5.2 Presentation of the financial position and consolidated financial statements of Lagardère SCA

Comments on the Lagardère SCA consolidated financial statements at 31 December 2019
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS), as described in note 1 to the consolidated financial statements, “Accounting principles”.
Under the impetus of Arnaud Lagardère, General and Managing Partner, the Group launched its strategic refocusing around two priority divisions:

  • Lagardère Publishing: Books, E-books, Mobile Games and Board Games;
  • Lagardère Travel Retail: Travel Essentials, Duty Free & Fashion, and Foodservice.

The Group’s business scope also includes “Other Activities”, which groups together Lagardère News (Paris Match and Le Journal du Dimanche magazine titles, Europe 1, RFM and Virgin Radio stations, and the Elle brand licence), Lagardère Live Entertainment, Lagardère Paris Racing, and the Group Corporate function. Lagardère Sports and Lagardère Studios are in the process of being sold.
The main changes in the scope of consolidation between 2018 and 2019 are described in note 4 to the consolidated financial statements.

5.2.1 CONSOLIDATED INCOME STATEMENT

(in millions of euros) 2019 2018(*)
Revenue 7 211 6 868
Recurring operating profit of fully consolidated companies(**) 378 385
Income from equity-accounted companies(***) 6 3
Non-recurring/non-operating items 27 63
of which impact of IFRS 16 on concession agreements(****) 60 41
Profit before finance costs and tax 411 451
Finance costs, net (53) (57)
Interest expense on lease liabilities (85) (76)
Income tax expense (55) (124)
Profit (loss) from discontinued operations (207) 5
Profit for the year 11 199
Attributable to:    
  • Owners of the Parent
 (15) 177
  • Minority interests
 26 22

(*) Data for 2018 restated for the full retrospective application of IFRS 16 and for the reclassification of Lagardère Sports as a discontinued operation in accordance with IFRS 5 (see notes 1.1 and 4.3, respectively, to the consolidated financial statements).
(**) Recurring operating profit of fully consolidated companies is an alternative performance measure taken from the segment information section of the consolidated financial statements (see reconciliation in note 5 to the consolidated financial statements), and is defined as the difference between profit before finance costs and tax and the following income statement items:

  • income from equity-accounted companies;
  • gains (losses) on disposals of assets;
  • impairment losses on goodwill, property, plant and equipment, intangible assets and investments in equity-accounted companies;
  • net restructuring costs;
  • items related to business combinations:
    • acquisition-related expenses,
    • gains and losses resulting from purchase price adjustments and fair value adjustments due to changes in control,
    • amortisation of acquisition-related intangible assets;
  • specific major disputes unrelated to the Group’s operating performance;
  • items related to leases and to finance lease sub-letting arrangements:
    • excluding gains and losses on lease modifications;
    • excluding depreciation of right-of-use assets under concession agreements;
    • including decreases in lease liabilities under concession agreements;
    • including interest paid on lease liabilities under concession agreements;
    • including changes in working capital relating to lease liabilities under concession agreements.

(***) Before impairment losses.
(****) Including gains and losses on lease modifications.

Items appearing in the Annual Financial Report are cross‑referenced with the following symbol AFR

In 2019, the Lagardère group delivered consolidated revenue of €7.211 million, up 5% on a consolidated basis and with further good like-for-like(1) growth of 4.1% powered by a solid performance at Lagardère Travel Retail and Lagardère Publishing.
The difference between consolidated and like-for-like revenue is essentially attributable to a €92 million positive foreign exchange effect resulting mainly from the appreciation of the US dollar. The €18 million negative scope effect mainly reflects the disposal of most of the magazine publishing titles to Czech Media Invest in January 2019 and of the TV Channels business in September 2019. This was offset by a positive impact resulting from Lagardère Travel Retail’s acquisitions of Hojeij Branded Foods (HBF) in late November 2018 and the International Duty Free group (IDF) at the end of September 2019.
Revenue for Lagardère Publishing in 2019 totalled €2.384 million, up 5.9% on a consolidated basis and up 2.8% like-for-like. The difference between consolidated and like-for-like figures is attributable to a €45 million positive foreign exchange effect resulting mainly from the appreciation of the US dollar, and a €23 million positive scope impact, chiefly relating to the acquisitions of Gigamic in February 2019, Short Books in June 2019, and Worthy Publishing in September 2018.
Revenue growth in 2019 was chiefly driven by a good performance at Education in France and Spain, the success of the new Asterix album, and sustained growth in Partworks and Mobile Games. Revenue for France was up 6.3%, spurred by a sharp rise in Education on the back of the reform of two French high school levels, and by a solid increase in Illustrated Books thanks to the international success of the new Asterix album, La Fille de Vercingétorix, along with a good performance at Hachette Pratique, Hachette Jeunesse Licences and Larousse. General Literature also had a good year, buoyed by the publication of the large-format version of Guillaume Musso’s La Vie secrète des écrivains, and by growth in Le Livre de Poche paperbacks led by the publication of Musso’s La Jeune Fille et la Nuit, and Valérie Perrin’s Changer l’eau des fleurs. Mobile Games also continued to enjoy good momentum.
The United Kingdom fell 1.4%, as a good performance for the backlist and for digital sales at Bookouture along with the success of Billy Connolly’s Tall Tales and Wee Stories late in the year failed to offset an unfavourable comparison effect resulting from the success of Michael Wolff’s Fire and Fury in 2018 and of the J.K. Rowling/ Robert Galbraith titles published in the last quarter of that year. The United States slipped 1.0%. A sharp rise in revenue from Digital audio books as well as the success of Andrzej Sapkowski’s The Witcher at Orbit late in the year, only partially offset the unfavourable comparison effect with 2018, which had been boosted by the remarkable success of James Patterson and Bill Clinton’s The President is Missing and by the publication of Nicholas Sparks’ Every Breath.
Spain/Latin America posted 10.3% revenue growth, spurred by curriculum reform in Spain and by the launch of the new Asterix album at Bruño.
Partworks delivered revenue growth of 4.9%, reflecting the good performance of first-half launches (particularly models and leisure crafts) in Japan, Germany and France.
E-books accounted for 7.7% of total Lagardère Publishing revenue in 2019 versus 7.9% in 2018, while digital audio books represented 3.4% of revenue versus 2.7% in 2018.
Revenue at Lagardère Travel Retail in 2019 totalled €4.264 million, up 16.1% on a consolidated basis and delivering solid 6.3% like-for-like growth. The difference between like-for-like and consolidated revenue is attributable to a €46 million positive foreign exchange effect resulting mainly from the appreciation of the US dollar, and to a €315 million positive scope effect, chiefly reflecting the acquisitions of Hojeij Branded Foods (HBF) in late November 2018, the International Duty Free group in Belgium, and Smullers in the Netherlands. Despite the slowdown towards the end of the year owing to the strikes, France reported a sharp 7.6% rise in revenue, buoyed by good Duty Free trading at regional platforms (Nice, Marseille and Nantes), along with growth in the Foodservice network (Toulouse) and the success of the new Relay concept at Travel Essentials. The EMEA region (excluding France) enjoyed robust momentum (up 6.9%), attributable to a good performance in Italy for Duty Free operations (Rome, Venice and regional airports) and Travel Essentials (favourable network impact), as well as in Romania, Spain and Portugal. The Middle East also reported solid revenue growth, with the opening of the new Dubai Foodcourt and ongoing expansion in Africa.
In North America, business grew by 2.9%, reflecting a dynamic performance at Travel Essentials driven by sales initiatives and Foodservice operations, despite the adverse impact of US-China trade tensions on Canadian airport traffic.
Asia-Pacific advanced 7.2%, spurred by growth in China (continental China and Hong Kong) which benefited from the new openings and modernisation initiatives carried out in 2018 and 2019. Business contracted in the Pacific region due to the economic slowdown in Australia and an unfavourable network effect, despite the full-year impact of new outlets opened in Christchurch, New Zealand.
Revenue for Other Activities totalled €288 million in 2019, down 4.3% on a consolidated basis and down 4.2% like-for-like. The revenue decline for Other Activities is chiefly the result of a 12.5% fall in Radio revenue owing to lower audience figures for Europe 1. Revenue also contracted for the News unit (down 6.9%), as upbeat advertising revenues failed to fully counter the drop in circulation revenues, which accelerated towards the end of the year owing to the strikes in France.
Revenue for the non-retained scope in 2019 was €275 million, down 57.2% on a consolidated basis and down 4.6% like-for-like. The difference between consolidated and like-for-like figures is due to a €355 million negative scope effect resulting from the disposals of most of the magazine publishing titles to Czech Media Invest in January 2019, of TV channels in September 2019, and of other digital assets also during that year.
Audiovisual Production revenue at Lagardère Studios slipped 1.7%, owing mainly to an unfavourable comparison basis in France resulting from a strong catalogue and delivery schedule in 2018, which offset the good performance of international audiovisual operations, particularly in Spain.
TV Channels, which were sold in September 2019, saw a 9% decrease in revenue as a result of lower advertising revenues and the closure of the Elle Girl and MCM channels at 30 June.
Recurring operating profit of fully consolidated companies amounted to €378 million, down €7 million on 2018.
Based on the target scope, recurring operating profit of fully consolidated companies jumped by €51 million year on year, to €361 million. Movements in this item can by analysed as follows for each division:

  • Lagardère Publishing reported €220 million in recurring operating profit of fully consolidated companies, up €20 million on 2018. Growth was led mainly by France, with Illustrated Books buoyed by the publication of a new Asterix album and Education by high school reform, as well as by Spain (new primary school textbooks) and the United States (growth in audio books and operating cost efficiency plan). The division also benefited from a positive foreign exchange effect resulting from the appreciation of the US dollar.
  • Lagardère Travel Retail posted €152 million in recurring operating profit of fully consolidated companies, a year-on-year rise of €31 million, spurred by the impact of the acquisitions of Hojeij Branded Foods (HBF) in November 2018 and International Duty Free group in the last quarter of the year, and by bullish performances from North America and Italy. France also had a very good year in 2019, despite the impact of the strikes. Business continued to ramp up despite events in Hong Kong, the collapse of the Icelandic airline Wow Air and a weak Australian economy.
  • Other Activities posted a recurring operating loss of fully consolidated companies of €11 million, stable year on year. The gradual reduction in overheads of the former Lagardère Active Corporate function, whose costs are being fully wound down in 2020, was offset by the combined impact of a decline in Europe 1 advertising revenues and in the circulation of press titles.

Recurring operating profit of fully consolidated companies for the non-retained scope amounted to €17 million, down €58 million year on year owing mainly to the various disposals during the year.
Income from equity-accounted companies (before impairment losses) came in at €6 million in 2019, versus €3 million one year earlier, buoyed by good performances from the joint operations at Lagardère Travel Retail.
Non-recurring/non-operating items included in profit before finance costs and tax represented net income of €27 million in 2019, comprising:

  • €134 million in net disposal gains, chiefly relating to the sale of TV channels in September 2019 (€99 million), BilletReduc in February 2019 (€18 million) and South African radio operations (€13 million). An additional disposal gain of €5 million was also generated on the 2017 sale of the office building in Levallois‑Perret (France);
  • €42 million in restructuring costs, including €15 million at Other Activities resulting from the late-2019 redundancy plan for the Group Corporate function, €14 million at Lagardère Travel Retail including integration costs following the acquisition of HBF at the end of 2018 and the impact of concept store closures in Australia, and €12 million at Lagardère Publishing relating to the streamlining of distribution centres in the United Kingdom;
  • €91 million in amortisation of intangible assets and expenses relating to acquisitions and disposals, including €82 million for Lagardère Travel Retail and €8 million for Lagardère Publishing;
  • €34 million in impairment losses against property, plant and equipment and intangible assets, including mainly €22 million relating to Lagardère Studio and €6 million relating to Lagardère Travel Retail;
  • the €60 million positive impact of applying IFRS 16 on concession agreements at Lagardère Travel Retail (including gains and losses on lease modifications).

In 2018, non-recurring/non-operating items represented a net positive amount of €63 million, including (i) €205 million in net disposal gains, of which a gain of €245 million on the May 2018 sale of an office building in Paris’ eighth arrondissement and a loss of €40 million on the sale of the 42% interest in the Marie Claire group; (ii) €71 million in restructuring costs resulting from the transformation of Lagardère Active into standalone units and the elimination of its Corporate function, as well as the streamlining of Lagardère Publishing distribution centres in the United Kingdom; (iii) €68 million in amortisation of intangible assets and expenses relating to acquisitions of consolidated companies, of which €59 million at Lagardère Travel Retail; (iv) €44 million in impairment losses, including the write-down of a portion of the overall goodwill relating to the Press CGU, as well as write-downs for Newsweb, Shopcade and International Radio operations at Lagardère Active; and (v) €41 million relating to the positive impact of applying IFRS 16 to concession agreements at Lagardère Travel Retail.
As a result of the above, profit before finance costs and tax came out at €411 million for 2019, versus €451 million one year earlier.
Net finance costs amounted to €53 million for 2019, a decrease of €4 million on the prior-year period. Following its refinancing in 2019, the Group stabilised its average borrowing costs.
Interest expense on lease liabilities represented €85 million in 2019, versus €76 million in 2018. The €9 million rise in this item results from the consolidation of HBF and IDF.
Income tax expense booked in 2019 was €55 million, €69 million less than in 2018 which included €83 million in tax on the sale of an office building in Paris’ eighth arrondissement and a tax saving of €11 million relating to the restructuring plan at Lagardère Active.
Profit (loss) from discontinued operations represented a net loss of €207 million in 2019, reflecting the loss generated by Lagardère Sports, for which a purchase offer was received in December 2019. Lagardère Sports reported €470 million in revenue and €64 million in recurring operating profit of fully consolidated companies, up €32 million on 2018. As announced, this increase was essentially due to a favourable calendar effect in Asia and Africa (AFC Asian Cup and Total African Cup of Nations football tournaments, respectively) and in Europe (World Men’s Handball Championship). The purchase offer led to the recognition of a €234 million write-down against goodwill and intangible assets.
Profit attributable to minority interests in 2019 was €26 million, versus €22 million attributable to minority interests in 2018, reflecting the performance of Le Livre de Poche paperbacks at Lagardère Publishing and of North American and Italian operations at Lagardère Travel Retail.

5.2.2 CONSOLIDATED STATEMENT OF CASH FLOWS

Cash flows

(in millions of euros) 2019 2018(*)
Cash flow from operating activities before changes in working capital 1 099 960
Decrease in lease liabilities (518) (443)
Interest paid on lease liabilities (77) (76)
Changes in working capital relating to lease liabilities (9) (2)
Cash flow from operations before changes in working capital and income
taxes paid		 495 439
Changes in working capital 34 18
Income taxes paid (52) (72)
Cash flow from operations 477 385
Cash used in investing activities (502) (554)
  • Purchases of intangible assets and property, plant and equipment
 (215) (215)
  • Purchases of investments
 (287) (339)
Proceeds from disposals 348 397
  • Disposals of intangible assets and property, plant and equipment
 32 254
  • Disposals of investments
 316 143
Interest received 7 5
(Increase) decrease in short-term investments - -
Net cash used in investing activities (147) (152)
Cash flow from operations and investing activities 330 233
Net cash used in financing activities excluding lease liabilities (31) (52)
Other movements 8 (38)
Net cash from (used in) discontinued operations (99) 40
Change in cash and cash equivalents 208 183

(*) Data for 2018 restated for the full retrospective application of IFRS 16 and for the reclassification of Lagardère Sports as a discontinued operation in accordance with IFRS 5 (see notes 1.1 and 4.3, respectively, to the consolidated financial statements).

5.2.2.1 CASH FLOW FROM OPERATIONS AND INVESTING ACTIVITIES

In 2019, cash flow from operating activities before changes in working capital (operating cash flow) totalled €495 million, versus €439 million one year earlier. This increase chiefly results from the favourable impact of business at Lagardère Publishing and Lagardère Travel Retail, only partly offset by the loss from discontinued operations in the year, and from the favourable impact of movements in provisions for all divisions.
Changes in working capital represented an inflow of €34 million over the year, compared to an inflow of €18 million in 2018. This €16 million increase reflects (i) a €49 million improvement for Lagardère Publishing resulting from lower author advances at the end of the year and a year-on-year reduction in Partworks inventories, which had been affected by a busy launch schedule at the end of 2017, and (ii) a rise of €26 million for the non-retained scope, including a €22 million inflow relating to the collection of a portion of the proceeds from the sale of most of the magazine publishing titles to Czech Media Invest (CMI). The increase is offset by a €73 million decline for Lagardère Travel Retail (2018 had been boosted by a favourable one-off impact linked to the working capital optimisation drive).
Income taxes paid totalled €52 million in 2019 compared to €72 million in 2018. The decrease in this item partly reflects €42 million in taxes paid on the sale of a building in Paris’ eighth arrondissement in 2018, offset by adverse changes in tax settlements in connection with tax consolidation in France and the impact of higher taxation on cross-border trade in the United States.
Taking account of the above items, cash flow from operations represented an inflow of €477 million in 2019 compared to an inflow of €385 million in 2018.
Purchases of property, plant and equipment and intangible assets represented an outflow of €215 million, stable year on year. Purchases chiefly relate to Lagardère Travel Retail (€162 million), a significant portion of which corresponds to the financing of new stores. The balance (€35 million) results essentially from Lagardère Publishing and is mainly attributable to the end of investments in logistics projects in the United Kingdom and in new information systems projects in France. In 2018, this item related mainly to Lagardère Travel Retail, Lagardère Publishing, and the former Lagardère Active division.
Purchases of investments represented an outflow of €287 million in 2019 and mainly related to the acquisition of the International Duty Free (IDF) group in Belgium, and to a lesser extent the acquisition of Autogrill Czech in the Czech Republic by Lagardère Travel Retail. Purchases of investments also included Lagardère Publishing’s acquisitions of Gigamic, Blackrock Games and Short Books in the United Kingdom. Purchases of investments in 2018 represented an outflow of €339 million and mainly related to Lagardère Travel Retail’s November 2018 acquisition of Hojeij Branded Foods (HBF), a leading Foodservice operator in North America, and Lagardère Publishing’s acquisition of Worthy Publishing Group, a publishing house based in the United States.
Disposals of property, plant and equipment and intangible assets represented an inflow of €32 million in 2019, and mainly concerned the collection of the balance of the amount owed on the 2017 sale of an office building in Levallois-Perret (France), and the sale of Boursier.com business assets. In 2018, disposals represented an inflow of €254 million and resulted from the sale by Lagardère Active of an office building in the eighth arrondissement of Paris (France).
Disposals of investments represented an inflow of €316 million in 2019, relating mainly to disposals at Lagardère Active as part of the strategic refocusing plan, including the sale of the TV channels in September 2019, of BilletReduc in February 2019, and of South African radio operations in January 2019. In 2018, disposals of investments represented an inflow of €143 million, mainly at Lagardère Active owing to the sale of International Radio operations in Eastern Europe, MonDocteur and Doctissimo, along with the sale of the 42% interest in the Marie Claire group.
In all, cash flow from operations and investing activities represented a net inflow of €330 million in 2019, compared with a net inflow of €233 million in 2018.

5.2.2.2 NET CASH USED IN FINANCING ACTIVITIES

Financing activities in 2019 represented a net cash outflow of €31 million and include:

  • €201 million in dividends paid, of which €172 million by Lagardère SCA and €29 million paid to minority interests, including €22 million by Lagardère Travel Retail, particularly in North America;
  • a €263 million net increase in debt, essentially relating to the €253 million Schuldscheindarlehen German law private placement issued in June 2019, and also reflecting the redemption of the 2014 €500 million bond issue in September 2019 and a new €500 million bond issued in October 2019 and maturing in 2026;
  • €65 million in interest paid, including the payment of €29 million in coupons on the 2014, 2016 and 2017 bond issues and of €33 million in relation to hedging instruments (mainly of exchange rate risk);
  • purchases and sales of treasury shares representing a net outflow of €31 million, including €29 million allocated to free share awards for employees.

5.2.3 NET DEBT

Net debt is an alternative performance measure and is calculated based on elements taken from the consolidated financial statements.
A reconciliation with those accounting items is presented below:

(in millions of euros) 31 Dec. 2019 31 Dec. 2018(*)
Short-term investments and cash and cash equivalents 913 710
Financial instruments designated as hedges of debt with
a positive fair value(**)		 - 8
Non-current debt(***) (1 842) (1 020)
Current debt (532) (1 065)
Net debt (1 461) (1 367)

(*) Data for 2018 restated for the full retrospective application of IFRS 16 and for the reclassification of Lagardère Sports as a discontinued operation in accordance with IFRS 5 (see notes 1.1 and 4.3, respectively, to the consolidated financial statements).
(**) At 31 December 2018, financial instruments designated as hedges of debt with a positive fair value were included in “Other non-current assets” in an amount of €5 million and in “Other current assets” in an amount of €3 million.
(***) Non-current debt includes financial instruments designated as hedges of debt with a negative fair value, representing €8 million at 31 December 2019 and €1 million at 31 December 2018.

Changes in net debt during 2019 and 2018 were as follows:

(in millions of euros) 2019 2018(*)
Net debt at 1 January (1 367) (1 367)
Cash flow from operations and investing activities 330 (56)
Interest paid (65) (1 020)
(Acquisitions) disposals of treasury shares (31) (4)
(Acquisitions) disposals of minority interests (2) (3)
Dividends (201) (198)
Debt related to put options granted to minority shareholders (1) 3
Changes in scope of consolidation (20) (8)
Fair value of financial instruments designated as hedges of debt (15) (14)
Impact of classification of assets as held for sale (82) 41
Effect on cash of changes in exchange rates and other (7) 7
Net debt at 31 December (1 461) (1 367)

(*) Data for 2018 restated for the full retrospective application of IFRS 16 (see note 1.1 to the consolidated financial statements).