Anticipated Overall Economic Development
Bertelsmann anticipates the economic conditions will develop as follows in 2014. In the reporting period, the subdued global growth dynamic of recent years is expected to accelerate slightly. The Institute for the World Economy at the University of Kiel (IfW) forecasts that the global economy will grow by 3.7 percent in real terms in 2014. The recovery based on the gradually stabilizing economic conditions in Europe and the ongoing course of recovery in the United States is being supported by the continuing expansive monetary policy. However, compared with the high level of previous years, fewer growth stimuli for the global economy are expected from the threshold countries.
For the United States, the IfW expects real growth of 2.3 percent in 2014. According to the IfW forecast, the euro zone will strengthen over the course of 2014 and achieve a real growth rate of 0.9 percent. The European Central Bank estimates that the economy in the euro zone will benefit from a recovery in domestic demand and a gradual increase in the demand for exports. Nonetheless, European economic development will still be adversely affected by the consolidation measures of indebted member states as well as by high unemployment. In view of the clear upturn in the UK, real growth of 2.0 percent is expected in 2014. The recovery of the euro zone will also improve German economic development. For 2014, the IfW expects real growth of 1.7 percent in Germany. Domestic stimuli are playing a key role in the positive expectations. Private consumption benefited from favorable employment and income prospects, and investments are being driven by the improving global economic environment and the easing of uncertainty.
Anticipated Development in Relevant Markets
The worldwide media industry is primarily influenced by global economic developments and the resulting growth dynamic. The continued trend toward digitization of content and distribution channels, changes in media usage and the increasing influence of threshold countries will continue to present risks and opportunities in the years to come. Through the intended transformation of the Group portfolio in line with the four strategic priorities, Bertelsmann expects to benefit to an increasing extent from the resulting opportunities. Through its businesses, Bertelsmann operates in a variety of different markets and regions whose developments are subject to a range of factors and do not respond in a linear fashion to overall economic tendencies. The following takes into account only those markets and regions that are large enough to be relevant for forecasting purposes and whose expected development can be appropriately aggregated and evaluated.
In 2014, a stable overall development in the TV advertising markets in Germany and Benelux, declines in France and a slight to moderate recovery in Southern and Eastern Europe is expected. The English-, German- and Spanish-language book markets are expected to show largely stable development in 2014. In the magazine business, the advertising and circulation markets in Germany, France, Spain and China in 2014 are expected to continue to decline. In 2014, the services markets are expected to achieve growth similar to 2013, and the storage media markets are expected to continue to decline at the same rate as in the previous year. The European print markets for magazines, catalogs and promotional materials and the print market for books in the United States are expected to continue to decline in 2014.
Despite the gradually easing uncertainty over economic developments, the forecasts are still subject to certain risks. The following expectations are therefore based on the assumption that the normalization of the overall economic situation will continue, and that most of the forecast market developments and the economic predictions of the research institutions will be realized.
Bertelsmann’s business development will be determined by the diversity of some of its businesses. The presence in different markets and regions reduces possible fluctuations and has a stabilizing effect. For financial year 2014, Bertelsmann anticipates that the positive business development will be driven by the stable market expectations for the TV advertising markets in Germany and Benelux, the stable book markets and the continuously growing service markets. The growth stimuli created in financial year 2013 through the strategic portfolio expansions will have a positive impact on Bertelsmann’s growth profile over the next few years. The accelerated scaling back of structurally declining businesses – in particular, print, replication, Club and Direct Marketing – will also help to mitigate their negative impact.
In addition to the assumed market developments, the predicted economic developments in the geographic core markets of Western Europe and the United States are the basis of the expected business development. With the revenue and earnings share within the euro zone expected to remain at around 75 percent, the extent of growth is based on the forecasted real and nominal economic development. The IfW assumes that GDP in the euro zone will increase by 2.2 percent in nominal terms and by 0.9 percent in real terms in 2014. The OECD predicts that GDP in the euro zone will increase by 2.0 percent in nominal terms and by 1.0 percent in real terms in 2014. In view of these economic forecasts, Bertelsmann expects a stable development of Group revenues for 2014. Taking into account the strategic portfolio expansions made in the reporting period but not included for the whole year as of December 31, 2013, Bertelsmann expects a significant increase in Group revenues in financial year 2014. Despite incurring start-up losses for digitization projects and new businesses, Bertelsmann expects stable to slightly increasing operating EBIT compared with the previous year, which will more than offset the negative impact of structurally declining businesses. As a result of the strategic portfolio expansions in financial year 2013, which are taken into account for the full year’s period for the first time in 2014 as well as higher operating investments, Bertelsmann anticipates a significant increase in the level of invested capital in financial year 2014. Consequently, a low overall return on investment and a strong fall in BVA are expected.
The revenues of Penguin Random House will be strongly above the previous year’s figure as they are taken into account for the full year’s period in the consolidated financial statements for financial year 2014. Otherwise, the expected performance of any individual unit of key significance for the Bertelsmann Group is not expected to deviate significantly from that of the Group.
Depending on how the economy develops, Bertelsmann does not currently anticipate interest rate changes to have any material impact on the average financing costs of medium-to long-term financing. The liquidity situation in the forecast period is expected to be sufficient.
These forecasts are based on Bertelsmann’s current business strategy as outlined in the “Business and Economic Conditions” section. In general, the forecasts reflect careful consideration of risks and opportunities and are based on operational planning and the medium-term outlook for the corporate divisions. All statements concerning potential economic and business developments represent opinions advanced on the basis of the information that is currently available. Should underlying suppositions fail to apply and/or further risks arise, actual results may differ from those expected. Accordingly, no assurances can be provided concerning the accuracy of such statements.