Business News

Bertelsmann Stabilizes Profitability for 2007 at a High Level

Wednesday 19. March 2008 - Operating EBIT 2007 at €1.8 billion Consolidated revenues of €18.8 billion Return on sales of 9.7 percent at the high level of the previous year Group net income negatively impacted by non-recurring items Debt back in the target corridor Considerable profit upturn expected for 2008 Funds available for investments

In 2007, the international media company Bertelsmann stabilized its operating profitability at a high level. Operating EBIT totaled €1,811 million after the record figure of €1,867 million in the previous year. Adjusted for portfolio measures and exchange rate movements, Operating EBIT increased by 3.7 percent. Due to the disposal of the Group’s music publishing operations and the weakness of the U.S. dollar, consolidated revenues declined by 2.8 percent to €18.8 billion (previous year: €19.3 billion). Adjusted for portfolio and exchange rate effects, revenues were at the high level of the previous year. Operating return on sales thus again reached 9.7 percent. However, Group net income was down considerably year-on-year. In 2006, the equivalent figure contained high disposal gains. Due to negative non-recurring items, group net income in the reporting period totaled €405 million compared to €2.5 billion in the previous year.

In 2007, the television business was again a growth driver: With its channels and production, the television, radio and TV production group, the RTL Group, posted a strong rise in revenues and Operating EBIT. The media and communications service provider Arvato, also increased revenues with Operating EBIT reaching the high posted in the previous year. In terms of sales and Operating EBIT, the magazine publisher, Gruner + Jahr was down compared to the previous year due to the weakness in gravure printing business, as was the case with the book publishing group, Random House, where sales and result were strongly impacted by the development of the dollar. After the sale of the music publishing operations, revenues and Operating EBIT in the BMG division declined. In a difficult business environment, BMG increased its operating results adjusted for portfolio effects from €90 million to €93 million. In 2007, Direct Group recorded a considerable decline in the revenues and earnings contribution. It was necessary to take a high impairment loss on the North American club activities.

Hartmut Ostrowski, Chairman and CEO of Bertelsmann AG stated: “Bertelsmann was successful in 2007. After the record results of the previous year, we retained a stable position. We are strong in operating terms and are profitable at a high level. In 2007 we made extensive value corrections and removed risks such as the Napster legal dispute with the relevant expenses in order to prepare the ground for the new strategic alignment on organic growth. It is only on the basis of growth that the value of a company can be increased further on a long term-basis.”

In the course of its new growth strategy, Bertelsmann will focus its funds for investments in strongly growing business. Hartmut Ostrowski describes the resulting consequences for the Direct Group as follows: “We are examining all strategic options, including a possible sale.”

In 2007, consolidated revenues totaled €18.8 billion, a decline of 2.8 percent (previous year: €19.3 billion). Organic growth of 0.4 percent was offset by portfolio effects of -1.4 percent and exchange rate movements of -1.8 percent.

Operating EBIT totaled €1,811 million, 3.0 percent down from the 2006 figure. Adjusted for portfolio and exchange rate effects, Operating EBIT increased against the previous year by 3.7 percent. The return on sales was 9.7 percent, again reaching the record figure of the previous year. Operating free cash flow also achieved a record in 2007.

On the other hand Group net income declined considerably. Non-recurring items of €-854 million and the substantial gains from the disposal of the music publishing operations in the previous year depressed 2007 profits to €405 million, compared to €2,459 million in the previous year. The charges resulted from settlements relating to the legal dispute relating to the former music file sharing platform Napster; from impairments in the North American club activities; in Printing; and at the British TV channel Five, as well as a fine for the RTL advertising time marketing company, IP Deutschland.

In 2007, investments declined by 5.5 percent year-on-year. €1,032 million was expended in 2007 for investments in property, plant and equipment, intangible assets and financial assets including purchase price payments (2006: €1,092 million). Of this figure, €463 million (previous year: €502 million) related to property, plant and equipment, the majority of which was used at Arvato, while a total of €171 million (previous year: €154 million) was invested in intangible assets, primarily for RTL Group.

Debt was further reduced in 2007. At the end of December 2007, debt totaled €6,330 million (2006: €6,760 million). Beginning 2008, Bertelsmann is changing the presentation of its economic debt figures to an external view. According to this extended definition, leasing liabilities are also included in economic debt. In addition pension provisions including actuarial gains and losses are now recognized. As a result of this change, the economic debt posted at December 31, 2007 increased to €7,720 billion (previous year: €8,450 billion).

As part of this change, the target figure for the dynamic leverage factor (calculated as the ratio of economic debt to Operating EBITDA) has also been adjusted. The previous figure of 2.3 increases to 3.0, as leasing obligations are added to the previous figure of 0.7. At the end of 2007, the new combined leverage factor is 3.1, just under the target figure. As a result of changed customer payment behavior, there were above-average inflows from the 2007 year end business in January and February 2008. At the end of February 2008, this resulted in the leverage factor declining to 2.9, within the internally defined target corridor.

Bertelsmann CFO Thomas Rabe: “Bertelsmann reached what we consider an appropriate level of debt. Economic debt is in line with our business profile and our profitability. As of now, we can again reinvest funds generated by operating businesses or as a result of portfolio measures for acquisitions.”

For fiscal year 2007, as was the case in previous years, Bertelsmann will again be making a profit-sharing distribution to all employees in its participation plan.

In June 2008, under the terms and conditions of the profit participation certificates, 15 percent of the notional amount of the 2001 profit participation certificate will again be paid out. The distribution on the “old” profit participation certificates from 1992 will be 5.45 percent (previous year: 12.69 percent).

Despite general conditions which are becoming more difficult globally, the Bertelsmann AG Executive Board is confident about the way forward: In comparison to 2007, uncertainty about the development of the global economy has increased, particularly in the U.S. For 2008, Bertelsmann expects a moderate upturn in revenues. The operating result will be at or slightly above the high level achieved in 2007. In 2008, the Group net income will move up considerably, with non-recurring effects no longer applying.

Further key figures:

In 2007, non-recurring items totaled €-854 million after €1,161 million in the previous year. The high level of positive special items in the previous year was primarily due to disposal gains totaling €1,410 million. At €250 million, disposal gains were substantially lower in 2007. Of this figure, €99 million resulted from the disposal of the RTL Group’s interests in Grupo Media Capital and Sportfive. The newly formed joint venture between the RTL Group and John de Mol in the Netherlands resulted in a share swap gain of €134 million.

The effect of these transactions in 2007 was offset by restructuring and integration expenses totaling €-214 million (previous year: €-68 million). These expenses were composed of €123 million for Direct Group, €30 million for BMG and €61 million for Prinovis, a gravure printing joint venture operated by Arvato, Gruner + Jahr and Axel Springer AG.

Non-recurring items also included expenses for the out-of-court settlement of the legal proceedings initiated against Bertelsmann by EMI and various U.S. music publishers (by way of a class action) in the U.S. in spring 2003 due to Bertelsmann’s financing of the music file-sharing platform Napster. Bertelsmann also succeeded in reaching a settlement with Warner Music, which had initiated out-of-court proceedings for alleged claims concerning Bertelsmann’s financing of Napster. These settlements totaled €245 million. Non-recurring items also included expenses for the payment of a fine in the amount of €96 million. This was imposed by the German Federal Antitrust Office on the advertising time marketing company and RTL Group subsidiary, IP Deutschland.

Impairments were also recognized by Direct Group (€-291 million) taken on the North American club activities of Bertelsmann Direct North America. Impairments were also taken at the RTL Group for Five in the U.K. (€-123 million), at Prinovis (€-70 million) and at Arvato (€-39 million).

Cash flow from operating activities totaled €1,463 million million compared to €1,712 million in the previous year. This decline was largely due to the payments for the settlement of the legal disputes with music publishers. The sustained operating free cash flow adjusted for non-recurring items increased to €1,714 million compared to €1,587 million in the previous year. The cash conversion rate increased from 85 percent in the previous year to 95 percent.

Total assets declined slightly by €0.7 billion year on year to €21.8 billion. Shareholders’ equity increased by €0.1 billion to €6.1 billion. The equity ratio was thus 28.1 percent (2006: 26.7 percent).

At year-end, the Bertelsmann Group had a total of 102,397 employees worldwide (previous year: 97,132). The increase of 5,265 employees may be attributed to organic growth as well as acquisitions and other factors.

Divisions

RTL Group, the television, radio and TV production group, increased both revenues and operating profit in 2007. The return on sales increased significantly to 17.1 percent (previous year: 14.8 percent). Revenues amounted to €5.7 billion, up 1.2 percent on the previous year (€5.6 billion), despite the sale of the interest in the French pay TV channel TPS. This improvement is primarily due to the increase in advertising revenues in RTL Group’s core European markets. RTL Group’s Operating EBIT increased by 17.1 percent to €978 million in 2007 (previous year: €835 million). The main earnings driver was the family of channels clustered around RTL Television, which was renamed Mediengruppe RTL Deutschland. The number of employees at year-end increased slightly to 11,392 (December 31, 2006: 11,307). In 2007, RTL Group continued to pursue its three-pillar strategy of expanding its channel families, further diversifying its revenue sources and expanding into high-growth regions. The RTL Group’s channels systematically focused on using all available distribution methods and platforms: in addition to analog and a growing number of digital TV channels, this includes online services, video on demand (VoD), and Internet and mobile TV. New channels were launched in the Netherlands and Russia. In late 2007, the Fremantle Media production company announced the launch of a cinema production subsidiary in Germany (“Ufa Cinema”). In 2007, RTL Group disposed of its stake in the Portuguese company Media Capital for €209 million. In the Netherlands, it acquired Radio 538, the leading national radio channel, as well as TV sports broadcasting rights, shows and series from John de Mol’s Talpa Media Holding, in exchange for which Talpa Media received a minority interest in RTL Nederland. RTL Group also entered the Russian cable and satellite TV market with the launch of a joint venture. In the interests of rapid settlement and to ensure planability, IP Deutschland accepted a fine of €96 million that was imposed as part of an investigation by the German Federal Antitrust Office into the leading German marketing companies for TV advertising time. Mediengruppe RTL Deutschland recorded significant earnings growth in 2007, with RTL Television and Vox enjoying increased market share among their 14- to 49-year-old target group in particular, thereby expanding their lead over the competition. In France, the M6 family of channels lost viewer share as a result of the growing fragmentation of the market, but increased its revenues and operating profit on a like-for-like basis.

The leading global trade book publisher Random House recorded lower revenues and operating profit in 2007 than in the previous year. The return on sales improved to 9.4 percent (previous year: 9.3 percent). The weak U.S. dollar and a slowdown in consumer spending in North America adversely affected revenues, which amounted to €1.8 billion, down 5.6 percent on the previous year (€1.9 billion). Due to the weak dollar, Operating EBIT declined by 4.9 percent to €173 million (previous year: €182 million). The number of employees decreased slightly to 5,764 at year-end (December 31, 2006: 5,804). In the U.S., Random House published a record 230 New York Times bestsellers, including “Playing for Pizza” by John Grisham; “On Chesil Beach” by Ian McEwan; “Clapton” by Eric Clapton; “Giving” by Bill Clinton and Suze Orman’s “Women & Money”. Among other major bestsellers were the movie tie-in editions of “No Country for Old Men” by Cormac McCarthy, Robert Ludlum’s “The Bourne Ultimatum”; “The Golden Compass” by Philip Pullman and Ian McEwan’s “Atonement.” The Grammy-winning audio edition of “Harry Potter and the Deathly Hallows” by J. K. Rowling became the fastest-selling audiobook of all time. In the U.K., Random House Group U.K. outperformed all other publishers in the Sunday Times bestseller lists, accounting for nearly one-third of the year’s overall rankings. “Nigella Express” by Nigella Lawson has sold over one million copies in its hardcover edition. The Group acquired a majority stake in Virgin Books and established several new publishing ventures, such as Transworld Ireland, which is dedicated to Irish authors. In Germany, Verlagsgruppe Random House recorded significant growth in revenues and earnings, which were driven by the success of bestsellers by authors such as Leonie Swann, Dieter Hildebrandt and Eva-Maria Zurhorst, as well as its paperback program and its self-help and religion publishing. In Spain, “La Catedral del Mar” by Ildefonso Falcones, published by Random House Mondadori, continued to enjoy excellent sales. Random House expanded its online marketing capabilities in 2007, launching digital platforms with book-content search-and-browsing capabilities in the U.S., Canada, and Germany. Random House authors won many prestigious awards around the world in 2007: Doris Lessing, published by Random House in Germany and Spain, won the Nobel Prize for Literature, and Al Gore, who publishes with Random House in Germany, Japan, and Korea, received the Nobel Peace Prize. Four Random House, Inc. titles won Pulitzer Prizes, a record for a single year.

The magazine publisher Gruner + Jahr recorded a slight year-on-year decline in revenues in 2007, with Operating EBIT also falling slightly. The return on sales amounted to 9.3 percent (previous year: 9.7 percent). Revenues in the period under review totaled €2.8 billion, down 1.0 percent on the previous year (€2.9 billion), while the division’s operating profit amounted to €264 million, 4.7 percent lower than in 2006 (€277 million). Gruner + Jahr’s branding and magazine activities were particularly successful in the past fiscal year, with G+J Germany and G+J International generating record results and G+J France also enjoying a strong earnings performance. By contrast, the proportionate consolidated earnings of the gravure joint venture Prinovis, which was affected by start-up losses and margin erosion as a result of overcapacity had a negative impact. G+J also increased its publishing investments, which increasingly focused on projects forming part of the “Expand Your Brand” strategic initiative that was launched in 2006. The aim of this campaign is to encourage innovations relating to G+J’s established media brands and their expansion into various media channels. Due to portfolio adjustments, the number of employees at year-end fell marginally to 14,448 (December 31, 2006: 14,529). In the current year, Gruner + Jahr focused on the further development of its “Expand Your Brand” activities and the reinforcement of its market position in its core business areas. Multimedia activities in particular were stepped up, with “Stern.de”, “Brigitte.de” and “Gala.de” in Germany expanding their reach as a result of improved content and the integration of new services, such as audio and full-video features. In France, G+J acquired the travel portal “Monvoyageur.com”, while “Mywoman.at” was launched in Austria. An innovative magazine format was introduced to the German market in 2007 in the shape of the quarterly “Ebay-Magazin.” In France, the G+J subsidiary Prisma Presse recorded stable business development at a high level in 2007, with magazines such as “Femme Actuelle” and “Gala” helping it to defend its market leadership successfully. The French TV magazines also developed positively. The women’s magazine “Jasmin” – which was jointly launched in 2006 by G+J and the publisher Axel Ganz – was discontinued, while in Germany, “Woman” magazine was taken from the market. The division increased its operating profit in Spain on the back of the intensified cooperation with Motor Presse, among other things. In China, the performance of the equity interest in Boda, the country’s second-largest magazine publisher, exceeded expectations.

The BMG division, which largely consists of the 50 percent interest in the Sony BMG Music Entertainment joint venture following the sale of its music publishing operations in late 2006, recorded lower revenues and operating profit in 2007 than in the previous year. However, earnings increased slightly on a like-for-like basis. The return on sales amounted to 6.4 percent (previous year: 8.6 percent). In the period under review, revenues declined by 27.8 percent to €1.5 billion (previous year: €2.0 billion), primarily as a result of the sale of the BMG Music Publishing unit. BMG‘s revenue development was dominated by the sharp decline in the market for physical media (-17 percent), which was only partially offset by growth in digital formats (+40 percent). BMG’s Operating EBIT fell by 46.2 percent to €93 million (previous year: €173 million). Adjusted for the earnings attributable to BMG Music Publishing in the previous year (€83 million), however, earnings increased slightly. Sony BMG’s lower product sales was more than offset by cost reductions in the areas of marketing, sales and administration. The adjusted number of employees fell to 2,851 at year-end (December 31, 2006: 3,009). Sony BMG its activities in response to the accelerated decline in the market in fiscal year 2007, evolving into a music-based entertainment company through increased investments in related areas such as concert promotion and production, artist management, TV production and merchandising. In 2007, Sony BMG entered into a number of 360-degree agreements, which allow it to participate in all of the revenues generated by an artist above and beyond recorded music sales. Sony BMG also intensified its digital activities and set new trends with its innovative business models, enabling it to record growth of 35 percent in the period under review. The rapid expansion of its digital offerings and the use of a wide range of additional digital distribution channels allowed the company to partially offset the decline in physical sales. Digital sales accounted for 17 percent of total revenues (previous year: 12 percent).

The media and communications service provider Arvato increased its revenues in fiscal year 2007, while its operating profit remained stable at a high level. The return on sales amounted to 7.4 percent (previous year: 7.7 percent). Revenues increased by 2.8 percent to €4.9 billion in the year under review (previous year: €4.8 billion), primarily on the back of organic growth. Operating EBIT remained essentially unchanged year on year at €366 million (previous year: €367 million). The number of employees worldwide rose to 51,846 at year-end (December 31, 2006: 46,584). The service activities bundled within Arvato Services enjoyed profitable growth. This was driven in particular by the ongoing trend towards outsourcing. Arvato Services strengthened its market position in Europe through the acquisition of service center locations from Deutsche Telekom and the French mobile communications company SFR, among other things. The “Würzburg integriert!” project in 2007 also saw the start of the first cooperation between Arvato and the public authorities in Germany. In the United Kingdom, the division entered the loyalty services market with the acquisition of the Moonriver Group. Arvato Infoscore (data, information and receivables management) increased its revenues and earnings in the period under review. The Arvato Print unit recorded slightly lower earnings in 2007 on the back of a high level of competitive pressure and largely stable revenues. The unit continued to expand its value chain and reinforce its market position. The Mohn Media Group, which is primarily active in the area of offset printing, sustainably expanded its activities in the past fiscal year. At the gravure company Prinovis, which is operated by G+J and Axel Springer AG as a joint venture, earnings fell as a result of the start-up losses for the Liverpool site and the difficult market conditions throughout 2007. The division’s storage media operations were restructured and assigned to Arvato Digital Services. By bundling the former Arvato Storage Media Group and parts of the division’s service activities, an integrated full-service provider for digital content was created. All in all, storage media was able to maintain its position in a difficult market environment. The IT service provider Arvato Systems recorded revenue and earnings growth in its core business areas. Revenues fell at Arvato Mobile on the back of lower ringtone sales and portfolio streamlining measures. The direct sales company Inmediaone again reported record sales.

Direct Group, which operates book, DVD and music clubs, bookstores and online shops, reported lower revenues and a significant reduction in its operating profit in 2007 compared with the previous year. The return on sales amounted to 0.4 percent (previous year: 4.1 percent). Revenues amounted to €2.6 billion, down 4.1 percent in the previous year (€2.7 billion). This development was due to the negative development of the U.S. dollar and a significant fall in sales of physical media and membership figures, particularly in the U.S. The acquisition of the remaining 50 percent of the shares of the U.S. book club Bookspan from the former joint venture partner Time Warner was not sufficient to offset these effects. Operating EBIT fell by 90.9 percent to €10 million (previous year: €110 million). This, too, was primarily driven by the weak performance of the division’s U.S. operations. Music, DVD and book club membership declined significantly, while the level of revenues per member also fell. Extensive write-downs were recognized at Bertelsmann Direct North America in the period under review. Some clubs outside the U.S. and the bookstore chains also recorded lower profits in the year under review. The number of employees rose to 15,109 at year-end (December 31, 2006: 14,996). In Germany, Der Club again recorded a profit in 2007. The club activities of France Loisirs and Circulo de Lectores in Spain also remained profitable. Following the integration of the bookstore chain Bertrand, which was acquired in 2006, Direct Group now covers the entire value chain in Portugal, from publishing and distribution through to sales via book clubs, the Internet and stationary outlets. The establishment of a bookstore chain in Spain under the same name began in 2007. Club activities in Ukraine continued to enjoy dynamic growth. In late 2007, the Executive Board and Supervisory Board of Bertelsmann AG resolved to reorganize the direct-to-customer activities bundled within Direct Group. As the new CEO, Fernando Carro assumed operational responsibility for the activities in Europe in particular. The music and DVD clubs of BMG Columbia House and Bookspan, the book club which was fully acquired in the year under review, have since reported directly to Peter Olson, CEO of Random House and a member of the Executive Board of Bertelsmann AG, under the name Bertelsmann Direct North America. The Chinese book club and the related bookstore chain were also reassigned to Arvato.