1) (1) At 31 December 2005 - 32 158 11 11 212 Charge for the year - 18 24 9 5 56 Impairment charge 20 - - - - 20 At 31 December 2006 20 50 182 20 16 288 Net book value At 31 December 2006 3,423 149 156 101 66 3,895 At 31 December 2005 3,425 167 178 110 67 3,947 Amortisation of intangible assets is shown within operating costs in the incomestatement. The £20 million impairment charge in 2006 related to Carlton ScreenAdvertising cash-generating unit as a result of structural changes in the cinemaadvertising market. In calculating this impairment, growth rates and discountrates consistent with those below have been used, and calculations have beenmade on a value in use basis, using cash flow projections over the next fouryears. Carlton Screen Advertising is part of the Other operations segment. Impairment tests for cash-generating units containing goodwill The following units have significant carrying amounts of goodwill: 2006 2005 £m £mBroadcasting 2,963 2,963 Multiple units without individually significant goodwill 460 462 3,423 3,425 The recoverable amount of the Broadcasting cash-generating units is based onvalue in use calculations. Those calculations use cash flow projections based onactual operating results and the five year business plan. Cash flows inperpetuity are extrapolated using a 2.5% growth rate and are appropriate becausebroadcasting is a long-term business. The growth rate used is consistent withthe long-term average growth rate for the industry. A pre-tax discount rate of12.5% has been used in discounting the projected cash flows. The key assumptions and the approach to determining their value are: Assumption How determined Total advertising market Long term trends, industry forecasts and macro-economic outlook Television share of advertising market Long term trends, industry forecasts and in-house estimates Digital penetration Industry forecasts and government stated objectives ITV1 share of commercial impacts Impact of digital penetration and historic viewing shares by platform 7 Investments in joint ventures and associated undertakings Joint Associated Total ventures undertakings £m £m £m At 1 January 2005 55 28 83 Share of attributable profits 5 6 11 Other - (1) (1) At 31 December 2005 60 33 93 Additions - 1 1 Share of attributable profits 5 3 8 Disposals - (29) (29) Repayment of loans (1) - (1) Reclassification as assets held for sale (3) - (3) Exchange movement and other (2) (1) (3) At 31 December 2006 59 7 66 The aggregated summary financial information in respect of associates in whichthe Group has an interest is as follows: 2006 2005 £m £mAssets 54 143 Liabilities (56) (108) Revenue 118 142 Profit 4 13 The aggregated summary financial information in respect of the Group's share ofinterests in joint ventures is as follows: 2006 2005 £m £mNon-current assets 54 66 Current assets 43 49 Current liabilities (26) (27) Non-current liabilities (25) (29) Revenue 62 66 Expense (59) (61) 8 Equity investments £m At 1 January 2005 153 Additions at fair value 13 Disposals (3) Revaluation to fair value 18 At 31 December 2005 181 Disposals (90) Revaluation to fair value (6) Reclassification as assets held for sale (48) At 31 December 2006 37 9 Analysis of net debt 1 January Net Currency 31 2006 cash flow and and December acquisitions non-cash 2006 Restated £m movements £m £m £m Cash 522 303 (1) 824 Cash equivalents 141 (3) (1) 137 Cash and cash equivalents 663 300 (2) 961 Loans and loan notes due within one year (285) 13 (196) (468) Finance leases due within one year (3) 3 (3) (3) Loans and loan notes due after one year (781) (581) 210 (1,152) Finance leases due after one year (75) - 3 (72) (1,144) (565) 14 (1,695) Net debt (481) (265) 12 (734) Included within non-cash movements is the movement of the £200 million Eurobondinto amounts payable in less than one year based on its payment due date. 1 January Net Currency 31 2005 cash flow and and December Restated acquisitions non-cash 2005 £m £m movements Restated £m £mCash 441 81 - 522 Cash equivalents 141 (1) 1 141 Cash and cash equivalents 582 80 1 663 Loans and loan notes due within one year (252) (22) (11) (285) Finance leases due within one year (3) 3 (3) (3) Loans and loan notes due after one year (568) (234) 21 (781) Finance leases due after one year (78) - 3 (75) Preference shares (8) 8 - - (909) (245) 10 (1,144) Net debt (327) (165) 11 (481) Included within cash equivalents is £75 million (2005: £78 million) the use ofwhich is restricted to meeting finance lease commitments under programme saleand leaseback commitments and Gilts of £31 million (2005: £29 million) overwhich the unfunded pension promises have a charge. The restatements above are due to the reclassification of the unsecured €356million Exchangeable Bond as falling due within one year. 10 Capital and reserves Attributable to equity shareholders of the parent company Share Share Merger Translation Available Retained Total Minority Total capital premium and other reserve for sale earnings £m interest equity £m £m reserves £m reserve £m £m £m £m £m At 1 January 2005 422 91 2,666 (2) 13 (85) 3,105 8 3,113 Cancellation of shares (3) (39) - - - - (42) - (42) Shares issued in the year 4 46 - - - - 50 - 50 Total recognised income and expense - - - 1 20 248 269 4 273 Movements due to share-based compensation - - - - - 18 18 - 18 Equity dividends - - - - - (107) (107) - (107) At 31 December 2005 423 98 2,666 (1) 33 74 3,293 12 3,305 Share buy-backs (24) - 24 - - (251) (251) - (251) Shares issued in the year 2 22 - - - - 24 - 24 Cancellation of convertible shares (12) - - - - - (12) - (12) Issue of deferred shares 12 - - - - - 12 - 12 Total recognised income and expense - - - (2) (16) 244 226 3 229 Movements due to share-based compensation - - - - - (9) (9) - (9) Dividends paid to minority interests - - - - - - - (8) (8) Equity dividends - - - - - (127) (127) - (127) At 31 December 2006 401 120 2,690 (3) 17 (69) 3,156 7 3,163 Included within retained earnings is a £25 million (2005: £26 million) deductionfor investments held in ITV plc shares by the Group-sponsored employee benefittrusts. Merger and other reserves Merger and other reserves at 31 December 2006 include merger reserves of £2,548million (2005: £2,548 million), capital reserves of £112 million (2005: £112million), capital redemption reserves of £24 million (2005: £nil) andrevaluation reserves of £6 million (2005: £6 million). Translation reserve The translation reserve comprises all foreign exchange differences arising onthe translation of the accounts of, and investments in, foreign operations. Available for sale reserve The available for sale reserve comprises all movements arising on therevaluation of assets accounted for as available for sale. 11 Basis of preparation The Group accounts consolidate those of ITV plc, ("the Company"), a companydomiciled in the United Kingdom and its subsidiaries (together referred to asthe "Group") and the Group's interest in associates and jointly controlledentities. As required by EU law (IAS Regulation EC 1606/2002) the Group's accounts havebeen prepared and approved by the directors in accordance with InternationalFinancial Reporting Standards as adopted by the EU ("IFRS"). The accounts are principally prepared on the historical cost basis except whereother bases are applied under the Group's accounting policies. During the period, the Group has reviewed its revenue recognition policy forpremium rate telephony services recognising the increasing significance of thisrevenue stream. The Group's policy has consequently been revised to reflectrevenue as the amount billed net of operator costs. Previously revenue was shownnet of other costs, such as production costs, in addition to operator costs.2005 revenue and operating costs have therefore been restated, reflecting anincrease in both of £19 million. The impact of this change in accounting policyin 2006 was that revenue and operating costs are both £16 million higher thanunder the previous accounting policy. 2006 was the first full year of operationof ITV Play which also earns revenues from premium rate telephony services. ITVPlay's revenue and operating costs in 2006 would have been £34 million lower ifthe new accounting policy had not been adopted. There is no effect on profit orthe balance sheet. At 31 December 2005, the Company had outstanding an unsecured €356 millionExchangeable Bond which matured in January 2007. The Exchangeable Bond was able to be exchanged at any time at the option ofinvestors for shares in Thomson SA at an exchange rate of €41.2 per share. At 31December 2005 the Thomson share price was €17.7, having traded below €24 sinceAugust 2002. Independent market estimates were that the Thomson share pricewould not recover to the conversion price by January 2007. The Company thereforetook the view that the possibility of exchange before January 2007 was remoteand classified the Exchangeable Bonds as a loan repayable between one and twoyears in the December 2005 balance sheet. IAS 1.60(d) states that - "a liabilityshall be classified as current when the entity does not have an unconditionalright to defer settlement of the liability for at least 12 months after thebalance sheet date". Although, as explained above, it is very unlikely that anybondholder would have exercised its option before January 2007, bondholderscould technically exercise that right at any time. Therefore the Company did nothave an unconditional right to defer settlement. Accordingly the Company hasreclassified the liability as current in its 2005 balance sheet (£245 million). The financial information set out herein does not constitute the Company'sstatutory report and accounts for the year ended 31 December 2006. Statutoryaccounts for 2006 will be delivered to the Registrar of Companies following theCompany's annual general meeting. The auditor has reported on those accounts;their report was unqualified and did not contain statements under 237(2) or (3)of the Companies Act 1985. Copies of the 2006 annual report and accounts will besent to all shareholders and will be available from the registered office of theCompany, 200 Gray's Inn Road, London, WC1X 8HF. This information is provided by RNS The company news service from the London Stock Exchange

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