Final Results
SMG PLC
12 April 2007
SMG
Preliminary Results 2006
Financial Highlights
Group Underlying Results* 2006 2005 Change
Revenue £147.3m £159.3m - 8%
Operating Profit £18.1m £29.0m - 38%
Profit Before Tax - Continuing £9.7m £17.8m - 46%
Profit Before Tax - Discontinued £0.3m £2.2m - 87%
Profit Before Tax - Total £10.0m £20.0m - 50%
Earnings per Share 3.0 pence 4.8 pence - 38%
Dividend 1.2 pence 2.9 pence - 59%
*Underlying results exclude exceptional items.
Strategic Developments
• New leadership team in place
• Financial stability, agreement signed with banking covenants
• Focus on TV as core business - turnaround underway, details in June
• Virgin IPO - strong prospects, much investment recently, poised for
growth
• Current Primesight sale stopped - excellent business, price too low due to
legacy process
Operational Highlights
• Successful stv rebrand
• New commissions for Rebus & Taggart
• Virgin Radio launched on Freeview
• Future media developments - stv.tv; peopleschampion.com; all new
virginradio.co.uk
• Settlement agreed with pension schemes' Trustees
Richard Findlay, Chairman said:
'SMG now has a new leadership team with the backing of the shareholders and the
benefits of stability that brings. I am very excited about both the prospects
for Virgin Radio as an independent company and the turnaround in our core TV
business.'
Rob Woodward, Chief Executive:
'I believe passionately in the future of SMG and I am confident that with our
new strategy, our strengthened leadership team, our enthusiastic staff and a
period of financial stability we will deliver for all our stakeholders.'
12 April, 2007
There will be a presentation for analysts at the offices of ABN AMRO, 250
Bishopsgate, London EC2 today at 9.00am.
Further enquiries:
SMG plc
Richard Findlay, Chairman Tel: 020 7882 1199
Rob Woodward, Chief Executive
George Watt, Group Finance Director
Brunswick Group LLP
James Hogan Tel: 020 7404 5959
Simon Sporborg
Ash Spiegelberg
SMG plc
Preliminary Results 2006
CHAIRMAN'S STATEMENT
Introduction
I begin my first report to shareholders by saying how pleased I am to be leading
the new Board of SMG, a company we have long believed to have enormous potential
within a changing media landscape that brings both challenges and exciting
opportunities.
SMG has underperformed the UK media sector for some time. It has had a weak
strategy weakly executed; leading to excess debt, a lack of focus, instability
in the leadership, dissatisfaction amongst the shareholders and poor staff
morale. These problems can and will be solved, because the underlying
businesses, the people who work for them and our relationships with audiences
and advertisers are strong.
The first step in this turnaround took place a few weeks ago: SMG now has a new
leadership team with the backing of the shareholders and the benefits of
stability that brings.
The second step was announced recently: we have signed an agreement with our
banking syndicate that removes the financial uncertainty and pressure the
business has suffered from.
Our strategy is now simple and focused. TV is our core business and our new CEO,
Rob Woodward has begun to execute his turnaround plan. He will give you more
details about this in June. I am delighted to say that Rob has already succeeded
in strengthening the leadership team in TV, and I welcome the proven skills and
experience he has added to the business.
In this context, we announced separately today that we intend to float Virgin
Radio in the coming months. There has been a considerable investment in Virgin
Radio over the last year: in broadcast talent and online content, in sales and
marketing, and in platform expansion and digital rollout. We anticipate that
Virgin Radio's IPO will create a strong and focussed radio business, with a
great brand, that will provide an attractive, pure-play investment opportunity.
The Board and I believe that this will provide both a strong platform for Virgin
Radio's future growth and the right strategic focus and balance sheet structure
for SMG's TV business.
The sale of Primesight and Pearl & Dean has been running for 6 months, and SMG
has been in a weak position as a vendor for much of that time. We have
terminated the Primesight sale, because we judged the price, although in the
range of market expectations, as too low. SMG now has the financial and
leadership stability to initiate a fresh sale, when appropriate. In the
meantime, we are happy to have this highly profitable business as part of our
company. The sale of Pearl & Dean continues, and we will apply a similar
rationale in our decision-making as this progresses.
Let me now turn to the financial results that are being announced today, which
cover the period 1 January to 31 December, 2006, and predate my appointment as
Chairman.
2006 Performance
Overall, the advertising climate in the UK has remained difficult, and this had
an unavoidable effect on SMG's performance in 2006, particularly in television
and cinema.
Group revenue fell by 8% to £147.3m (2005: £159.4m) as network television
advertising sales revenues were further impacted by reduced audience levels. The
statutory Pre-Tax Loss of £76.7m includes exceptional costs and write-downs
totalling £86.7m. Pre-Tax Profit, excluding exceptional items and including
discontinued operations, was £10.0m (2005: £20.0m), which represents a
year-on-year fall of 50%. Earnings per share, calculated on the same underlying
basis, reduced by 38% to 3.0 pence (2005: 4.8 pence).
Exceptional items included goodwill impairment write downs to the carrying
values of Virgin Radio - written down by £58.8m to £105.0m - and Pearl & Dean -
written down by £18.0m to £nil. In addition, there was a write down of
television programme stock of £6.5m, an OFCOM settlement relating to Virgin
Radio licence costs of £0.8m and a re-organisation charge, to reduce central
function costs, of £2.6m. Only the re-organisation charge is a cash item.
The Group also made a significant step forward through the resolution of the
future funding of the Group's pension schemes, as announced on 29 January, 2007.
The product of several months of discussions with the schemes' Trustees, these
proposals have been implemented from 6 April, 2007.
Bank Facilities
On 20 October, 2006, the SMG Board reported that the Group would potentially
breach certain of its financial covenants at the end of 2006. On 10 April, 2007,
following detailed discussions with our lenders, who have remained supportive
throughout, we announced that the Group was granted a waiver of the relevant
covenants and has now negotiated an amended £193m bank facility until 30
September, 2008.
Dividend
In view of the deterioration in performance in the second half of 2006, and the
ongoing pressure on the Group's balance sheet, the Board has decided not to
recommend a final dividend for 2006 (2005: 1.7 pence). This will result in a
full year dividend, as per the interim dividend, of 1.2 pence (2005: 2.9 pence).
People
The Group's long serving Chief Executive, Andrew Flanagan, stepped down from his
position and from the Board in July, 2006. Following the cessation of the more
recent merger talks with UTV plc in February 2007, the previous Non-Executive
Directors and the Chairman, Chris Masters, decided to resign, leading to the
immediate appointment of myself and Rob Woodward, as Chief Executive, and our
non-executive colleagues. Donald Emslie, Executive Director, resigned yesterday.
The new Board comprises - in addition to myself and Rob Woodward - George Watt
(Group Finance Director), David Shearer (Senior Independent Non-Executive
Director), Waheed Alli (Non-Executive Director), Vasa Babic (Non-Executive
Director), Jamie Matheson (Non-Executive Director) and Matthew Peacock
(Non-Executive Director).
Of paramount importance to the success of any Company is its staff and I would
like to pay tribute to the fortitude and dedication of SMG's people across the
business for whom the last few years, and particularly months, have been
turbulent and unsettling. I want to assure them of their new Board's best
efforts in returning the Company to the position we all wish to see it occupy.
Outlook
Advertising markets have been varied in the early part of 2007. Television
airtime revenues have declined by 5% over the same period last year, but this
represents an outperformance against ITV1 as a whole which was down by 7% year
on year. Radio revenues have grown by 8% in Q1, also outperforming the market,
and displaying particularly strong online revenue growth. Pearl & Dean has also
seen strong Q1 revenue growth of 13%, outperforming its 5% increase in screens,
while Primesight has grown Q1 revenues by 15% through increased focus on panel
yield.
We see these trends broadly continuing into April and, as a result, the Board
views advertising markets for the year ahead with cautious optimism.
Richard Findlay
Chairman
12 April, 2007
CHIEF EXECUTIVE'S REVIEW
Introduction
This is my first opportunity to formally communicate with shareholders since
joining SMG and to introduce myself to the many constituencies that are focussed
on seeing a recovery in SMG's performance. I believe passionately in the future
of SMG and I am committed to leading the turnaround of the business. I am
confident that with ambition, an aligned and motivated leadership team, an
enthusiastic and professional staff, a focussed strategy and a period of
financial stability, we can deliver for shareholders.
As Richard mentioned, we believe that the conditions for an IPO of Virgin Radio
are particularly good. The flotation announced today will create a powerful,
branded pure-play Radio business, and, leave SMG as a television business that
can better focus on the needs of its viewers and advertisers. It will also
significantly improve our balance sheet, because we will use the float proceeds
to pay down debt.
I am currently in the process of reviewing every detail of the television
business in order to refine my plans for the future. After 100 days in office, I
will agree with my colleagues on the newly-formed SMG Board a realistic but
highly challenging turnaround plan to restore SMG's position in UK media,
focussing on producing and delivering compelling content, serving communities of
interest and capitalising on the stv brand.
The financial results being reported in today's announcement relate to 2006, the
Group's financial year prior to my appointment as Chief Executive.
Divisional Performance
Television revenues fell 8% across 2006 to £125.6m (2005: £137.0m), broadly in
line with ITV1 as a whole and reflecting the effects of Contract Rights Renewal,
multichannel competition and continuing weakness in the television advertising
market overall. This was partially offset by cost savings - including reduced
headcount - and by higher levels of overseas sales, repeats of network
programmes and a marginal increase in turnover at SMG Solutions.
stv's share of ITV1's net advertising revenues (NAR share) was 6.6%, in line
with 2005 and supplemented by an improved performance from the local sales
operation in Scotland.
The high operational gearing of this business resulted in operating profit for
the division as a whole falling 34% to £15.8m (2005: £24.1m).
Virgin Radio outperformed the UK radio market with turnover down only 3% at
£21.7m (2005: £22.4m). Reduced airtime revenues were substantially offset by a
very strong performance in sponsorships & promotions, online and concert ticket
sales.
However, 2006 saw significant investment at Virgin Radio in presenters,
engineering developments, marketing, online and digital platforms and costs at
the station increased by £2.6m over 2005. As a result, operating profit fell by
53% to £2.3m (2005: £4.9m).
Cinema advertising turnover at Pearl & Dean, while down 31% to £20.6m at a
headline level as a result of the loss of the UGC contract, was broadly flat
(down £0.1m) when viewed on an underlying basis. This represented an
outperformance against the cinema market overall, which was down in 2006.
However, Pearl & Dean recorded an operating loss of £4.2m (2005: £0.8m loss) as
a result of the loss of the UGC profit contribution and increased rental costs.
The focus on inventory management and the continued growth of the six sheet and
Backlights estate at Primesight, the outdoor advertising division of SMG, saw
turnover increase by 13% to £23.3m (2005: £20.7m). Six sheet panels and
Backlights recorded increases in both revenue and yields and operating profit
grew by 50% to £4.5m (2005: £3.0m). Last year during the sale process,
Primesight identified some planning issues relating to a number of its
advertising panels. This is an industry-wide issue and I'm pleased to say that
we have agreed a satisfactory way forward in order for us to address this.
Operational Matters
SMG's operational performance in 2006, while predating my appointment, provides
some important indicators of the potential of SMG's businesses going forward.
Equally, it demonstrates the weakness of the past strategy for the business.
Going forward we will use our strengths in: Audiences; Content; and Future Media
to all play a pivotal role in the Group's recovery.
Audiences
Audiences represent the lifeblood of all media businesses and they will be a
primary focus for us as we move forward. stv is an underexploited brand and we
must find new opportunities to super serve the numerous communities of interest
in Scotland.
stv has an unparalleled advantage. Our starting point is strong. We remain the
most popular peak-time station in Scotland and across 2006 enjoyed a peak-time
audience share of 28.3% - some six percentage points ahead of our closest rival,
BBC1 Scotland (22.6%), and fully 20 percentage points ahead of our nearest
commercial rival, Channel 4 (8.7%). 49 of the UK's 50 most popular programmes on
commercial television in 2006 were broadcast to the Scottish audience on stv,
and while some erosion of the audience is inevitable up to digital switchover in
2010/2011, we anticipate reaching this significant watershed retaining stv's
position as Scotland's most popular television station. It is up to us to
exploit this unique platform and to build stv's relationship with Scottish
viewers and advertisers.
Last year saw significant investment in the business. Virgin Radio's audience
slipped by 2.1% across 2006 as a result of the effects of schedule and presenter
changes, alongside continued AM erosion. Nonetheless, Q4 2006 listening
statistics, released in February 2007, showed quarter on quarter growth in both
reach (+4.0%) and listening hours (+3.6%), suggesting an improvement in this
trend. Virgin Radio is now available to listeners on all available platforms
following its July launch on Freeview, that made the station available in a
further 9m digital television homes. This development means that Virgin Radio
listeners can now tune in via analogue, DAB, satellite TV, digital terrestrial
TV and online - and we view this continued multiplatform stance as vital to the
station's ongoing connection with its audience. In pursuit of this strategy,
Virgin Radio last month announced its application, in partnership with Channel 4
amongst others, for the D2 (DAB) Multiplex when it is granted by the Government
in 2008.
Cinema audiences were down 4.9% in the UK in 2006 and up 8.9% in Ireland, which
contributed to Pearl & Dean's flat revenue performance in 2006. 2007 has a much
stronger film slate with the inclusion of proven film product such as Pirates of
the Caribbean, Harry Potter, Shrek, The Fantastic Four and Spiderman.
Content
Content is at the heart of all broadcast and online businesses and I believe
that SMG's television businesses have the potential to differentiate themselves
using entertaining and informative programming that will excite viewers. This
will be a key area of opportunity for us in the future. I have already taken
steps to enhance the strengths of our television content leadership team and, in
addition, I am delighted to have Waheed Alli as a Non Executive Director of the
company.
In 2006, ITV1's programme schedule was supplemented by a number of changes to
our output in Scotland. In May, SMG's previous Board decided to re-brand SMG's
two licences as stv, enabling the business to capitalise on the combined
schedule and shared resources, while retaining their distinct identities in
regional news. News regularly attracts a larger combined audience than the BBC's
regional evening news programme.
In January 2007 split news services were launched within our early evening news
programmes giving viewers more localised services from Edinburgh or Glasgow in
the south and Dundee or Aberdeen in the north. This service has proved popular
with viewers and is one example of how stv can differentiate itself in a crowded
market.
We have a good opportunity to grow our production base. The quality of SMG
Productions' network programme output was recognised at the Scottish BAFTA
Awards with Best Children's programme award going to Uncle Dad, produced for
CITV, and our long-running detective series, Taggart, receiving the prestigious
BAFTA Award for special contribution to Scottish broadcasting, in recognition of
its long-lasting international success. Taggart continued its domestic success
with six commissions from ITV1 in 2006, alongside Rebus' further four
commissions.
The Christian O'Connell Breakfast Show, launched in January 2006, represented a
significant change to Virgin Radio's weekday schedule. While the show
experienced an inevitable element of audience turnover, the most recent (Q4
2006) listener research revealed an upturn in listening and we are optimistic of
this trend continuing in 2007. The Virgin Radio weekday schedule has been
further enhanced in 2007 with the introduction of Madness front man, Suggs, to
the afternoon slot, with Ben Jones taking over the important drive time show and
station favourite, Geoff Lloyd, moving to early evenings.
Future Media
SMG has taken some initial steps to reduce the Group's reliance on spot
advertising through drawing on the strength of its broadcast brands. While this
is a start, I am not convinced about SMG's current strategy. We will therefore
set out a clearer and more focussed approach to future media and I anticipate a
significant re-appraisal of this activity going forward.
In July the Group launched stv.tv, an information and entertainment site that
capitalises on the strength of the stv brand. Peopleschampion.com, a price
comparison site, founded and fronted by the well-respected internet banking
pioneer, Jim Spowart, followed in September. An experimental IPTV site,
scotlandontv.tv, was test-launched in November 2006 providing viewers worldwide
with the opportunity to download programmes from stv's extensive archive.
Earlier this year SMG launched smartycars.com, an online car retail and
information site aimed at winning a share of the classified car advertising
market, initially in Scotland. In addition, in 2006 the award-winning
virginradio.co.uk was refreshed and the Group also launched pearlanddean.com.
Summary
2006 was a troubled year for SMG. It is clear that the past strategy was badly
flawed. However, the Group has significant untapped potential and I am committed
to rebuilding the company using the core strengths referred to above.
The flotation of Virgin Radio will create a great standalone business and leave
SMG as a much more sharply focused Group, with a balance sheet that will
support, rather than hold back, our development. In addition, ending the current
sale process for Primesight will allow us to achieve full value for this
business in due course.
I believe that the new leadership at SMG, the financing we have agreed, the
senior executives joining us and the outline strategy articulated today
represent important, positive progress for the Group. I look forward to
communicating the details of our turnaround plan in June.
Rob Woodward
Chief Executive
12 April, 2007
Consolidated income statement
for the year ended 31 December 2006
2006 2005
Note Underlying Exceptional Results for Underlying Exceptional Results for
results items year results items year
£m £m £m £m £m £m
CONTINUING OPERATIONS
Revenue 2 147.3 - 147.3 159.4 - 159.4
Net operating
expenses before
exceptional costs (129.2) - (129.2) (130.4) - (130.4)
Reorganisation
costs 3 - (2.6) (2.6) - (2.7) (2.7)
Writedown of
stock 3 - (6.5) (6.5) - - -
Ofcom
settlement 3 - (0.8) (0.8) - - -
Goodwill
impairment 3 - (58.8) (58.8) - - -
-------- --------- -------- -------- -------- --------
Net operating
expenses (129.2) (68.7) (197.9) (130.4) (2.7) (133.1)
-------- --------- -------- -------- -------- --------
Operating
profit/(loss) 18.1 (68.7) (50.6) 29.0 (2.7) 26.3
Gain on
disposal of
investment 3 - 0.4 0.4 - 2.3 2.3
Loss on
disposal of
property 3 - (0.4) (0.4) - - -
-------- --------- -------- -------- -------- --------
- - - - 2.3 2.3
-------- --------- -------- -------- -------- --------
Profit/(loss)
before
financing 18.1 (68.7) (50.6) 29.0 (0.4) 28.6
Interest 0.2 - 0.2 0.6 - 0.6
income
Finance costs 4 (8.6) - (8.6) (11.8) - (11.8)
-------- --------- -------- -------- -------- --------
Profit/(loss)
before tax 9.7 (68.7) (59.0) 17.8 (0.4) 17.4
Tax (charge)/
credit 6 (0.2) 2.7 2.5 (4.6) 0.2 (4.4)
-------- --------- -------- -------- -------- --------
Profit/(loss)
for the year
from
continuing
operations 9.5 (66.0) (56.5) 13.2 (0.2) 13.0
DISCONTINUED OPERATIONS
(Loss)/profit
for the year
from
discontinued
operations 2,3 - (18.0) (18.0) 2.0 (0.6) 1.4
-------- --------- -------- -------- -------- --------
Profit/(loss)
attributable
to equity
holders 9.5 (84.0) (74.5) 15.2 (0.8) 14.4
-------- --------- -------- -------- -------- --------
Earnings per
ordinary share
- basic and
diluted 8 3.0p (23.6p) 4.8p 4.6p
Earnings per
ordinary share
from
continuing
operations
- basic and
diluted 8 3.0p (17.9p) 4.2p 4.2p
Consolidated statement of recognised income and expense
for the year ended 31 December 2006
2006 2005
£m £m
(Loss)/profit for the year (74.5) 14.4
-------- --------
Actuarial gain recognised in the pension schemes 4.1 45.0
Deferred tax charge to equity (1.2) (14.8)
Cash flow hedges 0.8 (0.5)
Recognition of equity component of CULS - 2.5
-------- --------
Net profit recognised directly in equity 3.7 32.2
-------- --------
Total recognised (expense)/ income for the year (70.8) 46.6
-------- --------
Consolidated balance sheet
at 31 December 2006
Note 2006 2005
£m £m
ASSETS
Non-current assets
Goodwill 9 113.5 222.1
Property, plant and equipment 10 18.2 36.0
Deferred tax asset 14.8 16.7
--------- --------
146.5 274.8
--------- --------
Current assets
Inventories 36.1 33.8
Trade and other receivables 42.6 56.2
Cash and cash equivalents 8.7 28.0
Short-term bank deposit 11 2.5 5.0
Derivative financial instruments 13 0.3 -
--------- --------
90.2 123.0
--------- --------
Non-current assets classified as held for sale 5 76.7 -
--------- --------
Total assets 313.4 397.8
--------- --------
EQUITY
Capital and reserves attributable to the Company's
equity holders
Share capital 14 7.9 7.8
Share premium 14 60.2 59.0
Merger reserve 173.4 173.4
Equity reserve 2.5 2.5
Other reserve 14 3.2 5.3
Hedging reserve 14 0.3 (0.5)
Retained earnings 14 (202.0) (125.1)
--------- --------
Total equity 45.5 122.4
--------- --------
LIABILITIES
Non-current liabilities
Borrowings 149.3 149.1
Convertible unsecured loan stock 12 - 22.2
Derivative financial instruments 13 - 0.5
Other financial liabilities 1.1 0.8
Retirement benefit obligation 16 46.7 53.0
--------- --------
197.1 225.6
--------- --------
Current liabilities
Trade and other payables 35.6 36.5
Convertible unsecured loan stock 12 22.5 -
Current tax liabilities 1.5 10.0
Provisions 1.4 3.3
--------- --------
61.0 49.8
--------- --------
Liabilities directly associated with total assets
classified as held for sale 5 9.8 -
Total liabilities 267.9 275.4
--------- --------
Total equity and liabilities 313.4 397.8
--------- --------
Consolidated cash flow statement
for the year ended 31 December 2006
Note 2006 2005
£m £m
OPERATING ACTIVITIES
Cash generated by operations 15 11.8 26.7
Taxes paid (4.0) -
Interest paid (10.6) (9.0)
Pension deficit funding - (2.8)
--------- ---------
Net cash (used)/ generated by operating (2.8) 14.9
activities --------- ---------
INVESTING ACTIVITIES
Interest received 0.2 0.3
Disposal of investment - 2.7
Purchase of property, plant and equipment (9.7) (11.2)
--------- ---------
Net cash used by investing activities (9.5) (8.2)
--------- ---------
FINANCING ACTIVITIES
Dividends paid (5.3) (11.6)
Net borrowings drawn 0.2 10.1
Release of cash on deposit 2.5 2.5
Net repayment of loan notes/stock - (0.2)
--------- ---------
Net cash (used)/ generated by financing (2.6) 0.8
activities --------- ---------
Movement in cash and cash equivalents (14.9) 7.5
Net cash and cash equivalents at beginning of 28.0 20.5
year --------- ---------
Net cash and cash equivalents at end of year 16 13.1 28.0
--------- ---------
---------------------------------- -------- --------- ---------
Reconciliation of movement in net debt
for the year ended 31 December 2006
Note 2006 2005
£m £m
Opening net debt (139.1) (134.8)
Movement in cash and cash equivalents in the (14.9) 7.5
year
Increase in debt financing (0.2) (10.1)
IFRS (increase)/ decrease in CULS liability (0.3) 0.6
Movement in loan note liabilities (0.3) 0.2
Net movement in Escrow cash (2.5) (2.5)
--------- ---------
Closing net debt 16 (157.3) (139.1)
--------- ---------
---------------------------------- -------- --------- ---------
Notes to the preliminary announcement
for the year ended 31 December 2006
1. Basis of preparation
The financial information set out in the preliminary announcement does not
constitute the Group's statutory accounts within the meaning of Section 240 of
the Companies Act 1985 and has been extracted from the full accounts for the
years ended 31 December 2006 and 31 December 2005 respectively. The information
for the year ended 31 December 2005 does not constitute statutory accounts as
defined in section 240 of the Companies Act 1985. A copy of the statutory
accounts for that year has been delivered to the Registrar of Companies. The
auditors' report on the financial statements was unqualified and did not include
a statement under section 237(2) or (3) of the Companies Act 1985. The statutory
financial statements for the year ended 31 December 2006 have yet to be signed.
They will be finalised on the basis of the financial information presented by
the directors in this preliminary announcement and will be delivered to the
Registrar of Companies in due course. The accounting policies adopted in the
preparation of the preliminary announcement are consistent with those applied in
the preparation of the Group's statutory accounts for the year ended 31 December
2005.
2. Business segments
For management purposes the Group is currently organised into four operating
divisions - Television, Radio, Cinema and Outdoor.
These divisions are the basis on which the Group reports its primary segment
information.
Principal activities are as follows:
Television - the production and broadcasting of television programmes and
associated enterprises.
Radio - the operation of commercial radio in the UK.
Cinema - the provision of advertising space within cinema complexes.
Outdoor - the provision of advertising solutions across various outdoor media.
On 13 September 2006, the Group put its Outdoor and Cinema businesses up for
sale. The disposal groups meet all the conditions to be classified as held for
sale and are therefore classed as discontinued operations.
Segment information about these businesses is presented as follows:
SEGMENT REVENUES
External sales
2006 2005
£m £m
Continuing operations
Television 125.6 137.0
Radio 21.7 22.4
-------- --------
147.3 159.4
-------- --------
Discontinued operations
Outdoor 23.3 20.7
Cinema 20.6 29.9
-------- --------
43.9 50.6
-------- --------
-------- --------
191.2 210.0
-------- --------
Independent Television Commission ('ITC') qualifying revenue was £97.0m (2005:
£109.0m)
Turnover in 2006 includes £2.2m of revenues from sources outside the UK (2005:
£2.1m).
SEGMENT RESULTS
Underlying Exceptional Segment result
segment result items
2006 2005 2006 2005 2006 2005
£m £m £m £m £m £m
Continuing
operations
Television 15.8 24.1 (6.9) (2.7) 8.9 21.4
Radio 2.3 4.9 (59.6) - (57.3) 4.9
-------- -------- -------- -------- -------- --------
18.1 29.0 (66.5) (2.7) (48.4) 26.3
-------- -------- -------- -------- -------- --------
Reorganisation costs
attributable to Group (2.2) -
-------- --------
Operating
(loss)/profit (50.6) 26.3
Gain on disposal of
investment 0.4 2.3
Loss on disposal of
property (0.4) -
Financing (8.4) (11.2)
-------- --------
(Loss)/profit before tax (59.0) 17.4
Tax
credit/(charge) 2.5 (4.4)
-------- --------
(Loss)/profit
for the year from
continuing operations (56.5) 13.0
-------- --------
Discontinued
operations
Outdoor 4.5 3.0 - (0.4) 4.5 2.6
Cinema (4.2) (0.8) (18.0) (0.4) (22.2) (1.2)
-------- -------- -------- -------- -------- --------
0.3 2.2 (18.0) (0.8) (17.7) 1.4
Tax
(charge)/credit (0.3) (0.2) - 0.2 (0.3) -
-------- -------- -------- -------- -------- --------
Profit/(loss)
for the year
from discontinued - 2.0 (18.0) (0.6) (18.0) 1.4
operations -------- -------- -------- -------- -------- --------
Net
(loss)/profit
attributable
to equity
shareholders (74.5) 14.4
-------- --------
Operating profit in 2006 includes £1.3m arising outside the UK (2005: £1.1m).
Note
In 2006, the exceptional items in Television division relate to £6.5m for stock
writedown and £0.4m of reorganisation provision (2005: £2.7m relates to
reorganisation provision) and in Radio division the exceptional items relate to
the Ofcom settlement of £0.8m and goodwill impairment of £58.8m.
The exceptional items in Outdoor and Cinema division in 2005 relate to
reorganisation provisions.
3. Exceptional items
i) Reorganisation costs
In July 2006 the Group initiated a further restructure following the move of stv
to new premises in Pacific Quay, Glasgow. In December 2006, the Group also
announced plans to restructure the corporate function in light of the
announcement of the sale of both the Outdoor and Cinema businesses in September
2006. Both decisions culminate in a reduction in headcount within the
organisation, resulting in the creation of a provision for exceptional costs of
£2.6m.
In December 2005, the Group announced plans to reorganise the Television
business in light of reduced Public Service Broadcasting licence requirements
and the impact of new technology which will arise from the move of stv to new
premises in Pacific Quay, Glasgow. In the same month, the Group committed to a
reorganisation of the structure of the Out of Home division, resulting in the
creation of separate Outdoor and Cinema divisions. Both decisions culminated in
a reduction in headcount within the organisation, resulting in the creation of a
provision for exceptional costs of £3.5m.
ii) Writedown of stock
A stock writedown of £6.5m has been provided during the year. £5.4m relates to
network stock that has not been transmitted and will not be transmitted on ITV1
in the future. £0.8m relates to regional drama stock following Ofcom's decision
to reduce the future annual commitment for regional transmission. The remaining
£0.3m relates to a writedown of deficit funded stock following a review of the
future sales prospects for the deficit funded material.
iii) Ofcom settlement
In previous years the Group believed that £0.8m of analogue licence fees had
been overpaid to Ofcom. During the year the Group decided to write this amount
off following a decision to accept the revised analogue licence terms.
iv) Goodwill impairment
Goodwill impairment losses of £76.8m have been recognised in the year in
accordance with IAS36 on the carrying value of Virgin Radio (£58.8m) and Pearl
and Dean (£18.0m). These writedowns are due to the weaker trading performance
experienced in both businesses in 2006.
v) Gain on disposal of investment
On 20 October 2005, the Group announced the sale of its 19.9% stake in Heart of
Midlothian plc ('Hearts') to Heart of Midlothian 2005 Limited, a company wholly
owned by UAB Ukio Banko Investicine Grupe ('UBIG') at a consideration of £0.9m,
or 35p per share. The Group also entered into an agreement for the disposal of
its entire holding of convertible loan stock in Hearts to UBIG for a
consideration of £1.8m plus accrued interest. The disposal resulted in a net
gain of £2.3m to the Group after disposal costs of £0.4m.
In 2006, the write back of a provision for legal and professional fees relating
to the sale resulted in a net gain of £0.4m.
vi) Loss on disposal of property
In 2004, the Group disposed of its property at Cowcaddens, Glasgow. In line with
the sale agreement an additional amount of £0.8m was receivable when planning
consent was given for the site. This amount was received during the year and has
been offset by a writedown of tangible fixed assets of £1.2m resulting in a net
loss on disposal of £0.4m.
4. Finance costs
2006 2005
£m £m
Interest expense:
Bank borrowings 9.8 9.3
CULS and loan note interest 1.5 1.7
---------- ----------
11.3 11.0
Pension finance (credit)/ cost (2.7) 0.8
---------- ----------
Finance costs 8.6 11.8
---------- ----------
5. Discontinued operations
2006 2005
£m £m
Post tax results from discontinued operations (18.0) 1.4
---------- ----------
Cash flows from discontinued operations
Net cash flows from operating activities 3.3 2.5
Net cash flows from investing activities (2.0) (5.0)
---------- ----------
1.3 (2.5)
---------- ----------
The major classes of assets and liabilities comprising the operations classified
as held for sale are as follows:
2006
£m
Goodwill 32.4
Property, plant and equipment 20.4
Inventories 0.2
Trade and other receivables 19.3
Cash and cash equivalents 4.4
-----------
Total assets classified as held for sale 76.7
-----------
Trade and other payables 8.3
Tax liabilities 1.5
-----------
Total liabilities associated with assets classified as held for 9.8
sale -----------
Net assets of disposal group 66.9
-----------
6. Tax
2006 2005
£m £m
The (credit)/charge for tax on continuing operations is as
follows:
Tax on profit on ordinary activities excluding exceptional
items at 3% (2005: 26%) 0.2 4.6
Tax effect of exceptional items (2.7) (0.2)
--------- ---------
(2.5) 4.4
--------- ---------
The effective tax rate for the Group excluding exceptional items is 5% (2005:
23%). The tax charge is lower than the standard rate of 30% due to adjustments
for prior year provisions and certain tax planning initiatives.
7. Dividends
2006 2005
£m £m
Amounts recognised as distributions to equity holders in
the period:
Final dividend for the year ended 31 December 2004 of - 4.7
1.5p
Interim dividend for the year ended 31 December 2005 of - 3.8
1.2p
Final dividend for the year ended 31 December 2005 of 5.3 -
1.7p ----------- ---------
5.3 8.5
----------- ---------
The proposed interim dividend of 1.2p per share to be paid on 19 January 2007
was approved by the Board on 8 September 2006 and has not been included as a
liability as at 31 December 2006.
8. Earnings per share
Earnings 2006 Per share Earnings 2005 Per share
£m Weighted Pence £m Weighted Pence
average number average number
of shares (m) of shares (m)
Basic underlying EPS
Earnings
attributable
to ordinary
shareholders 9.5 315.3 3.0p 15.2 314.5 4.8p
------- -------- ------- ------- -------- --------
Earnings per share
from continuing
operations
Basic EPS 9.5 315.3 3.0p 15.2 314.5 4.8p
Pre tax
(profit)
from
discontinued
operations (0.3) (0.1p) (2.2) (0.7p)
Tax relating
to
discontinued
operations 0.3 0.1p 0.2 0.1p
------- -------- ------- ------- -------- --------
Basic
underlying
EPS
from
continuing 9.5 315.3 3.0p 13.2 314.5 4.2p
operations ------- -------- ------- ------- -------- --------
Basic EPS
Earnings
attributable
to ordinary
shareholders
(including
exceptional
items) (74.5) 315.3 (23.6p) 14.4 314.5 4.6p
------- -------- ------- ------- -------- --------
Earnings per share
from continuing
operations
Basic EPS (74.5) 315.3 (23.6p) 14.4 314.5 4.6p
Pre tax loss
/(profit) from
discontinued
operations 17.7 5.6p (1.4) (0.4p)
Tax relating
to
discontinued
operations 0.3 0.1p - -
------- -------- ------- ------- -------- --------
Basic EPS
from
continuing (56.5) 315.3 (17.9p) 13.0 314.5 4.2p
operations ------- -------- ------- ------- -------- --------
Earnings per share from discontinued
operations
Basic EPS
Pre tax
(loss)/profit
from
discontinued (17.7) 315.3 (5.6p) 1.4 314.5 0.4p
operations
Tax relating
to
discontinued
operations (0.3) (0.1p) - -
------- -------- ------- ------- -------- --------
Basic EPS
from
discontinued (18.0) 315.3 (5.7p) 1.4 314.5 0.4p
operations ------- -------- ------- ------- -------- --------
There is no difference between basic and diluted EPS as there is no material
impact from dilutive share options.
9. Goodwill
£m
Cost
At 1 January 2006 293.0
Recognised on acquisition of a subsidiary 0.6
Classified as held for sale (65.9)
--------
At 31 December 2006 227.7
--------
Accumulated amortisation
At 1 January 2006 70.9
Impairment losses 76.8
Classified as held for sale (33.5)
--------
At 31 December 2006 114.2
--------
Net book amount at 31 December 2006 113.5
--------
Net book amount at 31 December 2005 222.1
--------
Goodwill comprises capitalised goodwill on acquisitions completed since 1
January 1998.
10. Property, plant and equipment
Land and Plant, Total
buildings technical
leasehold equipment
£m and other £m
£m
Cost
At 1 January 2006 0.8 88.0 88.8
Additions 1.7 8.0 9.7
Disposals - (3.7) (3.7)
Classified as held
for sale - (38.7) (38.7)
--------- ---------- ---------
At 31 December 2006 2.5 53.6 56.1
--------- ---------- ---------
Accumulated depreciation and impairment
At 1 January 2006 0.6 52.2 52.8
Charge for year 0.4 5.5 5.9
Disposals - (2.5) (2.5)
Classified as held
for sale - (18.3) (18.3)
--------- ---------- ---------
At 31 December 2006 1.0 36.9 37.9
--------- ---------- ---------
Net book value at 31
December 2006 1.5 16.7 18.2
--------- ---------- ---------
Net book value at 31
December 2005 0.2 35.8 36.0
--------- ---------- ---------
11. Short-term bank deposit
The short-term bank deposit relates to £2.5m placed in Escrow for a further one
year (£10.0m in 2003 reducing by £2.5m each year) in respect of certain of SMG's
pension related indemnity obligations given under the sale and purchase
agreement of the Publishing division disposed of on 4 April 2003.
12. Convertible unsecured loan stock
The CULS as at 31 December 2006 is convertible on 30 April in each of the years
1999 to 2007 inclusive. The CULS are convertible into new SMG plc shares on the
basis of 50.2808 SMG shares per £100 nominal of SMG CULS. The CULS are unsecured
obligations of SMG and bear interest at a rate of 6.5% per annum. An immaterial
amount of CULS was converted during both the current and prior year.
In accordance with the requirements of IAS 39, an adjustment of £0.3m was made
during the year to reflect the debt to equity split of the CULS balance
outstanding. As at 31 December 2006, the outstanding CULS balance was £22.5m
(2005: £22.2m).
13. Derivative financial instruments
The derivative financial asset of £0.3m (2005: liability of £0.5m) has arisen as
a result of an interest rate swap. The notional principal amount of the
outstanding interest rate swap contract at 31 December 2006 was £60.0m. At 31
December 2006 the fixed interest rates are 4.94% (fixed until 2007) and floating
rates are 5.31% (3 month LIBOR). Any net gain or loss deferred in equity will
reverse during the next year, being the life of the swap.
14. Statement of changes in shareholders' equity
Share Capital Share Premium Other Hedging Retained
reserve reserve earnings
£m £m £m £m £m
At 1 January 2006 7.8 59.0 5.3 (0.5) (125.1)
Net loss - - - - (74.5)
Dividends - - - - (5.3)
Shares issued
during the period 0.1 1.0 - - -
Movement in IFRS
2 reserve - 0.2 (2.1) - -
Actuarial gain - - - - 4.1
Deferred tax
thereon - - - - (1.2)
Fair value gain
on interest rate
swaps - - - 0.8 -
-------- -------- --------- -------- ---------
At 31 December
2006 7.9 60.2 3.2 0.3 (202.0)
-------- -------- --------- -------- ---------
There have been no movements in the merger reserve and equity reserve during the
year ended 31 December 2006.
15. Cash flow from operating activities
2006 2005
£m £m
Continuing operations
Operating profit (before exceptional items) 18.1 29.0
Depreciation and other non-cash items 2.2 3.2
--------- --------
Operating cash flows before movements in working capital 20.3 32.2
Increase in inventories (9.0) (8.3)
(Increase)/ decrease in trade and other receivables (5.4) 4.3
Increase/ (decrease) in trade and other payables 6.7 (3.5)
Reorganisation costs (4.1) (0.5)
--------- --------
Cash generated from continuing operations 8.5 24.2
--------- --------
Discontinued operations
Operating profit (before exceptional items) 0.3 2.2
Depreciation and other non-cash items 2.8 3.4
--------- --------
Operating cash flows before movements in working capital 3.1 5.6
Decrease/(increase) in trade and other receivables 0.2 (2.6)
Increase/ (decrease) in trade and other payables 0.4 (0.5)
Reorganisation costs (0.4) -
--------- --------
Cash flow for discontinued operations 3.3 2.5
--------- --------
Cash generated from operations 11.8 26.7
--------- --------
16. Analysis of movements in net debt
At At
1 January 2006 Cash flow 31 December
2006
£m £m £m
Cash and cash equivalents 28.0 (19.3) 8.7
Cash and cash equivalents included in
the disposal groups held for sale (note
5) - 4.4 4.4
---------- --------- ----------
28.0 (14.9) 13.1
Bank borrowings (149.1) (0.2) (149.3)
Short-term deposits 5.0 (2.5) 2.5
Convertible unsecured loan stock (22.2) (0.3) (22.5)
Unsecured loan notes (0.2) - (0.2)
Secured loan notes (0.6) (0.3) (0.9)
---------- --------- ----------
Net debt (139.1) (18.2) (157.3)
---------- --------- ----------
17. Retirement benefit schemes
The Group operates two defined benefit pension schemes. The schemes are trustee
administered and the schemes' assets are held independently of the Group's
finances. Pension costs are assessed in accordance with the advice of an
independent professionally qualified actuary.
The schemes are the Scottish and Grampian Television Retirement Benefit Scheme
and the Caledonian Publishing Pension Scheme. They are closed schemes and
therefore under the projected unit method the current service cost will increase
as the members of the scheme approach retirement.
A full actuarial valuation of the schemes was carried out at 1 January 2006 and
updated to 31 December 2006 by a qualified independent actuary. The major
assumptions used by the actuary were:
At 31 December At 31 December
2006 2005
Rate of increase in salaries 3.30% 3.25%
Rate of increase of pensions in payment 2.80% 2.75%
Discount rate 5.10% 4.80%
Inflation 2.80% 2.75%
Assumptions regarding future mortality experience are set based on advice,
published statistics and experience in each territory.
The average life expectancy in years of a pensioner retiring at age 65 on the
balance sheet date is as follows:
At 31 December At 31 December
2006 2005
Years Years
Male 15.0 15.0
Female 17.9 17.9
The fair value of the assets in the schemes, the present value of the
liabilities in the schemes and the expected rate of return at each balance sheet
date was:
At 31 December At 31 December
2006 2005
£m £m
Equities 8.4% 145.9 8.0% 146.2
Bonds 4.6%- 5.2% 114.7 4.1% - 4.9% 109.6
------ ------
Fair value of schemes' assets 260.6 255.8
Present value of defined benefit
obligations (307.3) (308.8)
------ ------
Deficit in the schemes (46.7) (53.0)
------ ------
A related offsetting deferred tax asset of £13.9m is shown under non-current
assets. Therefore the net pension scheme deficit amounts to £32.8m at 31
December 2006 (£36.7m at 31 December 2005).
18. Reconciliation of underlying results
Continuing Discontinued Group
underlying
results
2006 2005 2006 2005 2006 2005
£m £m £m £m £m £m
Turnover 147.3 159.4 43.9 50.6 191.2 210.0
Operating profit 18.1 29.0 0.3 2.2 18.4 31.2
Profit before tax 9.7 17.8 0.3 2.2 10.0 20.0
19. Mailing
A copy of the annual report is being sent to all shareholders on 24 April 2007
and will be available for inspection by members of the public at the Company's
registered office at Pacific Quay, Glasgow, G51 1PQ.
This information is provided by RNS
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