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Reach PLC   -  RCH   

Final Results

Released 07:00 24-Feb-2020

RNS Number : 8223D
Reach PLC
24 February 2020
 

Reach plc

 

                                                             24 February 2020

Reach plc ('Reach', 'the Company', 'the Group'), the largest commercial national and regional news publisher in the UK, today announces its preliminary audited results for the 52-week period ended 29 December 2019.

 

SOLID TRADING PERFORMANCE AND YEAR END CASH POSITIVE

CUSTOMER VALUE STRATEGY LAUNCHED

Results

                   Adjusted results(1)

                        Statutory results


2019

2018

Change

2019

2018


£m

£m

%

£m

£m

Revenue

702.5

723.9

(3.0)

702.5

723.9

Operating profit/(loss)

153.4

145.6

5.4

131.7

(107.6)

Profit/(loss) before tax

150.6

141.9

6.1

120.9

(119.9)

Earnings/(loss) per share

41.1p

39.2p

4.8

31.8p

(41.0)p

Dividends per share

6.55p

6.14p

6.7

6.55p

6.14p

 

Financial and Operational Highlights

·       Revenue was £702.5m (2018: £723.9m) benefiting from a full year of trading of the Express & Star acquisition

·       On a like-for-like basis(2) revenue fell by 5.3%, versus a fall of 6.6% in 2018, with resilient circulation revenue and stronger digital growth

·       Strengthened performance in digital(3) with like-for-like revenue increasing by 13.2% (up 16.4% in H2) and average worldwide monthly page views growing by 25% year on year to 1.3bn (up 34% in H2)

·       Significant cost efficiencies delivered during the year including structural cost savings of £12m and incremental acquisition synergies of £16m

·       Adjusted operating profit increased by 5.4% to £153.4m with adjusted operating margin increasing to 21.8% (2018: 20.1%)

·       Statutory operating profit of £131.7m (2018: loss of £107.6m) reflecting reduced adjusting operating items versus 2018

·       Accounting pension deficit (IAS 19) fell by £52.7m to £295.9m (£242.9m net of deferred tax)

·       Strong cash generated from operations(4) of £147.4m, up 7.0% year on year, supporting £60.0m acquisition term loan repayment, with year-end cash(5) positive position of £20.4m

·       Group refinanced its revolving credit facility with a £65m agreement to December 2023 (no drawings at the end of 2019)

·       Final dividend of 4.05 pence per share, an increase of 7.4%, giving a total dividend for the year of 6.55 pence per share (2018: 6.14 pence per share), up 6.7%

Current Trading, Outlook and Customer Value Strategy

·       The Group has continued to perform in line with management's expectations since the year end

·        The Board is confident that the Group will make further good progress through the rest of the year delivering its customer-focused objectives and digital growth ambitions

Commenting on the annual results for 2019, Jim Mullen, Chief Executive Officer of Reach, said:

"I was delighted to join Reach in August 2019 and have been impressed by the relentless focus on producing award-winning journalism and content that shapes national and regional conversations. These are strong foundations on which to invest and innovate to ensure a sustainable future for our trusted brands.

 

2019 was a year of good operational and solid financial progress with record growth in audience numbers, consistently good cash generation and a strong balance sheet. This, along with unparalleled scale, underpins our drive to build an intelligent, relevant and trusted content business for the long term whilst continuing to deliver for our stakeholders.

 

Content is at the heart of the new customer value strategy we are announcing today. We have an unmatched reach in UK media and will deepen our relationships via increased customer engagement. Through this, we see significant potential to accelerate the diversification of our digital revenue and capture more value to deliver on our sustainable digital growth ambitions."

 

Notes

(1)         Set out in note 19 is the reconciliation between the statutory and adjusted results. The current period is for the 52 weeks ended 29 December 2019 ('2019') and the comparative period is for the 52 weeks ended 30 December 2018 ('2018').

(2)         Set out in note 21 is the reconciliation between the statutory and like-for-like revenue. The like-for-like trends for 2019 include Express & Star as if it had been owned from the beginning of 2018 and exclude from the 2018 comparative the impact of portfolio changes and the disposal of Communicator Corporation.

(3)         Print revenue comprises circulation, advertising (including digital classified which is predominantly upsold from print), printing (including third party printing contracts) and other (contract publishing, syndication, reader offers and events). Digital revenue comprises the combined display and transactional revenue streams. Set out in note 20 is the reconciliation between the classifications in the prior period to the classifications in the current period.

(4)         Cash generated from operations has been extracted from the consolidated cash flow. An adjusted cash flow is presented in note 22 which reconciles the adjusted operating profit to the net change in cash and cash equivalents. Set out in note 23 is the reconciliation between the statutory and adjusted cash flow.

(5)         Cash and cash equivalents of £20.4m (note 15).

 

 

Enquiries

Reach

020 7293 3000

Jim Mullen, Chief Executive Officer

Simon Fuller, Chief Financial Officer and Company Secretary

Angus Prentice, Interim Investor Relations Director


Tulchan Communications

020 7353 4200

David Allchurch / Giles Kernick


 

About Reach plc

Reach plc is the largest commercial national and regional news publisher in the UK, with over 150 national and regional multi-channel brands including the Mirror, Express, Star, OK!, New!, Daily Record, Manchester Evening News, Liverpool Echo, WalesOnline, MyLondon and BelfastLive.

 

In December 2019, Reach sold 40m newspapers and reached a digital audience of over 40m people in the UK. For more information visit: www.reachplc.com.

 

Results and strategic update presentation

A presentation for analysts and institutional investors will be held today at Numis Securities, London Stock Exchange building, 10 Paternoster Square, London, EC4M 7LT, starting at 10.30am. Pre-registration for this event is necessary to comply with security procedures at the venue. To register your interest in attending the presentation, please contact Tulchan Communications either by email ReachPLC@tulchangroup.com or by telephone +44 (0)20 7353 4200.

 

A conference call facility and live webcast will also be available for analysts and institutional investors unable to attend in person. Details are as follows:

·      Conference call - telephone number: 0800 376 7922 or +44 (0)20 7192 8000; conference ID number: 9863544

·      Webcast - URL: https://edge.media-server.com/mmc/p/3i287h2k

 

A copy of the presentation and a replay recording of the presentation via audio webcast will be available at www.reachplc.com later today.

 

Forward-looking statements

This announcement has been prepared in relation to the financial results for the 52 weeks ended 29 December 2019. Certain information contained in this announcement may constitute 'forward-looking statements', which can be identified by the use of terms such as 'may', 'will', 'would', 'could', 'should', 'expect', 'seek, 'anticipate', 'project', 'estimate', 'intend', 'continue', 'target', 'plan', 'goal', 'aim', 'achieve' or 'believe' (or the negatives thereof) or words of similar meaning. Forward-looking statements can be made in writing but also may be made verbally by members of management of the Company (including, without limitation, during management presentations to financial analysts) in connection with this announcement. These forward-looking statements include all matters that are not historical facts and include statements regarding the Company's intentions, beliefs or current expectations concerning, among other things, the Company's results of operations, financial condition, changes in global or regional trade conditions, changes in tax rates, liquidity, prospects, growth and strategies. By their nature, forward-looking statements involve risks, assumptions and uncertainties that could cause actual events or results or actual performance or other financial condition or performance measures of the Company to differ materially from those reflected or contemplated in such forward-looking statements. No representation or warranty is made as to the achievement or reasonableness of and no reliance should be placed on such forward-looking statements. The forward-looking statements reflect knowledge and information available at the date of this announcement and the Company does not undertake any obligation to update or revise any forward-looking statement, whether as a result of new information or to reflect any change in circumstances or in the Company's expectations or otherwise.

 


Chief Executive's Review

 

Introduction and early reflections

This is my first annual review since taking over as CEO of Reach in August 2019. I am delighted to report a successful period of continuing good operational and financial progress for Reach, one which has seen the re-focusing of the Company's strategy as we aim to generate and accelerate our growth for the long term, and the appointment of a Chief Customer Officer. 

 

My early impressions of Reach are extremely positive and I feel privileged to lead a business that is laden with excellent journalistic, creative and operational talent. People are the core of our business and critical in taking the business forward. Reach has been on an acquisitive journey that has resulted in the unrivalled position of being the largest commercial national and regional news publisher in the UK. Tight cost control has delivered efficiency and balance sheet strength. However the challenges facing commercial news and content publishers have been well documented and I have been asked on several occasions what attracted me to joining Reach. The short answer is that I saw a compelling opportunity to drive increasing value as we deepen our relationship and better engage and understand our customers.

 

With a revival in readers searching for trusted news and content, a distribution reach unmatched in UK media and a record number of anonymous customers engaging on a daily basis, it is clear to me that there is significant opportunity to develop closer and better known relationships with our customers to further drive increased engagement and commercial yield.

 

The Group's operational and financial resilience is commendable. Best of all, though, is that Reach is very well positioned to take advantage of the many real opportunities that we are currently seeing in our industry. With our strong balance sheet, cost control and disciplined internal investment, and a print business that is highly cash generative, we have the capability and opportunity to create further value from our trusted reader and customer relationships and thereby further diversify our revenue base. All of which is additive to our long-standing commitments to our shareholders and pension schemes.

 

Overview

Reach delivered a solid financial performance in 2019, with a good operational performance, and record growth in audience numbers particularly in the second half of the year.

 

A refocus on operational management post the successful integration of the publishing assets of Northern & Shell ('Express & Star') has allowed us to deliver an improved operating margin and profitability, whilst an improvement in the rate of decline of print revenue together with strong growth in digital revenue resulted in an improved Group revenue performance on a like-for-like basis.

 

For the 52 weeks ended 29 December 2019, adjusted operating profit increased by 5.4% to £153.4m as a result of our continued focus on driving operating efficiency and reducing costs. Adjusted operating margin increased by 1.7 percentage points to 21.8%.

 

The Company saw reported revenue of £702.5m which is a decline of 3% or £21.4m. On a like-for-like basis revenue declined by 5.3% which is an improvement compared to 2018 where the year-on-year revenue decline was 6.6%. Like-for-like print revenue fell by 7.9% compared to 8.3% in 2018 but digital revenue demonstrated strong growth, increasing by 13.2% on a like-for-like basis compared to 9.6% in 2018. This increase in digital revenue benefited from strong page view growth, up 25% versus prior year. The slowdown in the year-on-year decline of print revenue was helped by resilient circulation revenue which declined by only 4.5% compared to a fall of 5.1% in 2018. Advertising revenue fell by 19.4% which compares to 16.2% in 2018.

 

The circulation revenue decline benefited from cover price increases during the year as well as increased availability, while the fall in advertising revenue was in part driven by the agreed reduction in Health Lottery advertising as part of the Express & Star acquisition. Excluding this effect, advertising revenue declined by 17.2%.

 

Cash generation continued strongly during the year and resulted in the Group becoming debt free with a net cash balance of £20.4m at the financial year-end. The strong cash flows enabled the early repayment of all our bank financing.

 

We also successfully refinanced our borrowing arrangements during the period. The Company's new debt facilities consist of an undrawn £65m non-amortising facility committed to December 2023, providing Reach with a simple long-term debt capital structure and a strong financial platform from which to continue delivering upon the growth objectives of the business.

 



 

The provision for dealing with and resolving civil claims in relation to historical phone hacking and unlawful information gathering has been increased by £11.0m at the year end to reflect an increase in the estimate of the cost of settling claims. This brings the total amount charged to the income statement since 2014 to £86.5m. At the year end, £21.1m of the provision remains outstanding and this represents the current best estimate of the amount required to settle the expected claims. Although it is not possible to provide a range of potential outcomes in respect of this provision, the Board remains confident that the exposures are manageable and under control. Due to this uncertainty, a contingent liability has been highlighted in the financial statements.

 

Adjusted profit before tax increased by 6.1% to £150.6m (2018: £141.9m) while adjusted earnings per share rose by 4.8% to 41.1p per share (2018: 39.2p per share).

 

Further details on our financial performance during the year are provided in the Financial Review.

 

Our customer-focused future

As a result of our strong financial and operating performance during the year, combined with the strength of the Company's balance sheet, we have now established a solid and stable foundation on which to drive customer focused, sustainable growth for Reach.

 

Our news brands have a long heritage of being trusted sources of news and information. Through our national and regional print titles we reach 15m UK adults each month. During the last five years, we have been driving expansion of our national and regional digital coverage. Our UK monthly online audience in December 2019 was 40m, up 8% on the prior year. To date, we have been very successful in growing page views of our online news sites. This has largely been achieved through investing in journalism and content producers, offering high quality, trusted content particularly on topical news items, campaigning, sport, celebrity news, royalty coverage and politics. We've also seen encouraging growth in page dwell time which is also important to driving yields.

 

There is much more that we can do. The yield that results from programmatic or algorithmic advertising has been and will remain a significant pillar of our growth but we now need to develop a strategy to capture the value we have in our trusted reader and customer relationships. To build upon this growing reach we intend to deliver more value from the increasing depth of our trusted reader and customer relationships.

 

The reach and distribution channels of digital and print are all too often kept separate. What binds them together is the reader and customer value of those who consume one or more of our brands or those who engage with our products and services found via our brands. As an industry, we too often talk about the decline of our print products, but 15m people read one of our newspapers and magazines each month. Although it is in decline, our print customer base is loyal and resilient and coupled with strong growth in our digital audience, we have an unparalleled reach in the UK of 47m (combined deduped print and digital reach) and we still remain the largest commercial national and regional news publisher in the UK. We have already started the process of getting a better grasp on our customer cross-over, uniquely identifying print readers and understanding our digital customers better. 

 

We have continued to invest in our InYourArea brand which will build upon the distribution of our network to deliver relevant local content and build direct local customer relationships. Through the investment in 2019 in our Live sites, we have invested in journalism to make sure we are further extending our network and covering areas in the UK where we are not currently present and where we expect organic growth offers better value returns than acquisitions.

 

We plan to bridge the current anonymity of our digital and print relationships by building known customer relationships. Thus making content more relevant, advertising more targeted, services more useful and customer relationships more meaningful and therefore more valuable. The 47m people we now reach in the UK means we have a significant base to begin our strategy of building more valuable customer relationships.

 

Our competitive position

Looking at the business today, some 84% of the Group's revenue comes from the print business, yet Reach in 2019 has moved from the sixth biggest digital asset in the UK to the fifth biggest digital asset after Google, Facebook, Amazon and Microsoft with 40m unique users accessing our online content in December 2019 (as measured by ComScore). In many of the large UK cities we serve, Reach's news content is relied upon for daily consumption by more than 50% of the local population. When we take our significant regional and national print products into account, we have a reach of 47m people accessing our content.

 



 

Amongst the top four of the UK's digital assets, we estimate that more than 90% of customers have signed up and provided their data. This has enabled these digital content providers to develop strong commercial offerings. In contrast, to date less than c.2% of Reach's customers have given us their consent through registration, largely because we have not asked for it. This highlights the initial opportunities we have and the very significant growth potential we see. Increased customer engagement will come from driving registration by engaging customers on key verticals and getting a better understanding of their behaviours and top interests. This increase in registered users will enable us to better personalise our offering and introduce these customers to new products and services.

 

Importantly, we already have much of the necessary technical resource in house. While there will be need for some technology investment in the future, we do not currently anticipate significant capex spend. We have a sophisticated content management system which we will continue to develop to enhance reader experiences when they visit our websites and apps. Our ad stack is optimised to deliver maximum revenue from advertising which is relevant to readers. As we develop our strategy, we will work with partners whose technology allows us to deliver our plans effectively and sustainably.

 

Our print titles are well managed with editorial conviction and still consistently produce award-winning journalism that shape the national and regional conversation. In 2019, amongst a number of campaigns pioneered by Reach titles:

·      In 2019 the Daily Mirror continued its long history of special editions, campaigns and agenda-setting reporting. The title decided the best and bravest way to explore the issues facing today's teenagers was to allow a group of young people to edit the Mirror in print and online for a day. A team of 20 teenagers took control of all content in the ground breaking NextGen edition. This same bold approach saw the Mirror devote an entire issue to the global climate crisis. It featured brilliant reporting from Northern Canada, India and Ghana; the launch of a campaign to plant a million trees; analysis from across the UK on our changing environment; and bespoke advertising from numerous existing and new clients. The paper even turned its masthead green for a day.

·      The Daily Express waged a hard-fought and successful campaign to save the lives of isolated and helpless Cystic Fibrosis sufferers. Launching in February 2019, the paper demanded sufferers be given access to wonder drugs Orkambi and Symkevi following deadlock between the NHS and US drug giant Vertex. By giving the sick a banner to unify behind, the Express shattered the stalemate meaning thousands of gravely-ill patients will live out their dream of a healthier, happier future. The fight continues. The paper has now launched a campaign for the cutting-edge Cystic Fibrosis wonder drug Trikafta to be made available on the NHS as soon as possible.

·      Scotland has the highest rate of drug-related deaths anywhere in Europe, prompting the Daily Record to ask some fundamental questions about the crisis. After speaking to key voices across all areas of the debate and travelling to Portugal, a country which had experienced and addressed similar problems, the Record concluded it was time to start treating drug addiction as a health issue rather than a crime. The highlight of the campaign was the Record's front page with the headline 'DECRIMINALISE DRUG USE'. This has since become the official policy of the Scottish government, which is trying to put pressure on the Prime Minister to devolve the powers to Holyrood.

·      The Manchester Evening News ('MEN') played a leading role in ensuring the North of England was a major factor in the 2019 General Election. Joining with more than 30 regional titles, the MEN spearheaded the 'Power up the North' campaign after exposing funding inequality that had actively widened the gap between North and South. With a huge audience amplified by national media attention, this unique collaboration ensured both major political parties went into the campaign with key policy pledges for the North. That narrative has accelerated post-Election and we remain central to ensuring promises are delivered.

·      Plastic waste has been a widely-discussed topic in recent years. In 2019, WalesOnline ran the 'Wales Against Plastics' campaign to shed light on the damage done by plastic waste to the Welsh landscape, from beaches to ancient woodlands. The news site called on councils to increase recycling and limit environmentally-damaging landfill, and highlighted Welsh businesses who were reducing their plastic packaging. It also asked readers to pledge to reduce their plastic waste, while offering practical advice on how to do so. Furthermore, the WalesOnline team organised their own clean-ups with editorial staff and members of the public at Swansea Bay beach and Aberavon beach, during which they cleaned up more than 30 bin bags worth of litter.

 

The titles within our portfolio represent a diverse set of opinions across the political spectrum which is arguably unmatched in the UK media landscape and as such are geographically, demographically and through the audience in which they represent a true reflection of our readers and customer. This is a rich base of customer information to build a customer value strategy.

 



 

Our customer value strategy

This is the start of a customer value strategy to build upon our significant reach and engage directly with our customers, essentially adding depth to the breadth we already have. This is in addition to our continuing operating efficiency, commitment to our core purpose of publishing first class journalism and content, and delivering on our pension and shareholder obligations. With that in mind, we are committed to the continuation of paying a progressive dividend and meeting our pension obligations. We will therefore continue to strive to deliver sustainable growth in revenue, profit and cash flow by layering our customer value strategy on to our operational efficiency initiative and better leverage our significant distribution and reach. Content is at the heart of this strategy and we will build an intelligent and relevant content business for the long term. We will continue to keep a tight control on capital investment with ongoing discipline being a key principle. Reach will better harness our talent and teams, and become a more data-driven and customer-centric organisation with a unified single view of the customer across Reach. To deliver this, our vision is 'Touching lives, shaping conversations and stirring emotions... our trusted brands connect people to the world. Every minute, every day.'

 

Current trading, outlook and customer value strategy

The Group has continued to perform in line with management's expectations since the year end. The Board is confident that the Group will make further good progress through the rest of the year delivering its customer-focused objectives and digital growth ambitions.

 

 

Jim Mullen

Chief Executive Officer

24 February 2020

 


Business Review

A year of progress, with improved digital momentum

2019 performance has been encouraging, with improvements across a range of financial and operational metrics, and provides a solid base for the future. Strong growth in digital audience drove an improved digital like-for-like revenue trend, whilst like-for-like circulation revenue decline (and therefore print revenue decline) trends improved due to targeted product and availability investment. We continue to deliver improvements for our customers through our brands, content and experience, as well as being focused on driving efficiencies across our business and delivering returns to shareholders while meeting our agreed pension obligations.

 

Strategic progress

Set out below is a summary of the progress made during 2019 in pursuing our strategy to maximise cash flow from print while accelerating digital audience and revenue:

 

Maximise cash flow from print

We continue to enhance the content and distribution of our print brands as we seek to support circulation revenue:

·      Editorial improvements were made to the Daily Express, increasing its pagination by eight pages per day including four pages of puzzles, which has proved popular with readers;

·      Following the success of the Sunday edition of the Liverpool Echo, in February we launched the Manchester Evening News on a Sunday with negligible increase in resource required, again demonstrating the efficiency of our editorial and publishing operating model;

·      The OK! bumper pack comprising OK!, New and Star magazines has been evolved with Star magazine being replaced with a 7-day TV listings magazine ('Star TV') which is a re-branded version of 'We Love TV' which already appears in the Daily Mirror on Saturday. This has added value to the OK! bumper pack at a lower cost; and

·      We continue to innovate our products with the Daily Mirror publishing two special editions during the year:

The Daily Mirror Next Gen Edition, published in May, was written and edited by young people from schools across the country, providing a platform for their voices to be heard more clearly and highlighting the issues that they felt passionate about. This special edition proved particularly popular amongst our advertisers, including SEAT, who were masthead sponsors for the edition.

The Daily Mirror Climate Issue, published in November, reported from Britain and around the globe on the climate crisis threatening our planet, telling the stories of those lives already impacted by floods and fires, and by rising sea levels and temperatures. This issue also saw the launch of our 'Million Mirror Trees' planting campaign.

We also continue to implement operational efficiency improvements designed to optimise the print cost base:

·      Delivered structural cost savings of £12m, £2m ahead of our target of £10m, including optimising our printing supply chain and evolving our printing processes;

·      Completed the integration of Express & Star, delivering savings on an annualised basis of £23m (£3m delivered in 2018,  an incremental £16m delivered in 2019 with a further incremental £4m being delivered in 2020); and

·      We also continue to review our portfolio of regional titles and closed three titles during the year.

 

Accelerate digital audience and revenue

Reach is currently the fifth largest digital asset in the UK and we continue to grow our digital reach. Through our digital distribution channels, our content reached over 40m unique users in December 2019 and we reach over 50% of the population in the big cities that we serve on a weekly basis.

 

We recorded strong organic growth in our digital audience through the course of 2019, with the number of page views accelerating in the second half of the year. Average worldwide monthly page views in 2019 grew by 25% year on year to 1.3bn (up 34% in H2).

 

We launched two new embeds across all online publications in our network. The 'Don't Miss' and 'Most Read' embeds are designed to improve recirculation by providing relevant in-article recommendations to our readers.

 

The Manchester Evening News ('MEN') became the first-ever UK regional news site to break the 1bn views mark in a single year. With over 750m views on desktop and mobile, plus a further 250m on its app, the MEN hit this milestone at the end of November 2019.



 

During the year, we opened new digital-only sites in areas or segments where we do not currently have a print presence such as Business Live and Cork Beo which brings together all our regional business coverage onto a single site.

 

Apart from our websites, we also have a stable of podcasts, including our hugely successful Blood Red Liverpool podcast, with monthly listens growing steadily. We launched several new podcasts during the year on topics including mental health and parenting.

 

In November, we announced a significant expansion of our digital network of regional news sites under the 'Live' brand, committing to at least seven new launches in 2020 and hiring 46 journalists into permanent positions. New launch areas include Bolton, Bradford, County Durham, Newport, North Yorkshire, Sheffield and Sunderland. This expansion represents further growth of our proven model and brings Reach journalism to even more communities across the country, demonstrating our commitment.

 

Since the year end, we announced a further investment in digital reach with more than 50 new jobs for our personalised hyper local news platform InYourArea, which has shown rapid growth since its launch in 2017. InYourArea already has 2.5m engaged users and consistently shows double-digit monthly growth, evidence of our continuing ability to lead in the hyper local news sector.

 

We recognise that digital audience growth alone is insufficient and we must build our digital revenue alongside it, which we have done with like-for-like digital revenue increasing by 13.2%, an acceleration year on year.

 

Key initiatives that continue to drive digital revenue growth include:

·      Audience engagement to deliver higher page views and optimisation of the advertising yield for each page impression and each page;

·      Strong revenue growth from InYourArea where we have a range of self-serve products for local advertisers including estate agents, jobs, local deals and a business membership and directory; and

·      Growth and development of our Ozone commercial partnership with News UK, The Telegraph and The Guardian, offering quality audiences at scale in a brand safe, transparent and trustworthy environment.

 

At the end of January 2020, Maureen McDonagh joined from Facebook in a new role as Chief Customer Officer. Maureen is responsible for delivering a joined-up data and customer strategy, working closely with the digital teams at Reach and steering a range of customer-focused objectives.

 

Beyond digital revenue, we continue seeking ways to diversify, for example, through events (leveraging our association with Brand Events), our book publishing business and Reach Sport (our sports media publishing business), which handled the publication of all the match day programmes for all the Rugby World Cup fixtures held this year in Japan.

 

Merger and acquisition opportunities

We will continue to consider merger and acquisition opportunities which accelerate progress in the delivery of our strategy and where the financial and business cases meet our requirements. These opportunities could be to provide further industry consolidation, increase our digital footprint or audience scale, develop our product set or to monetise our existing audience.

 

Sustainable growth

We believe growth from digital and new revenue streams will offset print declines on an aggregate basis, leading to a future stabilisation of revenue. This, combined with our inbuilt and relentless focus on maximising efficiency, gives the Board confidence that the delivery of sustainable growth in revenue, profit and cash flow is achievable in the future, for the benefit of all stakeholders.

 

Our colleagues

Our thanks go to all our colleagues for their valuable contribution to the solid financial and operating performance of Reach during 2019.

 


Financial Review

Solid financial progress and strong business fundamentals

The Group delivered a solid trading performance in 2019, with improved revenue trends and the delivery of significant cost savings resulting in an improvement in adjusted operating profit. The balance sheet strengthened with all bank debt repaid, a positive cash balance of £20.4m and a reduced IAS 19 pension deficit, while the strong cash flows continue to support the payment of a progressive dividend and our ongoing obligations to funding the pension scheme deficits.

 

Trading performance

Improved revenue mix

On a like-for-like basis, revenue declined by 5.3% compared to a like-for-like fall of 6.6% in 2018. Within this, print revenue fell by 7.9% (2018: down 8.3%) and digital revenue showed stronger growth, increasing by 13.2% (2018: up 9.6%). Total revenue fell by 3.0% to £702.5m benefiting from the acquisition of Express & Star.

 

Print revenue fell by 5.1% or £32.0m to £591.3m (2018: £623.3m). On a like-for-like basis, print revenue declined by 7.9% (2018: down 8.3%), with the more resilient circulation revenue declining by 4.5%. Circulation revenue now accounts for 61.2% of print revenue, while the more structurally challenged advertising revenue declined by 19.4%. The circulation revenue decline was part-mitigated by cover price increases and availability investment, while the advertising decline was impacted by the agreed reduction in Health Lottery advertising as part of the Express & Star acquisition (excluding this effect, advertising declined by 17.2%).

 

Circulation volumes for the Group's national daily titles (excluding the impact of sampling) fell by 12.6% which compares to a decline for the UK tabloid market of 9.8%. The Group's national Sunday titles (excluding the impact of sampling) fell by 14.6% which compares to a decline for the UK tabloid market of 10.7%. Volume declines for our regional titles were 14.1% for paid-for dailies, 21.2% for paid-for weeklies and 4.6% for paid-for Sundays. Our regional Sunday volumes were improved by the launch of MEN on Sunday which if excluded volume declines were 14.1%. The circulation volumes for the paid-for magazines, OK! and New!, continued to face challenging trading. The circulation volume trend versus the market average have been impacted by cover price differentials and strategy.

 

The like-for-like decline in advertising revenue reflects the impact of the reduction in Health Lottery advertising and the absence of the FIFA World Cup, which was in June and July in the prior year. Our nationally sourced advertising performed better than locally sourced advertising, which still suffers the drag of declining classified advertising. Print advertising volume market share on the Group's national titles on a like-for-like basis was broadly similar to 2018.

 

Printing like-for-like revenue increased by 6.6% benefiting from new printing contracts and additional services to existing customers.

 

Other like-for-like revenue increased by 1.8% including the benefit from the printing and distribution of programmes for the Rugby World Cup.

 

Digital revenue comprises the combined display and transactional revenue streams which are predominantly directly driven by page views. We have accelerated our digital audience growth, establishing ourselves as a digital player of true scale and we continue to find ways to monetise this scale and reach. Digital revenues were £107.0m in 2019 (2018: £91.3m).

 

Digital revenue on a like-for-like basis was up by 13.2% (compared to 9.6% in the 2018), benefiting from page view growth with revenue growth accelerating from 9.7% in the first half to 16.4% in the second half. The growth in the first half was impacted by our digital audience continuing to be negatively impacted by the changes in Facebook and Google algorithms in early 2018, while the second half benefited from our digital initiatives.

 

Average monthly worldwide page views in 2019 grew by 25% year on year to 1.3bn. The first half saw page view growth of 15% while the second half saw accelerated page view growth of 34%. In 2019 mobile page views grew by 37% while desktop page views fell by 4%.

 

Other revenue is derived from our specialist digital recruitment websites. In 2018 this also included revenue from our specialist digital marketing services business, which was disposed of in September 2018, and from third-party rental and other services income to tenants in Canary Wharf, which ended as we terminated sub leases following our move from four to two floors in June 2018.

 



 

Delivery of significant cost savings

Statutory operating costs fell by £254.1m to £578.2m due to there being no impairment charge compared to a charge of £200.0m in the prior year together with lower pension and restructuring charges and the benefit of cost savings despite the inclusion of Express & Star costs for an additional two months. 

 

A key priority for the Group is maintaining quality journalism whilst ensuring the commercial viability and profitability of our brands into the future. To achieve this we continue to drive efficiencies which we expect to not adversely impact our products. The Group tightly manages the cost base with cost savings delivered through natural mitigation where volumes decline, day-to-day management interventions, structural costs savings which permanently remove costs and synergy savings relating to the acquisition of Express & Star. In 2019, the Group delivered structural cost savings of £12m, £2m ahead of our target of £10m and completed the integration of Express & Star, delivering savings on an annualised basis of £23m (£3m delivered in 2018,  an incremental £16m delivered in 2019 with a further incremental £4m being delivered in 2020).

 

These savings have been achieved by a series of initiatives across the business, including editorial, commercial, printing, senior management structures and back office functions. We also drive longer term infrastructure and operational benefits by reducing office space, moving data centres to the cloud, alongside investing in new and improved systems. In addition to cost savings, we drive further optimisation initiatives through maximising the utilisation of our printing network by securing new or retaining existing print contracts or securing external printing for our newspapers where appropriate, managing the profitability of our titles and closing titles where there is no path to sustainability.

 

Labour costs were £240.1m (reduction of £5.8m versus 2018) with savings from print-related staff reductions partly offset by the additional two months of Express & Star and an increase in digital focused resource, alongside inflationary increases.

 

Newsprint costs were £73.1m (reduction of £2.5m versus 2018) with savings from reduced volumes and closures mostly offset by the additional two months of Express & Star and newsprint price increases (increase in H2 2018 and H1 2019 though reduction in H2 2019). Price inflationary pressures seen in recent years have eased more recently.

 

Depreciation was £21.5m (reduction of £0.8m versus 2018) as capital expenditure continues to be below depreciation, with minimal capex required for our print sites and expected for digital development.

 

Other costs were £243.5m (reduction of £245.0m on 2018) driven by reduced operating adjusted items of £225.6m (principally, the prior year impairment). The remaining reduction of £19.4m is driven by print costs actions more than offsetting the additional two months of Express & Star and an increase in digital focused costs and inflationary increases.

 

The total impact of the items excluded from adjusted operating costs was a charge of £27.3m (2018: £252.9m). Operating adjusted items comprise restructuring charges in respect of cost reduction measures of £10.7m (2018: £20.0m), a £11.0m (2018: £12.5m) increase in the provision for dealing with and resolving civil claims in relation to historical phone hacking, pension administrative expenses of £2.9m (2018: £3.0m) and an impairment of a printing press of £2.7m (2018: nil). In 2018, operating adjusted items also included a non-cash impairment of goodwill publishing rights and titles and freehold buildings of £200.0m, pension past service costs for Guaranteed Minimum Pension equalisation of £15.8m and a charge for other items of £1.6m.

 

Statutory results

The statutory operating profit of £131.7m for the year compares to a statutory operating loss of £107.6m in the prior year which was impacted by a non-cash impairment charge.

 

Statutory financing costs were £10.9m (2018: £12.4m) reflecting the reduction in the pension finance charge on a lower opening pension deficit and the reduction in finance costs as borrowings drawn to fund the acquisition of Express & Star have been repaid.

 

The statutory tax charge of £26.6m (2018: credit of £0.3m) comprises a current tax charge of £15.9m (2018: £17.2m) and a deferred tax charge of £10.7m (2018: credit of £17.5m).

 

Statutory profit after tax amounted to £94.3m compared to a loss after tax of £119.6m and statutory earnings per share for the year of 31.8 pence per share compares to a statutory loss per share of 41.0 pence in the prior year.



 

Adjusted results

The acquisition of Express & Star coupled with our continued focus on tightly managing the cost base ensured we delivered a solid performance, with adjusted operating profit growing by 5.4% or £7.8m to £153.4m. Adjusted operating margin increased by 1.7 percentage points from 20.1% in 2018 to 21.8% in 2019 reflecting our optimisation strategy.

 

The continued strong cash flows generated by the business ensured that finance costs were £2.9m, a decrease of £0.9m from the prior year due to repayment of term loan borrowings drawn to fund the acquisition of Express & Star.

 

The adjusted tax charge of £28.9m (2018: £27.7m) represents 19.2% (2018: 19.5%) of adjusted profit before tax. The rate is broadly in line with the statutory tax rate of 19.0%.

 

Adjusted profit after tax increased by £7.5m or 6.6% to £121.7m and adjusted earnings per share increased by 1.9 pence or 4.8% to 41.1 pence.

 

Reconciliation of statutory to adjusted results

 

 

 

 

Statutory

results

£m

 

Operating

adjusted

items

£m

 

Pension

finance

charge

£m

 

 

Adjusted

results

£m

Revenue

702.5

-

-

702.5

Operating profit

131.7

21.7

-

153.4

Profit before tax

120.9

21.7

8.0

150.6

Profit after tax

94.3

20.9

6.5

121.7

Basic earnings per share (p)

31.8

7.1

2.2

41.1

 

The Group excludes from the adjusted results operating adjusted items (note 5) and the pension finance charge (note 14). Adjusting items relate to costs or incomes that derive from events or transactions that fall within the normal activities of the Group, but are excluded from the Group's adjusted profit measures, individually or, if of a similar type in aggregate, due to their size and/or nature in order to better reflect management's view of the performance of the Group.

 

Items are adjusted for where they relate to material items in the year (impairment, restructuring, disposals) or relate to historic liabilities (historical legal issues, defined benefit pension schemes which are all closed to future accrual). These include items which have occurred for a number of years and may continue in future years. Management exclude these from the results that it uses to manage the business and on which bonuses are based to reflect the underlying performance of the business and believes that the adjusted results, presented alongside the statutory results, provides users with additional useful information.

 

Restructuring charges incurred to deliver cost reduction measures relate to the transformation of the business from print to digital, together with costs to deliver synergies. These costs are principally severance related, but may also include system integration costs. They are included in adjusted items on the basis that they are material and can vary considerably each year, distorting the underlying performance of the business.

 

Provision for historical legal issues relates to the cost associated with dealing with and resolving civil claims for historical phone hacking and unlawful information gathering. This is included in adjusted items as the amounts are material, it relates to historical matters and movements in the provision can vary year to year.

 

Impairments to non-current assets arise following impairment reviews or where a decision is made to close or retire printing assets. These non-cash items are included in adjusted items on the basis that they are material and vary considerably each year, distorting the underlying performance of the business.

 

The Group's pension schemes are all closed to new members and to future accrual and are therefore not related to the current business. The pension administration expenses and the pension finance charge are included in adjusted items as the amounts are significant and they relate to the historical pension commitment. Additionally, the charge in respect of Guaranteed Minimum Pension equalisation was included in adjusted items last year as the amount was material and it related to the historical pension commitment.

 

Other items may be included in adjusted items if they are material, such as transaction costs incurred on significant acquisitions or the profit or loss on the sale of subsidiaries, associates or freehold buildings. They are included in adjusted items on the basis that they are material and can vary considerably each year, distorting the underlying performance of the business.

Balance Sheet

Positive cash balance at year end

Net debt reduced by £61.2m from £40.8m net debt at the prior end to a net cash position of £20.4m at the year end.

 

In December 2019, the Group repaid early the remaining £39.7m drawing on the Acquisition Term Loan ('ATL') from cash reserves. With the repayment of £20.3m in the first half of the year, the ATL has been fully settled.

 

The Group also cancelled the previous amortising Revolving Credit Facility ('RCF') and entered into a new four-year £65m non-amortising RCF. This is to provide the necessary resources to continue to invest in the future strategy. The Group had no drawings at the reporting date on the RCF.

 

Deferred consideration of £59.0m in respect of the acquisition of Express & Star is included in trade and other payables. Of this amount, £18.9m is classified as current liabilities (payable on 28 February 2020) and £40.1m is classified as non-current liabilities (payable £16.0m on 28 February 2021, £17.1m on 28 February 2022 and £7.0m on 28 February 2023). There are no conditions attached to the payment of the deferred consideration and the transaction was structured such that no interest accrues on these payments.

 

The strong cash flows generated by the Group provide resilience and financial flexibility to invest in the business, meet pension funding obligations and pay a progressive dividend.

 

Historical legal issues

The historical legal issues provision relates to the cost associated with dealing with and resolving civil claims in relation to historical phone hacking and unlawful information gathering. In April 2019, the law changed in respect of conditional fee agreements, the effect of which was to limit from that date the extent to which a claimant's law firm can recover a premium in legal costs for success. During the year the Group has progressed and settled a number of claims and also seen new claims come forward, a number of which were advanced immediately prior to this change. The Group has also been required to provide further invoice information to claimant's lawyers in respect of certain suppliers to the Group over a period of time.

 

The provision has been increased by £11.0m at the year end to reflect an increase in the estimate of the cost of settling claims. At the year end, £21.1m of the provision remains outstanding and this represents the current best estimate of the amount required to settle the expected claims. There are three parts to the provision: known claims, potential future claims and common court costs. The estimates are based on historical trends and experience of claims and costs. The provision is expected to be utilised over the next few years. The Group has recorded an increase in the provision in each of the last five years which highlights the challenges in making a best estimate. Certain cases and other matters relating to the issue are subject to court proceedings, the dynamics of which continue to evolve, and the outcome of those proceedings could have an impact on how much is required to settle the remaining claims and on the number of claims. It is not possible to provide a range of potential outcomes in respect of this provision. Due to this uncertainty, a contingent liability has been highlighted in note 18.

 

Reduction in accounting pension deficit

The IAS 19 pension deficit in respect of the Group's six defined benefit pension schemes fell by £52.7m to £295.9m (£242.9m net of deferred tax). Group contributions, strong asset returns and a reduction in the expected rate of improvement in mortality have been mostly offset by an unfavourable movement in financial assumptions driven by a fall in the discount rate and higher inflation increases.

 

Group contributions to the defined benefit pension schemes in the year were £48.9m (2018: £90.1m including a contribution of £41.2m to the Express & Star schemes relating to the acquisition). Contributions have been agreed at £48.9m for 2020, £56.1m per annum for 2021 to 2023, £55.3m per annum for 2024 to 2026 and £53.3m for 2027.

 

Changes in the accounting pension deficit do not have an immediate impact on the agreed funding commitments. The next valuation for funding of all six pension schemes will be as at 31 December 2019 and this is required to be completed by 31 March 2021, although we anticipate this to be completed by 31 December 2020.



 

Cash Flow

Continued good cash generation

Cash flows from operating activities were £147.4m (2018: £137.8m), an increase of 7.0%. Net debt of £40.8m at the end of last year moved to a cash balance of £20.4m due to the £61.2m of cash flow before debt repayments.

 

Restructuring payments were £13.6m (2018: £18.1m) which included the completion of the integration of Express & Star. Restructuring costs in 2020 are expected to be £5m.

 

Capital expenditure was £3.9m (2018: £11.2m) which is more in line with the expected annual run rate as the Group is fully invested in its print plants and expenses costs relating to digital. Spend was higher in 2018 as it included expenditure in connection with the reduction in floors at Canary Wharf and costs relating to a new finance system.

 

The Group presents an adjusted cash flow which reconciles the adjusted operating profit to the net change in cash and cash equivalents. Set out in note 23 is the reconciliation between the statutory and the adjusted cash flow.

 

The adjusted operating cash flow was £133.1m (2018: £132.9m) which is before historical legal issues payments (£3.5m), dividends (£18.6m), pension funding payments (£48.9m), debt repayment (£60.0m) and additional purchase of shares in an associate (£0.9m). After these, the net increase in cash balances was £1.2m.

 

Dividends

The Board proposes a final dividend of 4.05 pence per share for 2019, an increase of 7.4%, bringing the total dividend for 2019 to 6.55 pence per share, an increase of 6.7%. The final dividend, which is subject to approval by shareholders at the Annual General Meeting on 7 May 2020, will be paid on 5 June 2020 to shareholders on the register at 11 May 2020.

 

The Board continues to adopt a progressive dividend policy which is aligned to the free cash generation of the Group. The free cash generation for this purpose is the net cash flow generated by the Group before the repayment of debt, dividend payments, other capital returns to shareholders and additional contributions made to the defined benefit pension schemes as a result of any substantial increase in dividends and/or capital returns to shareholders. Based on the Board's expectation of future cash flows, the Board expects dividends to increase by at least 5% per annum.

 

 

Simon Fuller

Chief Financial Officer and Company Secretary

24 February 2020

 


Statement of Directors' Responsibilities

The directors are responsible for preparing the Preliminary Audited Results Announcement in accordance with applicable laws and regulations. The responsibility statement below has been prepared in connection with the Company's full Annual Report for the 52 weeks ended 29 December 2019. Certain points thereof are not included within this Preliminary Audited Results Announcement.

 

The directors confirm to the best of their knowledge:

a)     the consolidated financial statements, which have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit and loss of the Group; and

b)    the Preliminary Audited Results Announcement includes a fair review of the development and performance of the business and the position of the Group together with a description of the principal risks and uncertainties that it faces.

 

By order of the Board of Directors

 

 

Simon Fuller

Chief Financial Officer and Company Secretary

24 February 2020

 

 


Consolidated income statement

for the 52 weeks ended 29 December 2019 (52 weeks ended 30 December 2018)


 

 

 

notes

 

Adjusted 2019

£m

Adjusted Items

2019

£m

 

Statutory

2019

£m

 

Adjusted

2018

£m

Adjusted Items

2018

£m

 

Statutory

2018

£m

 








Revenue    

4

702.5

-

702.5

723.9

-

723.9

Cost of sales


(370.7)

-

(370.7)

(377.4)

-

(377.4)

Gross profit


331.8

-

331.8

346.5

-

346.5

Distribution costs


(53.0)

-

(53.0)

(61.2)

-

(61.2)

Administrative expenses


(127.2)

(27.3)

(154.5)

(140.8)

(252.9)

(393.7)

Share of results of associates

13

1.8

5.6

7.4

1.1

(0.3)

0.8

Operating profit/(loss)


153.4

(21.7)

131.7

145.6

(253.2)

(107.6)

Interest income

6

0.1

-

0.1

0.1

-

0.1

Pension finance charge

14

-

(8.0)

(8.0)

-

(8.6)

(8.6)

Finance costs

7

(2.9)

-

(2.9)

(3.8)

-

(3.8)

Profit/(loss) before tax


150.6

(29.7)

120.9

141.9

(261.8)

(119.9)

Tax (charge)/credit

8

(28.9)

2.3

(26.6)

(27.7)

28.0

0.3

Profit/(loss) for the period attributable to equity holders of the parent


121.7

(27.4)

94.3

114.2

 

(233.8)

(119.6)









Earnings/(loss) per share

notes

2019

Pence


2019

Pence

2018

Pence


2018

Pence

Earnings/(loss) per share - basic

10

41.1


31.8

39.2


(41.0)

Earnings/(loss) per share - diluted

10

40.6


31.5

39.0


(41.0)

The above results were derived from continuing operations. Set out in note 19 is the reconciliation between the statutory and adjusted results.

 

Consolidated statement of comprehensive income


 

notes

2019

£m

2018

£m

 




Profit/(loss) for the period


94.3

(119.6)





Items that will not be reclassified to profit and loss:




Actuarial gain on defined benefit pension schemes

14

14.7

4.6

Tax on actuarial gain on defined benefit pension schemes

8

(2.8)

(0.8)

Share of items recognised by associates

13

(11.2)

3.2

Other comprehensive income for the period


0.7

7.0





Total comprehensive income/(loss) for the period


95.0

(112.6)

 


Consolidated cash flow statement

for the 52 weeks ended 29 December 2019 (52 weeks ended 30 December 2018)

 


 

notes

2019

£m

2018

£m

Cash flows from operating activities




Cash generated from operations

11

147.4

137.8

Pension deficit funding payments

14

(48.9)

(90.1)

Income tax paid


(11.7)

(12.5)

Net cash inflow from operating activities


86.8

35.2

Investing activities




Interest received


0.1

0.1

Dividends received from associated undertakings

13

0.5

-

Proceeds on disposal of property, plant and equipment


0.5

6.6

Purchases of property, plant and equipment


(3.9)

(11.2)

Acquisition of subsidiary undertakings


-

(43.1)

Proceeds on disposal of subsidiary undertaking


-

6.4

Acquisition of associated undertaking

13

(0.9)

(4.5)

Net cash used in investing activities


(3.7)

(45.7)

Financing activities




Dividends paid

9

(18.6)

(17.5)

Interest paid on borrowings


(3.3)

(3.8)

Draw down on bank borrowings


-

80.0

Repayment of bank borrowings

15

(60.0)

(45.0)

Net cash (used in)/received from financing activities


(81.9)

13.7

 




Net increase in cash and cash equivalents


1.2

3.2

Cash and cash equivalents at the beginning of the period

15

19.2

16.0

Cash and cash equivalents at the end of the period

15

20.4

19.2

 

Consolidated statement of changes in equity

for the 52 weeks ended 29 December 2019 (52 weeks ended 30 December 2018)


 

 

Share

capital

£m

 

Share premium

account

£m

 

 

Merger

reserve

£m

 

Capital

redemption

reserve

£m

Retained earnings and other reserves

£m

 

 

 

Total

£m

 







At 31 December 2017

(28.3)

(606.7)

(37.9)

(4.4)

10.5

(666.8)








Loss for the period

-

-

-

-

119.6

119.6

Other comprehensive income for the period

-

-

-

-

(7.0)

(7.0)

Total comprehensive loss for the period

-

-

-

-

112.6

112.6








Issue of shares

(2.6)

-

(17.4)

-

-

(20.0)

Merger reserve transfer

-

-

37.9

-

(37.9)

-

Credit to equity for equity-settled share-based payments

-

-

-

-

(1.0)

(1.0)

Dividends paid

-

-

-

-

17.5

17.5

At 30 December 2018

(30.9)

(606.7)

(17.4)

(4.4)

101.7

(557.7)








Profit for the period

-

-

-

-

(94.3)

(94.3)

Other comprehensive income for the period

-

-

-

-

(0.7)

(0.7)

Total comprehensive income for the period

-

-

-

-

(95.0)

(95.0)








Credit to equity for equity-settled share-based payments

-

-

-

-

(1.1)

(1.1)

Dividends paid

-

-

-

-

18.6

18.6

At 29 December 2019

(30.9)

(606.7)

(17.4)

(4.4)

24.2

(635.2)

 


Consolidated balance sheet

at 29 December 2019 (at 30 December 2018)


 

notes

2019

£m

2018

£m

Non-current assets




Goodwill

12

42.0

42.0

Other intangible assets

12

810.0

810.0

Property, plant and equipment


224.9

246.2

Investment in associates

13

21.9

25.3

Retirement benefit assets

14

31.2

10.2

Deferred tax assets


55.9

69.8



1,185.9

1,203.5

Current assets




Inventories


5.9

6.3

Trade and other receivables


116.4

108.4

Cash and cash equivalents

15

20.4

19.2

 


142.7

133.9

Total assets


1,328.6

1,337.4

Non-current liabilities




Trade and other payables


(40.1)

(59.0)

Borrowings

15

-

(39.7)

Retirement benefit obligations

14

(327.1)

(358.8)

Deferred tax liabilities


(159.3)

(159.7)

Provisions

16

(20.5)

(4.1)



(547.0)

(621.3)

Current liabilities




Trade and other payables


(122.2)

(111.3)

Borrowings

15

-

(20.3)

Current tax liabilities

8

(8.7)

(4.5)

Provisions

16

(15.5)

(22.3)



(146.4)

(158.4)

Total liabilities


(693.4)

(779.7)

Net assets


635.2

557.7





Equity




Share capital

17

(30.9)

(30.9)

Share premium account

17

(606.7)

(606.7)

Merger reserve

17

(17.4)

(17.4)

Capital redemption reserve

17

(4.4)

(4.4)

Retained earnings and other reserves

17

24.2

101.7

Total equity attributable to equity holders of the parent


(635.2)

(557.7)

 


Notes to the consolidated financial statements

for the 52 weeks ended 29 December 2019 (52 weeks ended 30 December 2018)

1.            General information

The financial information, which comprises the Consolidated income statement, the Consolidated statement of comprehensive income, the Consolidated cash flow statement, the Consolidated statement of changes in equity and the Consolidated balance sheet and related notes ('Consolidated Financial Statements') in the Preliminary Audited Results announcement is derived from but does not represent the full statutory accounts of Reach plc. The statutory accounts for the 52 weeks ended 30 December 2018 have been filed with the Registrar of Companies and those for the 52 weeks ended 29 December 2019 will be filed following the Annual General Meeting on 7 May 2020. The auditors' reports on the statutory accounts for the 52 weeks ended 30 December 2018 and for the 52 weeks ended 29 December 2019 were unqualified, do not include reference to any matters to which the auditors drew attention by way of emphasis of matter without qualifying the reports and do not contain a statement under Section 498 (2) or (3) of the Companies Act 2006.

 

Whilst the financial information included in this Preliminary Audited Results announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards (IFRS), this announcement does not itself contain sufficient information to comply with IFRS. This Preliminary Audited Results announcement constitutes a dissemination announcement in accordance with Section 6.3 of the Disclosure and Transparency Rules (DTR). The Annual Report for the 52 weeks ended 29 December 2019 will be available on the Company's website at www.reachplc.com and at the Company's registered office at One Canada Square, Canary Wharf, London E14 5AP before the end of March 2020 and will be sent to shareholders who have elected to receive a hard copy with the documents for the Annual General Meeting to be held on 7 May 2020.

 

The financial information has been prepared for the 52 weeks ended 29 December 2019 and the comparative period has been prepared for the 52 weeks ended 30 December 2018. Throughout this report, the financial information for the 52 weeks ended 29 December 2019 is referred to and headed 2019 and for the 52 weeks ended 30 December 2018 is referred to and headed 2018. The presentational and functional currency of the Group is Sterling. The Company presents the results on a statutory and adjusted basis and revenue trends on a statutory and like-for-like basis as described in note 2.

 

2.            Accounting polices

Basis of preparation

The financial information has been prepared in accordance with IFRS as adopted by the European Union. These standards are subject to ongoing amendment by the International Accounting Standards Board and by the European Union and are therefore subject to change. As a result, the financial information contained herein will need to be updated for any subsequent amendment to IFRS or any new standards that are issued. The financial information has been prepared under the historical cost convention as modified by the revaluation of financial assets held at fair value through profit and loss.

 

The accounting policies used in the preparation of the Consolidated Financial Statements for the 52 weeks ended 29 December 2019 have been consistently applied to all the periods presented except for the changes in accounting policy noted below. These Consolidated Financial Statements have been prepared on a going concern basis.

 

Going concern basis

The directors have made appropriate enquires and consider that the Group has adequate resources to continue in operational existence for the foreseeable future, which comprises the period of at least 12 months from the date of approval of the financial statements.

 

In accordance with LR 9.8.6(3) of the Listing Rules, and in determining whether the Group's annual consolidated financial statements can be prepared on a going concern basis, the directors considered all factors likely to affect its future development, performance and its financial position, including cash flows, liquidity position and borrowing facilities, and the principal risks and uncertainties relating to its business activities.

 

Having considered all the factors impacting the Group's businesses, including downside sensitivities (relating to trading and cash flows), the directors are satisfied that the Group will be able to operate within the terms and conditions of the Group's financing facilities for the foreseeable future.

 

The directors have reasonable expectations that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the Group's annual consolidated financial statements.

 

Changes in accounting policy

The same accounting policies, presentation and methods of computation are followed in the condensed consolidated financial statements as applied in the Group's latest annual consolidated financial statements.

 

The Group has not adopted any new standards and interpretations during the current financial period which began on 31 December 2018. Other than IFRS 16 'Leases', the standards and interpretations in issue and which will be adopted for periods beginning on or after 1 January 2019, are not expected to have a material impact on the Group.



 

IFRS 16 'Leases' will be adopted by the Group in the current financial year. The Group will apply the simplified transition approach (modified retrospective approach) and will recognise the lease liability on transition at the present value of the remaining lease payments, discounted using the incremental borrowing rate at the date of transition. The Group will not restate comparatives and the cumulative effect of initially applying IFRS 16 will be recognised as an adjustment to opening reserves at the date of transition. The Group estimates that the application of IFRS 16 will result in the recognition of a lease liability of around £45m and a right-of-use asset of around £44m, along with the derecognition of onerous lease provisions of around £1m and other working capital balances (including lease incentives) of around £3m, which results in an overall adjustment to opening reserves of approximately around £3m. Based on a constant portfolio of leases as at 29 December 2019 i.e. leases in place as at the current financial reporting date, the Group expects that profit before tax will be lower by around £1m. This is due to an increase in depreciation expense of around £8m on the right-of use asset and an additional interest expense of around £1m on the lease liability, offset by the removal of the rental expense of around £8m. There will be no impact on cash flows, although the presentation of the cash flow statement will change, with an increase in net cash inflows from operating activities being offset by an increase in net cash outflows from financing activities.

 

Alternative performance measures

The Company presents the results on a statutory and adjusted basis and revenue trends on a statutory and like-for-like basis. The Company believes that the adjusted basis and like-for-like trends will provide investors with useful supplemental information about the financial performance of the Group, enable comparison of financial results between periods where certain items may vary independent of business performance, and allow for greater transparency with respect to key performance indicators used by management in operating the Group and making decisions. Although management believes the adjusted basis is important in evaluating the Group, they are not intended to be considered in isolation or as a substitute for, or as superior to, financial information on a statutory basis. The alternative performance measures are not recognised measures under IFRS and do not have standardised meanings prescribed by IFRS and may be different to those used by other companies, limiting the usefulness for comparison purposes. Note 19 sets out the reconciliation between the statutory and adjusted results. Note 21 shows the reconciliation between the statutory and like-for-like revenues. An adjusted cash flow is presented in note 22 which reconciles the adjusted operating profit to the net change in cash and cash equivalents. Set out in note 23 is the reconciliation between the statutory and adjusted cash flow.

 

Adjusting items

Adjusting items relate to costs or incomes that derive from events or transactions that fall within the normal activities of the Group, but are excluded from the Group's adjusted profit measures, individually or, if of a similar type in aggregate, due to their size and/or nature in order to better reflect management's view of the performance of the Group. The adjusted profit measures are not recognised profit measures under IFRS and may not be directly comparable with adjusted profit measures used by other companies. Details of adjusting items are set out in note 19.

 

Key sources of estimation uncertainty

The key assumptions concerning the future and other key sources of estimation uncertainty that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below:

 

Provisions (notes 8, 16 and 18)

There is uncertainty as to liabilities arising from the outcome or resolution of the ongoing historical legal issues and in addition there is uncertainty as to the amount of expenditure that may be tax deductible and additional tax liabilities may fall due in relation to earlier years. Provisions are measured at the best estimate of the expenditure required to settle the obligation based on the assessment of the related facts and circumstances at each reporting date.

 

Retirement benefits (note 14)

Actuarial assumptions adopted and external factors can significantly impact the surplus or deficit of defined benefit pension schemes. Valuations for funding and accounting purposes are based on assumptions about future economic and demographic variables. These result in risk of a volatile valuation deficit and the risk that the ultimate cost of paying benefits is higher than the current assessed liability value. Advice is sourced from independent and qualified actuaries in selecting suitable assumptions at each reporting date.

 

Impairment review (note 12)

There is uncertainty in the value-in-use calculation. The most significant area of uncertainty relates to expected future cash flows for each cash-generating unit. Determining whether the carrying values of assets in a cash-generating unit are impaired requires an estimation of the value in use of the cash-generating unit to which these have been allocated. The value-in-use calculation requires the Group to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate present value. Projections are based on both internal and external market information and reflect past experience. The discount rate reflects the weighted average cost of capital of the Group.

Critical judgements in applying the Group's accounting policies

In the process of applying the Group's accounting policies, described above, management has made the following judgements that have the most significant effect on the amounts recognised in the financial statements:

 

Indefinite life assumption in respect of publishing rights and titles (note 12)

There is judgement required in continuing to adopt an indefinite life assumption in respect of publishing rights and titles. The directors consider publishing rights and titles (with a carrying amount of £810.0m) have indefinite economic lives due to the longevity of the brands and the ability to evolve them in an ever changing media landscape. At each reporting date management review the suitability of this assumption. 

 

Identification of cash-generating units (note 12)

There is judgement required in determining the cash-generating unit relating to our Publishing brands. At each reporting date management review the interdependency of revenues across our portfolio of Publishing brands to determine the appropriate cash-generating unit. The Group operates its Publishing brands such that a majority of the revenues are interdependent and revenue would be materially lower if brands operated in isolation. As such, management do not consider that an impairment review at an individual brand level is appropriate or practical. As the Group continues to centralise revenue generating functions and has moved to a matrix operating structure over the past few years all of the individual brands in Publishing have increased revenue interdependency and are assessed for impairment as a single Publishing cash-generating unit.

 

3.            Segments

Segments are identified on the basis of internal reports about components of the Group that are regularly reviewed by the Board and chief operating decision maker (executive directors) to allocate resources to the segments and to assess their performance. The Board and chief operating decision maker are not provided with an amount for total assets by segment. The Group's operations are primarily located in the UK and the Group is not subject to significant seasonality during the year.

 

Following recent acquisitions and disposals and changes to the management structure, management have reviewed the segment disclosure and have concluded that the performance of the Group should be presented as a single reporting segment. As such the previously reported segments of Publishing, Printing, Specialist Digital and Central are no longer reported and the Group presents the Group as a single reporting segment.

 

4.            Revenue

To better reflect how we view and operate the business, the Group amended the presentation of revenues in 2019, aligning our revenue streams with the strategy. Print revenue comprises circulation, advertising (including digital classified which is predominantly upsold from print), printing (including third party printing contracts) and other (contract publishing, syndication, reader offers and events); this corresponds to the part of our strategy focused on maximising cash flow from print. Digital revenue comprises the combined display and transactional revenue streams; this corresponds to the part of our strategy focused on accelerating digital audience and revenue. Other revenue comprises revenue from our specialist digital recruitment websites. Note 18 sets out the reconciliation between the classifications in the prior period to the classifications in the current period.

 

 

2019

£m

2018

£m

 



Print

591.3

623.3

   Circulation

361.7

362.1

   Advertising

152.5

189.0

   Printing

38.5

35.6

   Other

38.6

36.6

Digital

107.0

91.3

Other

4.2

9.3

Total revenue

702.5

723.9

 

The Group's operations are located primarily in the UK. The Group's revenue by location of customers is set out below:

 

 

2019

£m

2018

£m

 



UK and Republic of Ireland

700.9

721.9

Continental Europe

1.5

1.8

Rest of World

0.1

0.2

Total revenue

702.5

723.9

 

The Group has two customers where revenues represent more than 10% of total revenue. These two customers represent the majority of the circulation revenue.

5.            Operating adjusted items

 

 

2019

£m

2018

£m




Impairment of goodwill, publishing rights and titles and freehold buildings (note 12)

-

(200.0)

Pension administrative expenses and past service costs for GMP equalisation (note 14)

(2.9)

(18.8)

Restructuring charges in respect of cost reduction measures (note 16)

(10.7)

(20.0)

Provision for historical legal issues (note 16)

(11.0)

(12.5)

Other

(2.7)

(1.6)

Operating adjusted items included in administrative expenses

(27.3)

(252.9)

Operating adjusted items included in share of results of associates (note 13)

5.6

(0.3)

Total operating adjusted items

(21.7)

(253.2)

Other in 2019 relates to an impairment of a printing press in Saltire which has been mothballed. In 2018, other included: amortisation of intangible assets of £0.2m, transaction costs of £6.3m and a charge relating to property carrying value of £0.8m less profit on disposal of property of £2.3m and profit on disposal of subsidiary undertaking of £3.4m.

 

6.            Interest income

 

 

2019

£m

2018

£m




Interest income on bank deposits

0.1

0.1

 

7.            Finance costs

 

 

2019

£m

2018

£m




Interest on bank overdrafts and borrowings

(2.9)

(3.8)

 

8.            Tax

 

 

2019

£m

2018

£m

Corporation tax charge for the period

(15.9)

(17.2)

Current tax charge

(15.9)

(17.2)

Deferred tax (charge)/credit for the period

(9.9)

17.5

Prior period adjustment

(0.8)

-

Deferred tax (charge)/credit

(10.7)

17.5

Tax (charge)/credit

(26.6)

0.3




Reconciliation of tax (charge)/credit

%

%

Standard rate of corporation tax

(19.0)

19.0

Tax effect of items that are not deductible in determining taxable profit

(3.3)

(19.5)

Tax effect of items that are not taxable in determining taxable profit

-

0.7

Prior period adjustment

(0.8)

-

Tax effect of share of results of associates

1.1

0.1

Tax (charge)/credit rate

(22.0)

0.3

 

 

The standard rate of corporation tax for the period is 19% (2018: 19%). The tax effect of items that are not deductible in determining taxable profit includes certain costs where there is uncertainty as to their deductibility. The current tax liabilities amounted to £8.7m (2018: £4.5m) at the reporting date and include net provisions of £2.7m (2018: £1.3m). At the reporting date the maximum amount of the unprovided tax exposure relating to uncertain tax items is some £5m (2018: £7m).

 

The tax on actuarial gains on defined benefit pension schemes taken to the consolidated statement of comprehensive income is a deferred tax charge of £2.8m (2018: charge of £0.8m comprising a deferred tax charge of £8.7m and a current tax credit of £7.9m).



 

9.            Dividends

 

2019

Pence

per share

2018

Pence

per share

Dividends paid per share and recognised as distributions to equity holders in the period

6.27

5.92

Dividend proposed per share but not paid nor included in the accounting records

4.05

3.77

 

The Board proposes a final dividend for 2019 of 4.05 pence per share. An interim dividend for 2019 of 2.50 pence per share was paid on 27 September 2019 bringing the total dividend in respect of 2019 to 6.55 pence per share. The 2019 final dividend payment is expected to amount to £12.0m.

 

On 10 May 2019 the final dividend proposed for 2018 of 3.77 pence per share was approved by shareholders at the Annual General Meeting and was paid on 7 June 2019.

 

Total dividends paid in 2019 were £18.6m (2018 final dividend payment of £11.2m and 2019 interim dividend payment of £7.4m).

 

10.          Earnings per share

Basic earnings per share is calculated by dividing profit for the period attributable to equity holders of the parent by the weighted average number of ordinary shares during the period and diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares in issue on the assumption of conversion of all potentially dilutive ordinary shares.

 

 

2019

Thousand

2018

Thousand




Weighted average number of ordinary shares for basic earnings per share

296,138

291,478

Effect of potential dilutive ordinary shares in respect of share awards

3,457

1,571

Weighted average number of ordinary shares for diluted earnings per share

299,595

293,049

 

The weighted average number of potentially dilutive ordinary shares not currently dilutive was 3,526,324 (2018: 3,964,133).

 

 

Statutory earnings/(loss) per share

2019

Pence

2018

Pence




Earnings/(loss) per share - basic

31.8

(41.0)

Earnings/(loss) per share - diluted

31.5

(41.0)

 

 

Adjusted earnings per share

2019

Pence

2018

Pence




Earnings per share - basic

41.1

39.2

Earnings per share - diluted

40.6

39.0

 

Set out in note 19 is the reconciliation between the statutory and adjusted results.

 

11.          Cash flows from operating activities


2019

£m

2018

£m




Operating profit/(loss)

131.7

(107.6)

Depreciation of property, plant and equipment

21.5

22.3

Impairment charge

-

200.0

Amortisation of intangible assets

-

0.2

Share of results of associates

(7.4)

(0.8)

Charge for share-based payments

1.1

1.0

Loss/(profit) on disposal of land and buildings

0.3

(1.5)

Profit on disposal of subsidiary undertaking

-

(3.4)

Impairment of fixed assets

2.7

-

Write-off of fixed assets

0.2

0.5

Pension administrative expenses

2.9

3.0

Pension past service costs

-

15.8

Operating cash flows before movements in working capital

153.0

129.5

Decrease in inventories

0.4

0.1

Increase in receivables

(7.8)

(2.9)

Increase in payables

1.8

11.1

Cash flows from operating activities

147.4

137.8

 



 

12.          Goodwill and other intangible assets

The Group had three cash-generating units at the prior reporting date (Publishing excluding Express & Star, Express & Star and Digital Classified Recruitment). The Express & Star business has been fully integrated within the Publishing business such that the cash inflows are largely interdependent and they have been combined into a single cash-generating unit. This reflects the scale of advertising packages sold across all titles and websites and reflects the group wide nature of our printing operations and the wholesale and distribution contracts. At the reporting date the Group has two cash-generating units (Publishing and Digital Classified Recruitment).

 

The carrying value of goodwill and other intangible assets is:


Goodwill

£m

Publishing

rights and titles

£m

Intangible

assets

£m





Opening and closing carrying value

42.0

810.0

852.0

 

Goodwill of £42.0m comprises Publishing £35.9m and Digital Classified Recruitment £6.1m. Publishing rights and titles comprises Publishing £810.0m.

 

There is judgement required in continuing to adopt an indefinite life assumption in respect of publishing rights and titles. The directors consider publishing rights and titles (with a carrying amount of £810.0m) have indefinite economic lives due to the longevity of the brands and the ability to evolve them in an ever changing media landscape. The Group has grown digital revenue in recent years and is focused on investing to continue the growth for the coming years. The directors believe growth from digital and new revenue streams will offset print declines on an aggregate basis, leading to a future stabilisation of revenue. This, combined with our inbuilt and relentless focus on maximising efficiency, gives the Board confidence that the delivery of sustainable growth in revenue, profit and cash flow is achievable in the future.

 

There is judgement required in determining the cash-generating units. At each reporting date management review the interdependency of revenues across our Publishing brands to determine the appropriate cash-generating unit. The Group operates its Publishing brands such that a majority of the revenues are interdependent and revenue would be materially lower if brands operated in isolation. As such, management do not consider that an impairment review at an individual brand level is appropriate or practical. As the Group continues to centralise revenue generating functions and has moved to a matrix operating structure over the past few years all of the individual brands in Publishing have increased revenue interdependency and are assessed for impairment as a single Publishing cash-generating unit.

 

The Group tests the carrying value of assets at the cash-generating unit level for impairment annually or more frequently if there are indicators that assets might be impaired. The review is undertaken by assessing whether the carrying value of assets is supported by their value in use which is calculated as the net present value of future cash flows derived from those assets, using cash flow projections. If an impairment charge is required this is allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit and then to the other assets of the cash-generating unit but subject to not reducing any asset below its recoverable amount.

 

The impairment review concluded that no impairment charge was required in 2019. In 2018, the total impairment charge for the year was £200.0m (£187.1m net of deferred tax). The charge was allocated to goodwill (£92.5m), publishing rights and titles (£95.0m) and freehold buildings (£12.5m). Of the £200.0m impairment charge, £150.0m was charged at the 2018 half year and a further £50.0m was charged at the 2018 year end.

 

For the 2019 impairment review, the Group prepared cash flow projections for each cash-generating unit using the latest forecasts and projections. The growth rates for the first three-year period are internal projections based on both internal and external market information and reflect past experience of and the risk associated with each asset. For the Publishing cash-generating unit, projections for a further seven years have been prepared as this is the period over which the transformation to digital can be assessed. For the Digital Classified Recruitment cash-generating unit the three year projections have been used. Cash flow projections beyond the respective periods used for each cash-generating unit are extrapolated based on estimated growth rates which do not exceed the average long-term growth rates for the relevant markets. The long-term growth rates beyond the 10-year period have been assessed at 0% based on the Board's view of the cash-generating unit's market position and maturity of the relevant market. We continue to believe that there are significant longer term benefits of our scale local digital audiences and there are opportunities to grow revenue and profit in the longer term.

 

The discount rate reflects the weighted average cost of capital of the Group. The current post-tax and equivalent pre-tax discount rate used in respect of all cash-generating units is 11.1% and 13.5% respectively.

 

The impairment review is highly sensitive to reasonably possible changes in key assumptions used in the value-in-use calculations. For the Publishing cash-generating unit a combination of reasonably possible changes in key assumptions such as print revenue declining at a faster rate than projected, digital revenue growth being significantly lower than projected or the scale of cost saving initiatives being delivered being lower than forecast, could lead to an impairment in the Publishing cash-generating unit. If these sensitivities led to a 22% reduction in cash flows in each of the years in the 10 year period this would lead to the removal of the headroom. Alternatively an increase in the discount rate by 3.6 percentage points would lead to the removal of the headroom. For the Digital Classified Recruitment cash-generating unit, a 23% reduction in cash flows or an increase in the discount rate by 3.5 percentage points would lead to the removal of the headroom.

 



 

13.          Investment in associates

The carrying value of investments in associates is set out below:


PA Media  

2019

£m

Other  

2019

£m

Total  

2019

£m

PA Media

2018

£m

Other

2018

£m

Total

2018

£m








Opening balance

20.2

5.1

25.3

16.2

0.6

16.8

Investment

0.9

-

0.9

-

4.5

4.5

Dividends received

-

(0.5)

(0.5)

-

-

-

Share of results:

7.0

0.4

7.4

0.8

-

0.8

Results before adjusted items

1.3

0.5

1.8

1.3

(0.2)

1.1

Adjusted items

5.7

(0.1)

5.6

(0.5)

0.2

(0.3)

Share of other comprehensive (loss)/income

(10.9)

(0.3)

(11.2)

3.2

-

3.2

Closing balance

17.2

4.7

21.9

20.2

5.1

25.3

 

Information on principal associate:

Company

County of incorporation

Class of shares

Shareholding

Accounting year end

PA Media Group Limited

UK

Ordinary

23.54%

31 December

 

The table below provide summarised financial information for PA Media Group Limited which is material to the Group. The information disclosed reflects the amounts presented in the financial statements and management accounts of the associate as amended to reflect adjustments made when using the equity method, including fair value adjustments and modifications for differences in accounting policy.

 


   2019

£m

2018

£m

Non-current assets

25.3

57.3

Current assets

73.2

55.5

Total Assets

98.5

112.8

Current liabilities

(25.3)

(19.0)

Total Liabilities

(25.3)

(19.0)

Net assets

73.2

93.8

Group's share of net assets

17.2

20.2




Revenue

73.4

70.4

Profit for period after tax

32.5

3.7

Group's share of associates profit for the period

7.0

0.8

 

The financial statements of PA Media Group Limited are made up to 31 December each year. For the purposes of applying the equity method of accounting, the audited financial statements of PA Group Limited for the year ended 31 December 2018 together with the management accounts up to the end of December 2019 have been used with appropriate year-end adjustments made. Included in the share of operating adjusted items of associates is a £6.7m (2018: nil) profit on our share of the after tax profit on disposal of a building less after tax restructuring charges of £0.3m (2018: £0.1m) and after tax amortisation charge of £0.7m (2018: £0.4m). The share of other comprehensive loss of £10.9m (2018: profit £3.2m) relates primarily to pensions. Included in the current year is the impact of the purchase of a buy-in policy by the Trustees.



 

14.          Retirement benefit schemes

Defined contribution pension schemes

The Group operates a defined contribution pension scheme for qualifying employees: The Reach Pension Plan (the 'RPP'). The two Group Personal Pension Plans for Express & Star employees were closed on 31 March 2019 with all members given the opportunity to join the RPP on 1 April 2019. The assets of the RPP scheme where employees have an individual account at Fidelity are held separately from those of the Group in funds under the control of Trustees.

 

The current service cost charged to the consolidated income statement for the year of £17.7m (2018: £14.9m) represents contributions paid by the Group at rates specified in the scheme rules. All amounts that were due have been paid over to the schemes at all reporting dates.

 

Defined benefit pension schemes

Background

The defined benefit pension schemes operated by the Group are all closed to future accrual. The Group has six defined benefit pension schemes:

·       Trinity Mirror schemes (the 'TM Schemes'): the MGN Pension Scheme (the 'MGN Scheme'), the Trinity Retirement Benefit Scheme (the 'Trinity Scheme') and the Midland Independent Newspapers Pension Scheme (the 'MIN Scheme'); and

·        Express & Star schemes (the 'E&S Schemes'): the Express Newspapers 1988 Pension Fund (the 'EN88 Scheme'), the Express Newspapers Senior Management Pension Fund (the 'ENSM Scheme') and the West Ferry Printers Pension Scheme (the 'WF Scheme').

 

Characteristics

The defined benefit pension schemes provide pensions to members, which are based on the final salary pension payable, normally from age 65 (although some schemes have some pensions normally payable from an earlier age) plus surviving spouses or dependants benefits following a member's death. Benefits increase both before and after retirement either in line with statutory minimum requirements or in accordance with the scheme rules if greater. Such increases are either at fixed rates or in line with retail or consumer prices but subject to upper and lower limits. All of the schemes are independent of the Group with assets held independently of the Group. They are governed by Trustees who administer benefits in accordance with the scheme rules and appropriate UK legislation. The schemes each have a professional or experienced independent trustee as their chairman with generally half of the remaining Trustees nominated by the members and half by the Group.

 

Maturity profile and cash flow

Across all of the schemes at the reporting date, the uninsured liabilities related 60% to current pensioners and their spouses or dependants and 40% related to deferred pensioners. The average term from the reporting date to payment of the remaining uninsured benefits is expected to be around 18 years. Uninsured pension payments in 2019, excluding lump sums and transfer value payments, were £70m and these are projected to rise to an annual peak in 2031 of £99m and reducing thereafter.

Funding arrangements

The funding of the Group's schemes is subject to UK pension legislation as well as the guidance and codes of practice issued by the Pensions Regulator. Funding targets are agreed between the Trustees and the Group and are reviewed and revised usually every three years. The funding targets must include a margin for prudence above the expected cost of paying the benefits and so are different to the liability value for IAS 19 purposes. The funding deficits revealed by these triennial valuations are removed over time in accordance with an agreed recovery plan and schedule of contributions for each scheme.

 

The funding valuations of the schemes: at 31 December 2016 for the MGN Scheme showed a deficit of £476.0m, for the Trinity Scheme showed a deficit of £78.0m and for the MIN Scheme showed a deficit of £68.2m; at 5 April 2017 for the EN88 Scheme showed a deficit of £69.8m and for the ENSM Scheme showed a deficit of £3.2m; and at 31 December 2017 for the WF Scheme showed a deficit of £6.5m.

 

The deficits in all schemes are expected to be removed before or in 2027 by a combination of the contributions and asset returns. Contributions (which include funding for pensions administrative expenses) are payable monthly. The Group paid £48.9m into the defined benefit pension schemes in 2019 (2018: £90.1m including an initial pension contribution of £41.2m paid into the E&S Schemes in connection with the acquisition of Express & Star).

 

Remaining contributions per the current schedule of contributions are for £48.9m in 2020, £56.1m per annum in 2021 to 2023, £55.3m per annum in 2024 to 2026 and £53.3m in 2027.

 

The Group has agreed that in respect of dividend payments in 2018, 2019 and 2020 that additional contributions would be paid at 75% of the excess if dividends paid in 2018 were above 6.16 pence per share. For 2019 and 2020 the threshold increases in line with the increase in dividends capped at 10% per annum.

 

The future deficit funding commitments are linked to the three-yearly actuarial valuations. There is no link to the IAS 19 valuations which use different actuarial assumptions and are updated at each reporting date. The next valuation for funding of all six defined benefit pension schemes will be as at 31 December 2019 and this is required to be completed by 31 March 2021, although we expect this to be completed by 31 December 2020.



 

 

Although the funding commitments do not generally impact the IAS 19 position, IFRIC 14 guides companies to consider for IAS 19 disclosures whether any surplus can be recognised as a balance sheet asset and whether any future funding commitments in excess of the IAS 19 liability should be provisioned for. Based on the interpretation of the rules for each of the defined benefit pension schemes, the Group considers that it has an unconditional right to any potential surplus on the ultimate wind-up after all benefits to members have been paid of all of the schemes except the WF Scheme. Under IFRIC 14 it is therefore appropriate to recognise any IAS 19 surpluses which may emerge in future and not to recognise any potential additional liabilities in respect of future funding commitments of all of the schemes except for the WF Scheme. For the WF Scheme at the reporting date, the assets are surplus to the IAS 19 benefit liabilities. However, to allow for IFRIC 14, the Group recognises a deficit of the value of its future deficit contribution commitment to the scheme in line with the schedule of contributions in force at the reporting date.

 

The calculation of Guaranteed Minimum Pension ('GMP') is set out in legislation and members of pension schemes that were contracted out of the State Earnings-Related Pension Scheme ('SERPS') between 6 April 1978 and 5 April 1997 will have built up an entitlement to a GMP. GMPs were intended to broadly replicate the SERPS pension benefits but due to their design they give rise to inequalities between men and women, in particular, the GMP for a male comes into payment at age 65 whereas for a female it comes into payment at the age of 60 and GMPs typically receive different levels of increase to non GMP benefits. On 26 October 2018, the High Court handed down its judgement in the Lloyds Trustees vs Lloyds Bank plc and Others case relating to the equalisation of member benefits for the gender effects of GMP equalisation. This judgement creates a precedent for other UK defined benefit schemes with GMPs. The judgement confirmed that GMP equalisation was required for the period 17 May 1990 to 5 April 1997 and provided some clarification on legally acceptable methods for achieving equalisation. An allowance for GMP equalisation was first included within liabilities at 30 December 2018 and was recognised as a charge for past service costs in the income statement. The estimate is subject to change as we undertake more detailed member calculations and/or as a result of future legal judgements. There have been no significant developments in 2019 with further guidance expected in 2020

 

Risks

Valuations for funding and accounting purposes are based on assumptions about future economic and demographic variables. This results in risk of a volatile valuation deficit and the risk that the ultimate cost of paying benefits is higher than the current assessed liability value.

 

The main sources of risk are:

·          Investment risk: a reduction in asset returns (or assumed future asset returns);

·          Inflation risk: an increase in benefit increases (or assumed future increases); and

·          Longevity risk: an increase in average life spans (or assumed life expectancy).

 

These risks are managed by:

·          Investing in insured annuity policies: the income from these policies exactly matches the benefit payments for the members covered, removing all of the above risks. At the reporting date the insured annuity policies covered 12% of total liabilities;

·          Investing a proportion of assets in other classes such as government and corporate bonds and in liability driven investments: changes in the values of the assets aim to broadly match changes in the values of the uninsured liabilities, reducing the investment risk, however some risk remains as the durations of the bonds are typically shorter than that of the liabilities and so the values may still move differently. At the reporting date non-equity assets amounted to 85% of assets excluding the insured annuity policies;

·          Investing a proportion of assets in equities: with the aim of achieving outperformance and so reducing the deficits over the long term. At the reporting date this amounted to 15% of assets excluding the insured annuity policies; and

·          The gradual sale of equities over time to purchase additional annuity policies or liability matching investments: to further reduce risk as the schemes, which are closed to future accrual, mature.

 

Pension scheme accounting deficits are snapshots at moments in time and are not used by either the Group or Trustees to frame funding policy. The Group and Trustees are aligned in focusing on the long-term sustainability of the funding policy which aims to balance the interests of the Group's shareholders and members of the schemes. The Group and Trustees are also aligned in reducing pensions risk over the long term and at a pace which is affordable to the Group.

 

The E&S Schemes and the Trinity Scheme have an accounting surplus at the reporting date. For the WF Scheme this is before allowing for the IFRIC 14 asset ceiling. Across the MGN and MIN Schemes, the invested assets are expected to be sufficient to pay the uninsured benefits due up to 2044, based on the reporting date assumptions. The remaining uninsured benefit payments, payable from 2045, are due to be funded by a combination of asset outperformance and the deficit contributions currently scheduled to be paid up to 2027.

 

For the MGN and MIN Schemes, actuarial projections at the year-end reporting date show removal of the combined accounting deficit by the end of 2025 due to scheduled contributions and asset returns at the current target rate. From this point, the assets are projected to be sufficient to fully fund the liabilities on the accounting basis.

 

The Group is not exposed to any unusual, entity specific or scheme specific risks. Other than the impact of GMP equalisation, there were no plan amendments, settlements or curtailments in 2019 or 2018 which resulted in a pension cost.



 

Results

For the purposes of the Group's consolidated financial statements, valuations have been performed in accordance with the requirements of IAS 19 with scheme liabilities calculated using a consistent projected unit valuation method and compared to the estimated value of the scheme assets at 29 December 2019.

 

The assets and liabilities of the schemes as at the reporting date are:

 

 

TM Schemes

£m

E&S Schemes

£m

Total

£m





Present value of uninsured scheme liabilities

(1,809.6)

(528.3)

(2,337.9)

Present value of insured scheme liabilities

(176.2)

(149.8)

(326.0)

Total present value of scheme liabilities

(1,985.8)

(678.1)

(2,663.9)

Invested and cash assets at fair value

1,487.2

587.6

2,074.8

Value of liability matching insurance contracts

176.2

149.8

326.0

Total fair value of scheme assets

1,663.4

737.4

2,400.8

Funded (deficit)/surplus

(322.4)

59.3

(263.1)

Impact of IFRIC 14

-

(32.8)

(32.8)

Net scheme (deficit)/surplus

(322.4)

26.5

(295.9)

 

Based on actuarial advice, the assumptions used in calculating the scheme liabilities and the actuarial value of those liabilities are:

 

 

2019

2018

Financial assumptions (nominal % pa)



Discount rate

1.94

2.76

Retail price inflation rate

2.96

3.20

Consumer price inflation rate

2.01

2.00

Rate of pension increase in deferment

2.17

2.22

Rate of pension increases in payment (weighted average across the schemes)

3.31

3.39

Mortality assumptions - future life expectancies from age 65 (years)



Male currently aged 65

21.7

21.6

Female currently aged 65

24.0

23.5

Male currently aged 55

21.5

22.3

Female currently aged 55

24.0

24.3

 

The estimated impact on the IAS 19 liabilities and on the IAS 19 deficit at the reporting date, due to a reasonably possible change in key assumptions over the next year, are set out in the table below:


Effect on

liabilities
£m

Effect on

deficit
£m

Discount rate +/- 0.5% pa

-200/+220

-185/+200

Retail price inflation rate +/- 0.5% pa

+42/-41

+31/-29

Consumer price inflation rate +/- 0.5% pa

+53/-50

+53/-50

Life expectancy at age 65 +/- 1 year

+150/-145

+130/-125

 

The RPI sensitivity impacts the rate of increases in deferment for some of the pensions in the EN88 Scheme and the ENSM Scheme and some of the pensions in payment for all schemes except the MGN Scheme. The CPI sensitivity impacts the rate of increases in deferment for some of the pensions in most schemes and the rate of increases in payment for some of the pensions in payment for all schemes.

 

The effect on the deficit is usually lower than the effect on the liabilities due to the matching impact on the value of the insurance contracts held in respect of some of the liabilities. Each assumption variation represents a reasonably possible change in the assumption over the next year but might not represent the actual effect because assumption changes are unlikely to happen in isolation.

 

The estimated impact of the assumption variations make no allowance for changes in the values of invested assets that would arise if market conditions were to change in order to give rise to the assumption variation. If allowance were made, the estimated impact would likely be lower as the values of invested assets would normally change in the same directions as the liability values.



 

The amount included in the consolidated income statement, consolidated statement of comprehensive income and consolidated balance sheet arising from the Group's obligations in respect of its defined benefit pension schemes is as follows:

 

Consolidated income statement

 

2019

£m

2018

£m




Pension administrative expenses

(2.9)

(3.0)

Past service costs

-

(15.8)

Pension finance charge

(8.0)

(8.6)

Defined benefit cost recognised in income statement

(10.9)

(27.4)

 

Consolidated statement of comprehensive income

2019

£m

2018

£m




24.9

7.0

Actuarial (loss)/gain due to liability assumption changes

(271.8)

98.7

Total liability actuarial (loss)/gain

(246.9)

105.7

261.9

(98.0)

Impact of IFRIC 14

(0.3)

(3.1)

Total gain recognised in statement of comprehensive income

14.7

4.6

 

Consolidated balance sheet

2019

£m

2018

£m




Present value of uninsured scheme liabilities

(2,337.9)

(2,145.3)

Present value of insured scheme liabilities

(326.0)

(317.5)

Total present value of scheme liabilities

(2,663.9)

(2,462.8)

Invested and cash assets at fair value

2,074.8

1,829.2

Value of liability matching insurance contracts

326.0

317.5

Total fair value of scheme assets

2,400.8

2,146.7

Funded deficit

(263.1)

(316.1)

Impact of IFRIC 14

(32.8)

(32.5)

Net scheme deficit

(295.9)

(348.6)




Non-current assets - retirement benefit assets

31.2

10.2

Non-current liabilities - retirement benefit obligations

(327.1)

(358.8)

Net scheme deficit

(295.9)

(348.6)




Net scheme deficit included in consolidated balance sheet

(295.9)

(348.6)

Deferred tax included in consolidated balance sheet

53.0

64.5

Net scheme deficit after deferred tax

(242.9)

(284.1)

 

Movement in net scheme deficit

2019

£m

2018

£m




Opening net scheme deficit

(348.6)

(377.6)

Acquisition of subsidiary undertakings pensions schemes

-

(38.3)

Contributions

48.9

90.1

Consolidated income statement

(10.9)

(27.4)

Consolidated statement of comprehensive income

14.7

4.6

Closing net scheme deficit

(295.9)

(348.6)

 

Changes in the present value of scheme liabilities

2019

£m

2018

£m




Opening present value of scheme liabilities

(2,462.8)

(1,929.2)

Acquisition of subsidiary undertakings pension schemes

-

(682.7)

Past service cost loss

-

(18.7)

Interest cost

(66.3)

(61.4)

Actuarial gain - experience

24.9

7.0

Actuarial gain - change to demographic assumptions

42.7

16.6

Actuarial (loss)/gain - change to financial assumptions

(314.5)

82.1

Benefits paid

112.1

123.5

Closing present value of scheme liabilities

(2,663.9)

(2,462.8)



 

 

Impact of IFRIC 14

 

2019

£m

2018

£m




Opening impact of IFRIC 14

(32.5)

-

Acquisition of subsidiary undertakings pension schemes

-

(29.4)

Increase in impact of IFRIC 14

(0.3)

(3.1)

Closing impact of IFRIC 14

(32.8)

(32.5)

 

Changes in the fair value of scheme assets

 

2019

£m

2018

£m




Opening fair value of scheme assets

2,146.7

1,551.6

Acquisition of subsidiary undertakings pension schemes

-

673.8

Past service cost gain

-

2.9

Interest income

58.3

52.8

Actual return on assets greater/(less) than discount rate

261.9

(98.0)

Contributions by employer

48.9

90.1

Benefits paid

(112.1)

(123.5)

Administrative expenses

(2.9)

(3.0)

Closing fair value of scheme assets

2,400.8

2,146.7

 

Fair value of scheme assets

2019

£m

2018

£m




UK equities

49.2

37.4

US equities

128.6

99.5

Other overseas equities

191.1

275.8

Property

24.4

37.5

Corporate bonds

242.1

287.8

Fixed interest gilts

184.2

127.1

Index linked gilts

71.9

48.6

Liability driven investment

773.9

459.1

Cash and other

409.4

456.4

Invested and cash assets at fair value

2,074.8

1,829.2

Value of insurance contracts

326.0

317.5

Fair value of scheme assets

2,400.8

2,146.7

 

A majority of the scheme assets have quoted prices in active markets. Scheme assets include neither direct investments in the Company's ordinary shares nor any property assets occupied nor other assets used by the Group.

 



 

15.          Net debt

The net debt for the Group is as follows:


30 December 2018

£m

Cash

flow

£m

Loans

repaid

£m

29 December

  2019

£m

Non-current liabilities





Acquisition Term Loan

(39.7)

-

39.7

-


(39.7)

-

39.7

-

Current liabilities





Acquisition Term Loan

(20.3)

-

20.3

-


(20.3)

-

20.3

-

Debt

(60.0)

-

60.0

-






Current assets





Cash and cash equivalents

19.2

61.2

(60.0)

20.4

Cash and cash equivalents

19.2

61.2

(60.0)

20.4






Net debt

(40.8)

61.2

-

20.4

 

The Group repaid the Acquisition Term Loan in full during the year with £20.3m repaid in the first half (originally due in December 2019 and £39.7m repaid in the second half (originally due £20.3m in December 2020 and £19.4m in December 2022). The Group cancelled the previous amortising Revolving Credit Facility ('RCF') and entered into new four year non-amortising £65m RCF. The Group had no drawings at the reporting date on the RCF.

 

Acquisition deferred consideration

 

Deferred consideration of £59.0m in respect of the acquisition of Express & Star is included in trade and other payables in non-current liabilities amounting to £40.1m (payable £16.0m on 28 February 2021, £17.1m on 28 February 2022 and £7.0m on 28 February 2023) and in current liabilities amounting to £18.9m (payable on 28 February 2020). There are no conditions attached to the payment of the deferred consideration and the transaction was structured such that no interest accrued on these payments. However, under the sale and purchase agreement the Group has the right to offset agreed claims arising from a breach of warranties and indemnities and can also offset any shortfalls on the contracted advertising from the Health Lottery. The deferred consideration has not been discounted as we do not believe that the impact of such discounting is material.

 

16.          Provisions


Share-based payments

£m

 

Property

£m

 

Restructuring

£m

Historical legal issues

£m

 

Other

£m

 

Total

£m








At 30 December 2018

(0.1)

(6.6)

(4.3)

(13.6)

(1.8)

(26.4)

Charged to income statement

(0.6)

(1.7)

(10.7)

(11.0)

(4.2)

(28.2)

Reclassification

-

(0.4)

-

-

(2.8)

(3.2)

Utilisation of provision

-

3.0

13.6

3.5

1.7

21.8

At 29 December 2019

(0.7)

(5.7)

(1.4)

(21.1)

(7.1)

(36.0)

 

The reclassification relates to amounts previously included in accruals now more appropriately included in provisions.

 

The provisions have been analysed between current and non-current as follows:

 

 

2019

£m

2018

£m




Current

(15.5)

(22.3)

Non-current

(20.5)

(4.1)

 

(36.0)

(26.4)

 

The share-based payments provision relates to National Insurance obligations attached to the future crystallisation of awards. This provision will be utilised over the next three years.

 

The property provision relates to onerous property leases and future committed costs related to occupied, let and vacant properties. A majority of the provision will be utilised over the next two years and reflects the remaining term of the leases or expected period of vacancy.

 

The restructuring provision relates to restructuring charges incurred in the delivery of cost reduction measures. This provision is expected to be utilised within the next year.

 



 

The historical legal issues provision relates to the cost associated with dealing with and resolving civil claims in relation to historical phone hacking and unlawful information gathering. In April 2019, the law changed in respect of conditional fee agreements, the effect of which was to limit from that date the extent to which a claimant's law firm can recover a premium in legal costs for success. During the year the Group has progressed and settled a number of claims and also seen new claims come forward, a number of which were advanced immediately prior to this change. The Group has also been required to provide further invoice information to claimant's lawyers in respect of certain suppliers to the Group over a period of time.

 

The provision has been increased by £11.0m at the year end to reflect an increase in the estimate of the cost of settling claims. At the year end, £21.1m of the provision remains outstanding and this represents the current best estimate of the amount required to settle the expected claims. There are three parts to the provision: known claims, potential future claims and common court costs. The estimates are based on historical trends and experience of claims and costs. The provision is expected to be utilised over the next few years. The Group has recorded an increase in the provision in each of the last five years which highlights the challenges in making a best estimate. Certain cases and other matters relating to the issue are subject to court proceedings, the dynamics of which continue to evolve, and the outcome of those proceedings could have an impact on how much is required to settle the remaining claims and on the number of claims. It is not possible to provide a range of potential outcomes in respect of this provision. Due to this uncertainty, a contingent liability has been highlighted in note 18.

 

The other provision relates to libel and other matters and is expected to be utilised over the next two years.

 

17.          Share capital and reserves

The share capital comprises 309,286,317 allotted, called-up and fully paid ordinary shares of 10p each. In 2018, the Company issued 25,826,746 shares (at 77.4 pence) relating to the acquisition of Express & Star. The Company holds 10,017,620 shares as Treasury shares.

 

The share premium reflects the premium on issued ordinary shares. The merger reserve comprises the premium on the shares allotted in relation to the acquisition of Express & Star. The capital redemption reserve represents the nominal value of the shares purchased and subsequently cancelled under share buy-back programmes. Cumulative goodwill written off to retained earnings and other reserves in respect of continuing businesses acquired prior to 1998 is £25.9m (2018: £25.9m). On transition to IFRS, the revalued amounts of freehold properties were deemed to be the cost of the asset and the revaluation reserve has been transferred to retained earnings and other reserves.

 

Shares purchased by the Reach Employee Benefit Trust are included in retained earnings and other reserves at £3.7m (2018: £4.3m). During the year, 522,572 were released relating to grants made in prior years (2018: 480,280).

 

During the year, awards relating to 2,970,531 shares were granted to executive directors on a discretionary basis under the Long Term Incentive Plan (2018: 1,529,406). The exercise price of each award is £1. The awards vest after three years, subject to the continued employment of the participant and satisfaction of certain performance conditions, and are required to be held for a further two years.

 

During the year, awards relating to 2,593,910 shares were granted to senior managers on a discretionary basis under the Senior Management Incentive Plan (2018: 1,709,295). The exercise price of each award is £1. The awards vest after three years, subject to the continued employment of the participant and satisfaction of certain performance conditions.

 

During the year, awards relating to 77,399 shares were granted to executive directors under the Restricted Share Plan (2018: nil). The awards vest after three years.

 

18.          Contingent liabilities

There is the potential for further liabilities to arise from the outcome or resolution of the ongoing historical legal issues (note 16). At this stage, due to the uncertainty in respect of the nature, timing or measurement of any such liabilities, we are unable to reliably estimate how these matters will proceed and their financial impact.



 

19.          Reconciliation of statutory to adjusted results

   52 weeks ended 29 December 2019

 

 

 

 

Statutory

results

£m

Operating

adjusted

items

(a)

£m

Pension

finance

charge

(b)

£m

 

 

Adjusted

results

£m

Revenue

702.5

-

-

702.5

Operating profit

131.7

21.7

-

153.4

Profit before tax

120.9

21.7

8.0

150.6

Profit after tax

94.3

20.9

6.5

121.7

Basic earnings per share (p)

31.8

7.1

2.2

41.1

   52 weeks ended 30 December 2018

 

 

 

 

Statutory

results

£m

Operating

adjusted

items

(a)

£m

Pension

finance

charge

(b)

£m

 

 

Adjusted

results

£m

Revenue

723.9

-

-

723.9

Operating (loss)/profit

(107.6)

253.2

-

145.6

(Loss)/profit before tax

(119.9)

253.2

8.6

141.9

(Loss)/profit after tax

(119.6)

226.8

7.0

114.2

Basic (loss)/earnings per share (p)

(41.0)

77.8

2.4

39.2

(a)       Operating adjusted items relate to the items charged or credited to operating profit as set out in note 5.

(b)       Pension finance charge relating to the defined benefit pension schemes as set out in note 14.

Set out in note 2 is the rationale for the alternative performance measures adopted by the Group. The reconciliations in this note highlight the impact on the respective components of the income statement. Items are adjusted for where they relate to material items in the year (impairment, restructuring, disposals) or relate to historic liabilities (historical legal issues, defined benefit pension schemes which are all closed to future accrual).

 

Restructuring charges incurred to deliver cost reduction measures relate to the transformation of the business from print to digital, together with costs to deliver synergies. These costs are principally severance-related, but can also include system integration costs. They are included in adjusted items on the basis that they are material and can vary considerably each year, distorting the underlying performance of the business.

 

Provision for historical legal issues relates to the cost associated with dealing with and resolving civil claims for historical phone hacking and unlawful information gathering. This is included in adjusted items as the amounts are material, it relates to historical matters and movements in the provision can vary year to year.

 

Impairments to non-current assets arise following impairment reviews or where a decision is made to close or retire printing assets. These non cash items are included in adjusted items on the basis that they are material and vary considerably each year, distorting the underlying performance of the business.

 

The Group's pension schemes are all closed to new members and to future accrual and are therefore not related to the current business. The pension administration expenses and the pension finance charge are included in adjusted items as the amounts are significant and they relate to the historical pension commitment. Additionally, the charge in respect of Guaranteed Minimum Pension equalisation was included in adjusted items last year as the amount was material and it related to the historical pension commitment.

 

Other items may be included in adjusted items if they are material, such as transaction costs incurred on significant acquisitions or the profit or loss on the sale of subsidiaries, associates or freehold buildings. They are included in adjusted items on the basis that they are material and vary considerably each year, distorting the underlying performance of the business.



 

20.          Reconciliation of statutory revenue categories

 

2018 Categories

 

52 weeks

 ended

30 December

2018

£m

 

 

 

 

Reclassification

£m

 

52 weeks

ended

30 December

2018

£m

 

2019 Categories

Publishing Print

575.4

47.9

623.3

Print

   Circulation

362.1

-

362.1

   Circulation

   Advertising

176.7

12.3

189.0

   Advertising

   Printing

-

35.6

35.6

   Printing

   Other

36.6

-

36.6

   Other

Publishing Digital

103.6

(12.3)

91.3

Digital

Display & Transactional

91.3

-

91.3


Classified

12.3

(12.3)

-

 

Printing

35.6

(35.6)

-

 

Specialist Digital

8.0

(8.0)

-

 

Central

1.3

8.0

9.3

Other

Total revenue

723.9

-

723.9

Total revenue

 

21.          Reconciliation of statutory to like-for-like revenue


52 weeks

 ended

30 December

2018

£m

 

 

 

(a)

£m

 

 

 

(b)

£m

 

 

 

(c)

£m

52 weeks

 ended

30 December

2018

£m

Print

623.3

26.7

(8.1)

-

641.9

   Circulation

362.1

17.5

(0.9)

-

378.7

   Advertising

189.0

7.3

(7.1)

-

189.2

   Printing

35.6

0.5

-

-

36.1

   Other

36.6

1.4

(0.1)

-

37.9

Digital

91.3

3.2

-

-

94.5

Other

9.3

-

-

(3.6)

5.7

Total revenue

723.9

29.9

(8.1)

(3.6)

742.1

(a)        Inclusion of Express & Star (acquired on 28 February 2018) assuming owned by the Group from the beginning of 2018.

(b)        Exclusion of West Midlands Metro following ending of franchise agreement in December 2018 and other portfolio changes in 2018.

(c)        Exclusion of Communication Corp (sold on 26 September 2018).

 

There are no like-for-like adjustments relating to 2019 revenue.

 

22.          Adjusted cash flow


2019

2018


£m

£m

Adjusted operating profit

153.4

145.6

Depreciation

21.5

22.3

Adjusted EBITDA

174.9

167.9

Net interest paid

(3.2)

(3.7)

Income tax paid

(11.7)

(12.5)

Restructuring payments

(13.6)

(18.1)

Net capital expenditure

(3.4)

(4.6)

Working capital and other

(9.9)

3.9

Adjusted operating cash flow

133.1

132.9

Historical legal issues payments

(3.5)

(9.6)

Dividends paid

(18.6)

(17.5)

Pension funding payments

(48.9)

(48.9)

Adjusted net cash flow

62.1

56.9

Bank facility net (repayment)/borrowings

(60.0)

35.0

Acquisition related cash flow

(0.9)

(95.1)

Proceeds on disposal of a business

-

6.4

Net increase in cash and cash equivalents

1.2

3.2



 

23.          Reconciliation of statutory to adjusted cash flow

52 weeks ended 29 December 2019

2019



2019



Stat

(a)

(b)

Adjusted



£m

£m

£m

£m


Cash flows from operating activities






Cash generated from operations

147.4

(17.8)

3.5

133.1

Adjusted operating cash flow

Pension deficit funding payments

(48.9)

-

-

(48.9)



-

-

(3.5)

(3.5)

Historical legal issues payments

Income tax paid

(11.7)

11.7

-

-


Net cash inflow from operating activities

86.8





Investing activities




-


Interest received

0.1

(0.1)

-

-


Dividends received

0.5

(0.5)

-

-


Proceeds on disposal of property, plant and equipment

0.5

(0.5)

-

-


Purchases of property, plant and equipment

(3.9)

3.9

-

-


Acquisition of associate undertaking

(0.9)

-

-

(0.9)


Net cash used in investing activities

(3.7)





Financing activities






Dividends paid

(18.6)

-

-

(18.6)


Interest paid on borrowings

(3.3)

3.3

-

-


Repayment of bank borrowings

(60.0)

-

-

(60.0)


Net cash used in financing activities

(81.9)





Net increase in cash and cash equivalents

1.2

-

-

1.2


 

52 weeks ended 30 December 2018

2018




2018



Stat

(a)

(b)

(c)

Adjusted



£m

£m

£m

£m

£m


Cash flows from operating activities







Cash generated from operations

137.8

(20.8)

15.9

-

132.9

Adjusted operating cash flow

Pension deficit funding payments

(90.1)

-

-

41.2

(48.9)



-

-

(9.6)

-

(9.6)

Historical legal issues payments

Income tax paid

(12.5)

12.5

-

-

-


Net cash inflow from operating activities

35.2






Investing activities







Interest received

0.1

(0.1)

-

-

-


Proceeds on disposal of property, plant and equipment

6.6

(6.6)

-

-

-


Purchases of property, plant and equipment

(11.2)

11.2

-

-

-


Acquisition of subsidiary undertakings

(43.1)

-

(6.3)

(45.7)

(95.1)

Express & Star acquisition

Proceeds on disposal of subsidiary undertaking

6.4

-

-

-

6.4


Acquisition of associate undertaking

(4.5)

-

-

4.5

-


Net cash used in investing activities

(45.7)






Financing activities







Dividends paid

(17.5)

-

-

-

(17.5)


Interest paid on borrowings

(3.8)

3.8

-

-

-


Draw down on bank borrowings

80.0

-

-

(80.0)

-


Repayment of bank borrowings

(45.0)

-

-

80.0

35.0

Net bank borrowings change

Net cash received from financing activities

13.7






Net increase in cash and cash equivalents

3.2

-

-

-

3.2


(a)     Items included in the statutory cash flow on separate lines which for the adjusted cash flow are included in adjusted operating cash flow.

(b)     Payments in respect of historical legal issues (2018 and 2019) and transaction costs (2018) are shown separately in the adjusted cash flow.

(c)     Items related to the Express & Star acquisition shown as a single item in the adjusted cash flow.

 


Risks and Uncertainties

 

The Group recognises the importance in effective understanding and management of risk in enabling us to identify factors, both external and internal, that may materially affect our ability to achieve our goals. There is an ongoing process for the identification, evaluation and management of the principal risks faced by the Group, including emerging risks. Appropriate mitigating actions are in place to minimise the impact of the risks and uncertainties which are identified as part of the risk process. The principal risks and uncertainties, together with mitigating actions and developments in the year, are set out below. All risks are considered in the context of the changing regulatory and compliance landscape, and enabling the continuity of our operations. In the Annual Report this year, the Group has included a refreshed risks and uncertainties disclosure. This includes a more granular view of risks, as opposed to new risks, from the risk register following on from review sessions with the senior management team.

 

Principal risks and uncertainties

RISK

DESCRIPTION

MITIGATION

UPDATE

PRINT REVENUE DECLINE ACCELERATION

Structural changes in the traditional publishing industry have led to ongoing decline in print advertising and circulation revenues. 

 

Macroeconomic factors may contribute to a larger than expected decline.

 

A lack of appropriate strategic focus results in accelerated revenue loss for existing products.

Strategic development led by an experienced Board and Senior Management team.

 

Investment Committee established to approve business plans when reviewed against strategic KPIs.

 

Re-energised strategic focus to develop digital revenue streams through taking a more customer centric focus.

 

Continued tactical measures to minimise print revenue declines and to maintain profits by taking appropriate cash mitigation measures.

 

Governance structures enable ongoing review of performance against targets and strategic KPIs including a weekly structured trading meeting.

 

Senior Management are incentivised with performance-related rewards to deliver our strategic goals.

 

Acquisition, joint venture and other corporate development opportunities, which are aligned to our strategy, continue to be considered (including industry consolidation and non-organic digital opportunities).

 

NO CHANGE

 

Renewed strategic focus.

INSUFFICIENT DIGITAL REVENUE GROWTH 

A failure to grow digital revenues quickly enough to offset print declines.


RISK

DESCRIPTION

MITIGATION

UPDATE

LACK OF FUNDING CAPABILITY

 

The main financial risk is the lack of funding capability to meet business needs. This may be caused by a lack of working capital, unexpected increases in interest rates or increased liabilities, in particular:

 

·      Pension deficits grow at such a rate such that annual funding costs consume a disproportionate level of profit.

 

·      Volume and level of claims may continue to have significant cost implications.

 

 

PENSIONS

 

Regular reporting to the Board.

 

Collaborative relationship and regular meetings with Trustees.

 

Ongoing review of options to de-risk pension liabilities.

 

HISTORICAL LEGAL ISSUES

 

Ongoing historical legal issues claim level monitoring and management.

 

Standing item on Board agenda.

 

Working with external lawyers on civil claims and related investigations.

 

FINANCING

 

Strong cash generating business with a current focus on future financing.

 

Committed loan facilities are in place to 2023 to deliver our strategy.

 

Regular cash flow forecasting, monitoring through Treasury reporting processes.

 

Limited hedging exposure.

 

Appropriate bad debt insurance protection.

 

NO CHANGE

 

PENSIONS

 

We remain committed to addressing our historical pension deficits and continue to make significant payments to the schemes. Next triennial valuation to be agreed in 2020.

 

HISTORICAL LEGAL ISSUES

 

We continue to deal with the historical legal issues in a professional and efficient manner although the final outcome of the civil claims remains uncertain.

 

FUNDING

 

New facility with banking syndicate in place.

 

INABILITY TO RECRUIT AND RETAIN TALENT

 

The inability to recruit, develop and retain talent with the appropriate skills, knowledge and experience compromises our ability to deliver strategic business plans.

Ongoing considerations of:

-       Digital capabilities of workforce

-       Turnover levels

-       Pay and benefits

-       Opportunities to expand talent pool (for example, outside London)

-       Recruitment channels used

 

NO CHANGE

 

Retention and recruitment of appropriately skilled digital staff will remain an ongoing challenge, particularly in London. The skillsets required to deliver our evolved strategy amplifies this risk further.

 


RISK

DESCRIPTION

MITIGATION

UPDATE

CUSTOMER DATA MANAGEMENT CHALLENGES

 

 

Our evolved strategy relies on the appropriate, secure and GDPR compliant storage and usage of customer data with clear permissions in place. Storage and usage of data in a non-compliant manner may result in reputational or financial damage.

 

Group wide GDPR governance structures, policies and processes are in place alongside compulsory awareness training for our staff.

 

Externally facing websites have all been updated to make them compliant and the impact on audience and, potentially, revenue is being closely monitored.

 

Specific GDPR consideration being built into upcoming strategic initiatives.

 

Appointment of a Chief Customer Data Officer to provide central group-wide oversight of how customer data is utilised.

 

To appoint a formal Data Protection Officer (DPO) given increasingly data centric nature of the business.

 

INCREASE

 

The ongoing focus and challenge remains on embedding processes and ensuring that the consideration of data protection forms part of 'business as usual' thinking. Our evolved customer centric strategy brings the risk into sharper focus.

 

The effect on data protection law arising from the UK's exit from the European Union is unclear at present and will continue to be monitored.

 

BRAND REPUTATION DAMAGE

Damage to reputation arising from employee actions or behaviours, including breaches of regulations or best practice guidelines.

 

Editorial errors, behaviours or tone leads to loss of readership, damaged reputation and legal proceedings.

 

An incident which has an adverse impact on the environment.

 

 

Recruitment of highly experienced and capable people into key senior management roles.

 

Governance structures provide clear accountability for compliance with all laws and regulations.

 

Policies and procedures are designed to meet all relevant requirements.

 

Employees trained to comply with all relevant legislation.

 

Ongoing consideration of upcoming legislative changes and emerging trends.

 

NO CHANGE

 

There remains awareness that an indiscretion could lead to significant financial and reputational damage.

 

In editorial, we are aware of the heightened risk created in a digital led environment due to the 24/7 nature of operation and the need to move with pace.

 


RISK

DESCRIPTION

MITIGATION

UPDATE

CYBER SECURITY BREACH

A cyber security incident which leads to a serious data breach or the loss of systems/data and reputational damage.

 

 

All business-critical systems are well established and are supported by appropriate disaster recovery plans.

 

Regular reviews assess our vulnerability and our ability to re-establish operations in the event of a failure.

 

The technical infrastructure supporting the websites is within the cloud and the sites have been designed effectively providing adequate resilience and continued performance in the event of a significant failure.

 

Further investment to be made to enhance cyber security infrastructure and training.

 

INCREASE

 

We recognise the need for continued cyber security investment against an ever changing technological landscape.

 

Our evolved strategy, with an increased focus on customer data, potentially increases the impact of a cyber security breach.

HEALTH AND SAFETY ISSUE

A health and safety incident within one of our sites which results in death or injury to an employees or others.

 

An incident which has an adverse impact on the safety and security of our employees.

 

Clear Health and Safety policies and procedures consistently applied across the Group.

 

All parts of the group are serviced by professionally qualified and experienced Health and Safety Managers and Occupational Health service providers.

 

All printing plants have been externally assessed and certified as compliant with relevant standards.

 

Internal and external auditing is ongoing to ensure continuing compliance across our print and publishing sites.

 

 

NO CHANGE

 

We have received the Gold Award from the Royal Prevention of Accidents (ROSPA) Occupational Health and Safety awards scheme for 15 consecutive years, resulting in the Order of Distinction.


RISK

DESCRIPTION

MITIGATION

UPDATE

SUPPLY CHAIN FAILURE

Our print products rely on a small number of key suppliers (for example newsprint, wholesalers and distributors) and may be adversely affected operationally and financially by changes to supplier dynamics.

 

Specifically, from an IT and Digital perspective, We depend on the reliability and capability of key information systems and technology supplied by third party providers. A major failure, a breach, or prolonged performance issues could have an adverse impact on the business.

Well established long-term relationships with trusted suppliers.

 

Strong ongoing management and/or monitoring of providers including:

 

-       IT Providers

-       Outsourced ad production and planning

-       Wholesalers and distributors

-       Newsprint suppliers

-       Manufacturing maintenance and parts providers

-       Global digital partners.

 

Business continuity/disaster recovery plans in place, including at key partners.

 

Industry wide response likely should key common elements of the publishing supply chain be compromised.

 

Ongoing review of the operating model, including the assessment of alternative options.

 

In IT, governance oversight arrangements and committee structures are in place covering areas such as risk management, change control, security and service delivery.

 

Measures to reduce the reliance on key staff at IT providers.

 

Appropriate contractual protections in place.

 

NO CHANGE

 

A decreasing number of key suppliers and an increasing number of outsourced arrangements in place means it becomes increasingly important to stabilise and optimise arrangements and ensure appropriate contingency plans are in place.

 

This risk will continue to be considered in the context of the wider 'Business Interruption' risk.

 

MACRO-ECONOMIC DETERIORATION 

 

 

 

Macro-economic factors may have a negative impact on several areas of our business which may restrict our ability to protect profit levels.

 

These include an adverse effect on commercial revenue, increase in pension deficit levels, increasing supply chain costs and other cost pressures arising from any devaluation of Sterling given the UK centric nature of our operations.

Ongoing focus on macro-economic factors which may affect our business. Examples include inflation rate increases, interest rate changes, increased borrowing costs, exchange rate fluctuations and legislative changes.

 

Specifically, the uncertainty around the UK's exit from the European Union prompted a Group wide exercise to evaluate the potential impact and a number of mitigating actions can be taken in the event of, for example, larger than expected revenue declines, operational supply chain challenges or legislative changes. The assessment of our risk exposure remains under review.

NO CHANGE

 

As the impact of the UK's exit from the European Union becomes clearer, we will continue to evolve our response to mitigate any impacts.

 

We have a strong record of delivering additional cost savings when faced with unexpected revenue deficits.

 

 

 


This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
 
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