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 2020
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 a 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 were sold on 22 April 2020 and 30 October 2020, respectively.
The main changes in the scope of consolidation between 2019 and 2020 are described in note 4 to the consolidated financial statements.

5.2.1 CONSOLIDATED INCOME STATEMENT

(in millions of euros) 2020 2019
Revenue 4,439 7,211
Recurring operating profit (loss) of fully consolidated companies(*) (155) 378
Income (loss) from equity-accounted companies(**) (58) 6
Non-recurring/non-operating items (336) 27
of which impact of IFRS 16 on concession agreements(***) (17) 60
Profit (loss) before finance costs and tax (549) 411
Finance costs, net (76) (53)
Interest expense on lease liabilities (74) (85)
Income tax benefit (expense) 31 (55)
Profit (loss) from discontinued operations (20) (207)
Profit (loss) for the year (688) 11
Attributable to:    
- Owners of the Parent (660) (15)
- Minority interests (28) 26

(*) 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 (loss) before finance costs and tax and the following income statement items:

  • income (loss) 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 sub-leases:
    • excluding gains and losses on leases,
    • 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 leases.

Consolidated revenue for the Lagardère group came in at €4,439 million for 2020, down 38.4% on a consolidated basis and down 37.9% like for like (1).
The difference between consolidated and like-for-like revenue is essentially attributable to a €44 million negative foreign exchange effect resulting in part from the depreciation of the US dollar. The €40 million negative scope effect was chiefly linked to the sale of TV channels in September 2019 and Lagardère Studios in October 2020. This effect was countered by the favourable impact of Lagardère Travel Retail’s acquisition of International Duty Free (IDF) in late September 2019, and by Lagardère Publishing’s acquisition of Le Livre Scolaire in January 2020 and of Laurence King in September 2020.
Revenue for Lagardère Publishing totalled €2,375 million, down 0.4% on a consolidated basis and down 0.8% like for like. Sales remained stable during the crisis, testifying to the strong resilience of the business, supported mainly by a solid performance from General Literature in its different regions. The difference between consolidated and like-for-like revenue is attributable to the combined impact of a €24 million negative foreign exchange effect resulting mainly from the depreciation of the US dollar, and a €34 million positive scope effect, due notably to the acquisitions of Le Livre Scolaire in January 2020 and Laurence King in September 2020. In France, revenue for the division retreated 4.3%, hit by the marked decrease in sales during the first-half lockdown. Business was also affected by a smaller impact from curriculum reform versus 2019.
However, despite several weeks when bookshops were closed, General Literature reported growth, driven by the first volume of Barack Obama’s memoirs, A Promised Land, two titles from Guillaume Musso, La vie est un roman and Skidamarink, Vanessa Springora’s novel Le consentement, the success of titles from Virginie Grimaldi and Aurélie Valognes, and good momentum at Le Livre de Poche. Launched in 2019, Lagardère Publishing’s Board Games division turned in an upbeat performance, buoyed by Gigamic and Blackrock Games. It should be noted that Oriflamme, the first game to be published by Studio H, picked up the prestigious “Game of the Year” prize at the 2020 As d’Or awards.
In the United Kingdom, revenue increased by 9.9% despite the lockdowns. Revenue growth can be explained by the large number of best-selling titles including J.K. Rowling’s The Ickabog, Stephenie Meyer’s Midnight Sun, Delia Owens’ Where the Crawdads Sing, and Andrzej Sapkowski’s The Witcher series. There was vigorous growth in digital formats (e-books and audiobooks) during the year, partly attributable to the repeated closures of brick-and-mortar points of sale.
In the United States, revenue was up 3.9%, powered by the success of several novels in the second half, including Stephenie Meyer’s Midnight Sun and Nicholas Sparks’ The Return, along with various titles from well-known authors. The success of titles from The Witcher series and publications linked to the Black Lives Matter movement also contributed to the year’s good performance. Sales of digital formats enjoyed fast-paced growth, rising 17%.
In Spain/Latin America, revenue contracted 16.4%, hit by less extensive school reform and the absence of a new Asterix album in Spain, and by the impacts of the health crisis on the Education and General Literature segments in Mexico.
Revenue from sales of Partworks fell 9.5%, affected by a reduction in the number of launches due to the health crisis, and an unfavourable comparison basis in the first half of 2019, with a string of successes that were not repeated in 2020. Difficulties encountered by Presstalis took a toll on business in France in the first three quarters of 2020.
E-books accounted for 9.5% of total Lagardère Publishing revenue in 2020 versus 7.8% in 2019, while digital audio books represented 4.3% of revenue versus 3.4% in 2019.
Revenue for Lagardère Travel Retail totalled €1,720 million, down 59.7% on a consolidated basis and down 60.4% like for like. The positive €51 million scope effect was mainly attributable to the acquisition of International Duty Free (IDF) in Belgium. The currency impact reduced revenue by €20 million.
In France, the division reported a 64.5% contraction in business, reflecting the impact of the government’s measures restricting mobility, and in particular air traffic and international travel. The marked fall in sales at airports was partly countered by a smaller decline in sales at railway stations.
The EMEA region (excluding France) retreated 59.3%, affected by travel restrictions and border closures introduced in several countries including Italy, Belgium and the United Kingdom.
North America also reported lower revenue (down 60.4%), with fewer people travelling due to the lockdown measures introduced by various states.
Asia-Pacific revenue was down 56.2%. Revenue trends varied widely across the region, with the Pacific countries particularly starkly affected by the full, prolonged closure of their borders. In contrast, mainland China posted 18.2% revenue growth over the year, led by a significant rally in domestic traffic and strong online sales momentum. Lagardère Travel Retail’s new contract in Hainan’s Duty Free zone took effect as from mid-December 2020.
Revenue for Other Activities totalled €229 million, down 20.5% on a consolidated basis and down 20.7% like for like. Lagardère News revenue contracted 14.2% in 2020, due mainly to the 27.3% fall in licensing revenue owing to the pandemic. The decline in revenue from Radio (9.4%) and Press (11.9%) activities eased in the second half (after being significantly impacted in the first half by the fall in advertising revenues), thanks to the appeal of radio media for advertisers, along with good demand for press titles.
Revenue for the non-retained scope in 2020 was €115 million, down 58.2% on a consolidated basis and down 22.8% like for like. The difference between consolidated and like-for-like data is due to a €124 million negative scope effect linked to the sale of TV channels in September 2019 and Lagardère Studios in October 2020. Lagardère Studios saw its revenue decline in the year due to the halt in most production activities in light of the health crisis.
Recurring operating profit (loss) of fully consolidated companies amounted to a loss of €155 million, down €533 million on 2019.
Based on the target scope, recurring operating profit (loss) of fully consolidated companies fell by €515 million year on year, to €154 million. Movements in this item can by analysed as follows for each division:
Lagardère Publishing reported €246 million in recurring operating profit of fully consolidated companies, up €26 million year on year. Recurring operating profit of fully consolidated companies increased especially strongly in the second half of the year, by 19% to €219 million, following a 25% decline to €27 million in the six months to 30 June 2020. The year-on-year increase was driven by a more favourable format mix (strong growth in e-books and audiobook sales) in the context of the health crisis, and by a stellar rise in backlist sales due to the success of The Witcher series, among others.
Growth in recurring operating profit of fully consolidated companies was also attributable to the measures taken to reduce payroll costs along with sales and marketing expenditure.

(1) Based on constant Group structure and exchange rates.

Lagardère Travel Retail reported negative recurring operating profit of fully consolidated companies of €353 million, down €505 million on 2019. This represents a flow-through ratio of 19.9% on a consolidated basis. In the second half, the flow through was limited to 17%, thanks to cost-cutting measures.
These cost-cutting measures, including a reduction of €605 million in overheads, mainly concern:

  • renegotiation of financial terms (reduction in fixed rental payments, lower rate of variable payments);
  • reduction in the number of points of sale opened and adjusted opening times in line with traffic flows and the health situation;
  • adjustments to payroll costs, with the introduction of furlough in countries where these were available, or failing this, redundancies;
  • reduction in incidental overheads as a result of either cost savings or negotiations (as appropriate), including marketing costs, travel expenses, consulting fees, maintenance and cleaning costs, and royalties paid.

Other Activities posted negative recurring operating profit of fully consolidated companies of €47 million, down €36 million on 2019 due mainly to lower Radio and Press advertising revenues, and to the adverse impact of one-off-items including Presstalis and temporarily vacant premises following divestments.
Recurring operating profit of fully consolidated companies recorded by the non-retained scope was down €18 million year on year to a negative €1 million, reflecting the impact of the business downturn on Lagardère Studios earnings, and the various divestments carried out.
The loss from equity-accounted companies (before impairment losses) came in at €58 million in 2020, versus income of €6 million in 2019, This decline reflects the downturn in trading at Lagardère Travel Retail owing to the health crisis, in particular at Société de Distribution Aéroportuaire, Relay @ADP and Lagardère & Connexions.
Non-recurring/non-operating items included in profit before finance costs and tax represented net expense of €336 million in 2020, comprising:

  • €151 million in impairment losses against property, plant and equipment and intangible assets, including €106 million for Lagardère Travel Retail relating mainly to write-downs of its concessions in Rome (€55 million) and Belgium (€31 million), and to a lesser extent, to closures of points of sale. Impairment losses represented €20 million for Lagardère Publishing, relating mainly to Mexico and Spain. In the non-retained scope, Lagardère Studios goodwill was written down by €19 million;
  • €106 million in amortisation of intangible assets and expenses relating to acquisitions and disposals, including €94 million for Lagardère Travel Retail and €11 million for Lagardère Publishing;
  • €55 million in restructuring costs, relating mainly to the health crisis and to cost-cutting plans, including €36 million for Lagardère Travel Retail, €10 million for Other Activities and €9 million for Lagardère Publishing;
  • €7 million in net losses on disposals;
  • the €17 million negative impact of applying IFRS 16 on concession agreements at Lagardère Travel Retail (including gains and losses on leases). This includes the straight-line depreciation of right-of-use assets, partially offset by proceeds from certain reductions in fixed lease payments in 2020. Other rent reductions continue to be shown as a deduction from rightof- use assets. Fixed rental expenses recognised in recurring operating profit (loss) of fully consolidated companies decreased by €319 million in 2020 compared to 2019.

In 2019, non-recurring/non-operating items represented a net positive amount of €27 million, including (i) €134 million in net disposal gains primarily relating to the disposals of TV channels, BilletReduc and radio operations in Africa; (ii) €42 million in restructuring costs, mainly in connection with the late-2019 redundancy plan put in place for the Group’s Corporate function, integration costs following the acquisition of HBF at the end of 2018, and the impacts of concept store closures in Australia at Lagardère Travel Retail and the streamlining of distribution centres in the United Kingdom at Lagardère Publishing; (iv) €91 million in amortisation of intangible assets and expenses relating to acquisitions of consolidated companies, of which €82 million at Lagardère Travel Retail; (v) €34 million in impairment losses, concerning mainly Lagardère Studios; and (vi) a €60 million gain reflecting the positive impact of applying IFRS 16 to concession agreements at Lagardère Travel Retail.
As a result of the above, the loss before finance costs and tax came out at €549 million for 2020, versus profit of €411 million one year earlier.
Net finance costs came in higher year on year, at €76 million, chiefly reflecting €17 million in write-downs of financial assets at Lagardère Travel Retail and a rise in total debt during 2020.
Interest expense on lease liabilities represented €74 million in 2020, versus €85 million in 2019. The €11 million decrease in this item results from the decrease in lease liabilities at Lagardère Travel Retail following the renegotiation of its leases.
The Group booked a positive income tax figure of €31 million, an improvement of €86 million compared to 2019. This figure reflects tax income generated by the Travel Retail division’s losses in the period (mainly in the United States), as well as the lower income tax charge linked to the downturn in business (mainly in Europe).
The loss from discontinued operations amounted to €20 million in 2020 and includes the disposal losses and negative earnings at Lagardère Sports up until its sale in April 2020. The loss from discontinued operations was €207 million in 2019, corresponding to negative earnings and asset impairment at Lagardère Sports.
Profit (loss) attributable to minority interests in 2020 was a loss of €28 million, versus profit of €26 million attributable to minority interests in 2019. The year-on-year change chiefly reflects the sharp fall in Lagardère Travel Retail’s earnings.

5.2.2 CONSOLIDATED STATEMENT OF CASH FLOWS

Cash flows

(in millions of euros) 2020 2019
Cash flow from operating activities before changes in working capital 257 1,099
Decrease in lease liabilities (236) (518)
Interest paid on lease liabilities (49) (77)
Changes in working capital relating to lease liabilities (4) (9)
Cash flow from (used in) operations before changes in working capital and income taxes paid (32) 495
Changes in working capital (17) 34
Income taxes paid (38) (52)
Cash flow from (used in) operations (87) 477
Cash used in investing activities (206) (502)
- Purchases of intangible assets and property, plant and equipment (170) (215)
- Purchases of investments (36) (287)
Proceeds from disposals 97 348
- Disposals of intangible assets and property, plant and equipment 1 32
- Disposals of investments 96 316
Interest received 5 7
(Increase) decrease in short-term investments - -
Net cash used in investing activities (104) (147)
Cash flow from (used in) operations and investing activities (191) 330
Net cash used in financing activities excluding lease liabilities (72) (31)
Other movements - 8
Net cash used in discontinued operations - (99)
Change in cash and cash equivalents (263) 208

5.2.2.1 CASH FLOW FROM OPERATIONS AND INVESTING ACTIVITIES

In 2020, cash flow from (used in) operations before changes in working capital and income taxes paid (operating cash flow) represented a net cash outflow of €32 million, compared with a net cash inflow of €495 million in 2019. The 2020 figure breaks down as a net cash outflow of €138 million in the first half and a net cash inflow of €106 million in the second. These figures are primarily a reflection of the adverse impact of the health crisis on Lagardère Travel Retail, partly countered by the good second-half performance at Lagardère Publishing.
Changes in working capital represented an outflow of €17 million (inflow of €34 million in 2019), hit by the contraction in the Travel Retail business. The €95 million deterioration in Lagardère Travel Retail’s working capital position results from a sharp drop in trade payables, partly countered by lower inventories. The €33 million improvement at Lagardère Publishing reflects a rise in trade payables in line with the business upturn in the second half of the year.
Income taxes paid were €14 million lower, totalling €38 million in 2020 versus €52 million in 2019 on account of the trading slump at Lagardère Travel Retail.
Taking account of the above items, cash flow used in operations represented an outflow of €87 million in 2020 compared to an inflow of €477 million in 2019.
Purchases of property, plant and equipment and intangible assets represented an outflow of €170 million, €45 million less than in 2019. Purchases chiefly relate to Lagardère Travel Retail (outflow of €121 million), a significant portion of which corresponds to commitments undertaken in 2019 as well as investments in information systems and developments in China. The balance (outflow of €39 million) stems essentially from Lagardère Publishing’s logistics and IT projects in the United Kingdom and new information systems projects in France.
Purchases of investments represented an outflow of €36 million in 2020 and relate mainly to Lagardère Publishing’s acquisition of Le Livre Scolaire and Laurence King. In 2019, purchases of investments represented an outflow of €287 million 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.
Disposals of property, plant and equipment and intangible assets represented an inflow of €1 million in 2020. In 2019, disposals of property, plant and equipment and intangible assets represented an inflow of €32 million, corresponding mainly to 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.
Disposals of investments represented an inflow of €96 million, principally concerning the sale of Lagardère Studios and Lagardère Sports, Disposals of investments in 2019 related 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 all, cash flow from operations and investing activities represented a net outflow of €191 million in 2020, compared with a net inflow of €330 million in 2019.

5.2.2.2 NET CASH USED IN FINANCING ACTIVITIES

Financing activities in 2020 represented a net cash outflow of €72 million and include:

  • €13 million in dividends paid, essentially to minority interests, including €8 million by Lagardère Travel Retail, particularly in North America, and €5 million by Lagardère Publishing;
  • a €11 million net increase in debt, essentially relating to amounts drawn on the syndicated credit line, which showed a net positive balance of €300 million at 31 December 2020, offset by the €293 million net outflow resulting from repayments of commercial paper in 2020;
  • €64 million in interest paid, including the payment of €29 million in coupons on the 2016, 2017 and 2019 bond issues, €19 million in relation to currency hedging instruments, €6 million in interest and fees on the syndicated credit line, and €5 million in relation to bank borrowings;
  • acquisitions of minority interests representing a cash outflow of €12 million, including an outflow of €9 million at Lagardère Studios prior to its sale to Mediawan, and an outflow of €3 million at Lagardère Travel Retail in Iceland;
  • purchases and sales of treasury shares, representing a net inflow of €5 million.

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. 2020 31 Dec. 2019
Short-term investments and cash and cash equivalents 687 913
Financial instruments designated as hedges of debt with a positive fair value 16 -
Non-current debt(*) (1,643) (1,842)
Current debt (793) (532)
Net debt (1,733) (1,461)

(*) At 31 December 2019, non-current debt included financial instruments designated as hedges of debt with a negative fair value, representing €8 million.

Changes in net debt during 2020 and 2019 were as follows:

(in millions of euros) 2020 2019
Net debt at 1 January (1,461) (1,367)
Cash flow from (used in) operations and investing activities (191) 330
Interest paid (64) (65)
(Acquisitions) disposals of treasury shares 5 (31)
(Acquisitions) disposals of minority interests (12) (2)
Dividends (13) (201)
Debt related to put options granted to minority shareholders (14) (1)
Changes in scope of consolidation (4) (20)
Fair value of financial instruments designated as hedges of debt 23 (15)
Impact of classification of assets as held for sale 3 (82)
Effect on cash of changes in exchange rates and other (5) (7)
Net debt at 31 December (1,733) (1,461)