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Review of consolidated results and financial position

Consolidated Income Statement

The Rai Group income statement for 2008 shows a net loss of 7.1 million euros, against a loss of 4.9 million euros for 2007. The difference with the result of the Parent Company result, which presents a net loss of 37.0 million euros, is largely
determined by the elimination of the dividends disbursed by the Group companies in relation to the previous year’s results against those for the year ending.

The following section provides an overview of the main items of the Income Statement and the reasons behind the more significant changes from the previous year.


Revenues from sales and services

Revenues from sales and services consist of licence fees, advertising revenues and other commercial revenues.
They totalled 3,210.9 million euros, down 21.6 million euros (-0.7%) on 2007.

A breakdown of revenues from sales and services, per company and net of operations between Group companies, is presented in the following table.



Licence fees
(1,619.2 million euros). These include licence fees for the current year as well as those for previous years, collected through coercive payment following assessment, as highlighted in the following table.



The increase (+2.0%) is mainly attributable to an increase in the per-unit licence fee from 104.00 euros to 106.00 euros (+1.9%), with the remainder accounted for by an increase in the number of paying subscribers.

Advertising revenues (1,187.7 million euros) show a drop of 47.4 million euros (-3.8%) on 2007. This result is largely determined by a trend in advertising revenues characterised by good results in the early part of the year, aided by the presence of the European Football Championships and Olympic Games in the programming, and by a significant reduction in the second half of the year, particularly from October onwards, due to the current recession which has hit international markets.
The reference market (TV, Radio, Cinema and Internet) showed an overall decline of about 0.3% (source Nielsen) in 2008.

Other revenues (404.0 million euros) show a decline of 5.4 million euros (-1.3%), determined by a series of negative factors highlighted in the following table. Positive items included the higher proceeds generated by the television, radio and multimedia agreement for the foreign market, booked to Special services under agreement, while the Sale of rights, musical publications and theme-based satellite channels item included higher revenues taken in this area by Rai Cinema, Rai Trade and RaiSat. Negative items included lower revenues from performance by the Parent Company of services of varying nature for public entities, booked to the Other item.



The breakdown of other revenues, per company and net of operations between Group companies, is presented in the following table.

As shown in the table below, the relative weights of the three components in total revenues from sales and services show an increase in the Licence Fees item compared with the totals for the previous year, to the detriment of the Advertising component.

 

Operating Costs

These total 2,570.7 million euros, rising 145.6 million euros, 6.0%, compared with 2007, largely due to the presence of the aforementioned sports events held in 2008 (European Football Championships and Olympic Games).
The item includes internal costs (labour cost) and external costs, regarding ordinary business activities, apart from those relating to financial operation, as indicated in the classification below.

Cost of goods and external services – This caption includes purchases of goods and services required to make programmes of immediate-use (purchases of consumables, external services, artistic collaborations, etc.), filming rights for sports events, copyright, running costs (rental and hire fees, telephone and postage, cleaning, maintenance, etc.) and other operating costs (direct and indirect taxes, contribution to the Authority, the public broadcasting concession fee, etc.).
As shown in the table, the caption shows a drop of 140.4 million euros (+9.9%) from the previous year mainly as a result of costs for filming rights (+143.0 million euros) relating to important four-yearly sports events (European Football Championships and the Olympic Games, equating to 164.6 million euros), partially offset by savings in relation to other sporting disciplines.

Net of costs relating to the aforementioned big sports events, the caption shows a reduction, thanks to the cost containment policies implemented during the year.

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

Personnel costs. These amount to 1,009.6 million euros, up by a total of 5.2 million euros on the total at 31 December 2007 (+0.5%), as detailed in the table below.

The positive effects of resignation incentives in 2007 and the new 2008 incentives have allowed us to considerably counteract the physiological growth in labour costs deriving from contract renewals, meritocratic policies and increases for length of
service.

In addition to policies regarding resignation incentives, interventions on all the variable captions (overtime, rises and payment policies) weighed positively on the containment of labour costs, as did certain exogenous factors, the most significant
being the acceptance of the application for de-contribution for level two payment and the lowering of the severance pay fund revaluation index.

A breakdown of personnel costs by individual Group company is given in the following table.

Personnel on payroll at 31 December 2008 (including 48 two-year work-introduction and apprenticeship contracts) amounted to 11,309, down 9 on the same date of the previous year. In detail, leavers numbered 401, of whom 211 left under resignation incentives, while engagements numbered 392.

The average number of employees, including those on fixed-term contracts, came to 13,236, a rise of 23 from the previous year due to an increase of 24 in the number of staff on permanent contracts and a drop of 1 in the number of staff on fixed-term contracts.

Gross Operating Margin

The Gross Operating Margin, as a consequence of the above, is positive for 673.0 million euros, down 159.5 million euros, or 19.2%, on the previous year.

Amortisation of programmes

This caption is related to investments in programmes, which during 2008 amounted to 587.2 million euros, up 14.8 million euros (+2.6%), mainly due to TV fiction series which continued the growth trend shown in previous years, offsetting the drop in investments in films.

A breakdown of investments in programmes by each individual company is shown in the following table:

Amortisation charged to the above captions for the year, 520.1 million euros, shows an increase of 25.5 million euros (+5,2%) compared with the previous year, in line with the growth of investments.


Depreciation and other amortisation

This is linked to investments in tangible fixed assets and other investments, the latter consisting mainly of the purchase of frequencies for the development of the digital technical network and charges sustained for improvements to third-party assets.
The 2008 movement in these investments, shown in the following table, presents a total increase (+24.8 million euros) determined mainly by growth in tangible assets (+27.7 million euros) relating principally to Rai Way for the development of the digital terrestrial network, and by a slight drop in investments in other intangible assets (-2.9 million euros) mainly concerning costs sustained for improvements to third-party assets.

The table below shows the breakdown by company and type:

Amortisation/depreciation charged for the year amounts to 130.4 million euros, with a drop of 11.2 million euros compared with 2007, referring entirely to tangible fixed assets, in relation to the progressive completion of the amortisation of assets acquired in the past, in the presence of a contained level of investment.


Other net income (expense)

Other net income, amounting to 12.0 million euros (against 45.6 million euros of net expense in the previous year), comprises costs/revenues not directly related to the Company’s core business. More specifically, it consists of net prior-year income
(83.4 million euros), largely generated by the outcome of a transaction agreement concerning copyright, provisions for risks and charges (19.8 million euros) and provisions for the company supplementary pension fund for former employees (13.3 million euros).

The item also comprises, as was the case in prior years, expenses totalling 32.9 million euros (35.7 million euros in 2007) relating to repeat-usage programmes which it is not expected will be used or repeated.

Operating result

The results described above for operating revenues and costs led to a deterioration in the operating result, from 150.7 million euros in the previous year to 34.5 million euros this year, with a drop of 116.2 million euros.

Net financial expense

Net financial expense shows a loss of 7.9 million euros (-12.3 million euros in 2007). The item shows the economic effects of typical financial operations and comprises bank interest expense and income and net income/expense in relation to exchange rates.

The results of financial operations show a drop in net interest payable to banks of 0.6 million euros, due to the rise in interest rates on the markets in the first six months of the year and a slight decline in the Group’s average financial position.

Within the scope of Group policies to safeguard the value in euros of commitments in foreign currency estimated in the order or budget, as specified in greater detail further ahead, the considerable drop in value of the dollar against the euro during
the first part of the year determined the recording of higher charges on exchanges in commercial positions hedged against the risk (5.2 million euros), clearly down on the previous year, affected by higher charges on past exchanges relating to debts for Rai Cinema investments. These expenses are offset by a lower cost for the purchase of the same rights for a relative value calculated using the exchange rate in force at the time of entry into commercial agreements, mainly during previous years.

Intra-year overdrafts were covered with the use of loans granted with current account overdrafts or “hot cash” credit. The average cost of debt was 4.8%, with minimal spreads compared with inter-bank rates for the period. The advent of the international financial recession in the final quarter of the year generated an increase in the spreads applied to loans, offset by the reduction in the reference rate. Due to the low level of average debt and its extensive loans, the company did not run into liquidity difficulties.

Income from equity investments

This item, which comprises income and expense determined by the carriage of investments in associated companies and subsidiaries at equity (Sacis), shows a value of 3.0 million euros, improving on the total for the previous year (0.2 million euros).

Net exceptional expense

2008 highlights net exceptional expense for 0.3 million euros, against 27.9 million euros sustained in 2007, consisting mainly of incentivised resignation costs.

Income taxes

These amount to 115.6 million euros and represent the balance between current and deferred taxes as shown in the table.

The IRES (corporate income tax) of 20.3 million euros presents an increase of 8.0 million euros on the previous year’s figure, relating to the higher taxable bases of the subsidiaries which had benefited from off-ledger tax amortisation in 2007 which are no longer possible under the new laws.

No amount was recorded for IRES for the Parent Company, as the year is expected to have a negative tax result.

IRAP (regional tax on productive activities) for 37.0 million euros shows a drop of 8.6 million euros. This lower amount is largely determined by the deterioration of the taxable base and by the application of the benefit known as the “tax wedge”
introduced by Budget Law 2007, which took complete effect in 2008.

Furthermore, some Group companies took advantage of the opportunity offered by article 1, paragraph 48 of Law 244/07 (Budget 2008) which allowed the discharge of the higher tax deductions – essentially for accelerated amortisation – with
payment of a substitute tax which totalled 9.2 million euros. This made it possible to achieve a positive effect on the income statement due to the difference between the release of deferred taxes allocated to provision with an ordinary rate and the cost of the substitute tax.

Deferred tax liabilities in 2008 determine a positive effect equating to 30.4 million euros, partly as a consequence of the recovery of the transaction mentioned above and partly to the recovery of timing differences in income deriving from higher
amortisation carried out during previous years, purely for tax purposes.

Deferred tax assets are booked where there is reasonable certainty that there will be sufficient future taxable amounts to guarantee the relative tax benefit.

In detail, the figure for 2008 (0.9 million euros) is the result of the booking of new IRES credit deriving from the tax loss for the year, of 8.5 million euros, completely offset by taxable income taken into account in the calculation of taxation on a consolidated basis for tax year 2008, net of reversal of credit booked in previous years following the recovery of timing differences generated during the year.

 

CONSOLIDATED BALANCE SHEET AGGREGATES

Non-current assets

Tangible assets amount to 555.1 million euros and are represented by land and industrial buildings for 35.7%.

The decrease of 1.6 million euros with respect to 2007 is the balance of new investments (118.7 million euros), eliminations (1.4 million euros), depreciation (119.0 million euros) and positive differences on the conversion of tangible assets expressed in foreign currency (0.1 million euros).

Programmes are represented mainly by TV fiction series (500.1 million euros) and films (398.8 million euros). TV fiction series accounted for the greater part of investment during the year (360.7 million euros).

The change from the previous year (+33.5 million euros) is the net result of the following factors:
• investments for 598.6 million euros, net of eliminations of programmes being produced and disposals for 0.4 million euros;
• amortisation for 532.2 million euros;
• writedown of programmes for 32.9 million euros.

Equity investments amount to 11.5 million euros and present an increase on the previous year (+3.5 million euros), largely due to the carriage of investments in associated companies and subsidiaries at equity (Sacis).

Other Non-current assets are shown in the following table:

Working capital

The change from 2007 (+34.4 million euros) is due mainly to normal developments in the business.

Major changes relate to:

Other assets, which show a drop of 48.0 million euros due to the net recovery of advances for the acquisition of rights relating to sports events (particularly the European Football Championships and the Olympic Games).

Trade payables, which show a drop of 75.3 million euros, largely attributable to the effects of the transaction agreement already mentioned in relation to Other net income (expense).

Provisions for risks and charges, which show a drop of 27.9 million euros, mainly due to the aforementioned change in provisions for deferred taxes (30.2 million euros).
The overall risk situation to which the Group is exposed has not undergone any significant changes in the year, so the coverage level guaranteed by the provisions made continues to be sufficient to meet future risks and charges.

Other liabilities show an increase of 27.4 million euros mainly in relation to the booking of accounts payable concerning the contribution taken by the Italian Ministry of Communications to support projects to extend the digital terrestrial
platform.

Net financial position

The year-end net financial position is positive, despite the decline on the previous year (21.1 million euros compared with 110.4 million euros in 2007), and is comprised as follows:

The comparison of cash flows generated during this year compared to the previous one shows increased outflows towards third parties, amounting to about 81 million euros. The most significant concern the aforementioned transaction in relation
to copyright, which implicated payment of the balance. Further increases are recorded by the Parent Company in relation to payments for the year’s big sports events and for advances on futures sports events, as well as outflows for staff severance pay (retirement pensions and payments to IMPS). The outgoings of the associated companies remained stable, despite the increase in investments.

As regards income from third parties, an overall decline of about 45 million euros was recorded, this being the result of lower Government settlements of credits for institutional agreements and contributions for the digital project and, in the latter part of the year, the reduction of advertising revenues.

The average financial position is negative for about 42 million euros, deteriorating slightly in comparison to the previous year (35 million euros), as a consequence of the financial profile described above.

The analysis carried out on the basis of the financial and income statement ratios highlighted that:

• the net invested capital coverage ratio, calculated as the ratio between net invested capital and net equity, is 0.97 (0.84 in 2007);

• the current ratio, identified as the ratio between current assets (inventories, current assets, cash and cash equivalents and financial receivables) and current liabilities (current liabilities and financial debts), is 0.90 (0.99 in 2007);

the self-coverage ratio of fixed assets, calculated as the ratio of shareholders’ equity to fixed assets, is 0.43 (0.44 in 2007).

The financial risks to which the Group is exposed are monitored using appropriate computerised and statistical instruments. A policy regulates financial management in accordance with best international practice, the aim being to preserve the corporate value by taking an adverse attitude towards risk, pursued via active monitoring of the exposure and the centralised implementation of suitable hedging strategies by the Parent Company, also acting on behalf of the subsidiaries.

In detail:

• The exchange risk is significant in relation to the exposure in US dollars generated by the acquisition of rights to sports events in foreign currencies by Rai (as well as the funding of the foreign associated company Rai Corporation) and of film and television broadcasting rights by Rai Cinema. These commitments generated payments for about 237 million dollars during 2008. Operation takes place from the date of subscription to the commercial commitment, often lasting severalyears, and aims to defend the counter value in euros of commitments estimated at the time of order or in the budget.
Hedging strategies are implemented using financial derivative instruments – such as forward purchases, swaps, and options structures – without ever taking on an attitude of financial speculation. The Group policy envisages numerous operating
limits to be observed by the hedging activity.

• The interest rate risk is also regulated by the Company policy, particularly for medium/long-term exposure with specific operating limits. At the moment, the financial position does not contain significant long-term and variable rate exposures, but sees short periods of operational liquidity alternating with overdraft positions, for which the only limited hedging operations in place, defined in previous years, expired on 31 December 2008.

• The credit risk on cash deployment is extremely limited in that the company policy envisages only the use of low-risk financial instruments with parties with high ratings. Only tied deposits or sight deposits with remunerations close to the Euribor rate were used during 2008 for cash timing differences.

• Coming to the liquidity risk, short-term credit lines held with the banking system exceed 530 million euros and are sufficient to cover the overdraft positions that occur throughout the course of the year. The international financial recession
has caused the whole system more difficulties and greater expense in gaining access to credit, particularly evergreen credit.
Due to the low level of average debt and its extensive loans, the Group did not run into liquidity difficulties. To consolidate the financial structure, the Parent Company applied to a group of seven Italian and international banks for a three-year
stand-by loan of 200 million euros in 2008, which was subsequently granted (February 2009).

 

 

 

 

 

 

 

RAI: Rai Radio Televisione Italiana