Interim Results

11 August 2015

JOHNSTON PRESS PLC

RESULTS FOR THE 26 WEEK PERIOD ENDED 4 JULY 2015

Underlying profit before tax increased by £9.5m to £17.8m;

Net debt reduced by £10.9m from the year end to £183.3m1

Johnston Press plc ("Johnston Press" or "the Group"), one of the leading local media groups in the UK, announces its interim results for the 26 weeks ending 4 July 2015.

The Group traded well in the first quarter and while the second quarter was impacted by a slowdown in general trading, July has shown some improvement.

Key highlights1:

• Digital audience grew by over 20% to an average monthly audience of 19.9m in H1 2015 (2014: 16.7m)

• Digital revenues: Up 17.5% for the period, from £14.1m to £16.5m now representing 20.5% of advertising revenues (H1 2014: 16.6%)

• Revenue: Total underlying revenues of £128.9m (H1 2014: £135.1m) reflect a decline of 4.6% for the period (H1 2014: (4.3)%)

• Costs: Cost savings of £7.6m (gross) offset revenue declines, and funded digital investment of £2.6m in the period

• Operating profit: Underlying operating profit reduced £1.2m to £27m, sustaining a market leading margin of 20.9%Profit before tax: Underlying profit before tax increased 114.3% to £17.8m from £8.3m, reflecting reduced interest expense following refinancing

• Continued debt reduction: Net debt reduced to £183.3m (2014 FY: £194.2m)

Financial Highlights:

Strategic progress

The Group continues to transform the business in line with the strategic priorities previously set out. The Group has completed the first phase of a major structural change, implementing Newsroom of the Future (which aims to increase digital engagement, and arrest print decline rates, whilst improving operational efficiencies) across the Group, and has commenced the planning and design for the implementation of Salesforce of the Future (a project aiming to increase customer penetration, focus on solution selling and improve digital upsell). These strategic initiatives are designed to underpin the further development of the business.

Build overall audiences

• Average monthly audience (across print and digital) for the period was up 8.7% year on year to 29.4m.

• Digital audiences grew 3.4m (20.4%) to 19.9m unique users a month, year on year.

Growing digital substantially

· Digital advertising grew 17.5% year on year to £16.5m. Excluding the Employment category, which was particularly impacted in Q2, our overall digital growth was 22.9% year on year.

· Digital display advertising revenues of £6.1m were up 30% year on year, including strong growth in 1XL - our digital advertising exchange partnership with other local media groups.

· Mobile revenues almost doubled in the period from January to June 2015 while the proportion of mobile inventory sold at premium rates grew 50%.

Returning to top line revenue growth

• Total underlying advertising revenue has declined 5.1% in the first half of this year (H1 2014: 4.6%). Although the Group traded well in the first quarter, the second quarter was impacted by a slowdown in general trading, with May down 9.5%*. Trading in July has improved, reflecting a year on year advertising revenue decline of 7.7** for the month.

• Print advertising revenue declined 9.5% in the period to £64.1m (H1 2014: (8.7)%).

• Underlying newspaper sales revenue declined 5.3% year on year to £37.6m for the first half (H1 2014: (4.0)%), reflecting a decision to keep cover prices unchanged in over 60 of our titles.

* after adjusting to comparable number of weeks

** based on Week 30 YTD Sales analysis

Managing costs

Underlying operating costs were reduced by a net £5.0 million (5.3%), balancing tight cost control with further investment in the digital business.

Growing profitability

Underlying profit before tax increased by £9.5m, or 114.3%, to £17.8m (H1 2014: £8.3m), benefiting from the reduced underlying finance charges of £9.2m (H1 2014: £19.9m) as a result of the 2014 refinancing.

Pay down debt

Net debt was £183.3 million, a reduction of £10.9 million from the 2014 year-end. Net debt after mark-to-market adjustments was £183.1 million, a reduction of £1.5 million from the year-end, as the market price of the 8.625% bonds traded up £9.3m during the period.

Net debt has fallen from c.£300m at the start of 2014 pre refinancing to c.£183m at the 2015 half year and our interest rate over the same period has fallen from 11.7% to 8.625%.

Our aim is to continue to pay down debt and we will consider opportunities to repurchase bonds as they arise where financially attractive to do so.

Outlook

As highlighted in the trading update of 14 July 2015, as a result of the off-trend trading in the second quarter, the business enters the second half from a lower base than planned. The advertising revenue results for July 2015 down 7.7% represent an improvement on the rate of decline in Q2 2015. We believe in our strategy and are confident that our transformation projects will position the Group well for the future.

Ashley Highfield, Chief Executive, commented:

"Trading conditions in the first half of 2015 have undoubtedly been challenging, with May and June being particularly difficult - a time when there was also a high degree of uncertainty in the wider market.  

"However, we believe, local publishing, with SMEs representing 80% of our advertising revenue, is not as volatile as national publishing. We have seen some improvement in reducing the decline in advertising revenues in July compared to July 2014. We will continue to drive for further improvement in revenues, albeit off a lower base, and will also continue to target further cost savings.

"Our strategy remains constant and is showing real traction. Digital now accounts for over 20% of advertising revenues, up from 13% two years ago. Digital display saw growth of 30% in the period and we are developing new digital products such as AdPerfect# and Powerlistings~ aimed at small businesses. Our participation in the industry-wide 1XL national advertising exchange has contributed to our national digital advertising revenues growing by 120% in the period to £2.0m."

# Ad Perfect - A self-serve advertising solution that allows you to create your own advert on-line

~ Power Listings (Yext) - We manage the customer's profile across multiple business listing services.

For further information please contact:

Investor presentation and audio/webcast: A presentation for analysts and live audio/webcast will be held at 9.00am on Tuesday 11 August 2015 at Bell Pottinger, Holborn Gate, 330 High Holborn, London, WC1V 7QD.

Webcast link: https://secure.emincote.com/client/johnston_press/johnston002/ 

 A replay will be available after 2.00pm on the Group website www.johnstonpress.co.uk 

Please see the conference call dial in details below:

Number: +44 20 3059 8125 (no pin needed)

The announcement for the period ended 4 July 2015 will be available at www.johnstonpress.co.uk/investors.

Forward-looking statements

The report contains forward looking statements. Although the Group believes that the expectation reflected in these forward- looking statements are reasonable, it can give no assurance that the expectations will prove to have been correct. Due to the inherent uncertainties, including both economic and business risk factors underlying such forward looking information, actual results may differ materially from those expressed or implied by these forward looking statements. The Group undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise. 

Basis of presentation

In preparing the commentary on performance, the financial impact of a number of significant accounting and operational items affecting the results have been adjusted for in arriving at the underlying results discussed in this review.

Underlying results have been adjusted to exclude exceptional items, and other adjustments have been made to reflect the 'underlying business' including the impact of pensions, share based payment charges, Bond mark-to-market valuation and adjustments made to remove the revenue and operating costs from the prior period comparative for Letterbox direct delivery business which was outsourced in October 2014.

Results for the six months ended 4 July 2015

A summary of the key financial results is set out in the table below:

Revenue

Total statutory reported revenue in the first half of 2015 declined 5.1% to £128.9m. Underlying revenues declined 4.6% to £128.9m.

Underlying Revenue Analysis

The business earns £103m, 80% of its income, from publishing its own newspapers and magazines, £16.5m, 13%, from digital publishing and the balance from contract printing and third party publishing titles.

Print and Digital Advertising Revenue

¹ % and variance change has been calculated based on unrounded numbers.

Within total advertising revenue, print advertising ended 9.5% down year on year with the second quarter performance being off-trend having suffered from advertisers holding back spend during May and June. Digital revenues grew by 17.5% (from £14.1m to £16.5m) in the period.

· Property was disappointing, the sector continuing to suffer from a lack of supply of properties for sale, so impacting advertising.

· Employment - office of national statistics reported a rise in unemployment for the period March to May 2015. Other market insight shows a fall in permanent and temporary placements in June 2015 relative to June 2014. In the company, following a good January activity slowed down, coming off further in the second quarter. While Smartlist and other outbound activity performed well, inbound calls in particular slowed significantly during the second quarter.

· Motors showed strong growth in digital, up 25.6% driven by a strong car sales market in the period, a continuation of growth seen in the second half of 2014.

· Other, including digital kitbag, saw good growth in the period, up 16.1%.

· Display display revenues, having grown 30% from H1 2013 to 2014, grew a further 30% from H1 2014 to 2015, benefitting in 2015 from the launch of 1XL, the digital advertising exchange partnership with other local media groups (excluding Trinity Mirror). In Print display, both local and national display tracked expectations in quarter one, local display slowing in quarter two, while national display, although a smaller category, saw a substantial slow-down in quarter two (£800k down), offsetting much of the digital gains in the half.

Newspaper sales

Underlying newspaper sales revenues were down 5.3% in the first half of the year, reflecting a conservative approach to cover price increases whilst we focus on improving volume run-rates. As a result 66 titles are now declining at less than 11%, an improvement from 49 titles in June 2014.

Contract printing

Underlying Contract print revenues in the first half of the year were in line with the prior year, delivering £6.3m of revenue in the first half of 2015 and 2014. In March the Group won a significant four-title print contract with Express Newspapers in a multi-million pound, five year deal; printing commenced at the Group's Dinnington plant in July. The print slot was formerly occupied by a Trinity Mirror contract.

Other revenues

Statutory other revenues declined £0.5m period on period, which can be attributed to the outsourcing of the Letterbox leaflet business in October 2014. On an underlying basis, other revenues improved £0.2m period on period. Other revenues include reader offers, syndication revenue, and waste sales.

Gross margin and operating profit

The Group achieved a statutory operating profit of £22.2m in the first half (28 June 2014: £24.9m profit).

Trading results in the first half of the year have been challenging. The Group has continued to balance the need for investment in digital and journalism with cost savings. Within operating profit, underlying operating expenses continue to be actively managed and have reduced by £5.0m (£7.6m cost savings delivered net of £2.6m digital investment) compared with the same period in 2014. The reduction in costs includes current year savings (through lower headcount, office rationalisation and other initiatives) as well as the full year effect of the savings made last year. We are confident that we will achieve further cost savings in the year.

The tight management of costs has allowed us to maintain a robust underlying operating margin for the first half at 20.9% (28 June 2014: 20.9%).

¹ Finance costs (included in the table above) exclude the Bond mark to market, pension finance costs and investment income.

Finance costs (continued)

Operational finance costs have decreased by £11.5m compared to prior year, a direct result of the refinancing completed in May 2014. Refer to note 14.

Exceptional finance costs totalling £9.0m were incurred in relation to the refinancing in the prior period. Refer to note 4.

In the period, an adjustment to the value of the bond and charge to the income statement of £9.3m has been recognised on the Bond, compared to £0.6m loss in the comparative period. Refer to note 6b.

Exceptional Items

Exceptional operating items totalling £4.2m have been recognised in the first half of 2015 (28 June 2014: £2.9m). This comprises £2.4m of restructuring costs, £0.9m of Pension Protection Fund levy, £0.5m of one-off Value Creation Plan costs and £0.4m of business development costs. In 2014, a gain on disposal of £0.8m was recognised within exceptional items. Refer to Note 4.

Of the £4.2m charge to exceptional items in the period ended 4 July 2015 (28 June 2014: £2.9m), £3.6m were cash items (28 June 2014: £1.9m).

Taxation

Corporation tax for the interim period is charged at 21.5% (28 June 2014: credited at 58.3%, 3 January 2015: credited at 35.9%), including deferred tax. In the prior periods, the effective tax rate is higher than the nominal rate, due to the timing of deferred tax movements. Refer to Note 7.

Dividends

Following the completion of the £275m capital reduction referred to below, the Group has paid preference share dividends relating to 2014 and the first half of 2015.

The provisions of the bond restrict the Company's ability to pay dividends on the Company's ordinary shares until certain conditions, including that net leverage is below 2.25x EBITDA, are met. Although the Board wishes to resume dividend payments as soon as is appropriate, no ordinary dividend is proposed for the period.

Earnings per share

The 2014 rights issue and subsequent share consolidation distort the EPS metrics for the prior year. For information, underlying and proforma calculations are presented below (note 9):

The proforma table is presented based on the number of shares now in issue having adjusted for the effect of the rights issue and subsequent consolidation of 50:1.

1 All figures are shown post tax and exclude exceptionals and other underlying adjustments.

2 Underlying Proforma uses underlying profit and the 4 July 2015 half year weighted average number of shares. 

3 Underlying Fully diluted Proforma takes into account all current unvested shares that have a dilutive effect (18.1 million). At the current share price these options are unlikely to be exercised and therefore for statutory reporting purposes there is no dilution impact.

4 EPS has been calculated based on unrounded numbers.

Cash Flow/Net Debt

Net debt is £183.3 million excluding the £9.3 million mark-to-market loss on the bond, a reduction of £10.9 million from the year-end position. Net debt after mark-to-market is £183.1 million, a reduction of £1.5 million from the year-end position.

Net cash inflow from continuing operations in the 26 weeks ended 4 July 2015 amounted to £25.0m after pension contributions of £3.3m and redundancy costs of £5.3m. Refer to note 18.

Cash held at 4 July 2015 was £41.7m, an increase of £10.9m compared to 3 January 2015 and £2.2m compared to 28 June 2014. During the period to 4 July 2015 redundancies payments amounted to £5.3 million (28 June 2014: £14.0 million, 3 January 2015: £17.2 million) a reduction of 62% compared to prior year. Pension funding contributions were £3.3 million (28 June 2014: £6.2 million, 3 January 2015: £14.5 million). The Group continues to maintain a tight control of working capital and capital expenditure with £4.3m having been spent on asset purchases (28 June 2014: £3.7m, 3 January 2015: £8.7m) offset by £0.7m received from non-essential asset sales (28 June 2014: £6.3m, 3 January 2015: £8.0m).

Cash interest paid in the first half was £9.9m (28 June 2014: £16.5m, 3 January 2015: £27.0m), a decrease of 40.0% on the same period in 2014.

Pensions

The Group's defined benefit pension plan obligation has decreased by £2.9m, from the year-end, to £87.1m reflecting increased contributions (£3.3m in the period), partially offset by movements in the financial assumptions including an increased discount rate and inflation assumptions compared to June 2014.

Following the renegotiations of contributions to the deficit reduction plan, the minimum amount of contributions committed to be paid to the scheme during 2015 is £6.5m, this contribution level has increased from prior year contributions of £6.3m. Refer to Note 15.

Bond buy-back 

As announced in February 2015, consistent with the strategy to use surplus cashflow to reduce the overall leverage of the Company over time, the Company has allocated £5.0m of its cash to buy-back bonds. The Group will effect the purchase as soon as it is able.

Share capital reduction

At the Company's Annual General Meeting on 27 June 2014, a special resolution was approved to initiate a process to reduce the Company's share premium account by £275 million. The completion of the capital reduction was confirmed by an Order of the Court of Session, Scotland on 29 April 2015 and registered at Companies House on 5 May 2015. The capital reduction eliminates the opening accumulated deficit of £179.9 million on the Company's profit and loss account and created positive distributable reserves of £98.2 million at 30 May 2015. This will enable the Company to make distributions and provide loans to the Johnston Press plc Employee Share Trust ("JP EST") to satisfy options under the Group's share ownership schemes. Since the successful capital reduction the Group has paid preference share dividends relating to 2014 and the first half of 2015.

Acquisition

On 3 July 2015 Johnston Publishing Limited, a subsidiary of Johnston Press plc, acquired 100% of the share capital of Love News Media Limited, the publisher of the Brighton & Hove Independent, a free weekly title with a circulation of over 13,000 copies, for a total consideration of £90,000. Of this £30,000 has been deferred and will be settled subject to performance requirements set out in the acquisition agreement. The title, including its popular associated website: www.brightonandhoveindependent.co.uk and @BrightonIndy twitter following complements the South portfolio of assets. This title now allows the Group to serve customers along the Sussex coast.

Events after balance sheet date

Refer to note 21 for details of significant post balance sheet events.

Related party transactions

Related party transactions are disclosed in Note 20.

There have been no material changes in the related party transactions described in the last annual report.

Principal risks and uncertainties

There are a number of potential risks and uncertainties which have been identified by the business that could have a material impact on the Group's long-term performance.

The following significant market risks are important to the overall performance of the Group, and the Group has no control over these risk factors. The Directors consider the most significant market risks to include changes in gross domestic product and unemployment rates, levels of property transactions, new car sales and consumer confidence, and public sector spending.

The directors do not consider that the principal risks and uncertainties have changed since the publication of the annual report for the 53 week period ended 3 January 2015. A detailed explanation of the risks summarised below, and how the Group seeks to mitigate the risks can be found on pages 21 to 22 of the annual report which is available at http://www.johnstonpress.co.uk/investors/reports-results-presentations.

Further Reductions in Print Advertising 

Print advertising revenues could decline at a faster rate due to further migration of customer spending to online media and a lack of consumer confidence in some of the markets in which we operate.

Newsprint Price and Supply Risk 

Although paper prices have fallen over the course of the past 12 months future price rises represent a risk to the Group in terms of both supply and pricing of newsprint which, after staff costs, is the largest single expense incurred by the business.

Failure to Monetise Increased Readership of our content on Websites and Mobile devices. 

This is an industry issue. On-line advertising rates are lower and it is difficult to charge for accessing news on-line because free alternatives exist.

Pension Deficit Funding

The Group Defined Benefit pension scheme is currently in deficit leaving the Group responsible for potential shortfalls, in particular driven by sustained low interest rates.

Business Opportunities Constrained by Debt

The Group continues to operate with greater than optimal levels of gearing, hence continued reduction of debt over time remains a priority. However, this focus could lead to missed revenue opportunities if insufficient funds are left available for investment.

Business Change

The Group is implementing two major projects to revise the organisation of its news rooms and its sales model which may cause disruption during the transition.

Adequacy of Human Resources

Like most organisations there is an element of dependency on certain key individuals in the Group.

Lifestyle and Technology Changes Affect Newspaper Circulations

Newspaper circulations continue to decline due to increased availability of news through alternative media channels and changing reader habits.

Slowdown in Rate of Digital Growth and Reduction in Advertising Rates for Mobile

The Group experienced strong growth in its digital income streams in recent years. The rate of growth could slow down if customers seek alternative routes to audiences served. The industry as a whole has seen a shift towards accessing digital content through mobile devices which generally attract lower advertising rates than the rates achieved for desktop devices.

Liquidity and Going Concern

At the period end, the Group has gross debt of £225m, cash on balance sheet of £41.7m, and the Group has access to a £25m revolving credit facility (RCF) which remains undrawn. The bond (Senior Secured notes) has a five year maturity due 2019, and the Group's RCF matures on 23 December 2018.

The Group's policy is to ensure it has committed funding in place sufficient to meet foreseeable peak borrowing requirements. Based on its review, and after considering reasonably possible downside sensitivities, the Board is of the opinion that the Group has adequate financial resources to meet operational needs for the foreseeable future, and have concluded that it is appropriate to prepare the financial statements on a going concern basis.

Progress on Strategic Projects

Newsroom of the Future

Re-engineering our newsrooms to better equip us to cope with the demands of reporting in the modern age is nearing completion, over 88% of our newsrooms are now working with the Newsroom of the Future approach. Teams have new workflows, technology & tools to improve productivity and audience engagement whilst reducing costs. To date, there have been 1,000 people involved and we are seeing an improvement of 14.9% in unique users.

Salesforce of the Future

We will restructure our sales team to ensure retention of high yielding customers, acquisition of new high potential customers and the provision of a cost-effective model to serve low yielding customers. These plans are at an advanced stage and will commence roll out in Q4 2015 with a view to delivering a step change in performance in 2016.

Outlook

As highlighted in the trading update of 14 July 2015, as a result of the off-trend trading in the second quarter, the business enters the second half from a lower base than planned. The advertising revenue results for July 2015 down 7.7% represent an improvement on the rate of decline in Q2 2015. We believe in our strategy and are confident that our transformation projects will position the Group well for the future.

Responsibility Statement

The directors confirm that to the best of our knowledge:

(a) the condensed set of financial statements has been prepared in accordance with IAS 34 'Interim Financial Reporting';

(b) the interim management report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and

(c) the interim management report includes a fair review of the information required by DTR 4.2.8R (disclosure of related parties' transactions and changes therein).

By order of the Board,

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial information differs from legislation in other jurisdictions.

Address of Registered office

Johnston Press plc,

Orchard Brae House

30 Queensferry Road

Edinburgh

EH4 2HS

1Comparative income statement information has been restated to show the Republic of Ireland business as a discontinued operation due to its disposal on 1 April 2014.

2Items which are deemed to be non-recurring by virtue of their nature or size. Refer to note 4.

1 Movements in the translation reserve relate to the translation of interests in dormant Irish subsidiaries.

Consolidated statement of comprehensive income for the 26 week period ended 28 June 2014

1 Movements in the translation reserve relate to the translation of interests in dormant Irish subsidiaries.

Consolidated statement of changes in equity for the 26 week period ended 28 June 2014

1Share options and share warrant exercises generated a net cash inflow of £658,000. Issue of share capital generated £594,000 and issue of share premium generated £64,000. Also includes proceeds from fractional shares (refer to Note 28 of the 3 January 2015 published financial statements for further details).

1. General Information

The condensed financial information for the 26 weeks to 4 July 2015 does not constitute statutory accounts for the purposes of Section 434 of the Companies Act 2006 and has not been audited. No statutory accounts for the period have been delivered to the Registrar of Companies. This interim financial report constitutes a dissemination announcement in accordance with Rule 6.3 of the Disclosure and Transparency Rules of the United Kingdom Listing Authority.

The condensed financial information in respect of the 53 weeks ended 3 January 2015 has been produced using extracts from the statutory accounts for this period. Consequently, this does not constitute the statutory information (as defined in section 434 of the Companies Act 2006) for the 53 weeks ended 3 January 2015, which was audited. The statutory accounts for this period have been filed with the Registrar of Companies. The auditor's report was unqualified and did not contain a statement under Sections 498 (2) or 498 (3) of the Companies Act 2006.

The next annual financial statements of the Group for the 52 weeks to 2 January 2016 will be prepared in accordance with International Financial Reporting Standards as adopted by the EU ("IFRS"). The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34 'Interim Financial Reporting'. The financial information in this Interim Report has been prepared in accordance with the recognition and measurement criteria of IFRS and the disclosure requirements of the Listing Rules and Disclosure and Transparency Rules. The auditor has reviewed the financial information in this Interim Report and their report is set out on page 35.

The Interim Report was approved by the Directors on 11 August 2015 and is being made available to shareholders on the same date on the Company's website at www.johnstonpress.co.uk.

2. Accounting Policies

Basis of Preparation

The interim financial information has been prepared on the historical cost basis, except for the revaluation of certain properties, pension balances and financial instruments including borrowings. Historical cost is generally based on the fair value of the consideration given in exchange for the assets.

The directors are satisfied that the Group has sufficient resources to continue in operation for the foreseeable future, a period of not less than 12 months from the date of this report. Accordingly, they continue to adopt the going concern basis of accounting in preparing the unaudited condensed consolidated interim financial statements.

In June 2014 the Company completed its Capital Refinancing Plan. Gross proceeds of £140.0 million were received through the Placing and Rights Issue and gross proceeds of £220.5 million were received from the bond of £225.0 million 8.625% senior secured notes due 2019 at a discount of £4.5 million. In addition, the Company entered into a 4 year and 6 month £25 million Super Senior Revolving Facility Agreement ("RCF") which remains undrawn. Under the RCF, the Group has one financial covenant, measured quarterly, requiring the achievement of a specified ratio of consolidated leverage to consolidated EBITDA for the last 12 months. The Company is operating with headroom on the covenants.

Basis of Accounting

The financial statements have been prepared on the basis of the significant accounting policies set out in the financial statements for the 53 week period ended 3 January 2015 with the exception of the adoption of new or amended standards and interpretations in the current year as follows:

The following new and amended IFRSs have been adopted for the 26 week period which commenced 3 January 2015 to 4 July 2015:

There are numerous standards which have a mandatory application date of on or after 1 January 2016, the details of which will be assessed in further detail during the course of the year and disclosed in the annual financial statements. No significant changes are however envisaged as a result of their application.

2. Accounting Policies (continued)

Critical Accounting judgements and Key Sources of Estimation Uncertainty

Critical judgements in applying the Group's accounting policies

In the process of applying the Group's accounting policies, management has made the following judgements that have the most significant effect on the amounts recognised in the financial statements (apart from those involving estimations, which are dealt with below).

The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

Exceptional items

Exceptional items include significant transactions such as the costs associated with restructuring of businesses (including redundancy and business transformation consultancy costs) along with material items including for example significant pension related costs, the disposal or exit of a significant property directly linked to restructuring, one time incentive plans or Value Creation Plan and impairment of intangible and tangible assets together with the associated tax impact. The Company considers such items are material to the Income Statement and their separate disclosure is necessary for an appropriate understanding of the Group's financial performance. These items have been presented as a separate column in the Group Income Statement.

Valuation of publishing titles on acquisition

The Group's policies require that a fair value at the date of acquisition be attributed to the publishing titles owned by each acquired entity. The Group's management uses its judgement to determine the fair value attributable to each acquired publishing title taking into account the consideration paid, the earnings history and potential of the title, any recent similar transactions, industry statistics such as average earnings multiples and any other relevant factors.

The publishing titles are considered to have indefinite economic lives due to the historic longevity of the brands and the ability to evolve the brands in the changing media environment.

Valuation of share-based payments

The Group estimates the expected value of equity-settled share-based payments and this is charged through the Income Statement over the vesting periods of the relevant awards. The cost is estimated using a Black-Scholes valuation model. The Black-Scholes calculations are based on a number of assumptions that are set out in Note 31 of the 3 January 2015 financial statements, and are amended to take account of estimated levels of share vesting and exercise.

Provisions for onerous leases and dilapidations

Where the Group exits a rented property, an estimate of the anticipated total future cost payable under the terms of the operating lease, including rentals, rates and other related expenses, is charged to the Income Statement at the point where the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it. Where there is a break clause in the contract, rentals are provided for up to that point. In addition, an estimate is made of the likelihood of sub-letting the premises and any rentals that would be receivable from a sub-tenant. Where receipt of sub-lease rentals is considered reasonable, these amounts are deducted from the rentals payable by the Group under the lease and provision charged for the net amount.

Under the terms of a number of property leases, the Group is required to return the property to its original condition at the lease expiry date. The Group has estimated the expected costs of these dilapidations and charged these costs to the Income Statement. No discounting has been applied to the provision as the effect of the discounting is not considered material.

Key sources of estimation uncertainty

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

Impairment of publishing titles and print presses

Determining whether publishing titles are impaired requires an estimation of the value in use of the cash generating units (CGUs) to which these assets are allocated. Key areas of judgement in the value in use calculation include the identification of appropriate CGUs, estimation of future cash flows expected to arise from each CGU, the long-term growth rates and a suitable discount rate to apply to cash flows in order to calculate present value. The Group has identified its CGUs based on the six geographic regions in which it operates. This is considered to be the lowest level at which cash inflows generated are largely independent of the cash inflows from other groups of assets and has been consistently applied in the current and prior periods. At the interim period an impairment review has been undertaken resulting in a reduction of headroom however, no impairment charge is considered necessary for recognition in the period (28 June 2014: nil, 3 January 2015: £21.6m). The carrying value of publishing titles at 4 July 2015 was £511.6 million (28 June 2014: £533.1m; 3 January 2015: £511.6m). Details of the impairment reviews that the Group performs are provided in Note 11.

Determining whether print presses are impaired requires an estimation of the value in use of each print site. The value in use calculation requires the Group to estimate the future cash flows expected to arise from the print sites and a suitable discount rate in order to calculate present value.

Valuation of pension liabilities

The Group records in its Statement of Financial Position a liability equivalent to the greater of the deficit on the Group's defined benefit pension schemes or the discounted value of agreed future contributions required under IFRIC14. This liability is determined with advice from the Group's actuarial advisers each year and can fluctuate based on a number of factors, some of which are outside the control of management. The main factors that can impact the valuation include:

· the discount rate used to discount future liabilities back to the present date, determined from the yield on corporate bonds;

· the actual returns on investments experienced as compared to the expected rates used in the previous valuation;

· the actual rates of salary and pension increase as compared to the expected rates used in the previous valuation;

· the forecast inflation rate experienced as compared to the expected rates used in the previous valuation; and

· mortality assumptions.

Details of the assumptions used to determine the liability at 4 July 2015 are set out in Note 15.

3. Business Segments

Information reported to the Group's Chief Executive for the purposes of resource allocation and assessment of segment performance is focused on the two operating segments of Publishing (in print and online) and Contract Printing. These are the only two operating segments of the Group.

a) Segment Revenues and Results

1Inter segment sales are charged at prevailing market prices.

2Relates to changes in fair value of hedges, retranslation of USD and retranslation of Euro denominated debt.