Bertelsmann Reports Record Revenues and Earnings for 2006

• Revenues increase by 7.9 percent to €19.3 billion
• Operating EBIT up by 16 percent to €1.87 billion
• Return on sales reaches new record at 9.7 percent
• Net income more than doubles to €2.4 billion
• Debt repayment in wake of share buyback ahead of schedule
• Number of employees rises to 97,132
• Revenues and earnings expected to improve further in 2007
• Preparing for the next period of growth

The year 2006 was the most successful in Bertelsmann’s history thanks to continued growth in the group’s revenues and operating results. The international media company announced that revenues rose by 7.9 percent, from €17.9 billion to €19.3 billion, reaching an historic high. The increase is attributed to accelerated organic growth and portfolio effects. Operating EBIT saw a 16 percent increase, from €1,610 million in 2005 to a new record at €1,867 million. Operating return on sales also reached a new high at 9.7 percent, up from 9.0 percent in 2005. The group’s net income more than doubled to €2,424 million (2005: €1,041 million), partly due to capital gains from proceeds. At the end of the year, the number of employees grew to 97,132 (December 31, 2005: 91,559). Bertelsmann made significant progress on paying down its debt from the share buyback.

All corporate divisions of Bertelsmann except BMG improved their financial performance year on year. This applies in particular to RTL Group, which registered a surge in results thanks to a favorable advertising market and the performance of its content division, Fremantle Media. Direct Group doubled its results year on year. The Gruner + Jahr, Random House and Arvato divisions surpassed the high level of results in 2005.

Bertelsmann AG’s Chairman & CEO Gunter Thielen declared: “The figures for 2006 clearly show that we are heading in the right direction. Bertelsmann has never been more profitable. Our 9.7 percent return on sales puts us very close to our ambitious target ROS of ten percent. At this level of profitability, we can generate the cash flow necessary to continue growing without additional debt. We are already preparing for the next period of growth. We plan to actively shape the digital future, worldwide, with our innovative media content and services.”

Consolidated revenues for the year under review amounted to €19.3 billion – a 7.9 percent increase, of which 2.9 percent resulted from improved organic growth (2005: 2.3 percent). Portfolio changes and other effects contributed 5.0 percent (2005: 2.5 percent). Foreign currency exchange fluctuations had no impact on revenues (2005: 0.3 percent).

Operating EBIT was up by 16 percent, reaching €1,867 million (2005: €1,610 million). After considering financial results and taxes, net income amounted to €2,424 million, compared to €1,041 million in 2005. This includes the proceeds from the sale of Bertelsmann’s music publishing business to Vivendi, offset by restructuring and integration costs at Direct Group and BMG. In total, special items amounted to €1,161 million compared to €61 million in 2005.

The pivotal event of the business year was the buyback of GBL’s 25.1-percent stake in Bertelsmann for €4.5 billion, agreed to in May and concluded in July. The buyback was in-part financed by the sale of BMG Music Publishing, increased cash flow and the placement of two benchmark-size Euro bonds. The strategy is further supported by a restricted investment policy through the end of 2007 and a moderate dividend policy.

Gunter Thielen commented: “The buyback grants us a great deal of independence and entrepreneurial freedom. It safeguards our corporate culture of partnership, and strengthens the values that have made Bertelsmann so big and successful over the past 170 years. The new shareholder structure also ensures that much of the profits generated can be re-invested directly into the businesses. We’ve already paid down a sizable portion of the debt, and are well on track to reach our acceptable debt levels.”

As part of financing the buyback, the sale of BMG Music Publishing to Vivendi for €1.63 billion was agreed to in September. The cash was received and the business deconsolidated at the end of 2007. The company remains part of Bertelsmann until final antitrust clearance has been received.

In the period under review, Bertelsmann intensified its focus on emerging markets and digital ventures. RTL Group launched digital special-interest channels in several core markets, along with new video-on-demand, IPTV and mobile TV offerings. Random House branched out beyond its traditional book publishing business by establishing Random House Film; other measures included expanding its presence in Asia. As part of its “Expand your Brand” initiative, Gruner + Jahr extended its strong, established magazine brands to digital channels and developed new products and services beyond the print realm. At the same time, Gruner + Jahr intensified its activity in emerging markets such as China and southeast Europe. The Sony BMG Music Entertainment joint venture expanded its digital offerings and significantly increased the total revenue contribution of digital music sales. The company extended its presence to online and mobile platforms and devoted itself to marketing music video content, e.g. via online social networking sites.

Arvato ventured into emerging markets with innovative offerings and increased outsourcing activities. The division also gained initial – positive – experiences with its public private partnership in East Riding, U.K., where Arvato took on numerous public administration services, in a large-scale pilot project. Direct Group’s clubs generated more customer traffic by successfully intensifying their links with stationary book retail and the Internet. Direct Group added large numbers of new club customers, especially in Eastern Europe.

Chairman & CEO Thielen said: “Each of Bertelsmann’s divisions has formulated responses to the challenges of the future. This was additionally borne out by a comprehensive analysis of the group’s major Profit Centers, which we performed last year. We wanted to know: Are we fit for the future? Are we charting the right course for long-term success? The result was very gratifying: Bertelsmann is strategically well positioned and poised on the threshold to a new period of growth. Three quarters of our businesses occupy the number one or number two positions in their respective markets; 80 percent are above or on par with the market average when it comes to profitability. We have the capacity to grow by between five and eight percent a year starting in 2008.”

In 2006, the volume of investments was less than 2005 – a year characterized by significant investments – and amounted to €1,092 million after €2,565 million in 2005. Apart from increasing the shareholding in the Maul-Belser gravure company and a number of smaller acquisitions across all business divisions, investments were mainly made in property, plant and equipment.

The share buyback increased economic financial debt from €3,931 million to €6,760 million. This figure comprises net financial debt plus provisions for pensions and profit participation capital. At December 31, 2006, the Leverage Factor – or ratio between economic financial debt and Operating EBITDA – was 2.8, and thus exceeded Bertelsmann’s internal debt target of 2.3 or below.

Bertelsmann’s CFO Thomas Rabe declared: “By the end of this year, we will have already come very close to making our internal target of 2.3. At that point, we will again have financial scope of between €1.2 and €1.5 billion per year for acquisitions and €700 million for other ongoing investments. This translates to a total investment volume of six billion euros by 2010.”

In addition to this financial leeway, Bertelsmann is opening up further options by establishing an equity co-investment initiative in conjunction with its partners Citigroup Private Equity and Morgan Stanley Principal Investments. The initiative will allow Bertelsmann and its partners to pursue attractive media-related transactions and co-investment opportunities of significant scale. It will initially amount to €1 billion of equity from Bertelsmann and its partners.

Thanks to the positive developments in its operating performance, Bertelsmann will again pay out profit participation to all eligible employees for fiscal 2006, as in the past.

In May 2007, 15 percent of par value will again be paid out on the Bertelsmann Profit Participation Certificates 2001, under the terms and conditions governing PPC 2001. Payout on the “old” 1992 Profit Participation Certificates will amount to 12.69 percent of par value (2005: 6.97 percent).

The Bertelsmann AG Executive Board is confident about future performance: “We expect further growth in revenues and results for 2007 and 2008,” declared Gunter Thielen.

Other Key Financials:

In 2006, the special items affecting net income but not included in Operating EBIT were distinctly positive at €1,161 million (2005: €61 million). Positive contributions resulted first and foremost from capital gains from proceeds in the amount of €1,410 million, including €1,174 million from the sale of BMG Music Publishing. These gains were partly offset by restructuring and integration expenditures in the amount of minus €68 million (2005: minus €185 million), of which BMG accounted for minus €54 million, and Direct Group for minus €14 million. Apart from this, special items included the cost of an out-of-court settlement with Universal Music Group related to the “Napster” lawsuit, in the amount of €48 million. Special items also include a provision of €101 million for possible future settlements with other plaintiffs in this lawsuit.

During the period under review, Cash Flow from operations was €1,673 million after €1,791 million in 2005. Net cash from investments amounted to €498 million, after minus €2,489 million the previous year. Net cash from financing activities in 2006 – due primarily to the GBL share buyback – was minus €2,198 million (2005: minus €428 million).

Total assets decreased slightly, by €0.4 billion to €22.5 billion, compared with the end of the previous year. Changes in the structure of the balance sheet are largely attributable to the buyback of the GBL stake. As a result, shareholders’ equity at the end of 2006 dropped from €9,170 million to €6,429 million. The equity ratio was 28.6 percent (2005: 40 percent). Considering a 20.4 percent level at June 30, 2006, the year-end ratio had returned to well above the internal target of 25 percent or more.

At the end of the year, Bertelsmann had 97,132 employees worldwide (2005: 91,559¹). The increase by 5,573 employees is mainly attributable to organic growth and acquisitions.

¹ The number of employees for 2005 has been adjusted to reflect the changed measuring methodology.

Corporate Divisions

RTL Group, Europe’s leading television, radio and TV production group, recorded sharply improved revenues and operating profit in 2006. Return on sales reached 14.8 percent (2005: 14.8 percent). Revenues rose by 10.3 percent to €5.6 billion (2005: €5.1 billion), thanks above all to higher advertising income and significant growth in the TV production business. As a result of improved performance in almost all core activities, Operating EBIT increased by 10.4 percent to €835 million (2005: €756 million).

Key strategic moves in 2006 included the introduction of digital channels and expansion of diversification activities. The share of non-advertising-related business in total revenues increased to 39 percent (2005: 38 percent). As part of its drive for digitization, RTL Group is working on numerous new business models to complement its core activities in Free-TV, including video-on-demand (VoD), online communities, IPTV and mobile TV. Growth in viewer market share was influenced by the two major sporting events of 2006, the football world championship in Germany and the Olympic winter game in Turin, which were transmitted by state TV stations in most countries. Nevertheless, RTL Group’s channels managed to either largely maintain or even increase their ratings. The German family of channels improved its profitability and ad sales market position while keeping the viewer market share nearly stable. Vox was the only established private TV channel to add viewer market share. In France, investment in programs and a successful positioning of the M6 channel family paid off with an increase in viewer share and continuing high earnings levels. In the Netherlands, viewer market share remained at a high level despite a new competitor, with profitability rising sharply. RTL Televizija in Croatia, launched in 2004, already achieved break-even in the second full year of its operations. In the U.K., a sharp decline in TV advertising market and a high level of competitive intensity resulted in dwindling advertising income and audience shares. The TV production arm Fremantle Media grew its revenues and profits thanks to a number of international successful formats, especially in the U.S.

Random House, the world’s leading trade book publishing group, improved its revenues and profit in a global book marketplace that continues to grow slowly. Return on sales amounted to 9.3 percent (2005: 9.1 percent). Revenues were up by 6.5 percent to €1.9 billion (2005: €1.8 billion) thanks to a huge number of bestsellers and several corporate acquisitions. Operating EBIT rose to €182 million (2005: €166 million), a 9.6 percent increase. The profit increase reflects an improved performance in North America and Germany, along with Random House UK’s continued high profitability.

The 2006 fiscal year saw numerous Random House literary and publishing successes worldwide. In the U.S. the company had an industry-leading 201 New York Times national bestsellers, 37 of them #1 titles—the highest total in the company’s history. In the U.K., the Random House Group commanded more than one-quarter of all positions on the Sunday Times of London national bestseller lists in 2006, including 56 #1 bestsellers. Dan Brown's “The Da Vinci Code” paperback movie tie-in editions had more than seven million copies in print in North America, the U.K., and Australia, continuing the novel’s spectacular success. Verlagsgruppe Random House successfully launched "Pantheon" as Germany's first-ever trade-paperback-only imprint, and became one of the top three children’s publishers for the first time. Major portfolio changes during the period under review included the acquisition of the majority share of the prominent nonfiction publisher BBC Books, which became an imprint of the Random House Group U.K. In South Korea Random House bought back all outside ownership shares of its Korean book publishing company, which was subsequently renamed Random House Korea.

Europe’s biggest magazine publisher Gruner + Jahr improved revenues and operating profit in 2006. Return on sales reached 9.7 percent (2005: 9.5 percent). Revenue increased by 9.0 percent to €2.9 billion (2005: €2.6 billion). With mainly stable core activities in Germany and abroad, the increase was above all due to the inclusion for the entire year of Prinovis, the gravure company, a joint venture with Arvato and Axel Springer AG, together with the majority interest in Motor Presse. Newly-launched titles also made a positive contribution. At €277 million, Operating EBIT was 10.8 percent higher than the previous year’s €250 million despite an increase in editorial expenditures. This increase resulted from improved earnings from the core business in Germany and France, with more investments in new titles and the opening of the Prinovis printing works in Liverpool, as well as from portfolio effects and special items.

The “Expand your Brand” initiative was formative in Gruner + Jahr’s strategic development in 2006. It is aimed at marketing new products and expanding into new services based on the G+J’s strong magazine brands. The company is focusing on multimedia activities such as Internet communities and platforms, as well as an expansion of business activities including merchandising and events connected to magazine brands. Gruner + Jahr is also increasingly using its significant marketing skills for multimedia offerings such as digital television and mobile content.

Germany and France, the core markets, remained stable despite strong competitive pressure. In Germany, Gruner + Jahr introduced two new titles, “emotion” and “dogs”. Among titles launched since 2004, “NEON” and “View” delivered an outstanding performance, while the core titles (“stern”, “Brigitte” and “Gala”) also performed well. In France, the weekly women’s magazine “jasmin” was launched in a difficult market environment. The bi-weekly TV guides “TV Grandes chaines” and “Télé 2 semaines” increased their results sharply and further improved Prisma Presse’s strong market position. Gruner + Jahr was increasingly and actively involved in growth markets during 2006, such as with its investment in Boda, the Chinese company, which raised Gruner + Jahr to the second largest magazine publisher in China.

The BMG division, comprised of Bertelsmann’s 50-percent holding in the Sony BMG Music Entertainment joint venture and the BMG Music Publishing subsidiary (which was deconsolidated at the year-end 2006), registered declining revenues and operating profits in fiscal 2006. Return on sales amounted to 8.6 percent (2005: 8.3 percent). BMG’s revenues were down by 5.2 percent to €2.0 billion (2005: €2.1 billion) and operating EBIT declined by 2.3 percent to €173 million (2005: €177 million). The diminished result in 2006 is attributed solely to the recorded music business. This should be seen against the background of a further decline of the worldwide music market by five to six percent, largely caused by shrinking CD sales, also experienced by Sony BMG despite its slightly increased market share. Meanwhile, the company was able to raise the revenue contribution from digital formats from seven to twelve percent: Sony BMG improved its sales of downloads and subscriptions on online and mobile platforms, and also began marketing music video content.

The margin loss at Sony BMG was offset by higher operating profits at BMG Music Publishing and the elimination of amortizations of music rights. BMG Music Publishing’s positive performance, and substantial cost cuts due to the restructuring of Sony BMG, only partially compensated for losses sustained by lower product sales. Rolf Schmidt-Holz, a veteran Bertelsmann manager, replaced Andrew Lack from Sony as head of Sony BMG at the start of 2006. As a result, the scope of the restructuring was expanded to include the integration of the Country music labels in Nashville, the reorganization of the Sony Music U.S. Label Group, the merging of the U.S. sales organization for physical and digital formats, and the bundling of the U.S. catalog business. The year 2006 was very good for Sony BMG in terms of artists and repertoire: Sixteen new releases entered at #1 in the US album charts, putting Sony BMG ahead of all other record companies.

The international media and communications services provider Arvato recorded a notable increase in revenues. Operating profit also rose. Return on sales reached 7.7 percent (2005: 7.8 percent). Revenues increased by 9.6 percent to €4.8 billion in 2006 (2005:
€4.4 billion). The rise was mainly due to organic growth but also to portfolio effects, such as the first-time full-year consolidation of Prinovis and Infoscore Group. Operating EBIT rose by 7.6 percent to €367 million in 2006 (2005: €341 million), not quite as steeply as revenues. This was due to start-up and integration costs as well as tougher competition and continuing price pressures, particularly in the gravure and logistics sectors.

The service activities bundled in Arvato Services continued to grow dynamically in 2006. They profited above all from strong demand in the service center area as well as a very good performance on the French market and in the German customer loyalty business. Arvato Print held up well in a difficult market. Significant price pressure and overcapacity had a negative effect on earnings at printers in the U.S. and Italy as well as at Prinovis. On the other hand, the Mohn-Media group, an offset printer, improved its results in 2006. State-of-the-art rotogravure printing presses started operations in Treviglio, Italy and in Liverpool, U.K. (Prinovis). The Arvato Storage Media group managed to gain market share in the CD and DVD segments, despite strong competitive pressure in 2006. A new distribution and service center for the US entertainment sector was opened in cooperation with Arvato Print in Louisville (Kentucky, U.S.). Arvato Systems, the IT service provider, steadily expanded its range of products and services, particularly for media industry entities, and again extended its external customer base. The same applies to the Arvato Mobile business sector.

Direct Group with its book, DVD and music clubs and book shops showed strong increases in revenues and operating profit in 2006, thereby underscoring its return to growth and profitability. Return on sales reached 4.1 percent (2005: 2.2 percent). Revenues rose by 11.8 percent to €2.7 billion (2005: €2.4 billion) primarily due to the acquisition of the book shop chains Forum Alsatia (France) and Bertrand (Portugal) in 2006, and the first-time consolidation for the full year of the Columbia House (U.S.) and Librairies Privat (France), both acquired in 2005. Sales were slightly down on a “same store” basis. Higher revenues were recorded in particular due to the continuing strong growth of club business in Eastern Europe. Direct Group’s 2006 Operating EBIT doubled to €110 million (2005: €53 million). This over proportional growth is generally carried by many clubs and continued strict cost management.

The club business in Germany achieved a turnaround in 2006. The restructuring and new strategic program direction accomplished their objectives. “Der Club Bertelsmann” again recorded a clear profit for the first time for many years. BCA, the British club, also achieved a turnaround following extensive cost reduction measures and optimization of its service and product range. Direct Group’s Internet business again grew strongly. In Europe, Direct Group continued its strategy of closer integration of its club business with its book store business. The bookselling chains acquired in France and Portugal were integrated and in Spain, the company commenced the expansion of its own chain of bookstores.

Figures at a Glance (in € millions)

	2006	2005
Consolidated revenues	19,297	17,890
Operating EBIT by divisions Corporate/Consolidation Operating EBIT	1,944 (77) 1,867	1,743 (133) 1,610
Special items	1.161	61
EBIT (Earnings before interest and taxes)	3,028	1,671
Financial result	(427)	(386)
Income taxes	(177)	(244)
Net income	2,424	1,041
of which: Share of profit of Bertelsmann shareholders	2,101	880
of which: Minority interest	323	161

Investments

1,092

2,565

	At Dec 31, 2006	At Dec 31, 2005
Economic Debt	6,760	3,931
Employees (in absolute numbers)	97,132	91,559[1]

Definition of Operating EBIT: Operating EBIT refers to earnings before interest, taxes and special items.

[1] The number of employees for 2005 has been adjusted to reflect the changed measuring methodology.

About Bertelsmann AG

Bertelsmann is an international media company with a longstanding heritage and operations deeply rooted in many countries around the world. Our ‘Spirit to Create’ empowers us. We inspire people through a variety of creative media and communications offerings: information, entertainment and services. Our corporate culture of partnership forms the foundation of our economic success and our dedication to corporate responsibility. As an independent company of entrepreneurs, we shape the media world of tomorrow.

Bertelsmann includes RTL Group, Europe’s No.1 in television and radio, as well as the world’s biggest book-publishing group, Random House, with more than 120 publishing imprints (Alfred A. Knopf, Bantam, Goldmann). Gruner + Jahr, the European No.1 in magazine publishing (Stern, Geo, Capital), and the Sony BMG joint venture (Anastacia, Alicia Keys, Beyoncé, Dido, Usher) also stand for creativity and powerful brands. The Arvato division bundles the group’s media and communications services, which include the expanding units Arvato Logistics Services and Arvato Direct Services (distribution, service centers, customer relationship management), along with state-of-the-art printers, storage media production and comprehensive IT-services. Bertelsmann’s direct-to-customer businesses are bundled in Direct Group: book and music clubs with more than 35 million members all over the world.

For further questions, please contact:

Andreas Grafemeyer

Senior Vice President Media Relations

Tel.: +49 – 5241 / 80 24 66

andreas.grafemeyer@bertelsmann.de

Information posted on the Internet (www.bertelsmann.com):

• Press release and presentation charts for the Annual Press Conference
• Bertelsmann Annual Report 2006 for download (PDF)
• Video recording of the Annual Press Conference
• Photos of all Executive Board members under Press / Photos
• Bios of all Executive Board members

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GJ_2006_engl.pdf	117 kB