2010 was the financially strongest year in the Group’s history so far, as we accelerated our growth levels in an improved operating environment and reported higher profits on a like for like basis than in the record year of 2008.
A high proportion of this operating profit was converted into free cash flow, despite the fact that we entered the year with very low working capital levels. This cash was allocated to investments in the growth of the Group’s operations, to the reduction in our borrowing levels, to financial investments and to shareholder returns in the form of cash and equity dividends.
The Group’s reported 5% sales growth but sales were up 12% on an underlying constant exchange rate basis. This reflected the significant strengthening of the Group’s Swedish krona reporting currency against almost all of our operating currencies. These currency exchange rate movements did also reduce the impact of our underlying operating expense growth on the reported profitability levels. Our group operating margin increased to 15% for the year when excluding associated company income and was due primarily to the incremental operating leverage in the business.
The 8% growth in operating expenses at constant exchange rates reflected the investments that we continued to make during 2010 to strengthen our competitive market positions by adding new programming, channels, platforms, technologies and subscribers. It also reflected our overall tight control on recurring costs, as indicated by the 2% growth in sales, general and administrative expenses at constant exchange rates. The majority of our investments were, as usual, expensed, with capital investments accounting for approximately 1% of Group sales. Our working capital did increase during the year, primarily as a result of the initial and largest payment made for the Swedish broadcasting rights to English Barclays Premier League football, which we acquired in June. We therefore converted 70% of our EBITDA into operating cash flow and generated increased free cash flow (defined as net cash flow from operations less capital expenditure) of SEK 1 billion. We also received USD 31 million of dividends from CTC Media, of which we owned 38.3% in 2010 and which paid out cash dividends for the first time following a strong performance through and out of the recession.
We partially reinvested our cash balances and cash flows into the acquisition of 50% of the Raduga satellite pay-TV platform in Russia at the beginning of the year, and of a further 35% of our Ukrainian satellite pay-TV platform in the middle of the year, as well as in a SEK 250 million convertible issued by our CDON Group internet retailing subsidiary.
Ten years after the establishment of CDON Group, which has grown to become the leading e-commerce player in the Nordic region, we spun-off the company to MTG shareholders by distributing and listing its shares on the Nasdaq OMX Stockholm stock exchange in December. The spin-off gave rise to a SEK 1.7 billion non-cash accounting gain, and CDON Group’s contribution to our accounts otherwise comprised its net income and cash flow up until the end of November.
We also allocated our cash to the reduction in our borrowing levels. We refinanced the Group’s debt during the autumn by self-arranging a new SEK 6.5 billion five year revolving credit facility with a syndicate of eight international banks. This facility was used to retire our SEK 3.5 billion credit facility and SEK 3 billion term loan, which were approaching maturity in 2011 and 2012 respectively. The new facility provides us with greater financial flexibility to draw down cash or pay down debt, and was secured at highly competitive rates and on favourable terms. We reduced our total borrowings by SEK 766 million to SEK 2.7 billion by the year end.
Finally, we also allocated our capital to the enhancement of shareholder returns. The 2010 annual general meeting of shareholders approved the payment of a SEK 5.50 per share cash dividend, which was 10% higher than in 2009, and the Board has now proposed a 36% higher annual cash dividend of SEK 7.50 per share to this year’s AGM. This is in addition to the SEK 2 billion of market value distributed to shareholders in the form of CDON Group shares in December.
Our year end net debt position, when taking into account our cash balances of SEK 500 million, therefore amounted to SEK 2.0 billion, which was equivalent to less than 1 times Group EBITDA for the year. The Group’s return on capital employed increased to 25% in 2010 and we reported a 30% return on equity for the year.
All of the above reflects our integrated financial management structure with in-country financial controllers who report to centralised functions. This enables us to invest and upstream cash efficiently. Our actions in 2010 reflect our strategy to invest in growth, carefully control costs and focus on high levels of cash conversion, in order to generate attractive returns and increase sustainable levels of shareholder value.
Chief Financial Officer