Business News

Johnston Press: INTERIM RESULTS FOR THE 26 WEEKS ENDED 30 JUNE 2008

Wednesday 27. August 2008 - Johnston Press plc, one of the leading community media groups in the UK and Ireland, announces interim results for the 26 weeks ended 30 June 2008.

KEY POINTS

• Overall advertising revenues declined by 9.5% despite digital revenues growing by 52.1%.
• Continue to experience significant growth in overall audience reach – combining our newspaper readership with the rapidly increasing number of people visiting our websites.
• Underlying year on year cost reduction of £7.6m in the first half.
• Operating margin before non-recurring items of 27.9% (2007:30.9%).
• Cash generation of 97% of operating profit.
• Net debt reduced by £207.8m to £483.9m (Dec 2007:£691.7m).
• Interest cover of 3.9 times (excl. non-recurring items).
• £205m net proceeds from subscription and rights issue during period.
• Impairment charge of £109m taken against carrying value of intangible assets.
• Given proximity of the Rights Issue, no interim dividend, final dividend dependent on trading performance.
• Advertising revenues in the first 7 weeks of the second half are down 21.0% year on year.

OUTLOOK

Chief Executive Officer, Tim Bowdler said “Advertising trends have continued to deteriorate over the course of the year and future performance will inevitably be linked to the economies of the UK and to a lesser extent that of the Republic of Ireland. In response to the current challenging circumstances, we continue to actively manage our cost base to achieve productivity gains and in a manner which will protect the long term prospects of the Group. We expect to deliver a result reflective of these initiatives and the difficult market conditions”.

Chief Executive’s Half Year Statement

The first half of this year has been impacted by a particularly difficult trading environment with significant and deteriorating year-on-year reductions in advertising revenues. To minimise the impact on profitability, cost management programmes have been implemented which have benefited the first half of 2008 and will continue to do so throughout the balance of this year and beyond. The reduction in advertising revenues has led to a fall in operating profit, requiring impairment charges to be taken against the carrying value of publishing titles and goodwill.

In the six months to 30 June 2008, the Group recorded an operating profit before non-recurring items of £81.6 million (2007: £96.7 million) with an operating margin of 27.9% (2007: 30.9%). During this period, the Group reduced its debt by raising £212 million of equity funding from a combination of a subscription of shares by Usaha Tegas Sdn. Bhd. and a 1 for 1 Rights Issue. After deduction of fees the net proceeds were £205 million.

The net proceeds of the fund raising were used entirely to reduce borrowings with net debt at 30 June 2008 falling by £249.2 million to £483.9 million (June 2007: £733.1 million). Net debt at 30 June 2008 was adversely impacted by the deterioration in the Euro exchange rate compared to 30 June 2007. This increased net debt by £17 million compared to 30 June 2007. Finance costs for the period were £21.5 million (2007: £23.0 million) reflecting lower average net debt levels and marginally lower interest rates. Excluding the impact of non-recurring items, interest cover was 3.9 times and cash generated from operating activities was 97% of operating profit.

Reflecting the intentions regarding dividend policy as expressed in the Rights Issue prospectus, the Board has decided to pay no interim dividend. This decision, together with the trading performance during the second half of the year, will be taken into account when setting the final dividend for 2008. In the short term, the Board believes the most important use of available cash is to reduce the Group’s net debt position.

Non-recurring items within operating expenses in the period were £1.9 million (2007: £3.1 million). These costs related to the continuing programme of actions we are taking to fundamentally restructure the business to create a cost base which is more appropriate for the challenging trading environment in which we are now operating. The principal charges during the first half were the closing of 5 day shifts in the press hall in Leeds and the closure of various pre- press departments. During the second half we expect a continuation of this programme having already announced a number of further initiatives including the proposed closure of our printing operations in Northampton.

In addition, the Group incurred a non-recurring impairment charge of £109 million in the 26 weeks to 30 June 2008 as a result of the current difficult trading climate. This charge represents 7% of the £1.5 billion value of goodwill and publishing titles on the balance sheet before the impairment. The future discounted cash flows of each of the Group’s cash generating units were compared to the net assets of those units. Given that the future cash flows are based on our forecasts for 2008, this results in the impairment charge reported. Further details follow later in this Statement. There was also a reduction in the value of publishing titles of £5.3 million related to a tax adjustment of an equal and opposite amount. This is explained in more detail in note 5 and is a technical IFRS adjustment. After taking account of the non-recurring items, the Group incurred a loss before tax of £53.7 million compared to a profit before tax of £67.5 million in the prior year.

Underlying earnings per share, excluding non-recurring items, were 10.59p (2007: 14.04p). The weighted average number of shares for the 26 weeks to 30 June 2008 has been adjusted to reflect the placing of shares with Usaha Tegas and the 1 for 1 Rights Issue. The earnings per share for the previous periods have been adjusted for the dilution effect of the Rights Issue by amending the weighted average number of shares.

Business Environment
The trading environment since the beginning of 2008 has deteriorated sharply and in overall terms represents the most challenging conditions encountered by the Group for a considerable number of years. The seeds of the decline are to be found in the crisis in world financial markets which started in the second half of 2007 and has now spread to the wider economy. The impact on the property market, car sales, retail, employment and consumer confidence is all too evident with independent economic forecasts generally painting a very gloomy picture for the next 18 months at the very least. Reflecting this, our share price performance has been very disappointing throughout the period.

The trading review below provides a more detailed analysis of the Group’s advertising revenue performance but it is clear that the sharp declines we have experienced are directly related to the marked deterioration in the UK and Irish economies. Whilst the existence of established online competition, especially in the key classified advertising categories, is clearly evident, its impact on our print revenues has been far less significant than that inflicted by the economic downturn.

Trading Review
In this trading review the advertising statistics are like-for-like, excluding the weekly titles acquired in 2007 and 2008 and eliminating foreign exchange movements by using the same currency rate in each period.

Overall advertising revenues declined by 9.5% in the period despite digital revenues growing at an increasing pace, up by 52.1%. The overall rate of decline has increased over the period, rising from 6.7% in the first quarter to 12.3% in the second quarter with the month of June alone being 15.9% down. Total UK-based print advertising for the six months fell by 11.3%, and in June was 17.2% down. Advertising revenue in the Republic of Ireland fell by 16.7% over the period, reflecting a significant worsening in the economic climate with the property market in particular suffering a steep decline.

In the UK, property print advertising revenue fell by 17.8% over the six months, reflecting the poor state of the housing market and cutbacks by estate agents in response to that. The trend has deteriorated as the year has progressed with the month of June declining by 33.1%. Employment advertising has also suffered a worsening trend, down by 10.4% in the period but by 16.7% in the month of June. As mentioned above, this reflects the deteriorating economic environment with unemployment increasing and a tight rein on public sector expenditure. Motors advertising fell at a consistent rate over the six months being down by 17.0%. This reflects what continues to be a very challenging market with dealer consolidation, poor car sales and competition from websites all being factors. The “others” category declined by 7.4% also at a fairly consistent rate over the period with the largest factor being in respect of a conscious policy to tighten the conditions which apply to the Group’s acceptance of personal services advertising.

Display advertising fell overall by 7.5% with national display advertising faring marginally better than local. The latter accounted for approximately 70% of the total display category. Our strategy of creating new advertising platforms, in part on a Group-wide basis, which appeal to advertisers who have not typically used regional press extensively, has had some success. However, this was not sufficient to offset the overall weakness of our traditional customer base, which reflected the difficulties of the High Street.

UK newspaper sales revenues fell by 1.1% with a continued decline in circulations marginally exceeding the revenue gains from selective cover price increases. The greatest declines were again experienced by our daily titles with both daily and weekly sectors experiencing slightly greater reductions than the comparative period in 2007. The (Belfast) News Letter was again one of our best performing daily titles and The News (Portsmouth) also made encouraging progress in reducing its rate of decline significantly.

In terms of overall audience reach, when combining our newspaper readership with the rapidly increasing number of people visiting our websites, we continue to experience significant growth. This combined audience provides advertisers with increased levels of local market penetration and forms an essential part of our advertising proposition.

Digital Publishing
As noted above, our digital publishing operations continue to make excellent progress, with revenue growth of 52%. We also reached a larger audience with monthly unique visitors up by 42% to 11.2 million and equivalent page impressions ahead by 136% at 179.6 million. The continued expansion of our digital operations progressed with total expenditure in this area again increasing over the previous period.

Digital revenue growth continues to be strong for employment advertising with our CV matching service again making excellent progress. We also achieved a substantial increase in online display advertising and business directory listings. The January 2008 Group-wide launch of the iAnnounce service which provides users with the opportunity to place online personal announcements to mark events such as births, marriages or deaths has been a considerable success and in the first six months has generated 10% of total digital revenue.

During the period, Lori Cunningham was appointed as the new Group Digital Strategy Director having previously worked with Net-a-Porter, AOL and Booz Allen. Lori’s task is to steer the Group through the next stages of its digital developments, building on the success already achieved in terms of revenues, audience growth and enhanced content. So far as the latter is concerned, our websites are now an embedded part of our media portfolio with our local newsrooms routinely breaking news online, enhanced by an increasing amount of audio-visual content.

Capital Investment
Good progress continues to be made in our ongoing programme to introduce common IT systems throughout the business. A key project during 2008 is the installation of a consolidated central data storage centre hosted by Thus plc with mirrored systems, increasing resilience and providing direct internet access. On completion during the second half of the year, this will enable readers and viewers to interact with each of our companies in a more timely and efficient manner, improving the user experience and creating overall efficiencies.

In terms of print plant, the major press installation in Portsmouth is now fully operational and is meeting our expectations. In view of the excellent performance of the new presses in Dinnington, Yorkshire and Portsmouth, coupled with reduced volumes as a result of the tighter market conditions, we have carried out a further review of our printing capacity resulting in an announcement of the proposed closure of our Northampton facility.

The capital investment programme at Caledonian Offset in Edinburgh to provide more colour has been successfully completed and work is well advanced in Carn, Northern Ireland, where we have extended the existing press and are in the process of installing a second press which was previously at Portsmouth. This follows the earlier closure of two ageing press halls in Northern Ireland.

Acquisitions
On 7 March, the Group completed the acquisition of South Tipp Today, a small weekly free distribution newspaper which circulates in County Tipperary in the Republic of Ireland. The title, which complements our existing presence in the area, has already been integrated into our Irish business and is performing well. No other acquisitions were made during the first half and none are currently in prospect. However, we continue to believe that further industry consolidation is likely at some future point in time and that this would prove beneficial to the longer term prospects of the regional press together with its audience, advertisers and the wider communities which it serves.

Balance Sheet
There were two factors that significantly impacted the Balance Sheet at 30 June 2008.

The Group has recorded an impairment charge of £109 million against the value of goodwill and publishing titles as noted above. The future discounted cash flows over 20 years based on the current forecasts for 2008, which reflect the very difficult trading climate, did not support the net assets value on the Balance Sheet. The write down affected the businesses acquired in 2005 and 2006, particularly in the Republic of Ireland as well as Northern Ireland and Scotland. Of the £109 million, impairment against goodwill was £82 million. This included the entire value of goodwill relating to the Republic of Ireland and therefore the remaining impairment in this division reduced the value of publishing titles by £27 million. This results in a reduction in the provision for deferred tax of £5.3 million which was provided when the titles were first acquired, at the local rate of 20%. IFRS requires this tax adjustment to be flowed through the Income Statement.

When the original deferred tax was provided an equal and opposite offset was recorded in goodwill. This tax adjustment to comply with the rules of IAS 12 requires an associated offset in intangible assets. Given that the entire goodwill relating to the Republic of Ireland acquisitions has been impaired, the unmatched balance of £5.3 million has been written off against publishing titles. After tax, the net result of these adjustments is the £109 million impairment.

The second change in the Balance Sheet related to the placing of shares and the Rights Issue which increased share capital and share premium by £205 million, with an equivalent reduction in debt. Full details of the shares issued are summarised in note 16.

Business Risks
The principal risks and uncertainties facing our business have been reported in detail in our recent statements. As is all too evident, these concerns have now become reality with advertising revenues suffering significant declines especially for the property sector. Given the gloomy nature of current economic forecasts there is a significant risk that the position could worsen in the short term and that advertising revenues could continue to decline through 2009 and perhaps beyond. In those circumstances, the Group is closely focused on making ongoing adjustments to the cost base of the business to ensure that it is in the best possible shape to face the current downturn.

It was against this background coupled with concerns over the level of the Group’s borrowings, particularly as they related to its banking covenants, that the decision was made to raise new equity funds. As part of this exercise, and as mentioned above, there was a related subscription of shares by Usaha Tegas, which has resulted in Usaha Tegas now holding 20% of the total equity of Johnston Press. The Johnston family remain holders of 7.6% of the Group’s issued shares. Taken together, this represents a strengthening of the Group’s shareholding structure and has resulted in a significant reduction in overall borrowings.

At the time of the Rights Issue, the financial position of the Group was subjected to a series of stress tests to ensure that the structure of the Balance Sheet was sufficiently robust to cope with a variety of worsening market scenarios. Whilst the severity or duration of the current downturn cannot be predicted with absolute certainty, the Group believes that it is in a position to withstand any further erosion of advertising revenues which could be reasonably foreseen.

An increasing risk for companies in general is regarding the funding position of defined benefit pension schemes. In this regard, Johnston Press is relatively well placed. An IAS 19 valuation of the Group’s pension scheme was completed on 30 June 2008. The assumptions used in the valuation are summarised in note 15 and are compared to the assumptions used at 31 December 2007. The fair value of the scheme assets at 30 June 2008 was £357.5 million, with a scheme deficit of £8.4 million, compared to a deficit of £13.1 million at 31 December 2007 with scheme assets of £393.8 million. A full triennial valuation of the pension scheme was completed at 31 December 2007 and the Group is currently discussing future funding with the Trustees of the pension scheme.

Strategy
Group strategy remains firmly focussed on the provision of news and information to the local communities we serve, thereby enabling advertisers to achieve high levels of market reach to promote their goods and services. With our digital channels now firmly established as an integral part of our publishing mix at the local level, we are achieving real growth in the size of the audience we are reaching. Our strategy is aimed at further increasing audience reach thereby providing advertisers with improved response.

We are committed to the continued expansion of our digital media offering through ongoing and increasing levels of organic investment as we continue to develop our local cross-media franchises. We also continue to pursue a strategy of layering our markets with specialist print publications which complement our core newspaper titles. The objective of this is to reach new audiences and to attract new advertising revenues.

Organisation
Following completion of the equity fund raising exercise in June of this year, Ralph Marshall, an Executive Director of Usaha Tegas, was appointed to the Board as their nominee Director. He brings a considerable breadth of business experience to the Board.

As indicated in the Chairman’s Statement in the 2007 Annual Report, the Group is seeking to make two new non- executive appointments to replace Les Hinton, who left the Board in December 2007 and Peter Cawdron, who will stand down at the AGM in April 2009. The first of those appointments was made in July with the announcement that Gavin Patterson, a Director of BT Group plc and Chief Executive of BT Retail, was joining the Board. Gavin’s broad business experience and his extensive marketing and consumer expertise will be of particular benefit to the Board.

The process to appoint a new CEO, which was also covered in the Chairman’s Statement mentioned above, is making good progress. The Board expects to make a further announcement on this matter in due course to meet the timescale previously indicated.

The past six months has been a very testing time for the Group and the fact that we have been able to deliver these trading results in difficult circumstances owes a great deal to the continued dedication and enthusiasm of our staff for which I thank them.

Outlook
As indicated above, advertising trends have continued to deteriorate over the course of the year and future performance will inevitably be linked to the economies of the UK and to a lesser extent that of the Republic of Ireland. In response to the current challenging circumstances, we continue to actively manage our cost base to achieve productivity gains and in a manner which will protect the long term prospects of the Group. We expect to deliver a result reflective of these initiatives and the difficult market conditions.