Newspaper & Mailroom
Johnston Press: RESULTS FOR THE 52 WEEKS ENDED 1 JANUARY 2011
Thursday 10. March 2011 - Johnston Press plc, one of the leading community media groups in the UK and Ireland, announces results for the 52 weeks ended 1 January 2011.
The Group has recorded its first underlying operating profit increase (excluding acquisitions) since 2004. Print advertising? (down 7.1% in 2010) continued to decline, albeit at a slower rate; public spending cut
backs impacted Q4.
Continued growth in digital advertising, up 4.0% on a like-for-like basis (52 weeks).
Like-for-like newspaper sales revenues down 2.8%.
Total operating costs (before non-recurring and IAS 21/39 items) down by £30.1m, offsetting revenue reductions.
The Group continues to deliver market leading operating margins and operations remain cash generative; operating profit on an underlying 52 week basis grew by 3.9%. Total cash generated by operations was £69.6m.
Profit before tax performance impacted by increase in finance costs and net impairment charge on intangibles of £13.1m.
Expansion of digital business continues with a new business directory platform launched in partnership with Qype and a 5 year extension to the current contract agreed with iAnnounce.
Despite the significant increase in finance costs the Groups net debt reduced by £35.4m to £386.7m. The Boards short term priority remains debt reduction. No final dividend is proposed.
Total advertising revenues for the first 9 weeks of 2011 down by 11.4% with a greater proportion of recruitment revenues in the comparative.
Commenting on the outlook, the Chairman, Ian Russell, said:
“The pace and consistency of the economic recovery remains uncertain and this is reflected in a weaker start to 2011 than we had anticipated. Nevertheless, much of the Groups work in 2010 was concentrated on improving systems and technology and making processes more efficient. Given the Groups historic strengths and presence in the many communities it serves, our opportunity now is to be innovative in growing revenues both from traditional and new sources and capitalising on the economic recovery when it gathers pace.”
Chairmans Statement During 2010, Johnston Press continued to provide its customers with industry leading local news and
advertising opportunities.
Innovation by our local publishing teams combined with the introduction of new technology developed centrally, has enabled us to improve significantly the quality of our business over the past year. The implementation of a new content management system led to further efficiencies whilst the introduction of our enhanced websites provides the opportunity to gain additional context-based advertising revenue.
This time last year we experienced the return of a measure of stability in advertising revenue and we were well positioned to benefit from any cyclical upturn. However, as the year progressed we saw less consistent recovery in revenues, culminating in a weaker than expected fourth quarter. Additional cost reduction throughout the year, in part through the introduction of new technology, helped to broadly maintain our level of profitability, albeit that the like-for-like (as defined on page 8) growth in profit we saw in the first half was lower during the final six months. The outcome therefore was a year with weaker revenues than anticipated, but with profit and cash flow maintained by actions taken to reduce costs.
Strategy
Our core competences are providing strong local news and information coverage and attracting advertising and associated revenue. Our content and brands are established and well respected in their local communities. Our vision is to utilise that local news and information to create and sustain strong local brands which operate both in print and in digital media.
To support that vision, our strategy is to innovate locally to maintain print circulation and maximise advertising revenue; develop profitable partnerships which allow us to continue to grow our digital revenues; and develop associated revenue streams which capitalise on our strong local brands.
Results
The continued, albeit slower, decline in print advertising revenues was the main contributing factor to a decrease of £29.9 million in total revenues from 2009 levels to £398.1 million. Print advertising revenues dropped from £256.3 million to £235.8 million, although digital revenues grew by 3.2% to £18.3 million. The latter was primarily driven by strong growth in employment revenues associated with the full year benefit of the Jobsite partnership with DMGT launched in August 2009. The overall rate of print advertising decline has reduced over the course of the year.
The Group has made further progress in reducing its cost base throughout the year which has offset the decline in revenues and is reflected in the operating profit (before non-recurring and IAS 21/39 items) of £72.0 million, 0.3% or £0.2 million up on the 53 week period in 2009. This represents an operating margin of 18.1% which compares favourably with our peers in the sector. Newspapers sales revenue was £96.7 million, down £4.5 million (4.5%) on 2009. Newspaper circulations declined by an average of 4.7% for weekly titles and by 7.3% for daily titles. It is clear however that the long-term downward trend in newspaper sales continues, reflecting evolving readership and purchasing patterns and technological advances in accessing news and information.
The refinancing in 2009 led to higher interest charges, as a result of which underlying earnings per share, at 3.67p, were down by 33.6% compared to 5.53p in 2009. The pre-tax profit for the year was £16.5 million, with a profit before tax of £30.5 million relating to trading before non-recurring and IAS 21/39 items.
Net debt at the end of the year was £386.7 million, a reduction of £35.4 million from the beginning of the year. As we reported in November, the reduction in net debt allowed us to bring forward the £30.0 million reduction of our facilities scheduled in 2011 to 30 September 2010. This will lead to a saving in the region of £1.0 million in interest costs in 2011.
Share Price and Dividend
Despite a strong performance in the early part of the year, our share price fell back to levels similar to those seen in early 2009 as doubts over UK economic recovery, public sector spending cuts and the strength of the advertising market continued. In line with our previously stated policy, and in accordance with the provisions of our financing arrangements, no dividend is proposed for the year. The Group will continue to use any excess cash to reduce its indebtedness.
1
Johnston Press plc Annual Report and Condensed Financial Statements 2010
Board
In April we marked the retirement of Freddy Johnston after serving for over 50 years as a Director of the Company. We wish Freddy a long and happy retirement. We also extend our good wishes to Peter Cawdron and Martina King who also stood down as Non Executive Directors at that time. The Board thanks them for their service to the Company. In October, Stuart Paterson, who has served as our Chief Financial Officer for nearly ten years announced his intention to step down from the board to join Forth Ports. I would like to thank him for his dedication to Johnston Press and the whole Board wishes Stuart every success for the future.
On 4 March 2011 we announced the appointment of Grant Murray as our new Chief Financial Officer. Grant brings significant experience in senior financial roles within the media sector, including at Guardian Media Group plc, Channel 5 Broadcasting and United Business Media plc. We look forward to welcoming him to the Board when he joins the Company on 3 May.
In July we were delighted to announce the appointment of Kjell Aamot to our Board as a Non Executive Director. Kjell was Chief Executive Officer of Schibsted ASA, the Norwegian publisher, from 1989 to 2009. He is also a Non Executive Member of the Board of PubliGroupe, a Swiss based listed marketing and sales organisation, and an advisor to FSN Capital, an Oslo based private equity firm. He will stand for election to the Board at our AGM in Edinburgh on 28 April. As reported last year, at the start of 2010 Geoff Iddison, Mastercards head of e-commerce and m-commerce also joined the Board as a Non Executive Director. Both Kjell and Geoff are welcome additions to the Board.
On 9 March 2011 we announced that John Fry, Chief Executive Officer, had notified the Board of his intention to step down from his role by March 2012, thereby providing sufficient time to facilitate a smooth handover to his successor. The process is now being started to find Johns successor and a further announcement will be made at the appropriate time.
The governance landscape for UK listed companies has continued to evolve. Our Board meets regularly throughout the year and the range of experience and expertise that the members bring has ensured a constructive challenge of management and healthy, open debate over key issues facing the Company. We have worked hard to ensure that the balance of our Board and the matters considered by it are appropriate for our business and that all Directors receive sufficient information and training for their roles. I am confident that we have an effective Board to address the challenges we face.
Employees
Once again I would like to offer my thanks and appreciation to the dedicated staff throughout Johnston Press for their hard work during the year. Further consolidation of our cost base has regrettably led to some additional redundancies and these difficult decisions reflect the challenging market conditions the Group continues to face. The commitment of our staff has been exemplary during this time and they have a key role in ensuring the Groups future success.
Outlook
The pace and consistency of the economic recovery remains uncertain and this is reflected in a weaker start to 2011 than we had anticipated. Nevertheless, much of the Groups work in 2010 was concentrated on improving systems and technology and making processes more efficient. Given the Groups historic strengths and presence in the many communities it serves, our opportunity now is to be innovative in growing revenues both from traditional and new sources and capitalising on the economic recovery when it gathers pace.
Business Review – Overview After four years of operating profit decline, 2010 saw a return to profit growth for the Group.
Market Summary
Although the UK economy officially came out of recession in 2010, the advertising market still remained challenging. The employment market, which had started to show some signs of improvement over the first quarter, unfortunately deteriorated over the second half of the year as public spending cut-backs were clearly evidenced in the reduction in public sector jobs being advertised. We also saw in the property market, after an encouraging start to the year with growing revenues, a reduction in the volume of transactions and mortgage approvals and this undoubtedly caused a slow down in property advertising in the fourth quarter. The general display market also saw an impact from the public sector spending review with the Central Office of Information spend in our papers reducing by 90% in the second half when compared to the first half.
In the year, our print advertising was down by 7.1% on a like-for-like basis (see page 8) and although this was a further decline it was at a much slower rate than that experienced in 2009. Within print advertising, property performed best growing during the year by 4.0%. However, as noted above, this performance slowed in the latter part of the year. Display advertising, our largest category, reduced by only 2.4% and saw improved trends in the latter part of the year despite the impact of the reduction in public sector spending referred to above. Employment revenues saw the largest impact of the public sector declines and reduced by 26.9%. In total, public sector related advertising was less than 9% of our total advertising in the second half of the year.
Contract printing was impacted by the loss of contracts and the closure of two plants in 2009. As our capacity rebalancing was completed in the early part of the year we have been able to look for new opportunities as the year progressed. This culminated in contracts to print the Hull Daily Mail and the Grimsby Evening Telegraph for Northcliffe being won in the last quarter. The addition of these new contracts has positioned contract printing well for 2011.
With advertising still declining, the focus on cost has continued. Like-for-like operating costs (before non-recurring and IAS 21/39 items) fell by £28.3 million or 8.0% during the year. This was achieved through investment in new systems and the continuing centralisation of back office functions while ensuring focus on local communities by keeping editorial and field sales local. By the year-end the installation of the improved editorial and content management systems was completed and over 2,000 journalists are now using the new system. This has enabled us to have a single view of editorial content independent of how it is delivered to customers. As new delivery mechanisms become available we expect these systems to be capable of automatically delivering content without extensive rework.
The rationalisation process included the closure of the printing press in Limerick. Printing has been moved to our larger press in Northern Ireland with some titles outsourced. Improved processes and centralisation of functions have resulted in the Group reducing the average number of staff employed by the Group from 6,835 to 6,209 (9.2%) during the year. We recognise that this is a difficult situation for many of our staff but we have managed to achieve this reduction with the vast majority coming through vacancies not being filled or voluntary redundancy.
Debt Reduction
The Boards focus has remained one of debt reduction and despite significantly higher finance costs, as a result of a full year of the facilities put in place in August 2009, net debt came down by £35.4 million during the year. This was achieved through continued good cash generation, control of working capital and limiting capital expenditure.
Strategy (a) Print While newspaper circulations have been in slow decline for many years the rate of decline can be influenced by the type of publication and the degree of investment in product quality. Our mix of business is skewed towards weekly newspapers, most of which are the leaders within their local communities. Overall 65.2% of our advertising revenues are in weekly newspapers, which have over recent years enjoyed better circulation trends than their daily equivalents due to their more localised footprint. They have also enjoyed better advertising trends due to the mix of advertising.
In order to improve the quality of our newspapers and ensure a sharp focus on their local markets, our editorial review process has been expanded to over 100 titles. This process gathers feedback from readers and editorial staff and results in an improvement programme for each publication.
Product quality has been assisted by the investment in new editorial and content management systems which have enabled significant changes in workflow. Increased focus is placed on the creation of news content while the subsequent production process has been largely automated.
During the past six years, much classified advertising has been lost due to increased competition from digital alternatives and through the economic downturn. This has encouraged the Group to focus on developing display revenues from both new and existing customers. A new programme of customer acquisition has been introduced across the business resulting in new local advertisers and new categories of display revenue. Whilst we expect some return of classified advertising as the economy improves, further structural change is inevitable. However, as much of the structural/cyclical impact has already occurred, the future impact of structural change is likely to be more muted and balanced by the cyclical bounce.
(b) Digital
Our digital strategy is to leverage the assets of our newspaper business into the online world. These assets include unique local news and information content, relationships with readers and advertisers and strong local brands. By leveraging these assets we are able to create an advantage over on-line competitors.
Digital revenues returned to growth during the year driven primarily by the improved recruitment proposition launched in August 2009. Through working with a partner, the Daily Mail & General Trusts (DMGT) Jobsite, we were able to rapidly introduce a better recruitment offering into our local markets. This has enabled us to improve our local market share in terms of the number of jobs available on the site and response to advertisements through visitor numbers; in 6 out of 9 of our major local markets we are in first or second position in terms of site visitors. These improved websites will enable us to hold our strong position in local recruitment with a unique combination of print and digital products.
During the year we have completed the rollout across the Group of improved editorial and content management systems. This system has provided the Group with an improved platform on which to launch new products. Updated websites utilising the system are now live in over 90% of our markets. These sites utilise Autonomy software in conjunction with our editorial and content management systems to create the ability of coding our editorial content in preparation for both improved contextual advertising and automated use of our editorial content. These are important building blocks which can be exploited further to develop our digital business.
A new digital business directory developed in partnership with Qype will also leverage the new platform. The directory will be fully integrated within our local news websites and enable advertising to be appropriately placed within the site. The new system is now in prototype and will be launched to customers during March/April 2011.
During the year we participated in the process to gain a local television licence to provide news within Scotland. Our bid, in conjunction with three other partners, was selected due to the high quality and depth of editorial content and our multi-media offering. Unfortunately, due to the change in Government, the process was then aborted and we find ourselves in a new Government programme to create local TV stations. At this stage, we are doubtful that this will lead to significant revenues for the Group.
Summary
After four years of operating profit decline, 2010 saw a return to profit growth for the Group. Advertising, whilst still declining, is considerably more stable than in the preceding two years. Digital revenues grew during the year and a pipeline is in place for further digital launches in 2011. Finally, the level of debt has continued to decline despite increased interest payments, and debt ratios have improved.
Business Review – Operational Review
During 2010, work continued on the Groups stated aim of focussing its publishing operations on revenue, audience, communities and people. A key component of this approach is the centralisation of non-publishing activities into a single operating unit.
To this end, a new service division was formed in 2010 to cover printing, logistics, transport, advertisement design and associated health and safety controls.
The publishing divisions have also been reduced from seven to five, being Scotland and North East England, the North of England, the Midlands, the South of England and Ireland (covering the whole of the island). This provides better management consistency for revenue responsibility, more effective use of resource and reduces the number of direct reports into the senior management team.
Digital
Aligned to this strategy is the use of technology to create a single view of content within one Group-wide content management system which can be used for multiple platforms such as the newspaper, the internet and mobile. During the year, this project was completed.
At the same time a project commenced to re-launch the Groups news websites with almost all of the sites being upgraded to a new design. An important aim is achieved with this switch in that all originated content is now created in a fully searchable format. This will enable the Group to develop further commercial opportunities such as matching relevant advertisers to online stories and timely creation of niche products while ensuring that publishing centres are ready for developments in emerging technologies such as smart phones, portable tablet devices and iPads.
In keeping with the approach to continue to grow digital revenues by partnering with key providers, agreement was reached with Qype, a leading online directory business based across Europe, to provide a business directory platform integrated into the new websites. This will greatly improve the business listing service currently on offer and enhance interaction with our audience, particularly with the ability to review services. This is expected to increase the Groups revenue for business listings in 2011.
During 2010 the Group also launched an iPhone application for The Scotsman which was the first Scottish-based iPhone news service of its kind. To date, over 5,000 users have downloaded the application.
IT Systems
In addition to the work undertaken to improve our digital performance, the IT function has been preparing the Groups infrastructure to ensure its sales function has a single customer view and at the point of contact the sales person has the most up to date information available. This is a long-term project involving over 2,000 sales staff and it is unlikely to be completed until late 2012, though some benefits have already been derived from a trial project to centralise telephone sales activities further. This trial, which demonstrated that improved technology created efficiencies and increased sales opportunities, is being used as a framework for planning telephone sales resource going forward.
Organisation Structure
Work was also completed on the overall organisation structure to ensure it is balanced and in keeping with the economic reality faced by the Company. In this regard projects started in 2009 to reduce workflow in editorial departments and streamline sub-editing functions were completed, back room activities associated with newspaper production were consolidated from 9 to 3 operating units and locally managed transport and logistic teams were moved to a Group-wide function managed within the newly created services division. In addition, management teams were streamlined.
As part of the overall strategy to improve sales activities, the position of Group Commercial Director has been created. This role will focus on ensuring that best practice is shared and implemented across the Group, that national advertisers (an area of increased activity) are more closely interacted with, and that the Groups digital and in-print strategies are aligned where appropriate.
Given the consolidation of our telephone sales activities, a Contact Centre Director position has also been created to ensure our telephone contact centres have the necessary management skills and competencies to provide a first class service to our customers and that our knowledge on best practice in this sector is up to date. This role will oversee the further consolidation of the Groups telephone sales activities and the installation of technology to support the improved customer service.
Audience Delivery
Maintaining audience both in print and online is a key part of our overall strategy and in this regard further steps have been taken to ensure our newspapers and websites meet the needs of our readers and viewers. To ensure this is the case, over 100,000 people are actively engaged in providing consumer feedback on our various products. This includes 12,000 reader panellists who respond to questionnaires and give views on product additions and changes, and 14,000 readers who work with our in-house research team giving feedback alongside editors and senior journalists as part of our newspaper product evaluation process.
This work has been supported by a move towards retaining newspaper readers by offering incentives for long-term subscription to our newspapers. Every publisher has a reader retention plan in place which encourages payment by direct debit for 12 month contracts.
As a result of these initiatives sales performance improved during the year with weekly titles 0.6% better in the second half of the year at -4.4% and daily newspapers 7.8% down. Encouragingly, nine of our weekly newspapers recorded an increased sales performance year-on-year including the Hastings Observer and the Worthing and Shoreham Herald. The performance of our daily titles in the second half of the year was disappointing. However, 6 of our 18 daily titles performed above the industry average including the Scarborough Evening News and the Belfast Newsletter, both of which were in the top 20 performances for the period in the market.
Digital audiences continued to grow with unique users up 3.0% on 2009 to an average of 7.1 million per month.
Business Development
Using the experience of the Companys established emigration exhibition business, the Group launched five new shows across its publishing portfolio. These larger exhibitions were part of a trial to determine if significant new revenue could be achieved alongside the already successful smaller shows operated by our publishing centres. Of the five exhibitions, the largest was LovePets held in November. This show, although hampered by the bad weather, successfully attracted national advertisers and exhibitors and demonstrated that events of this scale can be staged. Other events were also successfully delivered across the Group including the Magic of Christmas held in Northern Ireland, the South of England and the North of England.
In order to improve other revenue streams from our existing audience of over 17 million readers and viewers, an experienced enterprise manager was appointed. This has helped formulate new ideas and partnerships to grow revenues such as reader holidays, commissions on utility services and discounted goods offered uniquely to our readers. As a result of these initiatives, other revenues grew by 1.1% to £20.2 million (on a like-for-like basis).
Services Division
The print division was renamed to reflect the growing range of services it provides to the publishing companies, which now include pre-press, transport & logistics, page planning and health & safety.
In the more traditional area of print services, further steps were taken to improve efficiency by moving to one print centre in Ireland and closing the Limerick plant, changing shift patterns at Peterborough and realigning management to reflect this reduced capacity. New contracts were secured to print the Grimsby Evening Telegraph and Hull Daily Mail, and the division was again recognised by the industry for its printing standard.
The expanded services division has made substantial progress in consolidating the disparate activities associated with newspaper production, and resulted in savings of over £1.7m. This process will also lead to further efficiencies and improvements to service levels, particularly in the area of advertisement creation where self serve and automated processes will provide more timely and higher quality solutions.
The move to a single solution for the Groups transport and logistics needs brought an immediate benefit both in overall costs and in the implementation of best practice. This included the move to wholesale arrangements for the majority of our titles and the review of direct delivery arrangements, the latter bringing substantial cost savings.
Staff Development and Welfare
The main area of focus remains the minimisation of the effect of restructuring the organisation. In this regard the greatest impact has been the restructuring of the editorial departments which involved over 230 individuals. It is encouraging to report that around 85% were accommodated without the need for compulsory redundancies. In addition to this work, support has been given to change within the services division involving over 100 staff and within publishing and finance departments where local activities were centralised during the year.
A new centralised HR helpdesk was created to give management teams immediate access to HR professionals and the most up to date advice.
During the year over 2,000 journalists and sales staff completed in-house training programmes and internal communication was improved following the appointment of a new Group Communications Officer. This is part of a strategy to improve communication both up and down the organisation and includes a new weekly eNewsletter for all employees which will cover the key activities of the Group.
Following extensive consultation with staff and their representatives, the Groups final salary pension plan was closed to future accrual at the half year. As part of this change, staff were offered alternative membership of the Groups defined contribution pension plan along with other benefits including a new income protection scheme and employee assistance programme.
Business Review – Performance Review
The revenue declines that the Group has experienced through the recession continued in 2010, albeit at a much reduced rate. The impact of this was lower than in previous years due to the significant ongoing cost management activities within the Group. These activities more than offset the revenue declines so that on a like-for-like basis the Group succeeded in growing operating profit (excluding the impact of acquisitions) for the first time since 2004.
Trading Review
The table below compares the combined digital and print advertising by category over the first half and the second half of the year for the UK business on a like-for-like basis. The total advertising revenues for the Republic of Ireland business have been included on a constant currency basis.
The period to 2 January 2010 was a 53 week period. The impact of the 53rd week is shown in the table below and all comparisons which are termed as being on a “like-for-like basis” are calculated by comparing the 52 weeks of 2010 against the relevant 52 weeks of 2009.
As can be seen the year-on-year decline in the second half of the year was broadly consistent with the first half with the improvement we had hoped for not materialising. The main reason for this was cut backs in public sector expenditure post the general election and the Governments spending review. The impact of this is most notable on the employment category where public sector recruitment has dropped significantly, and the other classified category where we saw reductions in the volumes of public notices.
Other notable trends were property where the rate of growth seen in the first half slowed, in line with the volume of property transactions, and the improvement in motors and display advertising reflecting the GDP growth seen in the UK economy.
We also saw an improvement in the rate in 2009 being lower rather than any improvement in the economic conditions in that market.
The table below summarises revenues and total costs for the Group for 2010 and against 2009 with the impact of the 53rd week in that year isolated.
Print advertising which is included in the total advertising revenue analysis above declined by 7.1% on a like-for- like basis which is a significant improvement on the 27.4% decline reported in 2009.
Newspaper sales were down by 2.8% on the same basis, which is a slight deterioration on the 1.8% decline reported last year. However, approximately 1% of the overall decline was a result of moving more of our titles to wholesalers which results in a lower net sales price but which is more than offset by a reduction in distribution costs. As mentioned in the operational review there were continuing declines in the circulation of our titles but increased cover prices across the majority of our portfolio helped mitigate the impact.
Digital revenues grew on a like-for-like basis by 4.0% in the year. This growth was driven by employment and display revenues. The rate of growth in employment related revenues slowed in the second half of the year for two reasons; firstly, the benefit we enjoyed from our partnership with the Daily Mail Group on Jobsite passed its implementation anniversary such that the uplift we experienced on entering this arrangement is now included in the comparatives; and secondly the significant reduction in print recruitment advertising listings that were available for upsell into digital. Display revenues showed good growth throughout the year as the popularity of our news websites grew and other initiatives such as selling video advertising onto our news websites gained traction.
Contract print revenues decreased on a like-for-like basis by 17.1%. This reduction was caused in part by our decision to close our printing operations in Edinburgh and Kilkenny in the second half of 2009. Although these closures did result in a net saving to the Group, there were third party revenues that were lost as a consequence. The balance of the decrease has been driven by decreased volumes on existing third party contracts and the full year effect of the loss in 2009 of the Financial Times print contract.
Other revenues on a like-for-like basis increased by 1.1%. Around 40% of the revenue in this category comes from leaflets distributed with our free newspapers. Responding to the declines in advertising we have made reductions in the distribution of some of our free titles and some have ceased to be viable. This has resulted in an overall reduction in the distribution of free papers of 9% and this has been directly reflected in the leaflet revenues. There has, however, been good growth in other revenue streams within this category such as local awards, exhibitions and reader offers. The increases in these revenue streams have more than offset the decline in leaflet revenues.
In total, like-for-like revenues were down by 6.0% year-on-year.
Total operating costs for the Group, excluding non-recurring and IAS 21/39 items, were £326.1 million. This represents a decrease of 8.0% on a like-for-like basis over 2009. This saving was achieved despite the end of the Groups salary freeze in July 2010 and increased newsprint prices in the second half of the year. Unfortunately newsprint prices are increasing sharply again in 2011 in part reflecting the significant increase in the prices being paid for newsprint waste. A significant element of the 2010 cost savings relates to the implementation of the Content Management System discussed in the operational review. There were also significant cost savings related to the closure of printing presses and the transfer of some newspaper distribution to wholesalers both of which are mentioned above.
This overall cost reduction more than offset the like-for-like revenue reduction such that on the same basis, operating profit (before non-recurring and IAS 21/39 items) was £72.0 million, up from £69.3 million in 2009. This is the first like-for-like annual operating profit increase (excluding the impact of acquisitions) since 2004. The operating profit margin for the year was 18.1%, an increase on the 16.4% reported in 2009.
Non-recurring and IAS 21/39 Items
In addition to the trading results discussed above, there have been several items that have been identified as non- recurring either due to the nature of the item or their materiality. The most significant of these items are as follows:
a) As has been the case in prior periods, the Group is required under IAS 36 to test the carrying value of its intangible assets for indications of impairment. In 2009 this resulted in a net charge of £126.0 million. The testing at 1 January 2011 has resulted in a net charge of £13.1 million, primarily due to the print advertising performance in Q4 continuing into early 2011 and the increase in newsprint costs. Details of the impairment test assumptions and the carrying values by segment are included in note 9.
b) In November 2010 the Group announced the closure of its printing operations in Limerick. This resulted in the book value of the assets in this division being written down to their realisable value and a provision being taken against the remaining period of the lease. This resulted in a non-recurring charge of £4.0 million.
c) As discussed in the Operational Review, the Group continues to re-engineer the way in which it carries out its business and this has resulted in fundamental restructuring and reorganisation in several areas of the business including pre press, transport and logistics, editorial work flow, management, credit control and contact centres. These changes resulted in redundancy costs of £7.7 million, which have been recorded as non-recurring items.
d) As discussed in the 2009 Annual Report and Accounts, the Group took the decision to de-designate all its financial derivatives and cease applying the hedge accounting requirements of IAS 39 at the start of that year. This has the effect that all of the changes in the value of these financial instruments, and the assets/liabilities that they relate to, are recorded in the Income Statement. The effect of this is illustrated in a separate column of the face of the statement and the detail on the adjustments is included in note 6c.
e) Finally, as referred to in the tax rate section following, the Group has released certain tax provisions relating to the share warrants issued as part of the refinancing and in respect of tax years which have now been settled with HMRC. These items have been classified as non-recurring because of their nature and size (£13.6 million). Also included in non-recurring tax items is the impact of the reduction in the rate of deferred tax to 27%, a credit of £8.9 million and the release of deferred tax provision on publishing titles that have been impaired.
Finance Income/Costs
The net finance income on pension assets/liabilities was £0.4 million as the expected return on the pension fund assets was marginally higher than the interest cost on our pension liabilities.
Finance costs for the year were £41.9 million. This represents a very significant increase over the £28.8 million (before non-recurring items) reported last year. The charge this year reflects a blended rate of 10.0% and represents a full year of the financing facilities put in place in August 2009. This blended rate, which includes the payment-in- kind interest (PIK), is comparable with the rate for the last four months of 2009 of 9.9%. The charge in the Income Statement also includes £5.3 million being the amortisation of the fees, which totalled in excess of £16 million, associated with the refinancing. The Groups exposure to US dollar interest payments and principal repayments on the private placement loan notes are 97.8% hedged from a currency point of view and the overall percentage of our borrowings which have been swapped to fixed interest rates is 88%.
Profit before tax
The Groups profit before tax for the year was £16.5 million, an increase of £130.3 million on the loss before tax of £113.8 million reported in 2009. The main driver behind this increase is the significantly lower net impairment of intangible assets reported in 2010, £112.9 million lower than the net impairment charge reported in the prior year.
Tax Rate
The Group tax rate for the year, excluding non-recurring and IAS 21/39 items was 22.5%. This rate is considerably lower than the UK rate of 28%. The overall rate was reduced by the lower rates enjoyed in the Republic of Ireland and the Isle of Man.
There were also exceptional tax credits relating to the reversal of provisions made on the share warrants associated with the refinancing, a release of provisions held against prior tax years which have now been settled and the impact of the reduction in the rate of deferred tax. As noted previously, due to their nature and size, these amounts are reported as non-recurring.
Funding/Net Debt
Net debt at the year end was £386.7 million (excluding any reduction from unamortised debt issue costs), a reduction of £35.4 million on the prior year. The reduction of debt continues to be a key focus for the Board.
The funding of the Group throughout the year was under the finance arrangements put in place in August 2009. During the course of the year, the Group accelerated the committed reductions in the facilities which were scheduled in 2010 and 2011. This has resulted in the facilities being available to the Group now being £430 million, a reduction of £55 million. This reduction is in line with debt reduction over the last 18 months and still provides the Group with sufficient headroom within which it can operate comfortably as well as reducing our interest cost through lower non-utilisation fees, reduced private placement interest and reduced PIK accrual.
Although the current finance facilities do not expire until September 2012, the Group anticipates negotiating new facilities towards the end of 2011 to ensure that when preparing the 2011 Annual Report and Accounts the finance facilities available to the Group extend beyond 2012.
Net Asset Position
At the period end date, the Group had net assets of £411.2 million, an increase of £41.2 million on the prior year. This increase in net asset position is primarily due to the profit for the year leading to the reduction in net debt of £35.4 million, the reduction in the deficit in the pension plan of £23.3 million and the reduction in tax liabilities (excluding the United Business Media liability) of £17.5 million, offset partially by a reduction in the net book value of property, plant and equipment (including assets held for sale) of £21.4 million and the net impairment of intangibles of £13.1 million.
Liquidity and Going Concern
The Board has undertaken a recent and thorough review of the Groups forecasts and the associated risks. These forecasts extend for a period beyond one year from the date of approval of these financial statements. The extent of this review reflected the economic outlook and the current trends, together with volatility in advertising revenues. The improved trends, in terms of reduced year-on-year declines that we experienced throughout 2010 are expected to continue through 2011. The forecasts make key assumptions, based on information available to the Directors, around:
Future advertising revenues which show a reduced decline in the first half of 2011 with the balance of the year showing greater year-on-year stability reflecting the current external economic environment, consistent with current market views and recent advertising revenue trends.
Further cost reduction measures to reflect these lower revenues and the ongoing re engineering of the business.
Reduced interest costs reflecting lower debt levels.
After applying reasonable downside scenarios to the key assumptions underpinning the Groups forecasts, the Directors are satisfied that the Group would continue to operate within the covenants determined by the financial facility agreements. The Directors therefore believe, on the basis of these current financial projections and facilities available, that the Company and Group have adequate resources to continue in operation for the foreseeable future. Accordingly, the Directors continue to adopt the going concern basis in preparing the financial statements.
Pensions
The Groups defined benefit pension deficit has decreased by £23.3 million over the year. The reduction in the deficit has been the result of the following factors, both positive and negative.
Firstly investment markets, although they remained volatile over the course of the year, delivered returns in excess of those assumed by £18.1 million. Offsetting this there was a reduction in the discount rate applied to the schemes liabilities which resulted in an increase in the value of liabilities of £27.0 million. There has been minimal change in the mortality assumptions used this year with a small decrease in the assumption relating to the expected rate of inflation resulting in a £6.0 million reduction in liabilities.
The Group has also been working with the pension fund trustees to manage the liabilities of the plan and as part of the process the pension fund was closed to future accrual on 30 June 2010. This resulted in a reduction in liabilities of £6.3 million (see curtailment gain in non-recurring items). The change in the statutory minimum for deferred pension increases from RPI to CPI has also reduced the liabilities of the scheme by £15.0 million and this, together with other movements totalling £4.9 million made up the reduction.
Since the year end, the Group has also offered all existing pensioners the opportunity to take part in a pension exchange where, for a higher pension today, they give up a proportion of future increases. It is anticipated that this will further reduce the deficit by between £1.0 and £2.0 million when the exercise is completed by 31 March 2011. As this option will be offered to all remaining final salary members going forward, at the point of them taking their pension, there will be further liability reductions in the future.
The pension fund will also be subject to a triennial actuarial valuation carried out as at 31 December 2010. The results of this valuation will give rise to a new schedule of contributions and funding plan to reduce the deficit. The new schedule of contributions requires to be agreed by 31 March 2012.
Financial Reporting
In terms of this report, there are no significant changes in International Financial Reporting Standards from those in force at the end of 2009.
Control Processes
As discussed in the Corporate Governance Statement, the Group operates rigorous internal control processes that assist in the efficient operation of our businesses. Central to these processes and controls is the fact that the general ledgers, fixed asset registers, payables system, expenses and payroll are controlled through our shared services centre in Peterborough, together with all cash processing and sales ledger balances for the mainland UK being controlled through a single centre in Leeds.
Earnings per Share and Dividends
Basic earnings per share of 5.61p are significantly up on 2009 (-13.66p) for the following reasons:
An underlying improvement in operating profit; and Significantly reduced impairment charges in comparison to 2009; and Non-recurring tax credits totalling £25.9 million, relating to the reduction of liability for the share warrants
associated with the refinancing, a release of provision for taxes in prior years now settled and the impact of
the reduction in deferred tax rate; partially offset by Higher interest costs reflecting a full year of the facilities put in place in August 2009.
Excluding non-recurring and IAS 21/39 items, earnings per share at the basic level at 3.67p were down 1.86p on 2009.
There will be no dividend recommended by the Board relating to 2010. This reflects the Groups ongoing desire to further reduce debt levels within the business and is in accordance with the financing agreements entered into in 2009 which preclude the payment of any dividend until the ratio of net debt to EBITDA falls below 3.5 times.