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Bertelsmann Announces 2013 Fiscal Year Results, Part V

The international service provider Arvato delivered a robust business performance in financial year 2013. Revenues and operating EBIT remained stable at €4,400,000,000 and €244,000,000, respectively, the same sums as in 2012.
Return on sales thus remained at 5.5%. Operating EBITDA increased to €401,000,000 (up from €391,000,000 in 2012). This put the EBITDA margin at 9.1% (up from 8.8% in 2012).

There was, however, a change in management at the top of Arvato: Achim Berg has led the group as Chief Executive Officer since April of 2013. A new organizational structure arranges the businesses by Solution Groups and countries, and a central Key Account Management system was introduced for major international clients. At year-end, Arvato employed 66,410 people (up from the 63,627 people it employed on December 31, 2012).

The Bertlesmann Group reported, “During the reporting period Arvato registered significant growth mainly at IT Services and supply chain management solutions for international customers in the Internet, high-tech and consumer goods sectors, as well as in China. Arvato’s acquisition of Gothia Financial Group, completed in June 2013, advanced its internationalization and transformed it into the third-largest service provider in Europe in the rapidly growing market for business information and financial services.”

Arvato’s Print Services maintained its position in a difficult market environment. Revenues in Replication declined as expected. In Brazil and China, Arvato sold holdings in replication factories.

The development of Arvato’s businesses varied from region to region. For example, performance was satisfactory in the European core countries given the difficult economic situation. In the UK, a major new government services client, the Department for Transport, was acquired. The service activities in Spain saw profitable growth despite the economic crisis. Meanwhile, the services businesses in France were not quite able to maintain the previous year’s high levels. In the North American market, the portfolio of customers and locations was systematically culled to increase the profitability of the businesses. In Turkey, Arvato’s services businesses grew dynamically, and in China the company’s logistics network was expanded considerably yet again.

As with Penguin Random House and Gruner + Jahr, Arvato won prestigious awards.

In 2013, Bertelsmann’s gravure and international offset printing activities, grouped into Be Printers, generated revenues of €1,100,000,000 in a difficult market environment, (down €1,200,000,000 from 2012, a decline of 7.5%). Operating EBIT declined by 29.3% to €41,000,000 (whereas it had been €58,000,000 in 2012), and return on sales thus amounted to 3.7% (whereas it had been 4.8% in 2012). Operating EBITDA decreased to €92,000,000 (down from €115,000,000 in 2012), resulting in an EBITDA margin of 8.2% (down from 9.5% in 2012). At year-end, Be Printers employed 6,201 people (a decrease from 6,571 people on December 31, 2012).

Declining print runs characterized Be Printers’ printing operations in 2013, as did continuing price pressure and high excess capacity in the industry. Be Printers responded with new offers as well as various programs to increase efficiency and lower costs.

Specifically, the gravure division Prinovis realized savings in personnel costs and materials purchasing. Provisions for restructuring costs were formed for the planned closure of the Itzehoe, Schleswig-Holstein site this month.

The Bertelsmann Group noted, “As a special item, these are not shown under operating EBIT. The fire at a gravure printing press in Dresden led to restrictions on production; at the same time, Prinovis received a compensation payment from the machine’s property insurance. As a special item, this is also not shown under operating EBIT. In the UK, a major customer cut order volumes. Overall, revenues and earnings were down at Prinovis. During the reporting period, several of Prinovis’ print products and digital offers won industry awards for their high quality.”

Be Printers’ Southern European printing companies did business in a difficult market environment that was further exacerbated by macroeconomic developments in Italy and Spain. The units recorded declining volumes. Management countered this with measures to increase sales and cut costs, for example, in the areas of procurement and IT. The merger of the Italian and German calendar businesses also improved productivity and competitiveness.

Be Printers Americas countered the declining market development and kept its earnings stable. Growing business with clients outside the publishing industry – such as communications services for companies in the health-care sector – cushioned the decline in revenues. In 2013, major existing customers renewed their contracts with Be Printers Americas.

In 2013, Corporate Investments, which includes all of the Bertelsmann Group’s other operating activities, recorded significantly increased revenue of €582,000,000 (up from €471,000,000 in 2012) and operating EBIT of -€40,000,000 (whereas it was -€38,000,000 in 2012). Operating EBITDA was €10,000,000 compared with -€29,000,000 in 2012.

The EBITDA margin was 1.7%. The Bertelsmann Group stated, “The acquisition of full ownership of the BMG Music Rights subsidiary, completed in April 2013, helped to boost revenues. This was partly offset by declining revenues in the Club and Direct Marketing businesses. Operating EBIT reflects start-up losses, among other factors for business expansion in the education sector, and a decline in earnings in the Club business.” At year-end, Corporate Investments had 4,342 employees (up from 4,289 on December 31, 2012).

Bertelsmann established BMG Rights Management in October of 2008, with a management team comprised of former executives of BMG Music Publishing and other music publishing companies, as well as executives from the parent company. The private equity firm Kohlberg, Kravis Roberts & Co. (K.K.R.) acquired a 51% ownership stake in BMG Rights Management.

Since the end of March of 2013, BMG Rights Management is once again fully owned by Bertelsmann.[1] It grew strongly in 2013.

BMG acquired several catalogs of song and master rights: Primary Wave, Sanctuary, Mute, and Virgin/Famous. Numerous singers with fan bases of international scope signed new contracts, including Mick Jagger and Keith Richards of the Rolling Stones, Robbie Williams, and the Backstreet Boys. The music rights company expanded its presence in all major music markets, including opening a branch in Canada.

The Bertelsmann Group stated that in 2013 it “invested in developing its new line of business: education. The University Ventures Fund, jointly established with other investors, expanded its international portfolio of holdings. Bertelsmann also made direct investments to increase its stake in Synergis Education, a service provider that supports academic institutions in establishing accredited online degree programs, and in the innovative US online education provider University Now.”

The Bertelsmann Digital Media Investments (BDMI) and Bertelsmann Asia Investments (BAI) funds expanded their portfolios. For instance, BDMI joined RTL Group in investing in the online video network StyleHaul, which brought its holdings to a total of 49 at year-end. BAI acquired five new holdings – including providers of mobile payment services, car purchasing and cloud computing – and divested from three companies, realizing high capital gains in the process. The remaining portfolio, consisting of 20 holdings, developed very well. In India, two direct investments were made, including in the real estate portal In Brazil, investments were also made in two online media start-ups.

Revenues in the Club business declined as planned in 2013. The operational business of the direct marketing company Inmediaone will be gradually phased out by mid-2014. The dismantling of the German Club continued with store closures, and the businesses in the Czech Republic and Slovakia were sold to a strategic investor.

The Corporate Center department, which comprises all of the [Bertelsmann] Group’s Corporate Centers around the world, controlled and supported several large transactions in 2013, including the merger of Penguin and Random House into Penguin Random House… and the incremental placement of RTL Group shares on the Frankfurt Stock Exchange. Its work during the year also focused on the organization of a Management Meeting and ‘State of the Art Forum’ in Silicon Valley, as well as the global employee survey. In the first half of 2013, the Bertelsmann Executive Board launched the Operational Excellence program, which is designed to monitor processes and structures in the financial, HR, IT and procurement departments across the Group. The program will support Group strategy by modernizing structures, improving efficiency and creating uniform standards of quality. It will be implemented in several stages over a period of up to five years.

Overall, the Bertlesmann Group is doing quite well. The organization is adapting to use technological advances and meet challenges caused by socioeconomic trends beyond its control.

[1] Bertelsmann has been associated with music for over fifty years, since the establishment of the Ariola label in 1959. Acquisitions over the years included Arista in 1979 and RCA in 1986. The Bertelsmann Group consolidated its music interests under the name Bertelsmann Music Group (B.M.G.). In the face of declining sales, Bertelsmann agreed to merge the BMG recorded music division with Sony Music in 2004 to form Sony BMG. Bertelsmann kept the BMG music publishing division separate. By 2006, BMG was the third largest music publisher worldwide, but that year Bertelsmann sold BMG Music Publishing to Vivendi in order to refinance a major share repurchase of the Bertelsmann Group. Subsequently, Bertelsmann conducted a strategic review of the business options for Sony BMG. In late 2008, Bertelsmann completed the sale of its shares to Sony Corporation. As part of the deal, Bertelsmann acquired part of Sony BMG’s master rights catalogue.

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