16th Mar 2005 07:00
Johnston Press PLC16 March 2005 For Immediate Release 16 March 2005 RESULTS FOR THE YEAR ENDED 31 DECEMBER 2004 Johnston Press plc, one of the UK's leading regional newspaper publishers, ispleased to announce record results for the year ended 31 December 2004. KEY FINANCIALS 2004 2003 % Change £m £m Turnover 518.8 491.8 +5Operating profit 177.2 160.6 +10Profit before tax 150.6 128.0 +18Operating cash flow 192.7 167.6 +15 Earnings per share Pence Pence - headline 37.96 32.36 +17 - basic 37.60 31.57 +19 Dividend per share - final 4.80 4.00 +20 - total 7.20 6.00 +20 HIGHLIGHTS • Like-for-like advertising revenue growth better than expected at 5.5% - see financial review for definition (growth in the first half of 6.0% and 5.0% in the second half ). • Operating margins pre-exceptional items increased from 33.1% to 34.3%. • Profit before tax up 17.7%. • Interest cover increased to 6.8 times. • Commencement of project to build a new £60m print facility in Sheffield. • 15 year contract to print News International titles. • Continued investment in IT to drive business efficiency. PROSPECTS Chairman, Roger Parry said: "Despite the strength of trading in 2004 making for tough comparisons,like-for-like advertising in the first two months grew by 2.6%. Looking forwardthe Board expects to see another year of growth in advertising and other revenuestreams. We will also continue to invest heavily in editorial resources,printing, distribution and online technology. These factors, coupled with thetight management of costs, further efficiency gains and actions to offset theincrease in newsprint prices, should lead to another year of satisfactoryprogress for the Group in 2005." For further information please contact: Tim Bowdler, Chief Executive Officer Tel: 020 7466 5000 (today) orStuart Paterson, Chief Financial Officer 0131 225 3361 (thereafter) Buchanan Communications Tel: 020 7466 5000 Richard Oldworth/Richard Darby/Diane Stewart CHAIRMAN'S STATEMENT 2004 was a year of organic growth and continued progress for Johnston Press. TheGroup achieved record results in terms of sales, margins, profits, earnings pershare, dividends and cash generation. The continuing success of Johnston Pressstems from a single-minded focus on providing local communities with news,information and entertainment. The staff of Johnston Press have, once again,shown themselves to be amongst the best in the business and, on behalf of theBoard and shareholders, I would like to congratulate them. Results Revenues grew in excess of 5% which was more than we had expected, in partreflecting the success of new products launched during the year. Tight costcontrol and some continuing efficiencies from past acquisitions drove marginsand profits but the positive impact of recent investment in printing and ITsystems also helped. Operating profit for 2004 was £177.2 million, up 10%. Headline earnings pershare were 37.96p, up 17%. Dividend The Board proposes a final dividend of 4.8p per share, making a total of 7.2pper share for the year compared to 6p per share last year. This is an increaseof 20%. Organic Growth In recent years, Johnston Press has made a number of significant acquisitions.In 2004 we did not and all the growth has come from organic developments. Withinour existing market areas, we have launched a number of new publicationsincluding free newspapers, advertising-only publications and lifestylemagazines. We have launched a number of locally focused websites, upgraded ouronline classified platforms and invested heavily in new colour printing capacityand IT systems. During the year, we announced our commitment to invest more than£60 million in a new print facility in Sheffield and, in February 2005, weannounced a similar initiative costing more than £45 million at Portsmouth. We have a clear focus on using investment to improve the economics of ourexisting business. Progress Johnston Press has been serving local communities for more than 150 years andfor most of that time our medium has been printed paper. In the Group's earlyyears this was simple text; later it was enhanced by black and white photographyand, in recent years, by full colour presentations of text, photography andgraphics. Increasingly, websites and mobile services are becoming an importantpart of our offering, both to advertisers and to readers. Initially we took a very cautious approach to the internet boom, waiting to seeexactly how the technology and human behaviour would develop. We now have aclear picture of what we believe is the right way forward for a Group whichserves local communities. We are developing a family of websites which have common technology andfunctionality but each of which is focused on the needs of its own localcommunity. These websites enable us to provide a service of news, informationand entertainment, which supplements our daily and weekly printed publications.In addition, we have invested significantly in the technology to offer targetedand effective classified advertising on the web. We see web-based classified advertising as both a complement to, and anenhancement of, traditional print advertising. We believe that our developmentof two mutually supporting media will form a sustainable and robust businessmodel for the future. Strategy Going forward, our strategy is to build on our strengths as a local publisher.Whilst we recognise that there are significant technology changes going on,particularly in the online area, we remain convinced that fundamental humanbehaviour and human needs are not going to change. As I have said in a number ofprevious annual reports, "life is local" and it is this reality that drives ourstrategic approach, both online and in print. We believe it will be possible for us to participate in the anticipated furtherconsolidation of the local publishing industry. Economists and competitionexperts are increasingly recognising that, in terms of advertising revenues,newspapers compete with a variety of media and that, so far as plurality ofeditorial voice is concerned, this can be achieved just as well, indeed,sometimes far better, under a small number of owners than it can under diverse,fragmented and under-resourced ownership conditions. Accordingly, we are confident that we have significant sources of future growth,both through organic development of our existing franchises and the acquisitionof new ones. Board I am delighted to be able to announce the appointment of Les Hinton as anindependent non-executive Director. He has been in the newspaper industry formore than 40 years and, as Executive Chairman of News International, brings anextraordinary wealth of publishing experience to Johnston Press. It is also agreat pleasure to announce the appointment of Danny Cammiade as an executiveDirector in the role of Chief Operating Officer. He has made a majorcontribution to the success of Johnston Press and plays a central role incontinuing to drive the business forward. The Board consists of five independent non-executives, two non-executivesrepresenting the Johnston family interest, three executives and myself. LordGordon, one of our independent non-executive directors, will have completed 9years' service at this year's AGM, but the Board remains entirely satisfied thathe is independent. Johnston Press remains fully compliant with all aspects ofthe Combined Code. Prospects Despite the strength of trading in 2004 making for tough comparisons, lookingforward the Board expects to see another year of growth in advertising and otherrevenue streams. We will also continue to invest heavily in editorial resources,printing, distribution and online technology. These factors, coupled with thetight management of costs, further efficiency gains and actions to offset theincrease in newsprint prices, should lead to another year of satisfactoryprogress for the Group in 2005. ROGER PARRY Chairman 16 March 2005 CHIEF EXECUTIVE OFFICER'S REVIEW Johnston Press produced another record set of results in 2004, benefiting fromour extensive portfolio of well recognised market leading brands across numerouslocal communities around the UK. The year has witnessed a growing focusthroughout the Group on the achievement of stronger organic revenue growthcoupled with continuing improvements in business efficiency through ongoinginvestments in IT systems. The results for the year ended 31 December 2004demonstrate the effectiveness of a strategy which remains closely focused on ourcore business of local community publishing in the UK. Strategic Overview The concept of "Life is Local" continues to provide the underlying strategiclogic for Johnston Press. Extensive research commissioned by the NewspaperSociety, the industry's trade association, consistently illustrates theintensely local focus of people's lives covering a wide spectrum of activitiesincluding work, shopping, leisure and socialising. Our operations are closelyshaped to reflect this important tendency, serving numerous local communitiesacross the UK with a variety of print and online publications. In turn, ourbusiness substantially reflects the performance of a myriad of distinct andseparate local economies. The resultant underpinning drivers which power ouractivities are consumer confidence, the property market and employment levels.With the ongoing satisfactory performance of the UK economy as a whole, thesefactors continue to provide a solid foundation for our business. This has resulted in a high performing core business which is well placed toachieve further growth. It also provides an excellent platform from which tolaunch new initiatives whether these are in the form of new print publications,websites or related local ventures. An important such initiative at the end of2004 has been the establishment of a new publishing division, known as JPVentures, bringing together various non-local newspaper businesses includingOutbound Publishing (emigration newspapers and overseas property magazines), OffRoad Publications (Dirt Bike Rider and Trials & Motorcross News), LetterboxDirect (door-to-door leaflet delivery), and Days Out UK (leisure guide). It isanticipated that the resulting heightened focus on these businesses will drivefurther opportunities for growth. Already in late 2004, we completed theacquisition of Offer Pack, a small business which specialises in the design anddoor-to-door distribution of packaged special offer coupons to promote localretailers and services. During the year, we have also launched a large number of new publications inpursuit of a strategy which is aimed at layering our local markets with a rangeof newspapers, specialist print publications and local websites. This strategywill ensure that we are in a position to offer advertisers an increasing varietyof channels to promote their goods and services to local communities, improvingtargeting and maximising market penetration. Noteworthy during 2004 has been thelaunch of more than 20 lifestyle and specialist publications, the introductionof six regional editions of Jobs Today, a new weekly recruitment title brandedto mirror our online jobs site and a similar initiative for regional propertyadvertising. The industry structure has remained substantially unchanged during the past 12months, with the four largest publishers accounting for approximately 73% oftotal copies distributed or sold. Johnston Press remains fourth largest withabout 15% market share. There has been relatively little corporate activity andfew ownership changes, with Johnston Press making no newspaper acquisitionsduring the year. However, this should not be taken to suggest that continuedindustry consolidation is unlikely. We firmly believe that there will be moreownership changes in the future and that further industry consolidation will bepermitted by the regulators, although the timing of such changes cannot bepredicted. The disposal of our 33% holding in Two Boroughs Radio in Burnley was completedduring the year. Underlining our focused approach, this disposal completes ourwithdrawal from all the local radio activities which were acquired with RegionalIndependent Media Holdings Limited (RIM) in 2002. The improved use of IT will continue to play a vital part in the ongoingenhancement of operating performance and we have invested heavily in IT systemsand related hardware, in order to drive business efficiency and improve customerservice. Hand-in-hand with these IT investments has been the continueddevelopment of our printing capability, especially with regard to theinstallation of additional revenue-earning colour capacity. Whilst our focusremains on the provision of appropriate print capacity for our own needs, wehave entered into long-term 15-year contracts to print News International (NI)titles at our new Sheffield facility and, conditional upon planning consent, atPortsmouth. The opportunity to secure such valuable contracts will benefit theGroup financially and in terms of enhanced press capability. The broad geographic spread of our local publishing activities, together withthe sound structure of the Group which has been developed over many years by acombination of steady organic improvement and judicious acquisitive expansion,provide the Group with an excellent foundation from which to achieve continuedgrowth. Trading Performance 2004 was a 53-week financial year for Johnston Press and, in order to enablemeaningful comparisons, the figures quoted in this section are on alike-for-like 52-week basis, as explained in the Financial Review. Advertising revenue growth in 2004 was stronger than expected, ending the yearat 5.5%, comprising 6.0% growth in the first half and 5.0% in the second. Theperformance in the latter part of the year was particularly pleasing as thecorresponding period's comparatives were significantly stronger than earlier inthe year. The outcome reflects the benefits of our broad spread of marketleading publications across a widely dispersed geographic base. With the sole exception of motors' advertising, the second half followed thepattern of the first in which every advertising category grew. This was achievedentirely as a result of volume growth, with yields remaining static, despite thebenefit of additional premium-priced colour advertising and normal rate-cardincreases. This outcome reflects the launch of additional lower yieldingrecruitment and property publications using repurposed advertising content,together with the robust growth of property advertising, the lowest yieldingcategory. The rate of recruitment advertising growth was strong throughout, though lowerin the second half at 6.6% compared with 13.3% in the first. This reflects themore challenging second half comparatives, but demonstrates a very satisfyingunderlying performance. In very broad terms, growth was stronger in the north ofthe country than in the south, although there were several exceptions to thegeneral pattern. Property advertising had another excellent year with first and second halfgrowth rates of 4.7% and 15.2% respectively. The acceleration witnessed in thesecond half reflects the need for vendors to work harder in a slowing marketplace which also encouraged the house-builders to increase their advertisingexposure. Growth was lower in the South and South Midlands regions thanelsewhere. After marginal growth of 0.4% in the first half, motors' advertising declined inthe second by 3.0%. This remains our toughest market sector, adversely affectedby continuing dealer consolidation and a number of initiatives are being pursuedto improve performance. Revenues were patchy with no particular regional trends. The Other Classifieds category grew well in both halves at rates of 3.3% and5.6% respectively. This category comprises a variety of advertising sources,including entertainments, family announcements, public notices and generalclassifieds. Each of these segments grew with entertainments and familyannouncements being the strongest. There was no particular geographic pattern,although the south coast performed best. The rate of growth for display advertising was 2.0% in the second half,following an increase of 3.4% in the first. The second half comparatives weremore difficult due to the return of heavier supermarket advertising in thecorresponding period last year following the conclusion of the CompetitionCommission inquiry into the acquisition of Safeway and a more generalimprovement following a lull in activity during the Iraqi conflict. There wereno obvious regional trends. In overall terms, total advertising revenue growth was generally stronger in thenorth of the country than in the south, with the best increases being achievedby the Northeast and North of England (Yorkshire) divisions. However, outsidethose two regions, there were no major variances. Operating margins for the Group, before operating exceptional items, were againahead of the previous year with an increase from 33.1% to 34.0% and everydivision increased its operating profit. This outcome again demonstrates theability of Johnston Press to convert modest revenue growth into a much strongerprofit performance and reflects excellent cost control, aided by ongoinginvestments in IT systems, with the additional benefit of stable newsprintprices. Operating Review Even greater emphasis is now being placed on the achievement of organic revenuegrowth. Advertising directors from around the Group meet regularly to reviewbest practice and to discuss the development of new revenue generating ideas.This process has been reinforced by the recent appointment of an experiencedsenior executive to oversee these efforts. The Johnston Press intranet basedADS4U system, which provides an extensive database of advertising ideas andcreative copy, is available to all of our advertising staff and is now beingused extensively to generate additional revenues. During the year, we have also launched an unprecedented number of newpublications. Amongst these we have introduced 14 lifestyle publications. Beinghigh quality glossy colour magazines, these have enabled us to attractadvertisers who would not normally use our newspaper titles and, in turn, thishas added value to the newspapers into which these magazines are inserted. We have also launched a number of specialist publications aimed at specificmarket segments. Examples include two annual magazines launched in the Northwesttargeted respectively at the youth fashion market and teenagers in the 16-18 agebracket. Following further launches, South Yorkshire Newspapers, based inDoncaster, now has 7 monthly free newspapers dedicated to small communities suchas Rossington and Bawtry. This format almost literally brings local news to theparish-pump and also provides the smallest local advertisers with a viableplatform. We are seeking to extend this initiative elsewhere around the Group. Anew weekly free newspaper was launched in Milton Keynes to supplement theprevious twice-weekly publishing portfolio in order to meet the demands of thisrapidly growing city. In pursuit of significant revenue growth, we have almosttrebled the pagination and distribution of our Lincoln-based free newspaper fromits previous levels. Another important development during 2004 was the launch of a number ofclassified advertising print publications across wider geographic regions thanany one of our individual newspapers serve. Perhaps the most important of thesehave been the six regional recruitment titles "Jobs Today", replicating ouronline jobs content and reinforcing our web-based recruitment brand. Thesetitles extend the job advertisers' reach and generate additional cover pricerevenues. A similar initiative in respect of our property advertising under the"Exclusive Homes" brand provides a platform for higher priced properties forsale in various of the regions in which we publish. We are also working more closely than ever with Mediaforce, the independentnational sales house which represents all Johnston Press titles with nationaland regional advertising agencies. Mediaforce have offices in London,Birmingham, Manchester and Edinburgh and have represented Johnston Press for anumber of years. Together with Mediaforce, we are making more presentations toagencies and potential new advertisers in an effort to bring new business intoour titles. Successes in 2004 included Procter & Gamble, Nestle and Jet 2, oneof several low-cost airlines now using the regional press. We also launched aseries of focused Group-wide advertising supplements to attract new nationalbusiness, the first of these being dedicated to Euro 2004. Distinct from print publications, we have also achieved strong growth from anumber of related local events and services. The delivery of leafletsdoor-to-door, often in conjunction with our own free newspapers, is an importantand growing revenue source, accounting for £13.3 million in the year,representing a growth of 14%. In order to capitalise better on this opportunity,we are gradually switching the management of this activity from our localcompanies to Letterbox Direct, a dedicated leaflet delivery operation acquiredas part of RIM. Revenues from local exhibitions, including such events as jobfairs, motor shows and wedding fairs have increased by 4% and provide anopportunity for greater growth around the Group. Reader Holidays, which wepackage and promote through our newspapers, also grew by 4% and we have createdseveral centres of excellence to service other companies around the Group wherethis growth opportunity has not as yet been maximised. Premium line services,primarily for dating purposes, grew at 5% and, in response to changing patternsof usage, we are developing an online service to complement the currentprint-based offer. Hand-in-hand with our focus on achieving greater organic revenue growth are ourefforts to maximise the considerable opportunities which are available throughinvestment in IT systems and related hardware. The appointment of a Group Headof IT, following our acquisition of RIM in 2002, has brought much increasedimpetus and improved coordination to these efforts. It has resulted in muchgreater standardisation across the Group of the hardware and software we employ,which, in turn, has brought purchasing, operational and support benefits.Working closely with our preferred suppliers of advertising, editorial and salesledger systems, we have continued a programme of replacing ageing and disparatesystems with common region-wide platforms. During the year, this has involvednew installations in the majority of our regions. These installations haveenabled us to consolidate a number of our backroom pre-press productionoperations with consequent cost savings. A new newspaper sales system wasinstalled in the South of England division during the year and will form thebasis of an extended common system across the entire Group which will be rolledout during the current year. To facilitate customer service, efficiency and thetransfer of advertising content to our websites, we have introduced new softwarethroughout the Group to deal with property advertising. In an increasing numberof locations, this system is now being used by our estate agent customers toupload their entire property database which, in turn, has resulted in greateraccuracy, later deadlines and increased online content. During the year, we alsoinvested in a new payroll and HR system which will give greatly enhancedinformation to assist management around the Group. Major improvements are beingmade to our Group communications infrastructure, including the introduction ofvoice-over IP telephony. The Group's approach to Health & Safety has been overhauled and upgraded duringthe year with the introduction of strengthened operating and reportingprocedures. Although already at a good standard, this has resulted in a numberof additional measures being taken to improve further the Group's performance inthis critically important area. There were very few reportable accidents duringthe year with none involving serious injury. During 2004, we celebrated several important milestones, perhaps most notablythe 250th anniversary of the Yorkshire Post. Other important celebrationsincluded the 150th anniversaries of the Whitby Gazette, the Morpeth Herald andNorthumberland Gazette, the Grantham Journal, the Harborough Mail and theDerbyshire Times. The latter involved a dinner for many customers, staff andlocal personalities at Chatsworth House and we are grateful to the Duke ofDevonshire for permitting us to use this wonderful venue. A number of ournewspapers were also recognised for their excellence, including the SouthernReporter as "Best Paid-for Weekly Newspaper in Scotland", for the thirdsuccessive year, and the Worksop Guardian as "Campaigning Newspaper of the YearAll weekly paid-for newspapers". Electronic Publishing Considerable progress has again been made in terms of the growth and developmentof our web-based activities. The Group now has 182 local websites, an increaseof 20 over the course of the year. Total page impressions grew by 34% to reach20 million per month. Total online revenues increased by 17% to £6.3 million. During the year, our three classified sites, Jobs Today, Motors Today andProperty Today, were relaunched after a complete overhaul and upgrade. At anypoint in time, we now typically carry 12,000 jobs, 200,000 cars and 70,000properties for sale. The functionality and performance of each site has beensubstantially improved with the aim of achieving best-in-class status. We havealso continued the process of building local brand awareness. Of the manyenhancements made, perhaps the most noteworthy is the launch of a CV matchingservice on our Jobs Today site which is already generating additional revenuefrom an expanding database of CVs. The launch of Yorkshire Jobs Today, aregional jobs site, has also proved very successful with site visits andrevenues growing strongly. The success of our classified websites is very dependent upon the quality ofdata obtained from advertisers. In order to improve this, we have developed androlled out a software interface with our front-end advertising systems,providing our sales staff with a template which facilitates the collection ofstructured data. Using this enhanced customer information, coupled withsimilarly improved data about readers, we have introduced a customer relationsmanagement (CRM) programme across the Group, which over time will result inbetter customer reception and service, match our offers more closely tocustomers' interests and create opportunities for new revenue streams. We plan to increase the level of investment in our electronic publishingactivities and for these to make a growing contribution to overall Groupperformance. We have expanded the specialist team based in Peterborough who areresponsible for the maintenance and development of our sites. At local companylevel, we also have a number of specialist staff to assist in the commercialdevelopment of our sites which are very much an integral part of the publishingportfolio of each centre. Printing Further significant progress has been made by our Printing Division in improvingthe quality, reliability and timeliness of our printing operations. Almost everyJohnston Press title is now printed in-house, or at Broughton Printers as partof our long-term agreement with the Express Newspapers Group. With our owntitles utilising a greater share of total capacity due to increased paginationand colour growth, third-party print revenue fell slightly when compared withthe previous year. Costs have been well controlled and operating efficienciesfurther improved. Undoubtedly, the most exciting development in 2004 was the project to build amajor new printing centre at Dinnington on the M1, outside Sheffield. Thepurchase of the site was concluded at the year-end and ground works started atthe beginning of 2005. We were particularly pleased to announce, in October, a15-year agreement to print News International (NI) titles at our new facility.This resulted in an increase to the size of the building and press such that thetotal project cost will now be in excess of £60 million. In February of thisyear, we announced a similar arrangement with NI, conditional upon receivingplanning consent, for the redevelopment of our Portsmouth facility, a projectwhich is expected to cost in excess of £45 million. The NI contracts will make avaluable contribution to overall profitability and the resultant printingcapacity will greatly enhance the Group's capability, bringing total colouravailability to in excess of 80% of capacity. The projects to install additional colour towers at Leeds and Sunderland werecompleted on budget and to schedule, as was the installation of additionalcolour on a number of the existing Sunderland units. The introduction ofcomputer-to-plate technology at the same sites was also successfully completedwith the planned operational improvements being achieved. We continue to reviewour printing capability to ensure that we are able to meet current andanticipated customer needs. Newsprint prices during 2004 remained unchanged from the previous year but haveincreased from the beginning of 2005. Measures are already in place which willpartially mitigate the impact. Circulations For the year as a whole, total circulation revenues increased by 1.3%,comprising rises of 1.7% and 0.9% in the first and second halves respectively.We continue to pursue a conservative policy towards cover prices with 89 of our119 paid-for titles being increased during 2004. Circulations of our weeklytitles remain satisfactory although, after seven consecutive years of growththere was a flattening of performance. After an increase of 0.3% in the firsthalf, weekly circulations fell by 0.6% in the second. Our weekly titles continueto receive investment in terms of additional colour, pagination and improvedcontent and design. Approximately half of the Group's 241 titles are paid-forweeklies, more than are owned by any other UK regional newspaper publisher. As a result of a decision in the second half to remove almost all remaining bulksales from the reported figures, the declared ABC performance for our eveningtitles showed an average decline of 6.8%. The underlying figure represents afall of 4.2%. This followed a decline of 4.9% in the first half, which equatedto a reduction of 3.6% after allowing for a planned reduction in bulks. Behindthose disappointing headline figures, there were some notably improvedperformances including a second-half increase of 0.9% at the Hartlepool Mail andfor the Scarborough Evening News, which just fell short of equalling last year'ssale. During 2004, we commissioned an extensive market research exercise, at a totalcost of almost £1 million, to research 65 of our titles including 10 of our 15daily newspapers. The results to date have been very encouraging in terms ofindicated readership levels and the percentage of people who turn to our titlesfirst when seeking items to purchase. For example, 81% of the people inBlackpool turn to the Blackpool Gazette first when looking for a job and 89%turn to it first for properties. We also commissioned separate market researchexercises for two of our dailies, the Sheffield Star and the Yorkshire Post, toprobe in detail the attitudes of readers towards the titles and to understandbetter how our content may need to be adapted to meet changing needs and tastes.The approach used in Sheffield will be used as a template for similar researchwhich we will carry out for some of our other daily titles. Following its development in Sunderland, all of our daily centres around theGroup are now utilising a database driven approach to data capture to improveour canvassing activities and reader retention. The Group's Daily NewspaperSales Forum, which is tasked with driving improvements in newspaper salesperformance, has also made good progress in identifying and encouraging bestpractice. This has resulted in beneficial changes to our working relationshipwith newsagents, better use of point of sale materials, more effectivepromotional support and a clearer understanding of the effect of differingpublishing times on the sale. In addition, we have increased the number of addedvalue supplements which are being incorporated into various of our daily titlesin an effort to improve the attractiveness of the newspaper package on each dayof the week, thereby encouraging an increase in purchasing frequency. Whilstnone of these actions will result in a rapid turnaround, we remain confidentthat they will contribute to an improvement in longer-term performance. Content The Johnston Press editorial policy guidelines enshrine the right of editors todetermine both content and their editorial approach free from managementinterference, subject only to the broadest guidance concerning the generalstandards which we expect our newspapers to reflect, including observance of thePress Complaints Commission's Code of Practice. Our commitment to editorialfreedom has been reinforced by the establishment of the Editorial Review Group.This group, which includes a number of daily and weekly editors, has a wideranging remit which includes an objective to raise editorial standards, toprovide expert advice on the recruitment and training of editors, to act as aguardian of editorial freedom and to provide expert advice to Group managementon editorial and related issues. During the course of 2004, our newspapers covered a vast range of stories. Asubstantial part of our editorial coverage is devoted to important local issues,campaigns on behalf of communities and to supporting good causes and charitableorganisations in their fundraising efforts. Indeed, many of our employees areactively involved in this charitable work, a perfect example of which was themany and varied ways they raised funds for the Tsunami disaster appeals. Investigative journalism continues to play an important part in the role oflocal newspapers. The Motherwell Times exposed a security blunder which resultedin a prisoner walking free, despite facing further charges. The Yorkshire Post'sinvestigation into the activities of the BNP persuaded the Prime Minister tocondemn the party publicly for the first time. A series of Sheffield Starreports on policing has been welcomed by the Chief Constable of South Yorkshireas a valuable contribution to the formulation of future policing policies. Campaigning journalism lies at the very heart of our editorial agenda and formsa vital part of newspaper content. In Portsmouth, The News, through "Last Chancefor Justice", continues to seek a specific Arctic Medal for those men who tookpart in the Arctic campaign of World War II. The Northumberland Gazettecampaigned strongly against an elected Northeast Regional Assembly. TheCumbernauld News supported a Gulf War veterans' successful campaign for a publicinquiry into the causes and effects of so-called Gulf War Syndrome. TheGlenrothes Gazette has successfully campaigned for a War Memorial to be erectedfollowing the death in Iraq of two Black Watch soldiers from the town. TheYorkshire Evening Post helped to persuade the Home Secretary to close a loopholein the law which allowed juveniles who cause misery to remain anonymous.However, the vast majority of our campaigns are devoted to vital local concernsover aspects which impinge directly on peoples' everyday lives. Our newspapersalso support numerous appeals, many of which tend to be associated withhealth-related issues. However, there are a vast number of others, including, in2004, a Yorkshire Post appeal which raised £70,000 from readers in just 27 daysto help keep the Flying Scotsman, the world's most famous steam locomotive, inYorkshire. Many important national stories start life in the local press. Perhaps the mostnotable in 2004 was the Yorkshire Post exclusive concerning the death ofSergeant Steven Roberts, the first British soldier to be killed in Iraq.Features editor, Anne Pickles, won the trust of Sergeant Roberts' widow whosestory resulted in a series of exclusive features including details of equipmentshortages revealed in a tape of Sergeant Roberts' last phone conversation homeand which ultimately contributed to his death. Following the resultant extensivenational news coverage, the story was voted "UK Scoop of the Year" in the 2004Regional Press Awards and Anne was also named UK Feature Writer of the Year. Ofmany other national stories in which our newspapers had a leading involvement,two that stand out were the part played by the Morecambe Visitor in theMorecambe Bay cockling disaster and the leading role played by the NorthamptonChronicle & Echo concerning the future of the British Grand Prix at Silverstone,which included a series of exclusives. Throughout Johnston Press, editors play an active part in their communities,often being involved on local committees and interest groups. We regard this asan essential part of their role, typified, for example, by the editor of theCumbernauld News, who chaired a series of public meetings to discuss a possibleupgrade to the A80 trunk road. Similarly, we foster close relations with schoolsand, in Leeds and Portsmouth, we have fully equipped on-site classrooms whichare used by school children to create their own newspapers. Our titles alsorecognise local achievement in a variety of fields, including sport, businessand community involvement, often initiating or supporting celebratory eventssuch as the Pride in Peterborough Community Awards. However, newspapers are not only about weighty and serious matters; lighter,entertaining stories also have their place. The Diss Express' efforts for there-housing of a feral chicken population, made homeless by a supermarketdevelopment, under the campaign slogan "Home to Rooster", was picked up by theNews of the World with a sub-title "Give a Cock a Home". And, who knows, theGhanaian downhill skier, training for the 2006 Winter Olympics at the MiltonKeynes SnoZone and dubbed "The Snow Leopard" by the Citizen, may yet become thenext "Eddie the Eagle". Organisation and People Our Head Office management team remained unchanged throughout the year. Sincethe year-end, Henry Faure Walker has been appointed to head the newlyestablished JP Ventures Division and has been succeeded as Group BusinessDevelopment Manager by Simon Kennedy, a business graduate with experience in theTelecoms sector. I am particularly pleased with the announcement of DannyCammiade's appointment to the Board as Chief Operating Officer, well deservedrecognition of his considerable contribution to the success of the Group. At the divisional level, there has been only one new appointment with Nick Millstaking over the managing director's role at the East Midlands division,replacing Mike Hutchby, who moved to fill the equivalent position at the SouthYorkshire North Midlands division. At company level, there have been a number ofimportant appointments including several at managing director level from outsidethe Group, bringing valuable fresh talent into the business. The CommercialTrainee Leadership Programme has now been in place for more than 12 months andalready this has resulted in several junior management appointments. The schemewill be complemented by a Graduate Trainee Leadership Programme to be launchedin the current year. Our broad ranging suite of training programmes has been enhanced and extended toinclude a comprehensive training programme for newspaper sales staff as well aseditorial and advertising management diplomas. Similarly, our Senior ManagementDevelopment Programme continues to play an important role in growing seniormanagers for the future and a number of successful participants have beenappointed to new positions during 2004. We have taken a number of steps to ensure that we meet our objectives of being acaring and responsible employer, including the introduction of defined peoplevalues which emphasise open, straightforward communication, integrity, continuedsuccess and the importance of recognising everyone's contribution. As outlinedearlier, we have also made considerable improvements in our approach to Health &Safety and in developing a culture which recognises the absolute priority ofsuch matters. We have made real progress in improving communications andconsultation with all our employees. This has involved the introduction of anemployees' version of the annual report and accounts, team briefings, companyresults' briefings and employee forums. Progress has been made in our approachto diversity including the introduction of a Johnston Press bursary to assistpeople from deprived or ethnic backgrounds to undertake training in journalism.A total of four bursaries were awarded in 2004. Recognising the importance of all our staff and the huge contribution they maketo the continued success of our business, it is particularly pleasing that theShare Incentive Plan introduced in 2003 will, for the second successive year,result in all qualifying employees, representing the substantial majority ofthose we employ, receiving free shares in Johnston Press. To address ongoing funding shortfalls and to facilitate the merging of theJohnston Press and RIM defined benefit pension schemes, we injected a further£5.8 million prior to the year-end. As part of this exercise, all employees whochoose to be in the Company's pension arrangements will have four times' salarylife cover. Paternity leave of two weeks' pay at 90% of basic salary has beenextended throughout the Group and we have introduced childcare vouchers. Thesemeasures, along with others not mentioned, illustrate the importance we place onremaining a competitive and caring employer. TIM BOWDLER Chief Executive Officer 16 March 2005 FINANCIAL REVIEW Overview Financially 2004 was an excellent year for Johnston Press. The Group deliveredsignificant improvements in cash flow, operating margins, earnings per share andreturn on capital employed. This, combined with good growth on the top line anda substantial reduction in our net debt, leaves the Group well placed movinginto 2005. Financial Review In comparing performance between 2004 and 2003, it should be noted that 2004 hasbeen a 53-week financial year and, where relevant, in order to help the readermake like-for-like comparisons, we have included performance figures for 52weeks. 2004 2004 2004 2003 53 weeks 53rd week 52 weeks £'m £'m £'m £'m Advertising revenues 394.4 2.7 391.7 371.2 Newspaper sales 69.6 1.1 68.5 67.6 Contract printing 19.3 0.2 19.1 20.2 Other revenues 35.5 0.1 35.4 32.8 Total revenues 518.8 4.1 514.7 491.8 Costs 340.8 1.1 339.7 328.8 Operating profit - pre-exceptionals 178.0 3.0 175.0 163.0 Operating margin 34.3% 34.0% 33.1% The revenues and costs incurred in the 53rd week are only those that are trulyincremental for that period and ignore all other monthly costs such asdepreciation, salaries and lease payments. Revenues Although total advertising revenues for the Group grew by 6.2%, 0.7% of thisgrowth was due to the 53rd week, which contributed advertising revenues of£2.7m. Deducting this results in the like-for-like growth of 5.5%. The figures quoted in the rest of this section all relate to a like-for-likeperiod of 52 weeks. Advertising revenues for the Group by category were as follows: 2004 2003 Increase £m £m % Employment 117.2 106.5 10.1Property 56.0 51.1 9.6Motors 47.4 47.9 (1.2)Other classified 60.6 58.1 4.4 Total classified 281.2 263.6 6.7 Display 110.5 107.6 2.7 Total advertising revenue 391.7 371.2 5.5 This growth was predominantly volume driven, with advertising volumes up by 5.1%and yields up by only 0.4%. Yield growth was restricted by some of our organicrevenue growth initiatives which have repurposed classified content into otherpublications in the local/regional market at lower yields but with relativelylittle incremental cost. Adjusting for these initiatives, the underlying yieldincrease was 1.3%. This lower than normal increase reflects the high growth inproperty, our lowest yielding category, offsetting annual rate card increasesand a continued growth in the level of colour advertising which commands apremium, made possible by our ongoing investment in colour capability. The strongest two categories were employment and property, but there was alsogood growth in other classified and display advertising. Display advertising,after a disappointing year in 2003, returned to growth with a strong performancefrom those businesses that place their advertising through national agenciessuch as the supermarkets and the Central Office of Information. Motors had amore difficult year with the continued consolidation in the sector and areduction in the volume of cars being sold privately. The Chief Executive Officer's Review provides a summary of advertisingperformance by division. The table below shows a breakdown of the adversiting revenues for the two halfyears. Half year to 31 December Half year to 30 June 26 Weeks 26 Weeks 2004 2003 Increase 2004 2003 Increase £m £m % £m £m % Employment 55.5 52.1 6.6 61.7 54.4 13.3Property 27.9 24.2 15.2 28.1 26.9 4.7Motors 22.7 23.3 (3.0) 24.7 24.6 0.4Other classified 30.2 28.7 5.6 30.4 29.4 3.3 Total classified 136.3 128.3 6.2 144.9 135.3 7.1 Display 55.8 54.7 2.0 54.7 52.9 3.4 Total advertising revenue 192.1 183.0 5.0 199.6 188.2 6.0 The rate of growth in advertising revenues was slower in the second half of theyear principally because of the stronger comparatives in 2003 when advertisingrevenues picked up post the Iraqi conflict. Circulation revenues rose by £0.9m (1.3%) reflecting limited cover priceincreases more than offsetting the reduced circulation of our daily titles. Contract print revenues were down 5.8% on 2003. There were two main factorsbehind this, one being a reduction in the capacity available for third partywork due to increased Group volumes and the second being a reduction in thelevel of work going through the old heatset press in Portsmouth, which wepropose to close during the course of 2005. Total income from the other revenue categories, which include new media,leaflets and sundry revenues, showed good growth, up by 8.2%. This was pleasingas a number of Group initiatives were focused on this area. New media revenueswere up by 17.0% driven by employment advertising and the upgrading of all ofour classified platforms. The profit contribution from our new media activitieswas £3.6m. Leaflet sales had another very good year up 14.1%. Within sundryrevenues, good performance from exhibitions, sponsorship and the syndication ofnewspaper stories were the main factors behind the 4.6% growth. Margins The good growth in revenues, when combined with our ongoing emphasis oninvestment which creates business efficiencies and cost control, meant thatmargins improved again during the year. For the Group, operating margin on alike-for-like basis improved from 33.1% to 34.0%. Every division increased itsoperating profit in absolute terms. All of the ex-Regional Independent Media Ltd(RIM) businesses are fully integrated into the Group operating divisionswithout reducing previously reported operating margins, further evidence of thesynergies obtained from these businesses which had a combined margin atacquisition of 24.5%. After newsprint prices being flat in 2004, following 2 years of reductions in2002 and 2003, there has been an increase in 2005. Plans are already welldeveloped and being implemented that will help the Group reduce the impact ofthis increase. Operating Exceptionals As has been the practice of the Group in recent periods, costs or revenues thatare material and out of the normal course of operations are highlightedseparately in the columnar style profit and loss account. These include thecosts of redundancies, restructuring and gains or losses on the disposal offixed assets. In total this year, they amounted to £0.8m, net of a £1.0m profitmade on the disposal of the Group's interest in the commercial radio station inBurnley, 2BR, which it acquired as part of RIM. In addition, the Group wrote offa further £0.7m from its investment cost in Mirago plc, the European internetsearch engine. Cash Flow/Net Debt The operating cash flow and cash conversion of the business continued to bestrong with the operating cash flow 109% of the operating profit. As a result ofthis positive cash flow, net debt reduced by £95m, closing the year at £328m.The reduction was £15m greater than that experienced last year due to increasedprofitability, reduced interest charges and reduced payments into the Group'spension funds. This was achieved despite an increase in corporation tax paymentsafter the utilisation of tax losses in 2003 inherited from RIM and a one offpayment of £5.8m being paid (see below) to facilitate the merger of the RIMPension Plan into the Johnston Press Pension Plan. After the introduction of theGroup's Share Incentive Plan, shares were purchased to the value of £1.5m, basedon the Company achieving Board determined targets for 2003. The regionalisationof the credit control activities that resulted in increased debtors at the endof 2003 has now been completed according to plan and a reduction in debtorlevels also contributed to the positive cash flow in the year. In 2005, as theexpenditure on the new Sheffield print facility ramps up, it is expected thattotal capital expenditure will be in excess of £65m. Interest cover for the year was 6.8 times. Financial Investments As the Group is entirely UK based and the US Dollar based element of the privateplacement has been swapped back into Sterling, the main financial risk that theGroup faces is associated with interest rates. The Group policy is that borrowings should be arranged at the lowest possiblecost and with covenants within which it can comfortably operate. The policy alsorequires that a minimum of 50% of the debt should be hedged against potentialmovements in interest rates whilst the balance is kept under continuous review.At 31 December 2004, £250m of the debt was hedged or placed at an effective rateof 5.2% for an average period of 4 years. At the end of the year, the Directors reviewed the carrying value of the Group'sinvestments. The shares in Sunderland AFC have been disposed of post year endand the Group now no longer holds any listed investments. The unlistedinvestment in Mirago was written down by £0.7m (2003 £0.7m) based on theDirectors' valuation. Pension Funds/FRS17 At 31 December 2004, the Group achieved its objective of merging the RIM pensionschemes into the Johnston Press Pension Plan (JPPP). All of the RIM definedcontribution members (active, deferred and pensioners) moved across butunfortunately, because of legislation regarding protected rights, only theactive members of the defined benefit section could transfer. The pensioners anddeferred members have remained in a much reduced RIM scheme which the Group hascommitted to continue funding. To facilitate the merger of the final salaryschemes, the Company made a one off payment of £5.8m to equalise the ongoingfunding levels and to ensure that no member was disadvantaged by thecombination. Despite this contribution and the continued recovery in the stockmarkets, the total FRS17 deficit on the Group's schemes increased by £5.2m,gross of tax, to £70.6m. The main reasons behind this increase were lengtheninglife expectancy and a reduction in the discount rate used to calculate thepresent value of future liabilities. Full tri-annual valuations are being completed at the time of writing and willresult in new funding arrangements being put in place before the end of theyear. The Group is still reporting under the transitional arrangements of FRS17pending full implementation of that standard or International AccountingStandard 19 in 2005. The Group also carries accruals for unfunded ex-gratia pension arrangements forcertain former employees. This liability is subject to an annual actuarialvaluation and this resulted in no change to the pension provision. Accounting Standards The Group is preparing for the implementation of International FinancialReporting Standards (IFRS) and International Accounting Standards (IAS) from2005. As these standards have been released they have been considered to assessthe potential level of impact on the Group. The key areas of potential impact identified by the Group to date in adoptingIFRS are discussed below. These areas are in addition to the presentationalchanges that are required by the Standards. All figures quoted are forillustrative purposes only to assist in the understanding of the potentialimpact of moving to IFRS. IAS 19 'Employee benefits' - IAS 19 will be similar to the requirements underfull implementation of FRS17. The impact of full adoption of FRS17 will bedetailed in our Annual Report. In terms of presentation, the pension liabilityof £70.6 million and related deferred tax asset of £21.2 million will be shownseparately in the balance sheet. The charge to the profit and loss account in2004 would have been £5.9 million, which is an increase of £0.4 million over theSSAP24 defined benefit scheme charge. IFRS 2 'Share-based payments' - new profit and loss account charges will beincurred in respect of employee share awards and options based on their fairvalue. The Group has estimated that this would have resulted in an additionalcharge against profits of £1.1 million in 2004, cumulative £1.5 million, whichwill be included in the restated results when reporting the Group's position asat 31 December 2005. The majority of the charge relates to the Save-As-You-EarnScheme, which is open to all qualifying employees and which allows shares to bepurchased at a discount to the market price. The tax effect is excluded from theabove estimate. IAS 38 'Intangible assets' - the publishing titles held by the Group asintangible assets meet the recognition criteria under IAS 38 and will thereforecontinue to be held as intangible assets. Impairment reviews will continue to beperformed on an annual basis as the Group's current policy of charging noamortisation will also continue under IAS. IAS 10 'Events after the balance sheet date' - dividends in respect of a yearcan only be recorded when they are declared and approved. The impact on the 2004results of applying this change would be to reverse out the 2004 final proposeddividend of £13.7 million and replacing it with the 2003 final proposed dividendof £11.4 million, it being approved and paid during 2004. This would haveincreased shareholders' funds by £2.3 million at 31 December 2004. IAS 28 'Investments in associates' - requires the Group's share of the profit ofassociated companies to be shown net of tax and the impact in 2004 was £0.1million, reducing the profit and tax by this amount. IAS 32 & 39 'Financial instrument measurement and reporting' - in accordancewith the Group policy to enter into financial instruments only for hedgingpurposes, it is not expected that any material impact will arise from theapplication of hedge accounting and the treatment of any portion of thefinancial instrument that is ineffective. Share Incentive Plan The Share Incentive Plan introduced in January 2003 was continued into 2004 forall qualifying employees. The plan provides free shares for those employeesbased on financial performance targets determined by the Board of Directors. Asthe Group has exceeded the maximum target for 2004 determined by the Board,shares to the value of £1.5m (2003 £1.5m) will be distributed to participatingemployees based on their contracted hours of employment. Dividends and Earnings per ShareRelated Shares:
Johnston Press PLC