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Financial highlights From the Chairman From the Chief Executive
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FINANCE DIRECTOR'S REVIEW | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
In the year to 30 September 1999, turnover increased 5% to £1,938.1m (1998: £1,842.1m) and headline pre-tax profits before digital television and exceptional items were 3% lower at £321.3m (1998: £330.4m). PRE TAX PROFITS Headline basic earnings per share in 1999 were 33.8p compared to 34.1p in 1998. Headline diluted earnings per share in 1999 were 31.6p (1998: 31.3p).
Total Ordinary dividends per share for 1999 including the declared second interim dividend (in lieu of the final dividend) of 9.10p are 10% higher than last year at 15.05p (1998:13.65p). Carlton's divisional reporting is presented on a new basis consistent with the way in which the businesses are managed. The principal divisions are the Carlton Media Group and the Technicolor Group, both of which increased turnover and operating profits in 1999. However, the net loss from other businesses (grouped under "Other" and including corporate costs) was greater, leaving headline operating profits slightly higher at £319.5m (1998: £318.0m). In 1999 the share of operating profits of associates and joint ventures (excluding ONdigital and ITV2) was £11.0m (1998: £7.5m). Net interest payable including the share of associates' net interest (but before the financing cost of digital television), was £9.2m (1998: £4.9m receivable) with the change principally reflecting the purchase of Nimbus in July 1998 and the ITC Library in July 1999 for cash. Net digital television costs before tax relief totalled £132.7m principally from the share of ONdigital's losses (1998: £27.9m, mainly in respect of pre launch costs). Group cash flow remained strongly positive, generating £90.8m in 1999 after tax and loan funding for ONdigital of £31.0m. This was applied to fund net acquisition costs of £201.8m, principally £102.3m for the acquisition of the ITC Film library and £62.0m of equity investment in ONdigital. Net debt at 30 September 1999 was £253.3m compared with net debt at the start of the year of £59.8m. The Carlton Media Group comprises the broadcasting and advertising businesses of Carlton Television and Carlton Screen Advertising; the programme productions businesses Carlton Productions, Action Time and Planet 24; the programme library, video and book sales businesses Carlton International Media (including the ITC library), Carlton America, Carlton Video, Carlton Books and the home entertainment business, DHE. Turnover in Carlton Media Group increased by 3% to £859.6m (1998: £832.6m) and operating profits by 10% to £176.4m (1998: £160.9m). The increased operating margins in 1999 of 20.5% (1998: 19.3%) resulted from the higher proportion of turnover from advertising revenues. CARLTON MEDIA GROUP TURNOVER AND OPERATING PROFITS
Total Net Advertising Revenue ('NAR') of Carlton's three ITV stations increased by 7% on a comparable basis to £635.6m (1998: £594.7m). Programme production sales, principally for the ITV network, were in the region of £150m in 1999 including regional and digital programmes for transmission on Carlton's own stations and channels. Planet 24 contributed production sales of £9.7m in 6 months' trading under Carlton's ownership. Sales by Carlton International Media, our world-wide distribution business, were £35.1m in 1999 (1998: £39.0m). In addition there were 3 months' sales of the acquired ITC library of £2.3m. Carlton's share of ITV's network programme costs increased 6% to £229.5m (1998: £216.2m). Payments to the Government for our wholly owned broadcasting licences in 1999 totalled £117.2m (1998: £120.1m) made up of cash bids of £27.5m (1998: £57.7m) and the Percentage Qualifying Revenue ('PQR') payments of £89.7m (1998: £62.4m). The PQR rates applicable to advertising and sponsorship revenue during 1999 were 20% for Carlton Broadcasting (from 1 January 1999 and 11% prior to that), 11% for Central and 13% Westcountry (from 1 January 1999 and 0% prior to that). In 1999 Carlton's cash bid was £24.4m, Westcountry's was £3.1m and Central's was £2,400. ITV began broadcasting its service in digital, as well as analogue, in November 1998. No PQR is payable on the proportion of revenues attributed to the viewing of our ITV channels via digital broadcasts. Therefore as digital penetration increases in the future, the proportion of the advertising and sponsorship revenues attracting PQR will fall. We did not accept the terms offered to Central Independent Television because they would have resulted in higher licence payments in 1999, 2000 and 2001 than under the current terms. We have the opportunity to apply for the renewal of Central Independent Television's licence in 2000 to begin new ten-year licence periods with effect from April 2001. If we renew Central's licence on April 1st 2001, the new cash bid will only be effective from January 2002. The level of digital penetration is likely to be higher for those ten-year periods than assumed in the 1999 licence renewal process. While Central Independent Television operates under its existing licence terms, the digital proportions of advertising and sponsorship revenue will not be subject to PQR. In 1999, Carlton included £7.0m (1998: £22.4m) in respect of the Channel 4 funding formula which was ended from 31 December 1998 by Government legislation. Technicolor comprises video and disc production and distribution together with film print processing and distribution. In 1999 Technicolor's turnover increased by 11% to £908.3m (1998: £820.0m) and operating profits (before an exceptional operating charge) increased by 6% to £149.2m (1998: £141.2m). Operating margins were 16.4% (1998: 17.2%). Technicolor's video and disc production and distribution businesses (including Nimbus) had sales of £646.4m (1998: £504.7m) and operating profits of £104.0m (1998: £81.9m). The 1999 results included the first full year of sales and operating profits of Nimbus which accounted for increases of £107.0m and £14.6m respectively. There were also increments from the video acquisitions in Canada and of the other 50% of Central de Video in Mexico. These together added £10.2m to turnover and £1.1m of operating profit. Like-for-like growth, excluding the effect of acquisitions, for sales was 5% and for operating profits was 8%. Continuing cost reductions and increased operating efficiency offset price reductions triggered principally by volume discounts. Technicolor's film processing and distribution businesses had sales of £261.9m (1998: £315.3m) and operating profits of £45.2m (1998: £59.3m). Profitability fell due to lower volumes, pricing pressure and the loss of Sony as a contract customer in the US in October 1998. Other division comprises the results of the Products companies Quantel and Solid State Logic, the post-production businesses and central overheads. Turnover from the Products companies in 1999 fell by 15% to £114.2m (1998: £134.2m) and operating profits to £4.1m (1998: £22.8m). The reductions were due to the performance of Quantel which experienced a continuing downturn in the demand for its products across all geographic territories. The market place for editing and broadcast products has been greatly affected by price competition and by expenditure deferrals due to the uncertainty regarding digital television standards in the USA. However, during the year further overhead cost savings at an annual rate of £4m were implemented at a cost of £1.0m. The investment in R & D was increased in 1999 representing 11% of sales. Overall the results of the post-production businesses were similar to 1998. TVI was sold in May 1999 and The Moving Picture Company moved to new purpose-built facilities in July 1999. Carlton's digital television businesses in 1999 had turnover of £9.9m (1998: £6.7m) and total operating losses and net operating costs before tax of £132.7m (1998: £27.9m). Included in digital television are the five wholly owned digital channels, the simulcasting of our ITV stations, the new ITV2 and GMTV2 channels and Carlton Online, the 1998 start-up business. The joint venture within digital television is the 50% share in ONdigital which began broadcasting on 15 November 1998. Also included in digital television is the interest cost of £8.9m on the cumulative digital investment which grew to £227m by 30 September 1999.
Included in the share of ONdigital's operating losses is the cost to date of free boxes (including subsidies) which is being written off over a two-year period. ONdigital's other principal costs, some of which vary with subscriber volumes, are programming, marketing and retailer commissions, customer management, transmission and general overheads. Tax payable on Carlton's other UK businesses is offset by tax relief on Digital Television losses. Joint ventures and associated companies (excluding the digital television joint venture and associates) contributed £11.0m to operating profits in 1999 (1998: £7.5m). The increase in the share of operating profits resulted principally from GMTV, which became profitable following renewal of its licence on new terms from January 1999, and 3DCD, the Technicolor joint venture acquired with Nimbus, which exploits disc hologram technology. The principal exchange rate affecting Carlton's translation of overseas results was the US dollar. The average rate of the US dollar in 1999 was US$1.62/£ compared with US$1.66/£ in 1998. The year-on-year effect on profit translation was to increase profits in 1999 by £2.1m. At 30 September 1999 the rate was US$1.65/£ compared with US$1.70/£ at 30 September 1998. In 1999 there were exceptional operating charges in respect of the reorganisation of the US optical disc business following the acquisition of Nimbus in July 1998 (£2.5m) and the write down to zero of the net book value of certain of Carlton Digital Channels' programme inventory (£9.1m). Tax relief of £3.6m was provided on these items. In 1999 a pre-tax loss of £24.6m arose on the sale of 100% of Cabletime Limited, Comelim Circuits Limited, TVI Limited and Carlton Home Entertainment's audio business. The principal element of the loss was goodwill written back on disposal of £22.7m. There was no tax relief on these disposals. ATTRIBUTABLE PROFITS, EARNINGS PER SHARE AND DIVIDENDS The profit on ordinary activities after tax attributable to shareholders in 1999 was £94.5m (1998: £211.9m). This profit is stated before £14.2m (1998: £15.1m) of the annual fixed net dividends on non-equity shares (i.e. Preference shares). The dividends are net of the amortisation of the issue premium over the redemption price in respect of the 5.5p Preference shares. This is being amortised at the rate of £6.3m per annum (1998: £6.2m) over the period to the first redemption date in June 2000, from when redemption at par is entirely at Carlton's discretion. Headline basic earnings per share (calculated on profits after tax and net Preference dividends but before digital television and exceptional items) in 1999 were 33.8p (1998: 34.1p). After digital television and exceptional items, basic earnings per share in 1999 were 13.1p (1998: 32.3p). Headline diluted earnings per share in 1999 (calculated excluding digital television and exceptional items and before net Preference dividends and allowing for full conversion of the 5.5p Preference shares and the exercise of dilutive share options) were 31.6p (1998: 31.3p). In 1999 the 6.5p Preference shares were not dilutive of reported earnings having been so in 1998. Diluted earnings per share (after digital and exceptional items) were 12.6p (1998: 29.7p). The declared second interim dividend (in lieu of the final dividend) for 1999 of 9.10p net per Ordinary share, together with the interim dividend of 5.95p net per Ordinary share already paid, makes a total for the year to date of 15.05p net per Ordinary share (1998: 13.65p), an increase of 10%. The Ordinary dividends in 1999 are covered 1.1 times (1998: 2.3 times) by the profits after tax and net Preference dividends excluding non-cash goodwill charges. The reduction in cover is principally related to the net losses of Digital Television. Dividend cover based on headline earnings per share is 2.2 times in 1999 (1998: 2.5 times). The tax rate on headline profits of £321.3m in 1999 is 31.3% (1998: headline tax rate of 32.5% on headline profits of £330.4m). Tax relief on Digital Television losses at the rate of 29.0% (1998: 25.8%) includes the share of consortium relief from ONdigital and ITV2. The overall tax rate provided on the 1999 pre-tax profits of £152.4m is 38.4% (1998: 32.1% on pre-tax profits of £312.1m). In the US, federal tax has been provided at 35% and State Taxes have been provided at rates between 5% and 10%. The overall tax rate principally reflects the mix of UK and US profits, the level of tax relief for digital television losses and the impact of exceptional losses on sale of businesses in respect of which there is no tax relief.
Carlton generated £373.2m of cash from operations in 1999 (1998: £379.3m). The small reduction reflected the investment in digital television offset by a positive cash inflow from the management of working capital particularly from Technicolor. Net interest paid was £18.8m (1998: £5.2m received) and dividends from associates, mainly Meridian and ITN, totalled £4.2m (1998: £10.3m). The increase in financing costs was due to cash expenditure on acquisitions and investment in Digital Television. The cash cost of Preference dividends was £20.5m (1998: £21.3m), reflecting conversion of 15m Preference shares during the year. Tax paid was £95.5m (1998: £96.2m). Capital expenditure in 1999 of £85.1m (1998: £82.7m) included approximately £35.7m on new projects and operating properties. These included the expansion of DVD and Technicolor's distribution capacity. There were tangible fixed asset and investment disposals which realised £10.6m. Loans to a joint venture of £31m were for the ONdigital business. Expenditure on other investments in 1999 was principally related to Technicolor together with investments in Carlton Ordinary shares (£10m) to cover requirements under employee share schemes. Free cash flow in 1999 was £146.9m (1998: £161.9m), calculated after replacement capital expenditure but before all funding of ONdigital, acquisitions and capital expenditure on new business. Acquisitions of subsidiaries totalled £131.2m (1998: £160.7m). The principal acquisitions for cash in 1999 were the companies owning the ITC library (£102.3m), Planet 24 (£9.9m), and VTR Video now known as Technicolor Canada and the outstanding 50% of Technicolor Mexico (together £11.3m). In 1998 Nimbus was acquired for a cash cost of £155.8m. The £77.1m investment in joint ventures and associated companies in 1999 (1998: £51.5m) mainly related to equity investment in ONdigital (£62.0m) and investments in ITV2 (£8.7m). At the year end a total of £227m had been invested in all the digital television businesses. A £250m bond was issued in 1999 raising net cash funds of £247.2m. Equity dividends paid in 1999 absorbed £87.8m (1998: £79.4m) and new share issues raised £9.0m (1998: £2.2m). Overall there was a net cash outflow of £189.8m, a negative exchange movement on the sterling value of net debt of £3.7m resulting in net borrowings at the year end of £253.3m (1998: £59.8m). Shareholders' funds at 30 September 1999 were £505.3m compared with £497.5m at the end of 1998. Included within the increase of £7.8m is the write off of non-marketable intangible assets net of related deferred tax of £11.0m as required by the new accounting standard FRS10 in respect of Goodwill and Intangible Assets which became applicable in Carlton's 1999 financial year. Goodwill written off on acquisitions prior to 1999 has not been reinstated and the cumulative total of goodwill charged against reserves was £1,867.6m (1998: £1,893.2m) with the principal movement accounted for by company disposals. Net assets at 30 September 1999 included £814.6m of operating net assets (1998: £680.5m) excluding investments, cash and other liquid funds, overdrafts, dividends payable, tax and loans. The increase principally relates to the ITC film library which is included in intangible fixed assets, together with capital expenditure on tangible fixed assets. The overall return on the weighted average of net assets in 1999 (excluding digital) was 46% (1998: 53%). Financing At the year-end Carlton had an undrawn committed £150m syndicated bank facility with a maturity of November 2001 provided by a group of high quality international banks. The purpose of the facility is to provide backstop liquidity backing for Carlton's commercial paper programme and the maintenance of a group of core relationship banks to support Carlton in its future activities. Objectives, policies and strategies Interest rate management The interest rate profile of Carlton's cash and borrowings at the year-end is detailed in notes 18 and 23(a) respectively. Net interest payable was £18.1m (1998 - £2.1m receivable). A 1% increase in short-term sterling and dollar interest rates based on the year-end position would increase profits before tax by about £3.2m. Borrowings are denominated in currencies that match Carlton's net assets as described below. The fair values of borrowings and cash at the year-end are compared to their book values in note 23(b). Currency management Carlton is also subject to currency exposures on the translation of the net assets of its overseas subsidiaries, primarily in the US. Carlton does not usually hedge its profit translation exposures as these are an accounting rather than cash exposure. As Carlton accounts for currency profits using average exchange rates, there is a smoothing effect on short-term currency movements. Carlton does hedge a proportion of its transactional exposures by taking out forward foreign exchange contracts of up to four years forward against its anticipated and known sales and purchases. The decision to hedge is influenced by the size of exposure, the certainty of it arising, the trading and market position of the company in which the exposure arises and the current exchange rate. At the year-end Carlton estimated that its net purchases of foreign currency in 2000 would total less than £60m after taking into account foreign currency hedging in place. The year-end fair value of hedging maturing in 2000 was £2.0m above book value, due to the strength of sterling. Carlton's balance sheet transaction exposure is managed by partially matching currency assets with currency borrowings. Details of the currencies of borrowings and net assets at the year-end are illustrated below and these are not materially different from the average position during the year. Carlton's primary balance sheet translation exposure is against the dollar and it targets a 50% hedged position in the long term. At the year-end Carlton's balance sheet translation exposure was 38% hedged (1998 - 34%). During the year sterling weakened against the dollar, the major currency to which Carlton is exposed. The effect on profit translation was to increase profits on a year by year basis by £2.1m due to the average dollar translation rate decreasing from US$1.66 to US$1.62. Currency exchange on trading transactions is less significant. Exposure to the dollar is Carlton's largest single currency exposure and a movement against sterling by one cent, if maintained, over the whole year, would affect reported profits by approximately £0.5m. Investment of cash Group companies are continuing to work on the Euro project. Project work, both undertaken and on-going, includes the upgrading of information systems, where necessary, and the training of staff to handle Euro-denominated transactions, including dual currency transactions in the transition period between commencement of the Euro in 1999 and the first issue of notes and coins in 2002. The decision as to when to adopt the Euro as the Group's functional currency will principally depend on the timing of the UK joining the Euro. The Group does not currently expect significant project costs to be incurred as a result of the introduction of the Euro. The Group has not experienced to date significant business disruption as a result of the Millennium date change. Some residual risk remains and thus a final assessment of the impact of the Year 2000 issue will be reported in the Group's interim statement for the six-month period ending 31 March 2000. The Group's Year 2000 project commenced in 1996. All business critical systems under the direct control of the Group were identified and testing and remedial work performed as deemed appropriate. Internal and (where necessary) external technical expertise was used to evaluate the impact that Year 2000 issue would have on business critical systems. In addition, third party consultants were used to assess the integrity of the approach adopted by the Group. The state of readiness of all key business partners was assessed and group wide contingency plans were put in place, to address the wide range of potential business issues that could have arisen over the Millennium date-change and which could still arise during the Year 2000. These plans include alternative means of transacting business, alternative sources of supply, planning for key staff to be available at critical times and other appropriate measures. The Board estimates that the total cost of the Year 2000 programme will be at the lower end of the £12m to £15m previously reported. Actual costs incurred as at 30 September 1999 were £11 million, of which £4 million was charged directly to the profit and loss account. The balance was capitalised on the basis it represented enhancements to existing assets. Year 2000 costs have been treated in accordance with abstract 20 published by the Accounting Standards Board's Urgent Issues Task Force.
Bernard Cragg, |
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