The last year has been our best yet in financial terms, despite an adverse economic environment in many territories and market segments. Against this backdrop we have delivered record revenues and profits, and increased operating margins. This is testament to a portfolio of businesses that is diverse both in terms of geography and format, and which has enabled us to manage the impact of recession on our operating and financial performance.
Over the last 12 months we have worked hard to maximise our commercial returns; consolidate our successes in new areas of business, after a period of significant investment for growth; and keep costs under control. This focus has stood us in good stead, particularly in the face of extremely tough market conditions and has enabled us to deliver both strong revenue and profit growth.
A very strong operating performance, discussed below, along with improved capital efficiency and the organic generation of additional liquidity, enabled us to deliver a healthy dividend to the BBC. Dividends and programming investment, which together form the majority of our cash return to the BBC, remained almost unchanged year on year at £151.1m (£152.6m 2008/09). We were also able to repay a significant part of our loan from BBC Commercial Holdings Ltd.
Sales Growth £m
Profit Growth £m
For the year just ended, and in line with best practice, we have adopted International Financial Reporting Standards, as adopted by the European Union (IFRS), as the basis for the preparation of our consolidated financial results, and have also provided full prior year comparatives. Throughout this Review, all results are extracted from BBC Worldwide's financial statements and are presented consistently under IFRS, unless otherwise stated.
|*Sales include the Group's share of joint-venture sales|
Sales of £1074.2m were up 7.0% despite intense recessionary pressures in several markets. We delivered particularly strong revenue growth in the Channels business, helped by a focus on expanding the global distribution of existing channels and new launches in the previous year, notably in Africa, Australia, Scandinavia and Latin America. In Global Brands, Lonely Planet delivered a particularly healthy year, and Content & Production saw robust performances from Dancing with the Stars, Baby Borrowers, Great American Road Trip and What Not To Wear. With the exception of Magazines, which held revenue almost flat in an exceptionally difficult UK advertising market, every one of our businesses delivered growth.
|Operating Profit* £m||Operating Margin* %|
|*Operating profit is presented before exceptional
items under UK GAAP as previously applied by the Group, and before
specific items under IFRS
|*Operating margin is presented before exceptional
items under UK GAAP as previously applied by the Group, and before
specific items under IFRS
Operating profit before specific items grew significantly, up 36.5% at £145.2m. This reflected an excellent profit out-turn in: Sales & Distribution, in part due to a focus on generating more higher margin sales from the back catalogue as well as diligent cost control; Channels, as our international portfolio moved firmly out of the start-up phase; and in Home Entertainment where we took full control of 2 entertain in August 2009. We also achieved sharply reduced operating losses in Digital Media and the path to profitability is now clearly visible. In Content & Production, the strong performance in our formats business was partially offset by the development costs of our scripted business in Los Angeles.
A close focus on operating costs and revenue growth ahead of cost inflation resulted in an improvement in operating margins, as targeted in last year's review. Operating margins grew from 10.6% to 13.5%, ahead of the 12.8% (under UK GAAP) recorded in 2007/08.
Operating profit of £145.2m (£106.4m 2008/09) is stated before specific items to provide a comparable measure of year-on-year performance. One of the key disclosures under specific items is the movement in the fair valuation of our derivative financial instruments. Having adopted IFRS, derivative fair value movements have been recorded in the income statement. As a result of the significant volatility in exchange rates during the course of 2008/09 and 2009/10 there have been correspondingly large fluctuations in the fair value of these financial instruments, resulting in a £19.8m gain recognised in 2009/10 (loss of £(27.3)m 2008/09).
A further consequence of the transition to IFRS is that we are required to take an impairment charge of £17.5m against the value of our majority shareholding in Lonely Planet. This was entirely caused by the appreciation of the Australian dollar, the functional currency for Lonely Planet, which was 25.9% stronger against sterling at year end than at the same point in 2009. This is a non-cash charge against statutory profits, and is unrelated to Lonely Planet's trading performance, which was strongly ahead of prior year in both revenue and operating profit in local currency, and as such it is a technical impairment. It has also broadly been offset by the overall benefit to company profits in the year resulting from the translation of overseas earnings into sterling, which reflects the advantages of our geographically diverse business.
Full details of all other specific items are detailed in the table in Further Financial Information.
Both revenue and operating profit benefited from the weakness of sterling, with average sterling exchange rates down 6.6% against the US dollar, 5.6% against the euro, and 13.5% against the Australian dollar. The consequent strength of our overseas earnings helped to mitigate the effect of the weak UK economy on the results of the businesses in our home market.
UKTV, our UK channel joint venture owned 50:50 with Virgin Media, performed well given the condition of the television advertising market, with a profit contribution that was stable on prior year.
We also received our first full-year dividend of £5.0m from Animal Planet Europe, our joint venture with Discovery Communications Inc.
In March 2010 we acquired the remaining 40% of the equity in the 2 entertain DVD-distribution business, previously owned by Woolworths Group plc. The purchase price of £17.0m represented fair value as agreed between BBC Worldwide and the administrators of Woolworths, following the insolvency of Woolworths and the subsequent exercise by BBC Worldwide of its right to acquire the outstanding shares in 2 entertain. This investment has protected core BBC intellectual property and preserved the 2 entertain franchise for the licence-fee payer. 2 entertain continued to perform very well throughout the year, despite weak high-street conditions in the UK.
In 2007 we began a programme of investment in certain initiatives that would support our growth strategy. Investment levels peaked in 2008/09, when we launched a total of 15 BBC-branded channels, but we continued to invest actively during the last financial year, particularly in digital content and delivery.
Investment in new programming is always at the heart of our business and is the seed-corn for future years' growth and profitability. A total of £83.4m was invested in programmes in the year. The traditional funding model for programming has been severely challenged by recent economic circumstances. In response, we have developed a range of creative solutions with both the BBC and independents to ensure great ideas were greenlit. For example, we concluded a large investment in a package of upcoming BBC Natural History and Science titles, with Discovery as our co-production partner, including Great Barrier Reef and Africa, as well as a major investment in Universal, the follow up to this year's successful Wonders of the Solar System. We also worked with our domestic and international co-production partners to secure locally available production incentives to help finance new, independently produced content, such as Nativity, filmed in Morocco and post-produced in Canada for Red Planet.
Profit after interest and tax of £92.2m was sharply up on prior year of £22.5m. A tax charge including share of joint ventures and associates tax of £41.5m reflects an effective tax rate of 31.1% (51.5% in 2008/09). This is above the statutory UK rate of corporation tax of 28% because of the mix of profits taxed under overseas jurisdictions with higher effective rates of tax, and disallowable expenses, including the goodwill impairment referred to above. See the Further Financial Information for more information.
Strong operating cash flows reflected our increased profitability, a changing business mix and a lower rate of business and programming investment. This allowed us to pay a total of £32.1m in dividends to the BBC in the year, with a further £41.5m in June 2010 in respect of the year's performance, as well as repay some £86.4m of borrowings from BBC Commercial Holdings Ltd.
At the end of March this year, we held a £168.0m (£168.0m 2008/09) unsecured loan facility with our intermediate parent company, BBC Commercial Holdings Ltd, plus an additional loan of £50.0m (£50.0m 2008/09) with the European Investment Bank. At the end of the year, £134.1m of these facilities had been drawn (£208.4m 2008/09). At 31 March 2010 we held £23.3m in cash or cash equivalents (£55.9m 2008/09). Full details of our borrowing facilities are contained within Further Financial Information.
We are not alone in expecting the economic situation to remain uncertain, particularly in developed markets. We will therefore continue to manage our businesses for stable growth and returns, and seek to improve operating margins through a focus on higher-margin business and continued tight control of costs. We will continue to invest, particularly in digital and international opportunities, to ensure that our business remains able to deliver healthy returns and strong cash flows back to our shareholder, the BBC.
Chief Financial Officer
[Post signature of the BBC Worldwide Accounts 2009/10, Neil Chugani stepped down as Chief Financial Officer and as an Executive Director of the company with effect from 17 June 2010. Philip Vincent, who was Deputy Chief Financial Officer, was appointed Acting Chief Financial Officer on the same day.]