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review of balance sheet, income statement and financial position

Income Statement

The Parent Company Income Statement for 2011 recorded a net profit of 39.3 million euros, against a loss of 128.5 million euros in 2010.

Following the merger by incorporation of the subsidiary Rai Trade into Rai, which took place during the year, backdating the accounting effects to 1 January 2011, in order to ensure a fair comparison of this year’s results with those of last year, an Income Statement and a Balance Sheet resulting from the consolidation of the two companies, as highlighted by the reclassified statements presented at the side, have been drawn up for reference.

The result for 2011 shows an improvement of 167.4 million euros compared to 2010, which closed with a loss of 128.1 million euros.

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

Revenues from sales and services

Revenues from sales and services consist of licence fees, advertising revenues and other commercial revenues.

They totalled 2,824.8 million euros, down 33.9 million euros (-1.2%) on 2010.

Licence fees (1,708.4 million euros). These include licence fees for the current year as well as those for previous years, collected through coercive payment following legal registration.
They also include accounts, albeit for a residual amount, receivable from the Ministry of the Economy and Finance for unpaid licence fees relating to subscribers exempted from payment.
The overall increase (+1.4%) refers to the increase in the per-unit licence fee from 109.00 euros to 110.50 euros (+1.4%). Worth noting is the increase in the number of paying subscribers (+0.2%) and the drop in new subscribers (-3.1%), returned to the levels of 2009.



Once again in 2011 the licence fee paid in Italy continues to be one of the lowest in Europe.
By way of example, the table shows the annual licence fee, in euros, in force in the most important European countries.

Advertising revenues.
In a setting characterised by the deceleration of the economy and a drop in consumptions, advertising revenues in 2011 also showed evident signs of difficulty.

Overall, the trend in advertising revenues in 2011 must be interpreted not only in the light of the global deceleration of the economy, which has caused a general resizing of advertising budgets, but also in comparison to 2010, a year characterised by the presence of big sports events, such as the South Africa World Cup and the Vancouver Winter Olympics.

The Nielsen figures make it possible to estimate a reduction on the overall market of about 4%, with significant reductions on all media, apart from the Internet, which closed at (+12.3%).
Television and radio advertising investments in particular recorded a drop of 3.1% and 7.8% respectively.

In this context, Rai’s advertising revenues (883.9 million euros) highlight a reduction of 59.6 million euros (-6.3%) compared with 2010, as highlighted in the table at the side.
The significant continuing growth of advertising revenues from the specialised channels should be noted (+17.0 million euros, +70.0%).



Other revenues present an increase of 2.7 million euros (+1.2%), determined by a number of negative factors, as shown in the following table.

The main differing factors include the positive item, Sale of rights to utilise archive materials to football clubs, which presents an increase of 26.3 million euros due to the different effects of the agreements entered into during the two years, and the negative items Sale of rights and musical publications (-13.5 million euros), the reduction of which is largely due to the sale of foreign broadcasting rights for the matches of the Italian Football Championship in relation to different contracting methods for these operations (-5.4 million euros), without having significant net effects on the Income Statement, and to Musical Publications (-3.1 million euros).

Other less important reduction factors are Special services under agreement (-3.9 million euros) as a consequence of the reorganisation of activities envisaged under the foreign broadcasting agreement, and the Repayment of programme production costs (-4.7 million euros) mainly due to the absence of proceeds related to the creation of a long-running TV series. As shown in the dedicated table, the influence of revenues from licence fees accounts for about 60% of the total, while Advertising and Other revenues amount to about 40%.



Operating costs

The item includes internal costs (labour cost) and external costs, regarding ordinary business activities.

These total 2,517.1 million euros, down by 158.6 million euros, -5.9%, compared with 2010, as detailed below.

Consumption of goods and external services – This caption includes purchases of goods and services required to make programmes of immediate use (purchases of consumables, external services, artistic collaborations, etc), filming rights for sports events, copyright, services from subsidiaries, running costs (rental and hire fees, telephone and postage costs, cleaning, maintenance, etc.) and other operating costs (direct and indirect taxes, contribution to the Authority, the public broadcasting concession fee, etc.).

As shown in the table, the caption shows a drop of 175.9 million euros (-10.0%), determined mainly by the reduction of costs for the purchase of filming rights, essentially related to sports rights (-86.0 million euros).
2010, like all other even numbered years, was characterised by the presence of four-yearly sports events (World Cup and Winter Olympics) influencing the 2010 income statement by 107.8 million euros.
This reduction was partially offset by higher costs for the purchase of the broadcasting rights for the Italian National Football Team’s friendly and qualifying matches for the 2012 European Championships.

Regarding Group companies there were lower costs for purchasing film and series viewing rights from Rai Cinema for 51.8 million euros, following the contractual renegotiation of relations with the company in 2011, and higher costs for the activities performed by Rai Way (+5.4 million euros), mainly for the extension of broadcasting and transmission of the DTT signal.

In addition to the above, savings were observed in other components of the caption, confirming a continuation of the cost cutting policies.



Personnel costs – These amount to 935.3 million euros, up by a total of 17.3 million euros on the total at 31 December 2010 (+1.9%), as detailed in the table at the side.



The growth in personnel costs is justified almost entirely by the provision of a bonus system for executives, middle management, white and blue collars (about 16.6 million euros) not envisaged in the previous year as it was not paid. Regardless of this component, personnel costs for 2011 closed at a very similar value to that of 2010.

This result derives from a series of management measures to offset the economic growth ensuing from automatic pay increases provided for by the labour contract, the stabilisation of those on temporary employment contracts, the rise in the staff severance pay revaluation index and provisions to cover contractually agreed holidays for middle management, white and blue collars and orchestra members.

Among the actions taken, incentives for resignation and the substantial blockage of management policies played the most significant role.

Personnel on payroll at 31 December 2011 amounted to 10,196 units, up 56 on 31 December 2010.

The average number of employees, including those on fixed-term contracts, came to 11,829, with a reduction of 124 members of staff compared to last year.
In detail, there has been a drop of 97 members of staff on fixed-term contracts following stabilisation of staff on temporary contracts and the resignation of 27 members of staff on permanent contracts due to the simultaneous resignation incentives.

Gross Operating Margin

The Gross Operating Margin, as a consequence of the above, is positive for 321.8 million euros, up 120.9 million euros, or 60.2%, on the previous year.

Amortisation of programmes

This caption is related to investments in programmes, which during 2011 amounted to 255.3 million euros, down 26.8 million euros (-9.5%), mainly due to TV fiction series.



Amortisation charged to the above captions for the year, 240.3 million euros, shows a reduction of 26.3 million euros (-9.9%) compared with the previous year, related to the performance of investments.



Other amortisation

This is linked to investments in tangible non-current assets and other investments, the movements of which during 2011, highlighted in the following table, present an overall increase of 56.1 million euros, determined mainly by the purchase of the DEAR property complex for 52.5 million euros.



Depreciation and amortisation charged for the year in relation to the above captions amount to 68.1 million euros, with a drop of 0.4 million euros compared with 2010.
This substantial stability is due to the offsetting effect between the increase in depreciation and amortisation due to high levels of investment during the year and the reduction determined by the progressive completion of the amortisation of assets acquired in the past.



Other net income (charges)
The caption comprises costs/revenues not directly related to the Company’s core business and, in 2011, highlights net charges of 36.9 million euros (20.5 million euros in the previous year). In detail, it comprises expenses for repeatusage programmes which it is not expected will be used or repeated (29.2 million euros, with 34.7 million euros in 2010), provision for the company supplementary pension fund for former employees (13.8 million euros, 9.7 million euros in 2010), provisions for risks and charges (10.8 million euros, 15.4 million euros in 2010), partially offset by net contingent assets (18.1 million euros, 27.4 million euros in 2010) and the release of funds allocated in previous years (8.8 million euros, 16.4 million euros in 2010).

Operating Result
The results described above for operating revenues and costs led to an improvement in the operating result, from -154.7 million euros in the previous year to -23.5 million euros this year, with an increase of 131.2 million euros.

Net financial income (expense) The item Net financial income (expense) amounts to a negative 0.6 million euros (income of 2.7 million euros in 2010). The caption shows the economic effects of typical financial operations and comprises bank interest expense and income to/from banks as well as that relating to Group companies and net exchange gains.

The details show a drop in net interest payable to banks of 3.7 million euros against higher financial exposure to third parties and an increase in the rates applied. The simultaneous growth in loans to the associated companies, particularly to Rai Cinema and Rai Way, determined higher intercompany interest income of 2.6 million euros.

Exchange rate differences, mainly generated by the acquisition of rights to sports events in US dollars, were positive thanks to hedging activities carried out in previous years, which limited the oscillations of the euro/dollar exchange rate during the year. Other financial expenses are deteriorating as a result of higher bank commissions and interest payable to suppliers for extended payments established by contract.

The average cost of loans, made up of credit lines on current accounts, ‘hot cash’, stand-by and medium-term loans, increased in relation to the increase in the spread applied to bank loans, settling at 2.8% (1.9% in the previous year).



Income from equity investments

As indicated in the table below, the caption amounts to a total of 76.4 million euros and includes the dividends collected in the period considered valid for the results of the previous year (80.2 million euros), the revaluations (2.6 million euros) and writedowns of equity investments for impairment losses totalled during the year (6.4 million euros), 5.0 million of which relating to Rai Corporation, due to the expenses connected to the close of the activities resolved during 2011.



Net exceptional expense

This caption amounts to 4.8 million euros (45.0 million euros in 2010) and relates mainly to costs sustained for the continuation of actions to incentivise early staff resignation, launched during the previous year.

Income taxes

The caption amounts to 8.2 million euros (positive value of 11.4 million euros in 2010), determined by the balance between current and deferred taxes, as detailed in the table.

As regards the IRES tax, no amount was booked as the year’s result for tax purposes was negative.

IRAP, amounting to 36.0 million euros, shows an increase of 9.7 million euros compared with the previous year, determined by a higher taxable amount.

Deferred tax liabilities determine a positive effect of 2.7 million euros (the same as in 2010), as a consequence of the reversal of the temporary differences of income deriving from the higher amortisation applied in previous years for tax purposes only.

Deferred tax assets (25.1 million euros) originated from the booking of IRES credits deriving from:

• negative taxable income, which is offset by the positive taxable income of subsidiaries, included within the scope of the tax consolidation mechanism for tax year 2011 for 16.5 million euros;
• temporary differences in income which will arise during the next year, within the limit of the Group’s taxable income foreseeable during said year, for 8.5 million euros;
• other changes in IRAP for 0.1 million euros.

Balance sheet

Non-current assets

Tangible non-current assets are detailed in the table to the right.

Investments in programmes are mainly represented by TV fiction series (314.1 million euros), which accounted for the greater part of investments during the year (255.3 million euros).
The details are given in the table at the side.

Equity investments fell slightly (-2.2 million euros) largely due to the revaluation and writedowns of the companies.

Other non-current assets are shown in the table at the side.



Working capital The change from 2010 (+10.7 million euros) is due mainly to normal developments in the business.

Major changes relate to:

• Trade receivables: up 47.3 million euros, due to higher amounts of receivables from Group companies (+25.7 million euros) and from other customers (+21.0 million euros), the latter determined by fewer collections of amounts receivable for special services rendered to the Government under contract.
• Other assets: up 74.5 million euros largely due to advance payments made to purchase the broadcasting rights for sports events to be held next year (particularly the European Football Championships and the Olympic Games).
• Trade payables: up 115.9 million euros, due partially to greater exposure towards subsidiaries and partially to certain accounts payable in relation to contracts with football clubs and for the purchase of sports broadcasting rights and DEAR property complex.

It should be noted that Trade receivables comprise, net of the relative writedowns, consisting for the most part in accounts receivable from subsidiaries, mainly Sipra, and from public entities and institutions.



Net financial position

The year-end net financial position is positive, despite the decline compared to the previous year (0.8 million euros compared with 4.3 million euros in 2010), and is comprised as indicated in the table.

The net financial position is very similar to that of the previous year. There was an increase in accounts receivable from the subsidiaries Rai Way and Rai Cinema and a simultaneous increase in exposure towards banks.

This neutral position was determined by the positive economic result and the additional self-financing components, which generated a financial flow capable of covering the requirements determined by investments during the year.

This is confirmed by very contained cash flows on the main outgoings, capable of offsetting the lower advertising revenues and income from special services rendered to the Government under contract.

In May 2011, an unsecured pool loan was taken out at the best market conditions for 295 million euros with five bank counterparties, and as at 31 December 2011, 210 million euros of the loan amount had been used.



The loan, converted in observance of the company policy for about 70% at a fixed rate through an Interest Rate Swap, must be repaid in full by 31.12.2015, with amortisation beginning in June 2013, in constant six-monthly instalments.
The loan envisages the observance of two parametric/equity indexes, to be calculated on the basis of the consolidated financial statements, which are extensively observed.

The average net financial position is positive, despite dropping compared with the previous year (from 55 to 18 million euros).

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

• the net invested capital coverage ratio, calculated as the ratio between net invested capital and net equity, is 1.00 (0.99 in 2010);
• the current ratio, identified as the ratio between current assets (inventories, current assets, cash and cash equivalents and financial receivables) and current liabilities (current liabilities and financial debts), is 1.19 (1.00 in 2010);
• the self-coverage ratio of noncurrent assets, calculated as the ratio of shareholders’ equity to non-current assets, is 0.39 (0.36 in 2010).

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

In particular:

• The exchange risk is significant in relation to the exposure in US dollars generated by the acquisition of sports events rights and the funding of the associated company Rai Corporation.
These commitments generated payments for about 65 million dollars during 2011.
Operation takes place from the date of subscription to the commercial commitment, often lasting several years, and aims to defend the counter value in euros of commitments estimated at the time of order or in the budget.
Hedging strategies are implemented using financial derivative instruments – such as forward purchases, swaps, and options structures – without ever taking on an attitude of financial speculation.
The company policy envisages numerous operating limits to be observed by the hedging activity.
• The interest rate risk is also regulated by the company policy, particularly for medium/long-term exposure with specific operating limits.
In relation to the medium-term loan described above, Interest Rate Swap agreements were entered into for 205 million euros (131 of which to start on 31.12.2011), with the aim of transforming the cost of the loan, issued at a floating rate and therefore subject to market volatility into a fixed rate.
• The credit risk on cash deployment is limited in that the company policy envisages the use, for limited periods of cash timing differences, of low-risk financial instruments with parties with high ratings.
Only tied deposits or sight deposits with remunerations close to the Euribor rate were used during 2011.
• As regards the liquidity risk, it should be noted that the company, in a period characterised by marked uncertainty, consolidated its financial structure by taking out the mediumterm loan described above, of which 210 million euro had been used at 31.12.2011 (thanks to the extension of the possibility of use for the whole of the first year after subscription).
Short-term credit lines have been opened with the banking system for a maximum amount of about 515 million euros, which during the recent tensions on the financial markets have presented problems of complete usability.
Stand-by loans are also in place for a total of 130 million euros, and are due to expire in February 2012, and in the first quarter of 2012 they were renewed for 90 million euros. The existing loans allow coverage of overdraft periods during the year, on condition that the liquidation of the fees by the Ministry of the Economy and Finance takes place more or less in line with the quarter-end dates established by contract. To cope with the significant investments required by the DTT project – in the absence of significant public contributions – preliminary activities continue with the European Investment Bank for the opening of a specific medium/long-term loan.