Annual Report to Shareholders
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2015 Annual Report Entertaining Australia Nine Entertainment Co. is centred on delivering world-class content across platforms and focused on maximising shareholder returns 1990 2009/10 2013 2013 WIN affiliation Nine Network launched Acquired Nine Listed on the agreement with Nine digital channels, Go! Adelaide and Australian Securities Network commenced and GEM Nine Perth Exchange A rich and vibrant history of media and entertainment in Australia 1956 2007 2011 2013 Nine Network Acquired NBN Mi9 formed as Acquired Microsoft’s established umbrella to digital interest in Mi9 businesses JAN 2015 SEP 2014 MAR 2015 JUL 2015 AUG 2015 Launch of Stan, NEC’s Sale of HWW SVOD Joint Venture Acquisition of 60% Sale of Nine Live Sale of Willoughby with Fairfax Media of Pedestrian TV completed site agreed OCT 2014 FEB 2015 MAY 2015 AUG 2015 Announcement $150 million on-market Announcement of move NRL rights for of move of Nine buy-back announced of Nine Perth studio into 2018-2022 secured Adelaide studio into the CBD the CBD nine entertainment co. holdings limited abn 60 122 203 892 Contents Operational Highlights 2 Chairman’s Report 4 Chief Executive’s Report 6 Summary Financial Performance 8 Nine Network 10 Nine Digital 14 Stan and Nine Ventures 18 Nine Cares 20 Board of Directors 22 Directors’ Report 24 Remuneration Report 29 Operating and Financial Review 45 Corporate Governance 49 Financial Report 60 Shareholder Information 119 Corporate Directory 121 Annual Report 2015 1 Operational Highlights Full year EBITDA of $287 million was in line with guidance. In TV, Nine Network lifted its Free to Air advertising share to the highest level for 10 years, albeit in a market which declined. 100% owned Nine Digital exceeded expectations, as it transitioned to a post Microsoft environment. Strong cash conversion enabled a full year dividend of 9.2 cents per share. The sale of Nine Live has left the Group with net cash, resulting in sector-leading flexibility, in what remains a challenging period for the industry. 2 nine entertainment co. Operational Highlights Reported Pro Forma $m FY15 FY141 Variance Revenue 1,610.1 1,569.9 +2.6% Group EBITDA 287.3 311.0 –7.6% NPAT, before Specific Items 140.1 144.2 –2.9% Specific Items, after Tax (732.2) (80.5) nm Reported NPAT (592.2) 63.7 nm Operating Free Cash Flow 297.3 271.9 +9.4% Operating Free Cash Flow Conversion 103% 87% +16pts Earnings per Share, before Specific Items – cents 15.0 16.4 –8.5% Dividends per Share – cents 9.2 4.2 +119% Metro revenue share of 38.9%, up 0.2% for the year Metro Free to Air advertising market declined by 1.5%, albeit underlying trend improving 100% owned digital business exceeded expectations Launch of Stan in January 2015, with key performance metrics running ahead of expectations Operating Free Cash Flow up $25m to $297m, for conversion of 103% Full year dividend of 9.2 cents per share equating to a payout of 61%, with the final dividend being the first to be fully franked Lift in ongoing payout ratio to 80-100% from FY16, fully franked Sale of Nine Live for $640m leaving NEC in a Pro Forma net cash position $150m on-market share buy-back launched in May 2015, with $62m purchased in first two months Commitment to Nine Cares, which contributed more than $30m of value to the broader community Financial Position Reported Pro Forma As at 30 June 2015 30 June 2014 Variance Net Debt, $m 524.3 537.5 –$13.2m Net Leverage 1.8X 1.7X +0.1X Interest Cover 10.8X 5.7X +5.1X Pro Forma Net Cash2, $m 115.0 1. Comparatives restated to exclude inter-segment revenue. 2. Post completion of the Nine Live sale. Annual Report 2015 3 Chairman’s Report On behalf of the Board of Directors, I am pleased to present the Nine Entertainment Co. Annual Report for the 2015 financial year. 2015 was another active year for Nine Entertainment The sale of Nine Live has left us debt-free and Co. (NEC), with the two key milestones being underpins a number of capital management the start-up of Stan, Australia’s first mainstream initiatives which we have previously announced Subscription Video On Demand service in January and – on-market buy-backs and enhanced dividends. the sale of Nine Live announced in April. We finished Under our $150 million on-market buy-back program, the year with the prospect of a debt-free balance at 30 June 2015 we had purchased 36.3 million shares sheet, and a clear focus on maximising the returns for a total outlay of almost $62 million, and following from our remaining Free to Air and Digital businesses. the blackout period leading into our results release, we have re-commenced purchases. We have also In a difficult operating environment, NEC recorded announced that we intend to ask our shareholders at an EBITDA decline of 8% for the year to $287 million, the AGM in November for approval to lift the annual with Net Profit After Tax before Specific Items down cap on our buy-back to a maximum of 20% of issued 2.9%. This result was in line with the guidance given capital to give ourselves the flexibility to increase in June, but was below the internal targets we had set our program if appropriate circumstances present ourselves at the start of the year. themselves. The weakness in the television advertising sector Following the release of the full year results, the was the dominant theme over the year. While the Directors declared a fully franked dividend to overall advertising market was up slightly, Free to Air shareholders of 5.0 cents per share, bringing total television remained under pressure and recorded a dividends for the year to 9.2 cents per share, a 61% 1.5% decline over the year, although encouragingly payout of pre Specific Item earnings. Pursuant to our the market recorded growth over the second half. capital management initiatives, future dividends, Whilst detractors are quick to call the demise of Free which we expect to be fully franked, will be to Air Television, the relevance of live sport and News, determined based on 80–100% payout of earnings and the commitment of viewers to locally produced prior to Specific Items. content will see the medium continue to thrive. We firmly believe that Free to Air TV remains the most Our ratings performance in FY15 was a credit to our effective medium for advertisers – it has unbeatable programming team as we remained the number 1 scale and reach, an unparalleled relationship with network in the key marketing demographics of 18-49s its audiences and helps marketers build emotional and 25-54s for the fourth year in a row. The strength connections with their brands like no other media. and depth of our programming slate once again enabled our sales teams to grow our share of Free to It is an evolving landscape however. The emergence Air advertising revenue to the highest result for the of a number of Subscription Video On Demand network in ten years. We continue to work on ways to services, including our own Stan, are both improve the monetisation of our ratings leadership in supplementing and changing viewing habits, and these key demographics. the incumbents need to be nimble and open-minded about where future opportunities may lie. NEC’s now As required by Australian Accounting Standards, at unlevered balance sheet positions the Group strongly the time of our full year results we reviewed the Book to capitalise on any opportunities which may arise. Value of the assets on our balance sheet, specifically Nine is, after all, primarily a distributor of content and the intangibles. At the FY15 result, we took a write- the focus is on the different ways we can exploit this down of around $850 million which reflected the more content in a digital world, be it advertising-supported difficult environment in which we are operating, and or subscription. The evolution of Stan and the also the reduced value of some legacy international growth in our Digital businesses are testament to the programming contracts. It should be emphasised broadening focus of the Group. that the bulk of these are non-cash items and will not impact on our ability in the future to pay dividends. 4 nine entertainment co. dividends per share 9.2 cents As an employer of around 3,750 people around In closing, I would like to thank all of NEC’s Australia (or 3,500 post the sale of Nine Live), NEC management and staff for their ongoing aims to provide an inclusive workplace that attracts commitment and tireless work ethic. These are the very best employees, allowing each of them changing times in Media around the world, to achieve their potential in a supportive and and it is important that everyone continues to discrimination-free environment. Further details focus and think laterally to ensure the business of our corporate governance and diversity policies prospers in the face of industry change. can be found on pages 49-59 of this Annual Report. Thank you also to my fellow Board members During the year, the Board progressed both who have supported the management team its long and short term incentive plans for its and me throughout the year. I would like Key Management Personnel. As Chair of the to extend a particular thank you to the Remuneration Committee, I am confident these Directors who retired during the year – changes will provide a clear link between shareholder Joe Pollard, Raj Shourie and Edgar Lee – returns and executive remuneration, whilst ensuring and similarly welcome Holly Kramer who the Company is able to attract and retain a market- joined the Board in May this year.