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review of balance sheet, income statement and financial position

Income Statement

The Income Statement of the Parent Company for financial year 2012 recorded a net loss of 245.7 million euros, against a net profit of 39.3 million euros for financial year 2011, mainly determined by the strong and unexpected reduction of advertising revenues (-209.0 million euros) and the costs of big sports events.

As reported in greater detail further ahead in this report, the 2012 result benefits from a positive component equating to 20.5 million euros deriving from the adoption, as of this year, of the valuation of investments at equity, instead of evaluation at cost adopted until 31 December 2011.

The reasons for this change arise from the need to offer a better representation of the financial and earnings situation along with the results of operations and to increase the consistency of the Company’s equity, aligning equity figures with those of the consolidated financial statements.

This change also determines the booking of a Shareholders’ equity reserve of 112.1 million euros, by effect of the change in principle adopted until 31 December 2011.

The following section provides an overview of the main items of the Income Statement and the reasons behind the more significant changes from 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 2,625.5 million euros, down 199.3 million euros (-7.1%) on 2011.

Licence fees (1,747.8 million euros). These include licence fees for the current year as well as those for previous years, collected through coercive payment following legal registration.

The overall increase (+2.3%) refers to the increase in the per-unit licence fee from 110.50 euros to 112.00 euros (+1.4%) and to the increase in the number of paying subscribers due to the significant growth in new subscribers compared to the number of new subscribers in 2011 (506,486 units, +26.0%) capable of offsetting the rise in cancellations and arrears, or of the number of subscribers entered in the list of debtors who have not paid their licence fee.



Once again in 2012 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 selected European countries.

Advertising revenues.
In a framework characterised by the deceleration of the economy and the drop in consumption, advertising revenues in 2012 also recorded evident signs of difficulty.
The Nielsen figures, while failing to allow a fully standardised comparison due to the fact that changes have been made in the setting in which data is measured, show a 14.3% contraction in the advertising, affecting all media, apart from the Internet, which closed at +5.3%. Television and radio advertising investments in particular show a decline of 15.3% and 10.2% respectively.

In this context, Rai’s advertising revenues (674.9 million euros) highlight a reduction of 209.0 million euros (-23.6%) compared with 2011, as shown in the table to the right.

The drop in advertising revenues was higher than the contraction of the reference market, determining a considerable loss of the market share by the Rai concession holder during the year. To offset this, incisive actions were taken to intervene on the various corporate areas of Sipra, including a review of commercial practices and a strengthening of the managerial layout and of in-house procedures.

It should be noted that revenues from advertising on specialised channels continue to grow (+3.7 million euros, +9.0%).



Other revenues present a reduction of 29.7 million euros (-12.8%), as highlighted in detail in the table to the right.

The reduction is determined mainly by the drop in the Special services under agreement item (-22.3 million euros), resulting largely from reduction of amounts provided by the Presidency of the Council of Ministers to 50% compared to that envisaged for the previous year and by the Sale of rights to utilise materials to football clubs item (-7.6 million euros), the reduction of which is due to different agreements entered into during the two years.

Due to the advertising crisis and because of the reduction of other revenues, as indicated in the table to the right, revenues from licence fees represent two thirds of overall income.



Operating costs

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

These total 2,535.2 million euros, up 18.1 million euros, (+0.7%), compared with 2011, the reasons for which are listed 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.).

Compared with the previous year, the item shows an increase of 30.8 million euros (+1.9%), due to the presence during the year of costs related to fouryearly sports events (European Football Championship and Olympic Games) for 143.0 million euros (including costs for the production of these events amounting to 8.1 million euros).

Net of this component, there was a net reduction of about 110 million euros in external costs compared to 2011, determined largely by initiatives implemented during the year to contain spending.

The table on the following page shows details of savings in most items, apart from filming rights which presents an increase of 97.5 million euros for the reasons already disclosed.



Personnel costs – These amount to 922.6 million euros, down 12.7 million euros on the total at 31 December 2011 (-1.1%), according to the breakdown in the table to the right.



The reduction in personnel costs is determined mainly by the provision of a bonus system for employees, about 19 million euros lower than that assigned in the previous year.

Net of the phenomenon mentioned above, personnel costs presented a modest increase (about 6 million euros) due to the positive effects of incentives in 2011 which offset the physiological growth in personnel costs as a result of contractual automatic pay increases and the impact of the renewal of the collective labour contracts.

Lower inflation also positively influenced the trend of personnel costs, having a positive impact on the revaluation of the provision for staff severance pay and the continuation, once again in 2012, of the substantial blockage of payment policies.

Personnel on payroll at 31 December 2012 amounted to 10,476 units, up 280 on 31 December 2011.

The average number of employees, including those on fixed-term contracts, came to 11,851, with an increase of 22 members of staff compared to last year. In details, there has been a drop of 214 members of staff on fixed-term contracts following the final hiring of staff on temporary contracts and an increase of 236 members of staff on permanent contracts.

Gross Operating Margin

The Gross Operating Margin, as a consequence of the above, is positive by 106.9 million euros, down 214.9 million euros, or -66.8%, on the previous year.

Amortisation of programmes

This caption is related to investments in programmes, which during 2012 amounted to 233.1 million euros, down 22.2 million euros (-8.7%), largely for TV fiction series.



Amortisationcharged to the above captions for the year, 217.4 million euros, shows a reduction of 22.9 million euros compared with the previous year (-9.5%) related to the trend in investments.



Other amortisation

The 2012 movement in this item, shown in the following table, is linked to investments in tangible non-current assets and other investments, and presents a total reduction of 44.5 million euros, largely determined by the previous year’s acquisition of the DEAR property complex for an amount of 52.5 million euros.



Amortisation and depreciation for the period referring to the items mentioned above amount to 68.8 million euros, with a slight increase of 0.7 million euros compared to 2011.
This substantial stability is due to the offsetting effect between new amortisation/depreciation due to investments made during the year and the reduction determined by the gradual completion of the amortisation/depreciation of assets brought into use in past years.



Other net income (charges)
The item comprises costs/revenues not directly related to the Company’s core business and, in 2012, highlights net expenses of 36.4 million euros (36.9 million euros in the previous year). In detail, it comprises expenses for repeatusage programmes which it is not expected will be used, repeated or commercially exploited (28.2 million euros in 2011: 29.2 million euros), provision for the company supplementary pension fund for former employees (12.0 million euros, in 2011: 13.8 million euros), provisions for risks and charges (21.0 million euros, in 2011: 10.8 million euros), partially offset by net contingent assets (20.5 million euros, in 2011: 18.1 million euros) and the release of funds allocated in previous years (10.3 million euros, in 2011: 8.8 million

Operating Result
The performance described above for operating revenues and costs led to a reduction in the operating result, from -23.5 million euros in the previous year to -215.7 million euros this year, with a deterioration of 192.2 million euros.

Net financial expense
Net financial expense shows a loss of 3.8 million euros (0.6 million euros in 2011). The item shows the economic effects of typical financial operations and comprises bank interest expense and income as well as that relating to Group companies and net gains in relation to exchange rates.

The figures show an increase in net interest payable to banks of 5.0 million euros due to higher financial exposure to third parties and an increase in the average interest rates on loans.
Net intercompany positions, particularly with Rai Cinema and Rai Way, determined higher intercompany interest income of about 7 million euros, similarly to the previous year.

Exchange rate differences, mainly generated by the acquisition of rights to sports events in US dollars, were positive and increased thanks partly to hedging activities carried out in previous years, which counteracted the fluctuations in the euro/dollar exchange rate during the year. Other financial expenses, which grew modestly, deteriorated as a result of higher bank commissions for new loans.

The average cost of loans, consisting of current account credit lines, ‘hot money’, stand-by and medium-term loans, settled at 3.4% (2.8% in the previous year), up in relation to the increased weight of fixed rate debts compared to the previous year.



Income from equity investments

As indicated in the table on the following page, the item amounts to a total of 24.3 million euros.

As already highlighted, as of 2012 investments in subsidiaries and associated companies are assessed using the equity method instead of the previous valuation method based on the purchase cost adjusted in the event of durable losses in value.

The equity method envisages that the value at which investment is booked be the same as the corresponding fraction of the Shareholders’ equity resulting from the last financial statements, minus the dividends and after the adjustments required by the principles used in the preparation of the consolidated financial statements.

The gain or loss by the investee company for the year, duly adjusted, is booked to the Income Statement in the year to which the result refers.

Also, as 2012 is the year of first application of said principle, the higher values of the investments consequential to the profits of previous years, amounting to about 112 million euros, were carried in the specific Shareholders’ equity reserve.

The following table shows details of the item by company.



Net exceptional expense

This item amounts to 48.8 million euros (4.8 million euros in 2011) and refers mainly to costs sustained for actions to incentivise early staff resignation (62.2 million euros) partially offset by the gain from the reimbursement of IRES (corporate income tax) for the full deductibility of IRAP (regional tax on production) relating to personnel costs and similar (12.8 million euros).

Income taxes

The item amounts to 1.7 million euros (8.2 million euros in 2011), 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 25.0 million euros, shows a decrease of 11.0 million euros compared with the previous year, determined by a lower taxable base.

Deferred tax liabilities determine a positive effect of 3.0 million euros (2.7 in 2011), 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 (20.3 million euros) originated from the booking of IRES credit deriving mainly from:
• the negative taxable amount, which was offset by the positive taxable amounts of the subsidiaries, included within the scope of consolidation for the 2012 tax year, with a positive tax effect of 13.3 million euros;
• newly booked temporary differences for programme assets, which we are sure will be recovered in that they are transformable into tax credits, as provided for by paragraphs 55, 56 and 56 bis of Law Decree 225/2010, as amended by Law Decree 201/2011, with a positive tax effect of 8.1 million euros.

Balance sheet

Non-current assets

Tangible non-current assets, which have remained largely stable, are detailed in the table below.

Investments in programmesare mainly represented by TV fiction series (291.9 million euros), which accounted for the greater part of total investments during the year (233.1 million euros).
The details are given in the table below.

Equity investments increased (+136.1 million euros) as a result of application of the equity method to investments in subsidiaries and associated companies, as mentioned earlier. The details are given in the table below.



Other non-current assets, which also remained largely stable, are detailed in the table below.

Working capital
The change from 2011 (-134.6 million euros) is due mainly to normal developments in the business.

Major changes relate to:

• Trade receivables: down 214.9 million euros, due to lower amounts of receivables from Group companies (-124.2 million euros), mainly from Sipra as a result of the contraction of advertising and from minority customers, (-90.7 million euros), the latter determined largely by lower receivables for special services rendered to the Government under contract.
• Other assets: down 65.2 million euros largely due to the recoupment of the advance payments made to purchase the broadcasting rights for sports events held during the year (particularly the European Football Championships and the Olympic Games).
• Trade payables:down 187.3 million euros, due partially to lower debts towards subsidiaries and partially to certain previous year’s accounts payable to suppliers for the purchase of sports broadcasting rights and the DEAR property complex.

It should be noted that Trade receivables consist mainly of accounts receivable from subsidiaries, mainly Sipra, and from public entities and institutions.



Net financial position

The year-end net financial position is negative by 122.7 million euros, deteriorating compared to 2011 (positive by 0.8 million euros), and is made up as indicated in the table below.



There was an increase in the amount payable to banks (about 97 million euros) and a reduction in the balance of receivables from intercompany accounts (about 26 million euros).
The growth of debt was caused by a flow of activity during the year which, due to the negative economic result, was insufficient to cover the requirements determined by the year’s investments. The latter include the payment of the second instalment for purchase of the DEAR property complex (34 million euros).

In relation to cash flows for the year:
• the negative flows are due to the considerable reduction in advertising revenues, the absence of dividends from the subsidiaries and the application of previous charges relating to the development of the digital terrestrial network by Rai Way;
•the positive flows relate to the recovery of amounts receivable for special services rendered to the Government under contract and the limitation of the outlays to third parties outside the Group for current expenses.

The unsecured loan of 295 million euros taken out as part of a pool envisages the respect of two parametric/equity ratios, to be calculated on the figures of the consolidated financial statements, and these ratios were respected.

The average net financial position is negative by 55 million euros (positive by 18 million euros in 2011), with a deterioration of 73 million euros which is more limited than the final figure, which reflects the more favourable breakdown of the fee instalments, consequential to the 100 million increase in the amount paid with the second and third instalments.

The analysis carried out on the basis of the balance sheet and income statement ratios highlighted that:
• the net invested capital coverage ratio, determined in the ratio between net invested capital and own means, is 1.42 (1.00 in 2011);
• 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 1.13 (1.19 in 2011);
• the self-coverage ratio of noncurrent assets, calculated as the ratio of shareholders’ equity to noncurrent assets, is 0.24 (0.39 in 2011).

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 practices, 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. These commitments generated payments for about 65 million dollars during 2012.
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– without ever taking on an attitude of financial speculation. The Company policy envisages 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 during 2011 for 205 million euros, with the aim of transforming the cost of the loan, issued at floating rate and therefore subject to market volatility, to fixed rate.
• The credit risk on cash deployment is limited in that the Company policy envisages the use, for limited periods of cash surpluses, 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 2012.
• As regards the liquidity risk, the Company has, in the medium term, a loan, taken out as part of a pool, for 295 million euros (expiring in 2015), with six-monthly amortisation as of 2013. With the banking system, short-term and reversible credit lines were opened for a maximum amount of about 450 million euros. Stand-by loans are also in place for a total of 90 million euros, maturing in February 2013. The existing loans allow coverage of overdrafts during the year, on condition that payment of the fees by the Ministry of the Economy and Finance takes place in observance of the contractual quarter-end deadlines. A specific long-term loan of 100 million euros was taken out with the European Investment Bank to provide further coverage of the requirements of the progress of the DTT project during the year. This loan will be disbursed in two instalments during 2013.