REG - Reach PLC - Annual Results for 52 weeks ended 30 December 2018
Reach plc
25 February 2019
Annual Results Announcement
For the 52 weeks ended 30 December 2018
Results
Adjusted results(1)
Statutory results
2018
2017
Change
2018
2017
£m
£m
%
£m
£m
Revenue
723.9
623.2
+16.2
723.9
623.2
Operating profit/(loss)
145.6
124.7
+16.8
(107.6)
97.9
Profit/(loss) before tax
141.9
122.5
+15.8
(119.9)
81.9
Earnings/(loss) per share
39.2p
36.1p
+8.6
(41.0)p
23.0p
Dividends per share
6.14p
5.80p
+5.9
6.14p
5.80p
Financial Highlights
· Revenue increased by 16.2% to £723.9 million reflecting the acquisition of Express & Star; on a like for like basis(2) revenue fell by 6.6%
· Adjusted operating profit increased by 16.8% to £145.6 million, ahead of market expectations(3)
· Statutory operating loss of £107.6 million reflecting the impact of a non-cash impairment charge of £200.0 million and a charge of £15.8 million relating to the recent Guaranteed Minimum Pension ('GMP') equalisation(4) ruling
· The provision for dealing with historical legal issues was increased by £12.5 million during the year; after utilising £9.6 million during the year, £13.6 million of the provision remains outstanding at the year end
· Pension deficit (IAS 19) fell by £29.0 million to £348.6 million (£284.1 million net of deferred tax)
· Strong cash generation and low leverage with net debt(5) of £40.8 million; net debt fell by £40.2 million from the half year
· Final dividend of 3.77 pence per share, an increase of 6.2%; full year dividend of 6.14 pence per share, an increase of 5.9%
Operational Highlights
· Integration of Express & Star progressing to plan with synergy cost savings of £3 million achieved in 2018; on track to deliver at least £20 million of annualised synergy cost savings by 2020; further structural cost savings of £20 million achieved in 2018, £5 million ahead of target
· Circulation revenue trends have been supported by cover price increases; national print advertising saw improved trends in the second half of the year
· Like for like growth of 9.6% in publishing digital display and transactional revenue
· Average monthly page views in 2018 grew by 6% year on year to over a billion although this was impacted by the changes in algorithms undertaken by Facebook and Google early in 2018
Strategy and Outlook
· Name changed to Reach plc to better reflect our scale across both print and digital
· We are pleased to have completed the acquisition of Express & Star; significant progress made on integrating the business
· We continue to make good progress on delivery of our strategy for growth through three areas of strategic focus: Optimise, Grow and Commercialise
· Subject to there being no significant adverse implications arising from the UK's exit from the European Union, we are confident that our strategy will enable continued progress to support profit and cash flow
Commenting on the annual results for 2018, Simon Fox, Chief Executive, Reach plc, said:
"I am pleased with the performance we have delivered in 2018 and encouraged by the stronger finish to the year. We have begun 2019 in a strong financial position with good momentum on the integration of Express & Star and with clear plans for digital growth."
Enquiries
Reach
Brunswick
020 7293 3553
Simon Fox, Chief Executive
Vijay Vaghela, Group Finance Director
020 7404 5959
Nick Cosgrove, Partner
Will Medvei, Director
Notes
(1) Set out in note 17 is the reconciliation between the statutory and adjusted results.
(2) Set out in note 18 is the reconciliation between the statutory and like for like revenue. The like for like revenue trend for 2018 estimates the impact of owning Express & Star from the beginning of 2017 and they exclude from the 2017 comparatives the portfolio changes made in 2017 and both 2018 and 2017 exclude the revenue for The Communicator Corporation Limited which was disposed in September 2018.
(3) The market consensus for adjusted operating profit for the 52 weeks ended 30 December 2018 is £140.3 million based on the four analysts that have issued notes since our trading update on 14 December 2018.
(4) GMP equalisation is explained on page 4 and in note 14.
(5) Bank borrowings (£60.0 million) less cash and cash equivalents (£19.2 million).
Investor presentation
A presentation for analysts and shareholders will be held today at 11.00 am (telephone number: 0800 3767922 or +44 (0) 2071 928000; confirmation code: 4751039). The web-ex, which will display our presentation, can be accessed at the URL: https://edge.media-server.com/m6/p/ont3nfex. The presentation will also be live on our website: www.reachplc.com at 11.00 am and a playback will be available from 3.00 pm.
Annual Report
The Annual Report for the 52 weeks ended 30 December 2018 will be available on 26 February 2019 on the Company's website at www.reachplc.com and at the Company's registered office at One Canada Square, Canary Wharf, London E14 5AP and will be sent to shareholders who have elected to receive a hard copy by the end of March 2019.
Alternative performance measures
The Company presents the results on a statutory and adjusted basis and revenue trends on a statutory and like for like basis. The Company believes that the adjusted results and like for like trends will provide investors with useful supplemental information about the financial performance of the Group, enable comparison of financial results between periods where certain items may vary independent of business performance, and allow for greater transparency with respect to key performance indicators used by management in operating the Group and making decisions. Although management believes the adjusted basis is important in evaluating the Group, they are not intended to be considered in isolation or as a substitute for, or as superior to, financial information on a statutory basis. The alternative performance measures are not recognised measures under IFRS and do not have standardised meanings prescribed by IFRS and may be different to those used by other companies, limiting the usefulness for comparison purposes. Note 17 and note 18 respectively sets out the reconciliation between the statutory and adjusted results and the reconciliation between the statutory and like for like revenue.
Forward looking statements
Statements contained in this Annual Results Announcement are based on the knowledge and information available to the Company's directors at the date it was prepared and therefore the facts stated and views expressed may change after that date. By their nature, the statements concerning the risks and uncertainties facing the Company in this Annual Results Announcement involve uncertainty since future events and circumstances can cause results and developments to differ materially from those anticipated. To the extent that this Annual Results Announcement contains any statement dealing with any time after the date of its preparation such statement is merely predictive and speculative as it relates to events and circumstances which are yet to occur. The Company undertakes no obligation to update these forward-looking statements.
Management Report
Operating Performance
The Group delivered a strong performance in 2018 with adjusted operating profit increasing by 16.8% to £145.6 million, ahead of market expectations.
Revenue increased by 16.2% or £100.7 million to £723.9 million reflecting the benefit of the acquisition of Express & Star which was completed on 28 February 2018. Since completion, Express & Star contributed revenue of £159.5 million. Excluding revenue from Express & Star, revenue fell by £58.8 million which includes the net £8.8 million impact of portfolio changes (handing back two Metros to DMGT in December 2017, other portfolio changes in 2017 and the disposal of The Communicator Corporation Limited in September 2018).
On a like for like basis, revenue fell by 6.6% with Publishing revenue falling by 6.9%. Publishing print revenue fell by 8.7% and digital revenue grew by 5.3%, with digital display and transactional revenue growing by 9.6% partially offset by a 19.1% fall in digital classified revenue. Publishing digital revenue in 2018 was £103.6 million including revenue from Express & Star of £17.4 million.
The acquisition of Express & Star coupled with our continued focus on tightly managing the cost base ensured we delivered a strong performance with adjusted operating profit growing by 16.8% or £20.9 million to £145.6 million. This was despite a significant increase in the price of newsprint. We delivered structural cost savings of £20 million, £5 million ahead of our original target of £15 million. Synergy cost savings of £3 million were delivered from the integration of Express & Star. We expect further structural cost savings of £10 million in 2019 and incremental synergy cost savings of £12 million (annualised £15 million) from integrating Express & Star. We remain on track to deliver at least £20 million of annualised synergy cost savings by 2020.
Tight working capital management and the strong cash flows generated by the business ensured that adjusted financing costs were £3.7 million, an increase of only £1.5 million from the prior year despite the higher level of borrowings to fund the acquisition of Express & Star. Adjusted profit before tax increased by 15.8% to £141.9 million. Adjusted earnings per share increased by 8.6% to 39.2 pence per share.
A statutory operating loss was reported for the year of £107.6 million compared to a statutory operating profit of £97.9 million in the prior year due to the impact of the non-cash impairment charge of £200.0 million and a GMP equalisation charge of £15.8 million. The total impact of the items excluded from adjusted operating profit (note 5) was a charge of £253.2 million (2017: £26.8 million). Statutory financing costs were £12.3 million (2017: £16.0 million) and statutory loss before tax was £119.9 million compared to a statutory profit before tax of £81.9 million in the prior year. Statutory loss per share for the year of 41.0 pence compares to a statutory profit per share of 23.0 pence in the prior year.
Acquisition of the Publishing Assets of Northern & Shell
The acquisition of the publishing assets of Northern & Shell ('Express & Star') for a total consideration of £126.7 million comprised the UK publishing assets for £121.7 million which was completed on 28 February 2018 and the Ireland publishing assets for £5.0 million which was completed on 6 December 2018.
The UK publishing assets comprised 100% equity in Reach Network Media Limited (formerly Northern & Shell Network Limited) and its subsidiaries for £121.7 million. The consideration comprised an initial cash consideration of £42.7 million and an equity consideration of £20.0 million (issue of 25,826,746 shares at 77.44 pence per share) both on completion and deferred consideration of £59.0 million (£18.9 million, £16.0 million, £17.1 million and £7.0 million payable on the second, third, fourth and fifth anniversaries respectively of completion). Post completion, a merger review was instigated by the Competition and Markets Authority ('CMA') and the transaction was also reviewed by the Secretary of State for Digital, Culture, Media and Sport ('Secretary of State') for public interest considerations. On 20 June 2018 the acquisition was cleared by the Secretary of State and the CMA.
The Ireland publishing assets comprised a 50% equity interest in Independent Star Limited for £4.5 million and 100% equity in International Distribution 2018 Limited for £0.5 million. The acquisition of these assets was subject to clearance by the competition authorities in the Republic of Ireland which was granted on 5 December 2018.
Transaction costs (including costs relating to the competition and public interest reviews) amounted to £8.5 million (£2.2 million expensed in the second half of 2017 and £6.3 million expensed in 2018). Costs were £1.5 million higher than the £7.0 million estimated at the time of the acquisition due to higher than expected costs in relation to the regulatory reviews by the CMA and the Secretary of State.
In connection with the acquisition, the Group made an initial pension contribution of £41.2 million to the three defined benefit pension schemes of Express & Star and entered into a schedule of contributions amounting to £29.2 million over the period 2018 to 2027 (£1.9 million per annum from 2018 to 2020, £4.1 million per annum from 2021 to 2023, £3.3 million per annum from 2024 to 2026 and £1.3 million in 2027). The initial pension contribution was made on 2 March 2018. During the year the Group finalised with the Trustees the most recent triennial valuations of the three schemes confirming the schedule of contributions.
Also in connection with the acquisition, the Group agreed to revise the schedule of contributions for the other three defined benefit pension schemes of the Group amounting to an increase of £67.0 million over the period 2018 to 2027 (£3.2 million per annum from 2018 to 2020 and £8.2 million per annum from 2021 to 2027). The revised schedule of contributions were finalised with the Trustees on 1 March 2018.
The Group also agreed, as part of the acquisition, to increase from 50% to 75% the additional contributions that would be paid to the defined benefit pension schemes if dividends paid in 2018 are above 6.16 pence per share. For 2019 and 2020 the threshold increases in line with the increase in dividends capped at 10% per annum.
A new £75 million Acquisition Term Loan was procured in February 2018 and £70 million was drawn to partially fund the acquisition of the UK publishing assets which together with a drawing on the Group's Revolving Credit Facility and cash balances funded the initial consideration to the seller and the initial contribution to the defined benefit pension schemes of Express & Star. The remaining £5 million of the Acquisition Term Loan was available for completion of the acquisition of the Ireland publishing assets and was cancelled in October 2018 as the cash generated by the Group was sufficient to fund this £5 million.
Pension Schemes
The IAS 19 pension deficit in respect of the Group's six defined benefit pension schemes fell by £29.0 million to £348.6 million (£284.1 million net of deferred tax). This includes a net asset of £4.2 million for the Express & Star pension schemes at the end of the year (deficit at the date of acquisition was £38.3 million). Excluding the Express & Star pension schemes, the IAS 19 pension deficit fell by £24.8 million to £352.8 million. A favourable movement in assumptions (an increase in the discount rate and a reduction in the expected rate of improvement in mortality) and Group contributions have been substantially offset by weak asset returns, in particular in the second half of 2018 driven by the volatile equity markets, and by a charge for past service costs of £15.8 million arising from GMP equalisation.
The calculation of GMP is set out in legislation and members of pension schemes that were contracted out of the State Earnings-Related Pension Scheme ('SERPS') between 6 April 1978 and 5 April 1997 will have built up an entitlement to a GMP. GMPs were intended to broadly replicate the SERPS pension benefits but due to their design they give rise to inequalities between men and women, in particular, the GMP for a male comes into payment at age 65 whereas for a female it comes into payment at the age of 60 and GMPs typically receive different levels of increase to non GMP benefits. On 26 October 2018, the High Court handed down its judgement in the Lloyds Trustees vs Lloyds Bank plc and Others case relating to the equalisation of member benefits for the gender effects of GMP equalisation. This judgement creates a precedent for other UK defined benefit schemes with GMPs. The judgement confirmed that GMP equalisation was required for the period 17 May 1990 to 5 April 1997 and provided some clarification on legally acceptable methods for achieving equalisation. We have therefore included an allowance for GMP equalisation within liabilities at 30 December 2018. The estimate is subject to change as we undertake more detailed member calculations and/or as a result of future legal judgements.
Group contributions to the defined benefit pension schemes were £90.1 million (£47.0 million to the former Trinity Mirror schemes and £43.1 million to the Express & Star schemes which included an upfront payment of £41.2 million in connection with the acquisition). Contributions have been agreed at £48.9 million per annum for 2019 and 2020, £56.1 million per annum for 2021 to 2023, £55.3 million per annum for 2024 to 2026 and £53.3 million for 2027.
The change in the accounting pension deficit does not have an immediate impact on the agreed funding commitments. The next valuation for funding of all six pension schemes will be as at 31 December 2019 and this is required to be completed by 31 March 2021, although we anticipate this to be completed by 31 December 2020.
Low Leverage with continued Financial Flexibility
The Group continues to maintain a strong balance sheet with net debt of £40.8 million. This is an increase of £31.8 million during the year after expending £95.1 million in relation to the acquisition of the publishing assets of Northern & Shell (initial cash consideration of £42.7 million for the UK publishing assets, £5.0 million cash consideration for the Ireland publishing assets, transaction costs of £6.3 million and the initial pension contribution of £41.2 million less a net working capital adjustment of £0.1 million).
Net debt at the end of the year comprised £60.0 million drawn on the Acquisition Term Loan ('ATL') less cash balances of £19.2 million. The Group has access to an undrawn £83.3 million amortising Revolving Credit Facility ('RCF') which is committed until December 2021. The RCF amortises by £8.33 million every six months from June 2019 to December 2020 down to £50.0 million for the last year of the term. On 27 July 2018, the Group prepaid the £10.0 million repayment due under the ATL in December 2018 and on 10 October 2018 cancelled the undrawn £5 million. The outstanding £60 million drawn on the facility is repayable in three instalments of £20.3 million, £20.3 million and £19.4 million in December 2019, 2020 and 2021 respectively.
Leverage is below one times full year adjusted EBITDA (adjusted operating profit plus depreciation) and the strong cash flows generated by the Group provide resilience and financial flexibility to invest in the business, meet pension funding obligations and pay dividends.
Impairment Charge
The Group recorded a non-cash impairment charge of £200.0 million (£150.0 million provided in June 2018 in respect of the Regionals cash-generating unit and £50.0 million provided in December 2018 in respect of the Publishing excluding Express & Star cash-generating unit) against the carrying value of goodwill, publishing rights and titles and freehold buildings. This reflects the more challenging than expected trading environment for advertising revenue generated locally and the short term uncertainty arising from the UK's exit from the European Union.
Historical Legal Issues
The cost associated with the settlement of civil claims in relation to phone hacking has been higher than expected, in particular the legal fees of the claimant's lawyers. Although the utilisation of the provision has slowed during the year with £3.0 million utilised in the second half of 2018 compared to £6.6 million in the first half of 2018, we have increased the provision for settling these historical claims by £12.5 million during the year (£7.5 million provided in June 2018 and £5.0 million provided in December 2018) bringing the total amount provided to £75.5 million. At the end of the year £13.6 million of the provision remains outstanding and this represents the Board's best estimate of the amount required to settle the expected claims. This estimate is based on historical trends and experience of claims and costs, and in some cases, proposed offers to settle claims.
Whilst the Board notes that there is continued uncertainty, the increase in the year is predominantly due to increased legal fees for the claimants lawyers as the number of new claims has slowed. The Group has recorded an increase in the provision in each of the last three years which highlights the challenges in making a best estimate. Certain cases are subject to court proceedings and the outcome of these cases is likely to have an impact on how much is required to settle the remaining claims. Individual court rulings can affect multiple cases and therefore the Group's current ability to settle and so mitigate further legal costs. The Board remains confident that the exposures arising from these historical events are manageable and do not undermine the delivery of the Group's strategy.
Dividends and Share Buyback
The Board proposes a final dividend of 3.77 pence per share for 2018, an increase of 6.2%, bringing the total dividend for 2018 to 6.14 pence per share, an increase of 5.9%. The final dividend which is subject to approval by shareholders at the Annual General Meeting on 2 May 2019 will be paid on 7 June 2019 to shareholders on the register on 10 May 2019.
The Board continues to adopt a progressive dividend policy which is aligned to the free cash generation of the Group. The free cash generation for the purposes of assessing the dividend is the net cash flow generated by the Group before the repayment of debt, dividend payments, other capital returns to shareholders and additional contributions made to the defined benefit pension schemes as a result of any substantial increase in dividends and/or capital returns to shareholders. When setting the level of dividends the Board will ensure that the Group maintains adequate headroom for investment and any unexpected cash flow requirements for historical events or to fund further restructuring. Based on the Board's expectation of future cash flows, the Board expects dividends to increase by at least 5% per annum. The Board will also continue to consider, if appropriate, the return of capital to shareholders through a share buyback if it has generated surplus cash and sees an opportunity to enhance earnings per share and therefore shareholder value. Prior to initiating a share buyback programme the Board will carefully consider the cash generation of the business, investment requirements and the Group's obligations to the Group's defined benefit pension schemes.
People
We welcome our new colleagues at Express & Star and thank all our colleagues for their contribution to the strong performance in 2018.
At the Annual General Meeting on 3 May 2018, David Grigson stepped down from the Board of Directors and Nicholas Prettejohn became Chairman having joined as a non-executive director on 6 March 2018.
On 18 June 2018, Vijay Vaghela, Group Finance Director and Company Secretary, informed the Board of his decision to pursue other career opportunities, having worked in the business for almost 24 years. On 23 July 2018, the Group announced that Simon Fuller, previously Chief Financial Officer of McColl's Retail Group plc has been appointed as Chief Financial Officer and will join the Board on 1 March 2019 when Vijay will step down.
Lee Ginsberg, non-executive director and Chairman of the Audit & Risk Committee, has informed the Board that he will be stepping down as non-executive director and Chairman of the Audit & Risk Committee with effect from 30 April 2019 to focus on his other commitments. A process to identify and recruit a replacement will be initiated.
Current Trading and Outlook
Revenue in January and February 2019 is expected to fall by 7% on a like for like basis. Subject to there being no significant adverse implications arising from the UK's exit from the European Union, we are confident that our strategy will enable continued progress to support profit and cash flow.
Strategic Update
Having completed the acquisition of the Express & Star business, we changed the name of the Company to Reach plc to better reflect the Group's audience scale across both print and digital.
We have a clear strategy and have refreshed our areas of strategic focus to recognise the opportunity we have to optimise the quality and profitability of our print brands and to accelerate our digital audience and revenue performance.
Our strategic objective remains to deliver sustainable growth in revenue, profit and cash flow.
This will be delivered through three key areas of strategic focus:
· Optimise: Enhance our print brands and improve their longevity through quality journalism and content delivered as efficiently as possible;
· Grow: Using technology, data and content from across all of our brands to grow our digital reach; and
· Commercialise: Improve our revenue performance and seek new opportunities to commercialise our growing digital audience.
We will consider merger and acquisition opportunities which accelerate progress on all three pillars of our strategy and where the financial and business case meets our requirements.
We believe growth from digital and new revenue streams will begin to outstrip print declines on an aggregate basis, leading to a stabilisation of revenue and then a return to top line growth. This, combined with our inbuilt and relentless focus on efficiencies, makes the Board confident that the delivery of sustainable growth in revenue, profit and cash flow is achievable in the future, for the benefit of all stakeholders.
Key highlights of progress on each area of strategic focus are set out below.
Optimise
Although print circulation volumes and print advertising are in structural decline, we will seek to maximise the returns on our print brands so long as they remain viable by delivering quality journalism and content as efficiently as possible.
The quality of our titles is evident in the numerous journalism awards that our titles have won during the year. These included three awards at the National Press Awards 2018, MEN winning Daily Newspaper of the Year at the Regional Press Awards and Cornwall Live winning Gold in Regional Media Brand of the Year at the 2018 British Media Awards, amongst many others.
A key priority for the Group is maintaining quality journalism whilst maintaining the commercial viability and profitability of our brands into the future. To achieve this we continue to drive efficiencies which do not adversely impact quality journalism and have delivered structural cost savings of £20 million in 2018, £5 million ahead of the target of £15 million. These savings have been achieved by a series of initiatives across the business, including editorial, commercial, printing, senior management structures and all back office functions. We have also been driving longer term infrastructure and operational benefits by reducing office space, moving one of our two data centres to the cloud and investing in new and improved finance systems. We are targeting a further £10 million of structural cost savings in 2019.
In addition to delivery of the structural cost savings we delivered £3 million of synergy cost savings from the integration of Express & Star and remain on track to deliver at least £20 million of annualised synergy cost savings by 2020 with incremental savings of £12 million (£15 million annualised) in 2019.
In 2019 we expect restructuring costs of £15 million to deliver the £22 million of cost savings (£10 million structural and £12 million synergy cost savings noted above).
In addition to cost savings we will drive further optimisation initiatives through:
• Cover price increases, where appropriate;
• Maximising the utilisation of our printing network by securing new or retaining existing print contracts or securing external printing for our newspapers where appropriate; and
• Managing the profitability of our titles and closing titles where there is no path to profitability.
Grow
The growth in display and transactional revenue was impacted in the year by algorithm changes made by Facebook and Google early in 2018 which adversely impacted our audience. Average monthly page views in 2018 grew by 6% year on year to over a billion. Average monthly mobile page views grew by 15% while desktop page views fell by 9%.
To deliver continued growth in audience we are:
• Rolling out new and rebranding our existing regional websites to the Live format. During 2018 we rebranded the majority of our sites to the Live format and launched Edinburgh Live and MyLondon. We are launching a number of new Live sites in 2019 including Cork Live and Lancashire Live;
• Developing and implementing a differentiated digital editorial strategy for each of our national brands to improve our digital performance and user experience across all platforms and interfaces. We continuously look to improve the functionality of our digital infrastructure through software updates and ongoing development initiatives;
• Improving search engine optimisation across the network;
• Widening the sources of digital traffic to minimise the impact of future changes by platforms that could adversely impact our audience; and
• Investing in the development of new products such as InYourArea, Football.London and Football Scotland.
Commercialise
We strive to be best in class at commercialising the audiences we reach. We will continue to maximise print revenues and optimise our digital advertising yields, both nationally and regionally, using the best technology and people. In addition, we will seek other ways to monetise our audience and reach by:
• Market launch of a new integrated digital sales proposition for our portfolio of digital sites underpinned by a unified advertising stack;
• Working with other publishers in the UK to build scale audiences which provide the opportunity to provide advertisers with enhanced targeted reach and improve their return on investment. We have invested in a 25% stake in Ozone Project Limited which is a joint venture with three other national newsbrands;
• Local standalone commercial sales trials in new markets. The first of these is in Leeds and we plan to roll this out to the other standalone sites; and
• Leverage affiliate partnerships through the use of AI to place links within contextually relevant content.
Key Performance Indicators
To track delivery of our strategy, the following KPIs are reported on for 2018:
Financial measure
Group KPIs
Performance in the period
Publishing digital display and transactional revenue growth
At least 20% pa
û
Circulation revenue
Single digit declines
ü
Print advertising revenue
At least in line with national market trends
ü
Operating margin
Grow operating margin to support profits
ü
Dividend growth
At least 5% pa
ü
Publishing digital display and transactional revenue growth: like for like growth of 9.6% for the year is below the target in part due to our digital audience being negatively impacted by the changes in algorithms undertaken by Facebook and Google early in 2018.
Circulation revenue: like for like decline of 5.1% is in line with the target with cover price increases partially mitigating volume declines.
Print advertising revenue: national print advertising trends have been broadly in line with market trends.
Operating margin: adjusted operating margin improved by 0.1 percentage point from 20.0% in 2017 to 20.1% in 2018. The improvement in margin reflects the tight management of the cost base and has been achieved despite more challenging local advertising trends and the acquisition of Express & Star which operated at a lower operating margin.
Dividend growth: the final dividend for the year of 3.77 pence per share together with the interim dividend of 2.37 represents a total dividend of 6.14 pence per share, an increase of 5.9% on the 2017 total dividend.
2019 Targets
With the exception of the target for Publishing digital display and transactional revenue growth which will be 15%, the KPI targets for 2019 will be the same as 2018.
Group Review
The results have been prepared for the 52 weeks ended 30 December 2018 (2018) and the comparative period has been prepared for the 52 weeks ended 31 December 2017 (2017). The results are presented on a statutory and adjusted basis and revenue trends are presented on a statutory and like for like basis. The like for like revenue trend for 2018 estimates the impact of owning Express & Star from the beginning of 2017 and they exclude from the 2017 comparatives the portfolio changes made in 2017 and both 2018 and 2017 exclude the revenue for Communicator Corp which was disposed in September 2018. Note 17 sets out the reconciliation between the statutory and adjusted results and note 18 sets out the reconciliation between the statutory and like for like revenue.
The Group has four operating segments, each of which is a division, that are regularly reviewed for the purposes of allocating resources and assessing performance. The results of each division in this Group review are presented on an adjusted basis and there is no difference between the operating profit by division and the segment result of each operating segment that is shown in note 3.
The operating segments are: Publishing which includes all of our newspapers and magazines together with digital publishing; Printing which provides printing services to the Publishing segment and to third parties; Specialist Digital which includes our acquired digital classified recruitment business and the digital marketing services business (disposed in September 2018); and Central which includes revenue and costs not allocated to the operational divisions and our share of results of associates. Express & Star has been included in the Publishing, Printing and Central segments from the date of acquisition (note 20).
Income statement
Statutory results
Adjusted results
2018
2017
2018
2017
£m
£m
£m
£m
Publishing
679.0
578.5
679.0
578.5
575.4
494.6
575.4
494.6
Digital
103.6
83.9
103.6
83.9
Printing
35.6
31.6
35.6
31.6
Specialist Digital
8.0
9.6
8.0
9.6
Central
1.3
3.5
1.3
3.5
Revenue
723.9
623.2
723.9
623.2
Costs
(832.3)
(525.7)
(579.4)
(499.3)
Operating (loss)/profit before associates
(108.4)
97.5
144.5
123.9
Publishing
153.8
133.2
153.8
133.2
Printing
-
-
-
-
Specialist Digital
2.1
2.7
2.1
2.7
Central
(11.4)
(12.0)
(11.4)
(12.0)
Adjusted operating items
(252.9)
(26.4)
-
-
Associates
0.8
0.4
1.1
0.8
Operating (loss)/profit
(107.6)
97.9
145.6
124.7
Financing
(12.3)
(16.0)
(3.7)
(2.2)
(Loss)/profit before tax
(119.9)
81.9
141.9
122.5
Tax
0.3
(19.1)
(27.7)
(24.0)
(Loss)/profit after tax
(119.6)
62.8
114.2
98.5
(Loss)/earnings per share
(41.0)p
23.0p
39.2p
36.1p
The 2018 results are impacted by the acquisition of Express & Star, portfolio changes relating to the two Metros handed back to DMGT in December 2017, other portfolio changes in 2017 and the sale of Communicator Corp in September 2018. The net revenue impact of portfolio changes and the disposal was £8.8 million.
The results for 2018 include revenue of £159.5 million (Publishing £156.2 million and Printing £3.3 million) from Express & Star post completion (28 February 2018). Group revenue would have increased by £29.9 million (Publishing £29.4 million and Printing £0.5 million) if the acquisition had been made at the beginning of the year.
Revenue increased by 16.2% or £100.7 million to £723.9 million. The increase in revenue reflects the benefit of the acquisition of Express & Star on 28 February 2018. On a like for like basis, Group revenue fell by 6.6% or £52.9 million.
Operating costs
Statutory results
Adjusted results
2018
2017
2018
2017
£m
£m
£m
£m
Labour
(245.9)
(217.6)
(245.9)
(217.6)
Newsprint
(75.6)
(56.5)
(75.6)
(56.5)
Depreciation
(22.3)
(20.4)
(22.3)
(20.4)
Other
(488.5)
(231.2)
(235.6)
(204.8)
Operating adjusted items
(252.9)
(26.4)
-
-
Other costs
(235.6)
(204.8)
(235.6)
(204.8)
Costs
(832.3)
(525.7)
(579.4)
(499.3)
Statutory operating costs increased by £306.6 million to £832.3 million due to the acquisition of Express & Star, the impact of a non-cash impairment and a charge for past service costs for GMP equalisation. Adjusted operating costs increased by £80.1 million to £579.4 million due to the acquisition of Express & Star. Both statutory and adjusted operating costs benefited from structural and synergy cost savings together with ongoing cost mitigation actions.
The total impact of the items excluded from adjusted operating costs (note 5) was a charge of £252.9 million (2017: £26.4 million). Operating adjusted items comprise a non-cash impairment of goodwill, publishing rights and titles and freehold buildings of £200.0 million (2017: nil), pension past service costs for GMP equalisation and administrative expenses of £18.8 million (2017: £1.0 million), a £12.5 million increase in the provision for dealing with and resolving civil claims arising from phone hacking (2017: £10.5 million), restructuring charges in respect of cost reduction measures of £20.0 million (2017: £12.6 million) and a charge for other items of £1.6 million (2017: £2.3 million).
Adjusted operating margin increased by 0.1 percentage point from 20.0% in 2017 to 20.1% in 2018 reflecting the benefit of tight management of the cost base and has been achieved despite more challenging local advertising markets and the acquisition of Express & Star which operated at a lower operating margin.
Publishing
Adjusted results
2018
2017
Variance
Variance
£m
£m
£m
%
575.4
494.6
80.8
16.3%
Circulation
362.1
284.7
77.4
27.2%
Advertising
176.7
177.6
(0.9)
(0.5%)
Other
36.6
32.3
4.3
13.3%
Digital
103.6
83.9
19.7
23.5%
Display and transactional
91.3
68.7
22.6
32.9%
Classified
12.3
15.2
(2.9)
(19.1%)
Revenue
679.0
578.5
100.5
17.4%
Costs
(525.2)
(445.3)
(79.9)
(17.9%)
Adjusted operating profit
153.8
133.2
20.6
15.5%
Adjusted operating margin
22.7%
23.0%
(0.3%)
n/a
Revenue increased by 17.4% or £100.5 million to £679.0 million with print revenue increasing by 16.3% and digital revenue growing by 23.5%. On a like for like basis revenue fell by 6.9% with print revenue declining by 8.7% and digital revenue growing by 5.3%.
Costs increased by 17.9% or £79.9 million to £525.2 million. This includes the impact of the acquisition of Express & Star partially offset by the impact of handing back two Metros to DMGT in December 2017 and other portfolio changes in 2017 together with the benefit of structural cost savings, synergy cost savings and ongoing cost mitigation actions.
Operating profit increased by £20.6 million or 15.5% to £153.8 million with operating margin falling by 0.3 percentage points from 23.0% to 22.7%. The margin is impacted by the acquisition of Express & Star which operated at a lower operating margin.
Print revenue
Print revenue increased by 16.3%. On a like for like basis print revenue fell by 8.7%.
Circulation revenue increased by 27.2%. On a like for like basis circulation revenues fell by 5.1% with volume declines partially mitigated by cover price increases. Circulation volume declines for the Group's national newspapers (excluding the impact of sampling) fell by 12.7% which compares to a decline for the UK tabloid market of 10.0%. Volume declines for our regional titles were 13.8% for paid-for dailies, 16.5% for paid-for weeklies and 14.0% for paid-for Sundays. The circulation volumes for the paid-for magazines, OK! and New!, declined by 10.0% and 8.1% respectively. The circulation volume trends in the market have been impacted by cover price differentials.
Print advertising revenue fell by 0.5% and on a like for like basis fell by 16.0%. Print advertising volume market share for the year on the Group's national newspapers on a like for like basis was broadly similar to 2017.
Other print revenue increased by 13.3%. Like for like other revenue fell by 5.0%.
Digital revenue
Digital revenue grew by 23.5% with display and transactional revenue growing by 32.9% and classified revenue declining by 19.1%. Like for like digital revenue grew by 5.3% with growth from display and transactional revenue of 9.6% partly offset by classified revenue, which is predominantly upsold from print, which declined by 19.1%.
The growth in display and transactional revenue was impacted in the year by algorithm changes made by Facebook and Google early in 2018 which adversely impacted our audience. Average monthly page views in 2018 grew by 6% year on year to over a billion. Average monthly mobile page views grew by 15% while average monthly desktop page views fell by 9%.
Printing
Adjusted results
2018
2017
Variance
Variance
£m
£m
£m
%
Contract printing
24.6
21.3
3.3
15.5%
Newsprint supply
8.4
7.6
0.8
10.5%
Other revenue
2.6
2.7
(0.1)
(3.7%)
Revenue
35.6
31.6
4.0
12.7%
External costs
(157.2)
(131.2)
(26.0)
(19.8%)
Publishing division recharge
121.6
99.6
22.0
22.1%
Adjusted operating result
-
-
-
-
Revenue increased by £4.0 million or 12.7% to £35.6 million. This includes £3.3 million from the Express & Star print plant. On a like for like basis revenue increased by 5.2% reflecting the benefit of new print contracts, including the Guardian and a number of Metros, partially offset by lower third party volumes.
External costs increased by £26.0 million or 19.8% to £157.2 million and the net cost to the Publishing division increased by 22.1% to £121.6 million reflecting the increased volume for the Express & Star titles and higher newsprint prices.
Specialist Digital
Adjusted results
2018
2017
Variance
Variance
£m
£m
£m
%
Advertising
4.4
4.7
(0.3)
(6.4%)
Other
3.6
4.9
(1.3)
(26.5%)
Revenue
8.0
9.6
(1.6)
(16.7%)
Costs
(5.9)
(6.9)
1.0
14.5%
Adjusted operating profit
2.1
2.7
(0.6)
(22.2%)
Specialist Digital includes our digital classified recruitment business (Reach Work) and the digital marketing services business (Communicator Corp which was disposed in September 2018). Reach Work had revenue of £4.4 million and operating profit of £1.7 million, both marginally down on the prior year. Prior to disposal Communicator Corp delivered revenue of £3.6 million and operating profit of £0.4 million.
Central
Adjusted results
2018
2017
Variance
Variance
£m
£m
£m
%
Revenue
1.3
3.5
(2.2)
(62.9%)
Costs
(12.7)
(15.5)
2.8
18.1%
Central excluding associates
(11.4)
(12.0)
0.6
5.0%
Associates
1.1
0.8
0.3
37.5%
Adjusted operating loss
(10.3)
(11.2)
0.9
8.0%
The loss of £10.3 million compares to a loss of £11.2 million in the prior year. Rental income from surplus office space and revenue from other services to tenants fell as we terminated sub leases following the contraction of office space in Canary Wharf from four to two floors in June 2018. Costs fell by £2.8 million from £15.5 million to £12.7 million reflecting the ongoing tight management of costs and no further costs associated with the sub leases that were terminated. Share of results from associates increased by £0.3 million from £0.8 million to £1.1 million due to a stronger performance by PA Group partially offset by losses from Brand Events.
Financing costs
Statutory results
Adjusted results
2018
2017
2018
2017
£m
£m
£m
£m
Investment revenues
0.1
0.1
0.1
0.1
Pension finance charge
(8.6)
(11.9)
-
-
Finance costs
(3.8)
(4.2)
(3.8)
(2.3)
Interest on bank overdrafts and borrowings
(3.8)
(2.3)
(3.8)
(2.3)
Fair value loss on derivative financial instruments
-
(3.8)
-
-
Foreign exchange gain on retranslation of borrowings
-
1.9
-
-
Financing costs
(12.3)
(16.0)
(3.7)
(2.2)
Statutory financing costs fell by £3.7 million to £12.3 million reflecting the reduction in the pension finance charge on a lower opening pension deficit and no net cost in relation to derivative financial instruments and retranslation of foreign currency borrowings following the repayment in June 2017 of the £68.3 million of private placement loan notes and the maturing of the associated cross-currency interest rate swaps. Adjusted financing costs increased by £1.5 million to £3.7 million reflecting the interest on debt procured for the acquisition of Express & Star.
Tax
The statutory tax credit of £0.3 million (2017: charge of £19.1 million) comprises a current tax charge of £17.2 million (2017: £17.8 million) and a deferred tax credit of £17.5 million (2017: charge of £1.3 million).
The statutory effective tax rate is lower (2017: higher) than the standard rate of corporation tax for the reasons set out in the reconciliation below:
Reconciliation of tax credit/(charge)
2018
%
2017
%
Standard rate of corporation tax
19.0
(19.3)
Items not deductible in determining taxable profit (non qualifying depreciation/costs/impairment)
(19.5)
(3.6)
Tax effect of items that are not taxable in determining taxable profit (property disposal/utilised losses)
0.7
-
Prior period adjustment (current and deferred tax)
-
(0.5)
Tax effect of share of results of associates (brought in post tax)
0.1
0.1
Tax credit/(charge) rate
0.3
(23.3)
The adjusted tax charge of £27.7 million (2017: £24.0 million) represents 19.5% (2017: 19.6%) of adjusted profit before tax. The rate is higher than the statutory effective tax rate due to the impact of the adjusted operating items noted above.
Earnings per share
Statutory results
Adjusted results
2018
2017
2018
2017
£m
£m
£m
£m
(Loss)/profit after tax
(119.6)
62.8
114.2
98.5
Weighted average number of shares (000's)
291,478
272,730
291,478
272,730
(Loss)/earnings per share
(41.0)p
23.0p
39.2p
36.1p
Statutory loss after tax amounts to £119.6 million compared to a profit after tax of £62.8 million in the prior year due to the impact of a non-cash impairment charge of £200.0 million and a charge of £15.8 million for past service costs for GMP equalisation. Adjusted profit after tax increased by £15.7 million or 15.9% to £114.2 million.
The weighted average number of shares increased year on year reflecting the shares issued (25,826,746) as part of the purchase of Express & Star more than offsetting the full year impact of the share buyback started in August 2016 and completed in November 2017.
Statutory loss per share of 41.0 pence compared to earnings per share of 23.0 pence in the prior year due to the impact of the impairment charge and GMP equalisation charge. Adjusted earnings per share increased by 3.1 pence or 8.6% to 39.2 pence.
Other Items
Principal risks and uncertainties
There is an ongoing robust process for the identification, evaluation and management of the principal risks and uncertainties faced by the Group. Appropriate management actions are in place to minimise the impact of the risks and uncertainties which are identified as part of the risk process. These principal risks and uncertainties, the risk appetite in relation to these and the actions are set out in the Reach plc 2018 Annual Report which will be available on our website at www.reachplc.com on 26 February 2019.
The principal risks and uncertainties are:
· Strategy - the overall strategy or elements of the strategy are inappropriate and the delivery of the strategy is badly executed. This results in accelerated revenue loss for existing products (print advertising/newspaper sales) and a failure to attract new revenues (digital) quickly enough;
· Pensions - pension deficits grow at such a rate so as to affect the viability of the Group itself or so that the annual funding costs consume a disproportionate level of cash flow. During 2018 we experienced an increase in pension obligations of £15.8 million due to GMP equalisation;
· Historical legal issues - damage to our reputation arising from historical events, direct financial impact from legal claims and distraction of senior management time from delivering the strategy; and
· Brexit - there is significant uncertainty created by the process of the UK exiting the European Union. Brexit has increased our overall risk profile in the short term due to the potential implications on several areas of our business. These include an adverse effect on commercial revenue (economic uncertainty, potential data transfer issues), pension deficit levels, supply chain issues (ie newsprint) and cost pressures arising from any further devaluation of Sterling, and employment challenges with EU Nationals.
Brexit is a new risk this year. Reach recognises the potential impact caused by this uncertainty and has taken a number of actions. Overall, while the uncertainty around Brexit means the precise risk mitigation responses cannot yet be fully defined in all cases, we feel at this stage that we will be adequately prepared to respond.
The Group's response has been considered by the Board. The senior management team undertook a detailed risk assessment exercise to evaluate the implications on our business and consider risk mitigation options, in particular in the event the UK exits the European Union without a trading deal. Each risk area identified has been prioritised and given senior management ownership. Consideration has been given to what, if any, mitigating action can be taken at this stage. In many cases the risk owners are keeping a watching brief as specific actions cannot be defined until more detail emerges as to what Brexit will look like. This assessment has been debated and validated by the Board and will remain under review as the implications of Brexit and the terms attached to the UK's departure become clearer.
The risks are being kept under review by the senior management team. Where possible, mitigating actions have been taken including:
· Reviewing overseas printing arrangements and, where deemed appropriate, making arrangements to mitigate the risk to the publication of our titles;
· Continuing to review stock levels held to ensure sufficient supplies are held should border crossing delays occur;
· Exploring hedging options with pensions trustees and the impact this potentially may have on investment returns and therefore funding objectives;
· Reassessing all interactions with non UK based partners / suppliers / employees across the Group to ensure we can respond quickly to any potential changes to laws and regulations (such as data protection) in the event of a no deal Brexit;
· Incorporating a subsidiary in Ireland to operate our activities there; and
· Consulting with our European banks in our syndicate to understand their views on future funding beyond the current commitment to 2021.
The level of economic turmoil expected with a no deal Brexit is likely to have a direct impact on our advertising revenue and potentially circulation revenue if the economy moves into recession. While the revenue impact is difficult to assess, commercial teams would seek to defend revenue insofar as is possible. Failing this we would seek to mitigate the profit impact of any revenue deficits that may arise through proactive reductions within our cost base across the entire organisation. We have a strong record of delivering additional cost savings when faced with unexpected revenue deficits.
From an operational perspective, the key risk is disruption to our newsprint supply chain. We are reliant on some key overseas suppliers who may be affected by onerous customs practices in the wake of no deal Brexit. Following our risk assessment, at this stage we do not expect a significant production impact as our main suppliers are either UK based or are non EU based with their own terminals in ports. We already carry sufficient stock to be able to mitigate the risks associated with delays of up to one week. However, we, like many other organisations, are largely reliant on the Government initiating appropriate changes to ensure efficient customs operations to properly eliminate the risk.
Data protection
On 25 May 2018, the General Data Protection Regulation (GDPR) came into force in the EU and the Data Protection Act 2018 (DPA) came into force in the UK. During the first half of 2018, the Group completed an extensive readiness project in preparation for the implementation of the GDPR and the DPA. The Group has implemented policies, controls and procedures across the business to manage personal data in accordance with the provisions of the GDPR and the DPA and these are being embedded through a programme of training and ongoing communication. Due to the timing of acquisition and the regulatory review period, Express & Star implemented and operated standalone policies and procedures relating to the implementation of the GDPR and the DPA. These policies and procedures will be standardised as appropriate over time. The Group has seen minimal impact on revenues since the implementation of the GDPR and the DPA.
Related party transactions
The Group has a 21.53% investment in PA Group Limited, a 50% investment in Brand Events TM Limited, a 50% stake in Echo Building (Liverpool) Limited (acquired 4 September 2018), a 25% interest in Ozone Project Limited (acquired on 12 September 2018) and a 50% interest in Independent Star Limited (acquired on 6 December 2018) accounted for as associated undertakings. There were no material non trading transactions during the year.
Brokers
The Brokers to Reach plc during 2018 were Barclays, Numis and Peel Hunt. Peel Hunt will cease to be brokers from the end of March 2019.
Assessment of the Group's prospects
The directors have assessed the Group's prospects, both as a going concern and its longer term viability.
Going concern statement
The directors consider it appropriate to adopt the going concern basis of accounting in the preparation of the Group's annual consolidated financial statements.
In accordance with LR 9.8.6(3) of the Listing Rules, and in determining whether the Group's annual consolidated financial statements can be prepared on a going concern basis, the directors considered all factors likely to affect its future development, performance and its financial position, including cash flows, liquidity position and borrowing facilities and the principal risks and uncertainties relating to its business activities.
Having considered all the factors impacting the Group's businesses, including downside sensitivities (relating to trading and cash flows), the directors are satisfied that the Group will be able to operate within the terms and conditions of the Group's financing facilities for the foreseeable future.
The directors have reasonable expectations that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the Group's annual consolidated financial statements.
Viability statement
The directors have a reasonable expectation that the Company and the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment.
The directors assessed the prospects of the Group over a three year period which reflects the budget and planning cycle adopted by the Group. A three year period is adopted as it enables the directors to consider the impact of declining print revenues, the investment required to drive growth in digital and to identify the extent to which costs need to be minimised to support profit and cash flow. The assessment takes into account the Group's current position and the principal risks and uncertainties facing the Group including those that would threaten the business model, future performance, solvency or liquidity.
Sensitivity analysis is applied to the projections to model the potential effects should principal risks and uncertainties actually occur, individually or in combination. The Board also assessed the likely effectiveness of any proposed mitigating actions.
It is understood that such future assessments are subject to a level of uncertainty that increases with time and, therefore, future outcomes cannot be guaranteed or predicted with certainty. Also, this assessment was made recognising the principal risks and uncertainties that could have an impact on the future performance of the Group and also the financial risks described in the notes to the Group's annual consolidated financial statements.
Further information concerning the review of going concern and viability are set out in the Reach plc 2018 Annual Report which will be available on our website at www.reachplc.com on 26 February 2019.
Statement of directors' responsibilities
The directors are responsible for preparing the Annual Results Announcement in accordance with applicable laws and regulations. The responsibility statement below has been prepared in connection with the Company's full Annual Report for the 52 weeks ended 30 December 2018. Certain points thereof are not included within this Annual Results Announcement.
The directors confirm to the best of their knowledge:
a) the consolidated financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit and loss of the Company and the undertakings included in the consolidation taken as a whole; and
b) the Management Report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties they face.
By order of the Board of directors
Simon Fox
Chief Executive
Vijay Vaghela
Group Finance Director
Consolidated income statement
for the 52 weeks ended 30 December 2018 (52 weeks ended 31 December 2017)
notes
2018
£m
2017
£m
Revenue
3,4
723.9
623.2
Cost of sales
(377.4)
(308.2)
Gross profit
346.5
315.0
Distribution costs
(61.2)
(63.7)
Administrative expenses:
Operating adjusted items
5
(252.9)
(26.4)
Other administrative expenses
(140.8)
(127.4)
Share of results of associates:
Results before operating adjusted items
1.1
0.8
Operating adjusted items
5
(0.3)
(0.4)
Operating (loss)/profit
3
(107.6)
97.9
Investment revenues
6
0.1
0.1
Pension finance charge
14
(8.6)
(11.9)
Finance costs
7
(3.8)
(4.2)
(Loss)/profit before tax
(119.9)
81.9
Tax credit/(charge)
8
0.3
(19.1)
(Loss)/profit for the period attributable to equity holders of the parent
(119.6)
62.8
Statutory (loss)/earnings per share
2018
Pence
2017
Pence
(Loss)/earnings per share - basic
10
(41.0)
23.0
(Loss)/earnings per share - diluted
10
(41.0)
22.9
Set out in note 10 is the calculation of statutory and adjusted earnings per share and set out in note 17 is the reconciliation between the statutory and adjusted results.
Consolidated statement of comprehensive income
for the 52 weeks ended 30 December 2018 (52 weeks ended 31 December 2017)
notes
2018
£m
2017
£m
(Loss)/profit for the period
(119.6)
62.8
Items that will not be reclassified to profit and loss:
Actuarial gain on defined benefit pension schemes
14
4.6
62.6
Tax on actuarial gain on defined benefit pension schemes
8
(0.8)
(10.5)
Deferred tax credit
8
-
0.4
Share of items recognised by associates
3.2
(5.4)
Other comprehensive income for the period
7.0
47.1
Total comprehensive (loss)/income for the period
(112.6)
109.9
Consolidated cash flow statement
for the 52 weeks ended 30 December 2018 (52 weeks ended 31 December 2017)
notes
2018
£m
2017
£m
Cash flows from operating activities
Cash generated from operations
11
137.8
106.8
Pension deficit funding payments
14
(90.1)
(38.7)
Income tax paid
(12.5)
(13.9)
Net cash inflow from operating activities
35.2
54.2
Investing activities
Interest received
0.1
0.1
Proceeds on disposal of property, plant and equipment
6.6
1.2
Purchases of property, plant and equipment
(11.2)
(8.9)
Acquisition of subsidiary undertakings
20
(43.1)
-
Proceeds on disposal of subsidiary undertaking
21
6.4
-
Acquisition of associate undertaking
20
(4.5)
-
Net cash used in investing activities
(45.7)
(7.6)
Financing activities
Dividends paid
9
(17.5)
(15.3)
Interest paid on borrowings
(3.8)
(2.1)
Repayment of private placement loan notes
-
(68.3)
Purchase of own shares
-
(7.7)
Draw down on bank borrowings
13
80.0
25.0
Repayment of bank borrowings
13
(45.0)
-
Net cash received from/(used in) financing activities
13.7
(68.4)
Net increase/(decrease) in cash and cash equivalents
3.2
(21.8)
Cash and cash equivalents at the beginning of the period
13
16.0
37.8
Cash and cash equivalents at the end of the period
13
19.2
16.0
Consolidated statement of changes in equity
for the 52 weeks ended 30 December 2018 (52 weeks ended 31 December 2017)
Share
capital
£m
Share premium
account
£m
Merger
reserve
£m
Capital
redemption
reserve
£m
Retained earnings and other reserves
£m
Total
£m
At 1 January 2017
(28.3)
(606.7)
(37.9)
(4.4)
97.9
(579.4)
Profit for the period
-
-
-
-
(62.8)
(62.8)
Other comprehensive income for the period
-
-
-
-
(47.1)
(47.1)
Total comprehensive income for the period
-
-
-
-
(109.9)
(109.9)
Credit to equity for equity-settled share-based payments
-
-
-
-
(0.5)
(0.5)
Purchase of shares
-
-
-
-
7.7
7.7
Dividends Paid
-
-
-
-
15.3
15.3
At 31 December 2017
(28.3)
(606.7)
(37.9)
(4.4)
10.5
(666.8)
Loss for the period
-
-
-
-
119.6
119.6
Other comprehensive income for the period
-
-
-
-
(7.0)
(7.0)
Total comprehensive loss for the period
-
-
-
-
112.6
112.6
Issue of shares
(2.6)
-
(17.4)
-
-
(20.0)
Merger reserve transfer
-
-
37.9
-
(37.9)
-
Credit to equity for equity-settled share-based payments
-
-
-
-
(1.0)
(1.0)
Dividends paid
-
-
-
-
17.5
17.5
At 30 December 2018
(30.9)
(606.7)
(17.4)
(4.4)
101.7
(557.7)
Consolidated balance sheet
at 30 December 2018 (at 31 December 2017)
notes
2018
£m
2017
£m
Non-current assets
Goodwill
12
42.0
102.0
Other intangible assets
12
810.0
799.2
Property, plant and equipment
246.2
247.7
Investment in associates
25.3
16.8
Retirement benefit assets
14
10.2
-
Deferred tax assets
69.8
66.4
1,203.5
1,232.1
Current assets
Inventories
6.3
4.9
Trade and other receivables
108.4
89.9
Cash and cash equivalents
13
19.2
16.0
133.9
110.8
Total assets
1,337.4
1,342.9
Non-current liabilities
Trade and other payables
20
(59.0)
-
Borrowings
13
(39.7)
-
Retirement benefit obligations
14
(358.8)
(377.6)
Deferred tax liabilities
(159.7)
(165.4)
Provisions
15
(4.1)
(3.7)
(621.3)
(546.7)
Current liabilities
Trade and other payables
(111.3)
(80.1)
Borrowings
13
(20.3)
(25.0)
Current tax liabilities
8
(4.5)
(7.7)
Provisions
15
(22.3)
(16.6)
(158.4)
(129.4)
Total liabilities
(779.7)
(676.1)
Net assets
557.7
666.8
Equity
Share capital
16
(30.9)
(28.3)
Share premium account
16
(606.7)
(606.7)
Merger reserve
16
(17.4)
(37.9)
Capital redemption reserve
16
(4.4)
(4.4)
Retained earnings and other reserves
16
101.7
10.5
Total equity attributable to equity holders of the parent
(557.7)
(666.8)
Notes to the consolidated financial statements
for the 52 weeks ended 30 December 2018 (52 weeks ended 31 December 2017)
1. General information
The financial information in the Annual Results Announcement is derived from but does not represent the full statutory accounts of Reach plc. The statutory accounts for the 52 weeks ended 31 December 2017 have been filed with the Registrar of Companies and those for the 52 weeks ended 30 December 2018 will be filed following the Annual General Meeting on 2 May 2019. The auditors' reports on the statutory accounts for the 52 weeks ended 31 December 2017 and for the 52 weeks ended 30 December 2018 were unqualified, do not include reference to any matters to which the auditors drew attention by way of emphasis of matter without qualifying the reports and do not contain a statement under Section 498 (2) or (3) of the Companies Act 2006.
Whilst the financial information included in this Annual Results Announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards (IFRS), this announcement does not itself contain sufficient information to comply with IFRS. This Annual Results Announcement constitutes a dissemination announcement in accordance with Section 6.3 of the Disclosure and Transparency Rules (DTR). The Annual Report for the 52 weeks ended 30 December 2018 will be available on the Company's website at www.reachplc.com and at the Company's registered office at One Canada Square, Canary Wharf, London E14 5AP on 26 February 2019 and will be sent to shareholders who have elected to receive a hard copy with the documents for the Annual General Meeting to be held on 2 May 2019.
The financial information has been prepared for the 52 weeks ended 30 December 2018 and the comparative period has been prepared for the 52 weeks ended 31 December 2017. Throughout this report, the financial information for the 52 weeks ended 30 December 2018 is referred to and headed 2018 and for the 52 weeks ended 31 December 2017 is referred to and headed 2017. The Company presents the results on a statutory and adjusted basis and revenue trends on a statutory and like for like basis as described on page 2.
2. Accounting polices
Basis of preparation
The financial information has been prepared in accordance with IFRS as adopted by the European Union. These are subject to ongoing amendment by the International Accounting Standards Board and by the European Union and are therefore subject to change. As a result, the financial information contained herein will need to be updated for any subsequent amendment to IFRS or any new standards that are issued. The financial information has been prepared under the historical cost convention as modified by the revaluation of freehold properties which on transition to IFRS were deemed to be the cost of the asset and for derivative financial instruments and shared-based payments that have been measured at fair value.
The accounting policies used in the preparation of the consolidated financial statements for the 52 weeks ended 30 December 2018 have been consistently applied to all the periods presented except for the changes in accounting policy noted below and are set out in the Reach plc 2018 Annual Report. These consolidated financial statements have been prepared on a going concern basis as set out in the Management Report in this Annual Results Announcement.
Changes in accounting policy
The same accounting policies, presentation and methods of computation are followed in the condensed consolidated financial statements as applied in the Group's latest annual consolidated financial statements.
The adoption of IFRS 9 (Amended) 'Financial Instruments' and IFRS 15 (Issued) 'Revenue from Contracts with Customers' has had no material impact on the Group. The latest assessment of the impact of IFRS 16 (Issued) 'Leases' (effective for periods beginning on or after 1 January 2019) revealed that, when adopted based on the operating leases at the reporting date, fixed assets and lease obligations of around £45 million would be recognised on the consolidated balance sheet with no material impact on operating profit as operating lease costs would be replaced with an equivalent depreciation and interest charge in the consolidated income statement.
The Group has also adopted the following standards during the current financial period which have had no material impact on the Group:
· IFRS 4 (Amended) 'Applying Insurance Contracts'
· IFRS 2 (Amended) 'Share-based Payment'
· IAS 40 (Amended) 'Investment Property'
· IFRIC 22 (New) 'Foreign Currency Transaction and Advance Consideration'
· Annual improvements 2014 - 2016 cycle
The following standards and interpretations (*denotes not yet endorsed for use in the EU), which have not been applied and when adopted are not expected to have a material impact on the Group, were in issue and will be effective for periods beginning on or after 1 January 2019 unless stated below:
· IFRIC 23 (New) 'Uncertainty over Income Tax Treatments'*
· IFRS 9 (Amended) 'Financial Instruments'
· IAS 28 (Amended) 'Investments in Associates and Joint Ventures'*
· IAS 19 (Amended) 'Employee Benefits'*
· IFRS 17 'Insurance Contracts' - effective for periods beginning on or after 1 January 2021*
· Annual improvements 2015 - 2017 cycle*
Key sources of estimation uncertainty
The key assumptions concerning the future and other key sources of estimation uncertainty that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below:
Provisions (notes 8, 15 and 19)
There is uncertainty as to liabilities arising from the outcome or resolution of the ongoing historical legal issues and in addition there is uncertainty as to the amount of expenditure that may be tax deductible and additional tax liabilities may fall due in relation to earlier years. Provisions are measured at the best estimate of the expenditure required to settle the obligation based on the assessment of the related facts and circumstances at each reporting date.
Retirement benefits (note 14)
Actuarial assumptions adopted and external factors can significantly impact the surplus or deficit of defined benefit pension schemes. Valuations for funding and accounting purposes are based on assumptions about future economic and demographic variables. An estimate of the allowance for GMP equalisation of £15.8 million has been included within liabilities at 30 December 2018 and is subject to change as more detailed member calculations are undertaken and could change as a result of future legal judgements. These result in risk of a volatile valuation deficit and the risk that the ultimate cost of paying benefits is higher than the current assessed liability value. Advice is sourced from independent and qualified actuaries in selecting suitable assumptions at each reporting date.
Impairment review (note 12)
There is uncertainty in the value in use calculation. The most significant area of uncertainty relates to expected future cash flows for each cash-generating unit. Determining whether the carrying values of assets in a cash-generating unit are impaired requires an estimation of the value in use of the cash-generating unit to which these have been allocated. The value in use calculation requires the Group to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate present value. Projections are based on both internal and external market information and reflect past experience. The discount rate reflects a long-term equity and debt mix based on the period end enterprise value assuming a long-term debt to EBITDA ratio of 2.5 times. In calculating leverage of 2.5 times, the Group assumes that pension obligations are treated as debt. The leverage calculation for the Group's financing facilities excludes pension obligations.
Critical judgements in applying the Group's accounting policies
In the process of applying the Group's accounting policies, described above, management has made the following judgements that have the most significant effect on the amounts recognised in the financial statements:
Identification of cash-generating units (note 12)
There is judgement required in determining the cash-generating units. At each reporting date management review the interdependency of revenues across our portfolio of newspapers and websites to determine the appropriate cash-generating unit. The Group operates its newspaper titles and websites such that the majority of the revenues are interdependent and revenue would be materially lower if titles and websites operated in isolation. As such, management do not consider that an impairment review at an individual title or website level is appropriate or practical. As the Group continues to centralise revenue generating functions and has moved to a matrix operating structure over the past few years all of the individual titles and websites in Publishing have increased revenue interdependency and the number of cash-generating units has reduced.
Identification of intangible assets acquired in business combinations (note 20)
Significant judgement is involved in respect of the identification of intangible assets acquired in business combinations, such as publishing rights and titles, and in calculating their fair values. These judgements impact the amount of goodwill recognised on acquisitions. This involves consideration of the intangible assets acquired and the selection and application of a suitable valuation method and associated assumptions such as the discount rate and the useful economic life attributed to the assets. The Group has sufficient experience of valuations techniques and therefore performs the valuations internally.
Determination of the acquisition date in business combinations (note 35)
The directors have applied judgement with respect to the acquisition date relating to the Express & Star acquisition. The acquisition of the UK publishing assets was completed on 28 February 2018. Post completion, a merger review was instigated by the Competition and Markets Authority ('CMA') and the transaction was also reviewed by the Secretary of State for Digital, Culture, Media and Sport ('Secretary of State') for public interest considerations. On 20 June 2018 the acquisition was cleared by the Secretary of State and the CMA. The directors have concluded that the benefits of ownership had passed on the date the acquisition completed, that the acquisition date was 28 February 2018 and the acquisition has been included in the consolidated financial statements from 1 March 2018.
3. Operating segments
Operating segments are identified on the basis of internal reports about components of the Group that are regularly reviewed by the Board and chief operating decision maker (executive directors) to allocate resources to the segments and to assess their performance. The accounting policies used in the preparation of each segment's revenue and results are the same as the Group's accounting policies. The Board and chief operating decision maker are not provided with an amount for total assets by segment. The Group's operations are primarily located in the UK and the Group is not subject to significant seasonality during the year.
The Group has four operating segments that are regularly reviewed by the Board and chief operating decision maker. The operating segments are: Publishing which includes all of our newspapers and magazines together with digital publishing; Printing which provides printing services to the Publishing segment and to third parties; Specialist Digital which includes our digital classified recruitment business and the digital marketing services business (disposed of in September 2018); and Central which includes revenue and costs not allocated to the operational divisions and our share of results of associates. Express & Star has been included in the Publishing, Printing and Central segments from the date of acquisition (note 20).
Segment revenue and results
52 weeks ended 30 December 2018
Publishing
2018
£m
Printing
2018
£m
Specialist Digital
2018
£m
Central
2018
£m
Total
2018
£m
Revenue
Segment sales
679.0
157.2
8.3
1.3
845.8
Inter-segment sales
-
(121.6)
(0.3)
-
(121.9)
Total revenue
679.0
35.6
8.0
1.3
723.9
Segment result
153.8
-
2.1
(10.3)
145.6
Operating adjusted items
(253.2)
Operating loss
(107.6)
Investment revenues
0.1
Pension finance charge
(8.6)
Finance costs
(3.8)
Loss before tax
(119.9)
Tax charge
0.3
Loss for the period
(119.6)
52 weeks ended 31 December 2017
Publishing
2017
£m
Printing
2017
£m
Specialist Digital
2017
£m
Central
2017
£m
Total
2017
£m
Revenue
Segment sales
578.5
131.2
10.0
3.5
723.2
Inter-segment sales
-
(99.6)
(0.4)
-
(100.0)
Total revenue
578.5
31.6
9.6
3.5
623.2
Segment result
133.2
-
2.7
(11.2)
124.7
Operating adjusted items
(26.8)
Operating profit
97.9
Investment revenues
0.1
Pension finance charge
(11.9)
Finance costs
(4.2)
Profit before tax
81.9
Tax charge
(19.1)
Profit for the period
62.8
4. Revenue
2018
£m
2017
£m
Publishing Print
575.4
494.6
Circulation
362.1
284.7
Advertising
176.7
177.6
Other
36.6
32.3
Publishing Digital
103.6
83.9
Display and transactional
91.3
68.7
Classified
12.3
15.2
Printing
35.6
31.6
Specialist Digital
8.0
9.6
Central
1.3
3.5
Total revenue
723.9
623.2
The Group's operations are located primarily in the UK. The Group's revenue by location of customers is set out below:
2018
£m
2017
£m
UK and Republic of Ireland
721.9
621.5
Continental Europe
1.8
1.6
Rest of World
0.2
0.1
Total revenue
723.9
623.2
5. Operating adjusted items
2018
£m
2017
£m
Impairment of goodwill, publishing rights and titles and freehold buildings (note 12)
(200.0)
-
Pension past service costs for GMP equalisation and administrative expenses (note 14)
(18.8)
(1.0)
Provision for historical legal issues (note 15)
(12.5)
(10.5)
Restructuring charges in respect of cost reduction measures (note 15)
(20.0)
(12.6)
Other (a)
(1.6)
(2.3)
Operating adjusted items included in administrative expenses
(252.9)
(26.4)
Operating adjusted items included in share of results of associates (b)
(0.3)
(0.4)
Total operating adjusted items
(253.2)
(26.8)
(a) Other includes: amortisation of intangible assets of 0.2 million (2017: £0.3 million - note 12), transaction costs of £6.3 million (2017: £2.2 million - note 20), profit on disposal of property of £2.3 million with total net proceeds of £6.6 million less carrying value of £4.3 million (2017: £0.2 million), charge relating to property carrying value of £0.8 million (2017: nil) and profit on disposal of subsidiary undertaking of £3.4 million (2017: nil - note 21).
(b) Group's share of restructuring costs and amortisation incurred by PA Group partially offset by the profit on disposal of a trade by Brand Events.
6. Investment revenues
2018
£m
2017
£m
Interest income on bank deposits and other interest receipts
0.1
0.1
7. Finance costs
2018
£m
2017
£m
Interest on bank overdrafts and borrowings
(3.8)
(2.3)
Total interest expense
(3.8)
(2.3)
Fair value loss on derivative financial instruments
-
(3.8)
Foreign exchange gain on retranslation of borrowings
-
1.9
Finance costs
(3.8)
(4.2)
8. Tax
2018
£m
2017
£m
Corporation tax charge for the period
(17.2)
(17.4)
Prior period adjustment
-
(0.4)
Current tax charge
(17.2)
(17.8)
Deferred tax credit/(charge) for the period
17.5
(1.2)
Prior period adjustment
-
(0.1)
Deferred tax credit/(charge)
17.5
(1.3)
Tax credit/(charge)
0.3
(19.1)
Reconciliation of tax credit/(charge)
%
%
Standard rate of corporation tax
19.0
(19.3)
Tax effect of items that are not deductible in determining taxable profit
(19.5)
(3.6)
Tax effect of items that are not taxable in determining taxable profit
0.7
-
Prior period adjustment
-
(0.5)
Tax effect of share of results of associates
0.1
0.1
Tax credit/(charge) rate
0.3
(23.3)
The standard rate of corporation tax for the period is 19% (2017: blended rate of 19.25% being a mix of 20% up to 31 March 2017 and 19% from 1 April 2017). The tax effect of items that are not deductible in determining taxable profit includes certain costs where there is uncertainty as to their deductibility. The current tax liabilities amounted to £4.5 million (2017: £7.7 million) at the reporting date and include net provisions of £1.3 million (2017: £3.2 million). At the reporting date the maximum tax exposure relating to uncertain tax items is some £7 million (2017: £7 million).
The tax on actuarial gains on defined benefit pension schemes taken to the consolidated statement of comprehensive income is a credit of £0.8 million comprising a deferred tax credit of £8.7 million and a current tax charge of £7.9 million (2017: charge of £10.5 million comprising a deferred tax charge of £15.5 million and a current tax credit of £5.0 million).
9. Dividends
2018
Pence
per share
2017
Pence
per share
Dividends paid per share and recognised as distributions to equity holders in the period
5.92
5.60
Dividend proposed per share but not paid nor included in the accounting records
3.77
3.55
The Board proposes a final dividend for 2018 of 3.77 pence per share. An interim dividend for 2018 of 2.37 pence per share was paid on 28 September 2018 bringing the total dividend in respect of 2018 to 6.14 pence per share. The 2018 final dividend payment is expected to amount to £11.2 million.
On 3 May 2018 the final dividend proposed for 2017 of 3.55 pence per share was approved by shareholders at the Annual General Meeting and was paid on 8 June 2018.
Total dividends paid in 2018 were £17.5 million (2017 final dividend payment of £10.5 million and 2018 interim dividend payment of £7.0 million).
10. Earnings per share
Basic earnings per share is calculated by dividing profit for the period attributable to equity holders of the parent by the weighted average number of ordinary shares during the period and diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares in issue on the assumption of conversion of all potentially dilutive ordinary shares.
2018
Thousand
2017
Thousand
Weighted average number of ordinary shares for basic earnings per share
291,478
272,730
Effect of potential dilutive ordinary shares in respect of share awards
1,571
1,481
Weighted average number of ordinary shares for diluted earnings per share
293,049
274,211
On 28 February 2018, the Company issued 25,826,746 ordinary shares in connection with the acquisition of Express & Star (note 20). The weighted average number of potentially dilutive ordinary shares not currently dilutive was 3,964,133 (2017: 3,201,611).
Statutory (loss)/earnings per share
2018
Pence
2017
Pence
(Loss)/earnings per share - basic
(41.0)
23.0
(Loss)/earnings per share - diluted
(41.0)
22.9
Adjusted earnings per share
2018
Pence
2017
Pence
Earnings per share - basic
39.2
36.1
Earnings per share - diluted
39.0
35.9
Set out in note 17 is the reconciliation between the statutory and adjusted results.
11. Notes to the consolidated cash flow statement
2018
£m
2017
£m
Operating (loss)/profit
(107.6)
97.9
Depreciation of property, plant and equipment
22.3
20.4
Impairment charge
200.0
-
Amortisation of intangible assets
0.2
0.3
Share of results of associates
(0.8)
(0.4)
Charge for share-based payments
1.0
0.5
Profit on disposal of land and buildings
(1.5)
(0.2)
Profit on disposal of subsidiary undertaking
(3.4)
-
Research and development tax credit
-
(1.0)
Write-off of fixed assets
0.5
1.9
Pension administrative expenses
3.0
1.0
Pension past service costs
15.8
-
Operating cash flows before movements in working capital
129.5
120.4
Decrease in inventories
0.1
0.9
Increase in receivables
(2.9)
-
Increase/(decrease) in payables
11.1
(14.5)
Cash generated from operations
137.8
106.8
12. Goodwill and other intangible assets
The Group had four cash-generating units at the beginning of the year (Nationals and Regionals in Publishing and Digital Classified Recruitment and Digital Marketing Services in Specialist Digital). This increased to five cash-generating units after completion of the acquisition of Express & Star (note 20) which is included in Publishing and then reduced to four cash-generating units after the disposal of the Digital Marketing Services business (note 21). During the year it was recognised that the cash inflows of the Nationals and Regionals cash-generating units were largely interdependent such that they have been combined into a single cash-generating unit. The increase in the interdependency has been accelerated due to the increased scale of advertising packages sold across all titles and websites and reflects the groupwide nature of our wholesale and distribution contracts. At the year end the Group had three cash-generating units (Publishing excluding Express & Star, Express & Star and Digital Classified Recruitment).
The movement in the year in the carrying value of goodwill and other intangible assets is:
Goodwill
£m
Publishing rights and
titles
£m
Customer relationships and domain names
£m
Total
intangible assets
£m
Opening carrying value
102.0
798.9
0.3
901.2
Acquisition of subsidiary undertaking (note 20)
35.9
106.1
-
142.0
Amortisation
-
-
(0.2)
(0.2)
Disposal of subsidiary undertaking (note 21)
(3.4)
-
(0.1)
(3.5)
Impairment
(92.5)
(95.0)
-
(187.5)
Closing carrying value
42.0
810.0
-
852.0
Goodwill of £42.0 million comprises Express & Star £35.9 million and Digital Classified Recruitment £6.1 million. Publishing rights and titles comprises Publishing excluding Express & Star £703.9 million and Express & Star £106.1 million. Given the acquisition completed on 28 February 2018, the Express & Star balances are considered provisional under IFRS 3 (note 20).
The directors consider publishing rights and titles (with a carrying amount of £810.0 million) have indefinite economic lives due to the longevity of the brands and the ability to evolve the brands in an ever changing media landscape. There is judgement required in determining the cash-generating units. At each reporting date management review the interdependency of revenues across our portfolio of newspapers and websites to determine the appropriate cash-generating unit. The Group operates its newspaper titles and websites such that the majority of the revenues are interdependent and revenue would be materially lower if titles and websites operated in isolation. As such, management do not consider that an impairment review at an individual title or website level is appropriate or practical.
The Group tests the carrying value of assets at the cash-generating unit level for impairment at each reporting date or more frequently if there are indications that assets might be impaired. The review is undertaken by assessing whether the carrying value of assets is supported by their value in use which is calculated as the net present value of future cash flows derived from those assets, using cash flow projections. If an impairment charge is required this is allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit and then to the other assets of the cash-generating unit but subject to not reducing any asset below its recoverable amount.
The Group prepared cash flow projections for a cash-generating unit using the budget for 2019 and projections for 2020 and 2021. The growth rates for the three-year period are internal projections based on both internal and external market information and reflect past experience of and the risk associated with each asset. Cash flow projections beyond 2021 are extrapolated based on estimated growth rates which do not exceed the average long-term growth rates for the relevant markets. The long-term growth rates are based on the Board's view of the cash-generating unit's market position and maturity of the relevant market. The long-term growth rates for Publishing excluding Express & Star is -2.0% (2017: Nationals 0% and Regionals -1% with a weighted average combined decline of -0.4%), for Express & Star is -2.0% and for Digital Classified Recruitment is -1.0% (2017: 0%).
The post-tax discount rate used at the reporting date in respect of all cash-generating units is11.0% (2017: 10.5%) reflecting a long-term equity and debt mix based on the period end enterprise value assuming a long-term debt to EBITDA ratio of 2.5 times. In calculating leverage of 2.5 times the Group assumes that pension obligations are treated as debt. Although we use a leverage of 2.5 times which is higher than that permissible by the Group's financing facilities, the Group's financing facilities exclude pension obligations in calculating leverage. The equivalent pre-tax discount rate is 13.4% (2017: 12.8%).
The Group's 2017 Annual Report highlighted that the impairment review is highly sensitive to reasonably possible changes in key assumptions used in the value in use calculations.
At the interim we performed a full impairment review. As part of this the future long-term growth rate for the then Regionals cash-generating unit was reduced to -2% from -1% at the 2017 year end. This reflected a more challenging than expected trading environment, in particular local print advertising and lower digital growth. Lower than expected digital growth was a combination of digital revenue upsold from print being impacted by declining print revenues and by a change in the algorithms by both Facebook and Google early in 2018 which impacted digital audience growth and therefore revenue. We continue to believe that there are significant longer term benefits of our scale local digital audiences and there are opportunities to grow revenue and profit in the longer term. A £150.0 million impairment charge was reflected in the interim results. The combination of the Regionals and Nationals cash-generating units was recognised following the impairment charge being recorded.
At the reporting date we performed a full impairment review. In this review the discount rate was increased from 10.5% to 11.0% reflecting increased volatility and the long-term growth rate used for the Publishing cash-generating units was set at -2.0%, in line with that used for Regionals in the interim review. The changes in the assumptions together with consideration of the impact of the uncertainties created by the process of the UK exiting the European Union which may have an impact in the short term resulted in an impairment charge of £50.0 million in respect of the Publishing excluding Express & Star cash-generating unit.
The total impairment charge for the year is £200.0 million (£187.1 million net of deferred tax). The charge has been allocated to goodwill (£92.5 million), publishing rights and titles (£95.0 million) and freehold buildings (£12.5 million).
The impairment review is highly sensitive to reasonably possible changes in key assumptions used in the value in use calculations. Reasonably possible changes in key assumptions used in the value in use calculations would have the following impact on the Publishing excluding Express & Star cash-generating unit:
· In the short term, assuming that revenue declines are materially in line with our projections, the key assumption driving the value in use calculated is the ability to deliver cost savings targets to protect profitability. The Group has a strong track record in delivering these savings. Notwithstanding this, if EBITDA in 2021 (being the final year before the perpetuity factor) was £5 million lower in the Publishing excluding Express & Star cash-generating unit this would have increased the impairment charge by £33 million.
· In the medium to long term, the key assumption that drives value in use is the ability to generate digital revenue growth as the structural change in the industry continues. If digital revenue in 2021 (being the final year before the perpetuity factor) was £5 million or 2% below forecast in the Publishing excluding Express & Star cash-generating unit this would have increased the impairment charge by £33 million.
· The structural challenges faced are currently more acute in locally sourced rather than nationally sourced print revenues. This also impacts digital revenue upsold from print which is impacted by declining print revenues. Digital growth can also be impacted by factors such as the impact seen by a change in the algorithms by both Facebook and Google early in 2018 which impacted digital audience growth. With the uncertainty in the pace of decline of print advertising and of growth in digital revenue, the long-term decline in the Publishing excluding Express & Star cash-generating unit is -2.0% which compares to a weighted average combined decline of -0.4% at the prior year end and -0.6% at the interim review. A further 0.5% increase in the long-term decline to -2.5% would have increased the impairment charge by £32 million.
· An increase of 0.5 percentage points in the post-tax discount rate from 11.0% to 11.5% would have increased the impairment charge by £34 million.
A combination of reasonably possible changes in key assumptions relating to the Publishing excluding Express & Star cash-generating unit, such as print revenue declining at a faster rate than projected, digital revenue growth being significantly lower than projected or the scale of cost saving initiatives being delivered in the short term being lower than forecast, would lead to a further future impairment in the Publishing excluding Express & Star cash-generating unit. For the Express & Star and Digital Classified Recruitment cash-generating units, reasonably possible changes in key assumptions used in the value in use calculations would not result in an impairment charge.
13. Net debt
The net debt for the Group is as follows:
31 December 2017
£m
Cash
flow
£m
Loans
drawn
£m
Loans
repaid
£m
Transfer to current
£m
30 December 2018
£m
Non-current liabilities
Acquisition Term Loan
-
-
(60.0)
-
20.3
(39.7)
-
-
(60.0)
-
20.3
(39.7)
Current liabilities
Acquisition Term Loan
-
-
(10.0)
10.0
(20.3)
(20.3)
Revolving Credit Facility
(25.0)
-
(10.0)
35.0
-
-
(25.0)
-
(20.0)
45.0
(20.3)
(20.3)
Debt
(25.0)
(80.0)
45.0
-
(60.0)
Current assets
Cash and cash equivalents
16.0
(31.8)
80.0
(45.0)
-
19.2
Cash and cash equivalents
16.0
(31.8)
80.0
(45.0)
-
19.2
Net debt
(9.0)
(31.8)
-
-
-
(40.8)
Net debt at the end of the year comprised £60.0 million drawings on the Acquisition Term Loan ('ATL') less cash balances of £19.2 million. The Group had no drawings at the end of the year on the Revolving Credit Facility ('RCF').
A new £75 million ATL was procured in February 2018 and £70 million was drawn to partially fund the acquisition of the UK publishing assets (note 20) which together with a drawing on the Group's RCF and cash balances were used to fund the initial consideration to the seller and the initial pension contribution to the defined benefit pension schemes. The remaining £5 million was available for completion of the acquisition of the Ireland publishing assets (note 20). On 27 July 2018, the Group prepaid the £10 million repayment due under the ATL in December 2018 and on 10 October 2018 cancelled the undrawn £5 million. The outstanding £60 million drawn on the facility is repayable in three instalments of £20.3 million, £20.3 million and £19.4 million in December 2019, 2020 and 2021 respectively.
The Group also has access to an undrawn £83.3 million amortising RCF which is committed until December 2021. The RCF amortises by £8.33 million every six months from June 2019 to December 2020 down to £50.0 million for the last year of the term.
14. Retirement benefit schemes
Defined contribution pension schemes
The Group operates defined contribution pension schemes for qualifying employees: the Reach Pension Plan (the 'RPP') for employees other than Express & Star and two Group Personal Pension Plans (the 'GPP') for Express & Star employees. The assets of the RPP scheme where employees have an individual account at Fidelity are held separately from those of the Group in funds under the control of Trustees. The assets of the GPP where employees held a personal pension policy with Legal and General are held separately from those of the Group in funds under the control of Legal and General.
The current service cost charged to the consolidated income statement for the year of £14.9 million (2017: £13.6 million) represents contributions paid by the Group at rates specified in the scheme rules. All amounts that were due have been paid over to the schemes at all reporting dates.
Defined benefit pension schemes
Background
The defined benefit pension schemes operated by the Group are all closed to future accrual. The Group has six defined benefit pension schemes:
· Trinity Mirror schemes (the 'TM Schemes'): the MGN Pension Scheme (the 'MGN Scheme'), the Trinity Retirement Benefit Scheme (the 'Trinity Scheme') and the Midland Independent Newspapers Pension Scheme (the 'MIN Scheme'); and
· Express & Star schemes (the 'E&S Schemes'): the Express Newspapers 1988 Pension Fund (the 'EN88 Scheme'), the Express Newspapers Senior Management Pension Fund (the 'ENSM Scheme') and the West Ferry Printers Pension Scheme (the 'WF Scheme').
On 30 December 2016, the Mirror Group Pension Scheme and the MGN Past Service Pension Scheme were merged into the MGN Pension Scheme (collectively referred to as the Mirror Schemes). On 30 March 2017 the bulk annuity policy held by the Mirror Group Pension Scheme was shattered with individual policies issued to members, which led to an equal reduction to the assets and liabilities of £173.3 million. Both the Mirror Group Pension Scheme and the MGN Past Service Pension Scheme were wound up in 2017.
Characteristics
The defined benefit pension schemes provide pensions to members, which are based on the final salary pension payable, normally from age 65 (although some schemes have some pensions normally payable from an earlier age) plus surviving spouses or dependants benefits following a member's death. Benefits increase both before and after retirement either in line with statutory minimum requirements or in accordance with the scheme rules if greater. Such increases are either at fixed rates or in line with retail or consumer prices but subject to upper and lower limits. All of the schemes are independent of the Group with assets held independently of the Group. They are governed by Trustees who administer benefits in accordance with the scheme rules and appropriate UK legislation. The schemes each have a professional or experienced independent trustee as their chairman with generally half of the remaining Trustees nominated by the members and half by the Group.
Maturity profile and cash flow
Across all of the schemes, the uninsured liabilities related 60% to current pensioners and their spouses or dependants and 40% related to deferred pensioners. The average term from the year end to payment of the remaining uninsured benefits is expected to be around 19 years. Uninsured pension payments in 2018, excluding lump sums and transfer value payments, were £64 million and these are projected to rise to an annual peak in 2031 of £101 million and reducing thereafter.
Funding arrangements
The funding of the Group's schemes is subject to UK pension legislation as well as the guidance and codes of practice issued by the Pensions Regulator. Funding targets are agreed between the Trustees and the Group and are reviewed and revised usually every three years. The funding targets must include a margin for prudence above the expected cost of paying the benefits and so are different to the liability value for IAS 19 purposes. The funding deficits revealed by these triennial valuations are removed over time in accordance with an agreed recovery plan and schedule of contributions for each scheme.
The funding valuations of the schemes have all been agreed in the last 15 months. The valuations at 31 December 2016 showed deficits of £476.0 million for the MGN Scheme, £78.0 million for the Trinity Scheme and £68.2 million for the MIN Scheme. The valuations at 5 April 2017 showed deficits of £69.8 million for the EN88 Scheme and £3.2 million for the ENSM Scheme. The valuation at 31 December 2017 showed a deficit of £6.5 million for the WF Scheme.
The deficits in all schemes are expected to be removed before or in 2027 by a combination of the contributions and asset returns. The Group paid £90.1 million into the defined benefit pension schemes in the year (including an initial pension contribution of £41.2 million paid into the E&S Schemes in connection with the acquisition of Express & Star). Contributions have been agreed for 2019 and 2020 at £48.9 million per annum. Thereafter, contributions per the current schedule of contributions are for £56.1 million per annum in 2021 to 2023, £55.3 million per annum in 2024 to 2026 and £53.3 million in 2027. Payments to the TM Schemes in 2017 were £38.7 million comprising £36.2 million of deficit funding and £2.5 million in connection with the share buyback.
The Group has agreed that in respect of dividend payments in 2018, 2019 and 2020 that additional contributions would be paid at 75% of the excess if dividends paid in 2018 are above 6.16 pence per share. For 2019 and 2020 the threshold increases in line with the increase in dividends capped at 10% per annum.
The future deficit funding commitments are linked to the three-yearly actuarial valuations. There is no link to the IAS 19 valuations which use different actuarial assumptions and are updated at each reporting date. The next valuation for funding of all six pension schemes will be as at 31 December 2019 and this is required to be completed by 31 March 2021, although we anticipate this to be completed by 31 December 2020.
Although the funding commitments do not generally impact the IAS 19 position, IFRIC 14 guides companies to consider for IAS 19 disclosures whether any surplus can be recognised as a balance sheet asset and whether any future funding commitments in excess of the IAS 19 liability should be provisioned for. Based on the interpretation of the rules for each of the defined benefit pension schemes, the Group considers that it has an unconditional right to any potential surplus on the ultimate wind-up after all benefits to members have been paid of all of the schemes except the WF Scheme. Under IFRIC 14 it is therefore appropriate to recognise any IAS 19 surpluses which may emerge in future and not to recognise any potential additional liabilities in respect of future funding commitments of all of the schemes except for the WF Scheme. For the WF Scheme at the reporting date the assets are surplus to the IAS 19 benefit liabilities, however, to allow for IFRIC 14 the Group recognises a deficit of the value of its future contribution commitment to the scheme in line with the schedule of contributions in force at the reporting date.
The calculation of Guaranteed Minimum Pension ('GMP') is set out in legislation and members of pension schemes that were contracted out of the State Earnings-Related Pension Scheme ('SERPS') between 6 April 1978 and 5 April 1997 will have built up an entitlement to a GMP. GMPs were intended to broadly replicate the SERPS pension benefits but due to their design they give rise to inequalities between men and women, in particular, the GMP for a male comes into payment at age 65 whereas for a female it comes into payment at the age of 60 and GMPs typically receive different levels of increase to non GMP benefits. On 26 October 2018, the High Court handed down its judgement in the Lloyds Trustees vs Lloyds Bank plc and Others case relating to the equalisation of member benefits for the gender effects of GMP equalisation. This judgement creates a precedent for other UK defined benefit schemes with GMPs. The judgement confirmed that GMP equalisation was required for the period 17 May 1990 to 5 April 1997 and provided some clarification on legally acceptable methods for achieving equalisation. We have therefore included an allowance for GMP equalisation within liabilities at 30 December 2018 and this has been recognised as a charge for past service costs in the income statement. The estimate is subject to change as we undertake more detailed member calculations and/or as a result of future legal judgements.
Risks
Valuations for funding and accounting purposes are based on assumptions about future economic and demographic variables. This results in risk of a volatile valuation deficit and the risk that the ultimate cost of paying benefits is higher than the current assessed liability value.
The main sources of risk are:
· Investment risk: a reduction in asset returns (or assumed future asset returns);
· Inflation risk: an increase in benefit increases (or assumed future increases); and
· Longevity risk: an increase in average life spans (or assumed life expectancy).
These risks are managed by:
· Investing in insured annuity policies: the income from these policies exactly matches the benefit payments for the members covered, removing all of the above risks. At the reporting date the insured annuity policies covered 13% of total liabilities;
· Investing a proportion of assets in other classes such as government and corporate bonds and in liability driven investments: changes in the values of the assets aim to broadly match changes in the values of the uninsured liabilities, reducing the investment risk, however, some risk remains as the durations of the bonds are typically shorter than that of the liabilities and so the values may still move differently. At the reporting date non equity assets amounted to 76% of assets excluding the insured annuity policies;
· Investing a proportion of assets in equities: with the aim of achieving outperformance and so reducing the deficits over the long term. At the reporting date this amounted to 24% of assets excluding the insured annuity policies; and
· The gradual sale of equities over time to purchase additional annuity policies or liability matching investments: to further reduce risk as the schemes, which are closed to future accrual, mature.
Pension scheme accounting deficits are snapshots at moments in time and are not used by either the Group or Trustees to frame funding policy. The Group and Trustees are aligned in focusing on the long-term sustainability of the funding policy which aims to balance the interests of the Group's shareholders and members of the schemes. The Group and Trustees are also aligned in reducing pensions risk over the long term and at a pace which is affordable to the Group.
The three E&S Schemes each has an accounting surplus at the reporting date, before allowing for the IFRIC 14 asset ceiling.
Across the three TM Schemes, the invested assets are expected to be sufficient to pay the uninsured benefits due up to 2044, based on the reporting date assumptions. The remaining uninsured benefit payments, payable from 2045, are due to be funded by a combination of asset outperformance and the deficit contributions currently scheduled to be paid up to 2027.
For the TM Schemes, actuarial projections at the year end reporting date show removal of the combined accounting deficit by the end of 2025 due to scheduled contributions and asset returns at the current target rate. From this point, the assets are projected to be sufficient to fully fund the liabilities on the accounting basis.
The Group is not exposed to any unusual, entity specific or scheme specific risks. Other than the impact of GMP equalisation, there were no plan amendments, settlements or curtailments in 2018 or 2017 which resulted in a pension cost.
Results
For the purposes of the Group's consolidated financial statements, valuations have been performed in accordance with the requirements of IAS 19 with scheme liabilities calculated using a consistent projected unit valuation method and compared to the estimated value of the scheme assets at 30 December 2018.
The assets and liabilities of the schemes as at the reporting date are:
TM Schemes
£m
E&S Schemes
£m
Total
£m
Present value of uninsured scheme liabilities
(1,641.9)
(503.4)
(2,145.3)
Present value of insured scheme liabilities
(171.6)
(145.9)
(317.5)
Total present value of scheme liabilities
(1,813.5)
(649.3)
(2,462.8)
Invested and cash assets at fair value
1,289.1
540.1
1,829.2
Value of liability matching insurance contracts
171.6
145.9
317.5
Total fair value of scheme assets
1,460.7
686.0
2,146.7
Funded (deficit)/surplus
(352.8)
36.7
(316.1)
Impact of IFRIC 14
-
(32.5)
(32.5)
Net scheme deficit
(352.8)
4.2
(348.6)
Based on actuarial advice, the assumptions used in calculating the scheme liabilities and the actuarial value of those liabilities are:
2018
2017
Financial assumptions (nominal % pa)
Discount rate
2.75
2.50
Retail price inflation rate
3.20
3.15
Consumer price inflation rate
2.00
1.95
Rate of pension increase in deferment
2.20
1.95
Rate of pension increases in payment (weighted average across the schemes)
3.40
3.70
Mortality assumptions - future life expectancies from age 65 (years)
Male currently aged 65
21.6
21.7
Female currently aged 65
23.5
23.6
Male currently aged 55
22.3
22.4
Female currently aged 55
24.3
24.4
The estimated impact on the IAS 19 liabilities and on the IAS 19 deficit at the reporting date, due to a reasonably possible change in key assumptions over the next year, are set out in the table below:
Effect on
liabilities
£mEffect on
deficit
£mDiscount rate +/- 0.5% pa
-200/+220
-185/+200
Retail price inflation rate +/- 0.5% pa
+46/-43
+41/-39
Consumer price inflation rate +/- 0.5% pa
+44/-42
+44/-42
Life expectancy at age 65 +/- 1 year
+140/-140
+120/-125
The RPI sensitivity impacts the rate of increases in deferment for some of the pensions in the EN88 Scheme and the ENSM Scheme and some of the pensions in payment for all schemes except the MGN Scheme. The CPI sensitivity impacts the rate of increases in deferment for some of the pensions in most schemes and the rate of increases in payment for some of the pensions in payment for all schemes.
The effect on the deficit is usually lower than the effect on the liabilities due to the matching impact on the value of the insurance contracts held in respect of some of the liabilities. Each assumption variation represents a reasonably possible change in the assumption over the next year but might not represent the actual effect because assumption changes are unlikely to happen in isolation.
The estimated impact of the assumption variations make no allowance for changes in the values of invested assets that would arise if market conditions were to change in order to give rise to the assumption variation. If allowance were made, the estimated impact would likely be lower as the values of invested assets would normally change in the same directions as the liability values.
The amount included in the consolidated income statement, consolidated statement of comprehensive income and consolidated balance sheet arising from the Group's obligations in respect of its defined benefit pension schemes is as follows:
Consolidated income statement
2018
£m
2017
£m
Pension administrative expenses
(3.0)
(1.0)
Past service costs
(15.8)
-
Pension finance charge
(8.6)
(11.9)
Defined benefit cost recognised in income statement
(27.4)
(12.9)
Consolidated statement of comprehensive income
2018
£m
2017
£m
Actuarial gain/(loss) due to liability experience
7.0
(6.0)
Actuarial gain/(loss) due to liability assumption changes
98.7
(12.6)
Total liability actuarial gain/(loss)
105.7
(18.6)
Returns on scheme assets (less)/greater than discount rate
(98.0)
81.2
Impact of IFRIC 14
(3.1)
-
Total gain recognised in statement of comprehensive income
4.6
62.6
Consolidated balance sheet
2018
£m
2017
£m
Present value of uninsured scheme liabilities
(2,145.3)
(1,747.1)
Present value of insured scheme liabilities
(317.5)
(182.1)
Total present value of scheme liabilities
(2,462.8)
(1,929.2)
Invested and cash assets at fair value
1,829.2
1,369.5
Value of liability matching insurance contracts
317.5
182.1
Total fair value of scheme assets
2,146.7
1,551.6
Funded deficit
(316.1)
(377.6)
Impact of IFRIC 14
(32.5)
-
Net scheme deficit
(348.6)
(377.6)
Non-current assets - retirement benefit assets
10.2
-
Non-current liabilities - retirement benefit obligations
(358.8)
(377.6)
Net scheme deficit
(348.6)
(377.6)
Net scheme deficit included in consolidated balance sheet
(348.6)
(377.6)
Deferred tax included in consolidated balance sheet
64.5
66.2
Net scheme deficit after deferred tax
(284.1)
(311.4)
Movement in net scheme deficit
2018
£m
2017
£m
Opening net scheme deficit
(377.6)
(466.0)
Acquisition of subsidiary undertakings pensions schemes
(38.3)
-
Contributions
90.1
38.7
Consolidated income statement
(30.5)
(12.9)
Consolidated statement of comprehensive income
7.7
62.6
Closing net scheme deficit
(348.6)
(377.6)
Changes in the present value of scheme liabilities
2018
£m
2017
£m
Opening present value of scheme liabilities
(1,929.2)
(2,127.6)
Acquisition of subsidiary undertakings pension schemes
(682.7)
-
Past service cost loss
(18.7)
-
Interest cost
(61.4)
(51.8)
Actuarial gain/(loss) - experience
7.0
(6.0)
Actuarial gain - change to demographic assumptions
16.6
26.7
Actuarial gain/(loss) - change to financial assumptions
82.1
(39.3)
Benefits paid
123.5
95.5
Bulk transfer due to buyout
-
173.3
Closing present value of scheme liabilities
(2,462.8)
(1,929.2)
Impact of IFRIC 14
2018
£m
2017
£m
Opening impact of IFRIC 14
-
-
Acquisition of subsidiary undertakings pension schemes
(29.4)
-
Increase in impact of IFRIC 14
(3.1)
-
Closing impact of IFRIC 14
(32.5)
-
Changes in the fair value of scheme assets
2018
£m
2017
£m
Opening fair value of scheme assets
1,551.6
1,661.6
Acquisition of subsidiary undertakings pension schemes
673.8
-
Past service cost gain
2.9
-
Interest income
52.8
39.9
Actual return on assets (less)/greater than discount rate
(98.0)
81.2
Contributions by employer
90.1
38.7
Benefits paid
(123.5)
(95.5)
Administrative expenses
(3.0)
(1.0)
Bulk transfer due to buyout
-
(173.3)
Closing fair value of scheme assets
2,146.7
1,551.6
Fair value of scheme assets
2018
£m
2017
£m
UK equities
37.4
66.1
US equities
99.5
218.3
Other overseas equities
275.8
279.1
Property
37.5
24.6
Corporate bonds
287.8
240.5
Fixed interest gilts
127.1
60.0
Index linked gilts
48.6
24.8
Liability driven investment
459.1
148.9
Cash and other
456.4
307.2
Invested and cash assets at fair value
1,829.2
1,369.5
Value of insurance contracts
317.5
182.1
Fair value of scheme assets
2,146.7
1,551.6
The majority of the scheme assets have quoted prices in active markets. Scheme assets include neither direct investments in the Company's ordinary shares nor any property assets occupied nor other assets used by the Group.
15. Provisions
Share-based payments
£m
Property
£m
Restructuring
£m
Other
£m
Total
£m
At 31 December 2017
(0.2)
(6.2)
(2.4)
(11.5)
(20.3)
Acquisition of subsidiary undertakings
-
(2.3)
-
(0.4)
(2.7)
Charged to income statement
-
(0.4)
(20.0)
(14.4)
(34.8)
Utilisation of provision
0.1
2.3
18.1
10.9
31.4
At 30 December 2018
(0.1)
(6.6)
(4.3)
(15.4)
(26.4)
The provisions have been analysed between current and non-current as follows:
2018
£m
2017
£m
Current
(22.3)
(16.6)
Non-current
(4.1)
(3.7)
(26.4)
(20.3)
The share-based payments provision relates to National Insurance obligations attached to the future crystallisation of awards. This provision will be utilised over the next three years.
The property provision relates to onerous property leases and future committed costs related to occupied, let and vacant properties. The majority of the provision will be utilised over the next two years and reflects the remaining term of the leases or expected period of vacancy.
The restructuring provision relates to restructuring charges incurred in the delivery of cost reduction measures. This provision is expected to be utilised within the next year.
The other provision relates to legal and other costs relating to historical litigation and is expected to be utilised within the next year. The cost associated with the settlement of civil claims in relation to phone hacking has been higher than expected, in particular the legal fees of the claimant's lawyers, which contributed to the provision for settling these historical claims being increased by £12.5 million during the year bringing the total amount provided to £75.5 million. At the period end, £13.6 million of the provision remains outstanding and this represents the Board's best estimate of the amount required to settle the expected claims. This estimate is based on historical trends and experience of claims and costs, and in some cases, proposed offers to settle claims.
Whilst the Board notes that there is continued uncertainty, the increase in the year is predominantly due to increased legal fees for the claimants lawyers as the number of new claims has slowed. The Group has recorded an increase in the provision in each of the last three years which highlights the challenges in making a best estimate. Certain cases are subject to court proceedings and the outcome of these cases is likely to have an impact on how much is required to settle the remaining claims. Individual court rulings can affect multiple cases and therefore the Group's current ability to settle and so mitigate further legal costs. Due to this uncertainty, a contingent liability has been highlighted in note 19.
16. Share capital and reserves
During the year, the Company issued 25,826,746 shares (at 77.44 pence) relating to the acquisition of Express & Star (note 20). The total share capital increased to 309,286,317 allotted, called-up and fully paid ordinary shares of 10 pence each. The share premium account reflects the premium on issued ordinary shares. The merger reserve increased by £17.4 million reflecting the premium on the shares allotted in relation to the acquisition of Express & Star (note 20) and decreased by £37.9 million which has been transferred to retained earnings and other reserves as a result of the impairment during the year (note 12). The capital redemption reserve represents the nominal value of the shares purchased and subsequently cancelled under share buyback programmes.
The Board approved a share buyback programme of up to £10 million which commenced in August 2016. The share buyback was completed in November 2017. The Company holds 10,017,620 shares as Treasury shares. Cumulative goodwill written off to retained earnings and other reserves in respect of continuing businesses acquired prior to 1998 is £25.9 million (2017: £25.9 million). On transition to IFRS, the revalued amounts of freehold properties were deemed to be the cost of the asset and the revaluation reserve has been transferred to retained earnings and other reserves.
Shares purchased by the Trinity Mirror Employee Benefit Trust (the 'Trust') are included in retained earnings and other reserves at £4.3 million (2017: £4.9 million). During the year, 480,280 were released relating to grants made in prior years (2017: 447,096).
During the year, 1,529,406 awards were granted to executive directors on a discretionary basis under the Long Term Incentive Plan (2017: 1,219,327). The exercise price of the granted awards is £1 for each block of awards granted. The awards vest after three years, subject to the continued employment of the participant and satisfaction of certain performance conditions and are required to be held for a further two years. During the prior period, 111,792 awards were granted to executive directors under the Restricted Share Plan. The awards vest after three years.
During the year, 1,709,295 awards were granted to senior managers on a discretionary basis under the Senior Management Incentive Plan (2017: 1,242,316). The exercise price of the granted awards is £1 for each block of awards granted. The awards vest after three years, subject to the continued employment of the participant and satisfaction of certain performance conditions.
17. Reconciliation of statutory to adjusted results
52 weeks ended 30 December 2018
Statutory
results
£m
Operating
adjusted
items
(a)
£m
Finance
costs
(b)
£m
Pension
finance
charge
(c)
£m
Tax
items
(d)
£m
Adjusted
results
£m
Revenue
723.9
-
-
-
-
723.9
Operating (loss)/profit
(107.6)
253.2
-
-
-
145.6
(Loss)/profit before tax
(119.9)
253.2
-
8.6
-
141.9
(Loss)/profit after tax
(119.6)
226.8
-
7.0
-
114.2
Basic (loss)/earnings per share (p)
(41.0)
77.8
-
2.4
-
39.2
52 weeks ended 31 December 2017
Statutory
results
£m
Operating
adjusted
items
(a)
£m
Finance
costs
(b)
£m
Pension
finance
charge
(c)
£m
Tax
items
(d)
£m
Adjusted
results
£m
Revenue
623.2
-
-
-
-
623.2
Operating profit
97.9
26.8
-
-
-
124.7
Profit before tax
81.9
26.8
1.9
11.9
-
122.5
Profit after tax
62.8
24.1
1.5
9.6
0.5
98.5
Basic EPS (p)
23.0
8.9
0.5
3.5
0.2
36.1
(a) Operating adjusted items relate to the items charged or credited to operating profit as set out in note 5.
(b) Impact of the translation of foreign currency borrowings and fair value changes on derivative financial instruments as set out in note 7. The private placement loans notes were fully repaid and the associated cross-currency interest rate swaps matured in June 2017.
(c) Pension finance charge relating to the defined benefit pension schemes as set out in note 14.
(d) Tax items relate to prior year tax adjustments included in the taxation credit or charge as set out in note 8.
Set out on page 2 is the rationale for the alternative performance measures adopted by the Group. The reconciliations in this note highlight the impact on the respective components of the income statement. Items are adjusted for where they relate to material items in the year (impairment, restructuring, disposals) or relate to historic liabilities (historical legal issues, defined benefit pension schemes which are all closed to future accrual).
18. Reconciliation of statutory to like for like revenue
52 weeks
ended
30 December 2018
£m(a)
£m
(b)
£m52 weeks
ended
30 December 2018
(like for like)
£m52 weeks
ended
31 December
2017£m
(a)
£m(b)
£m(c)
£m52 weeks
ended
31 December
2017
(like for like)
£mPublishing Print
575.4
26.2
-
601.6
494.6
172.1
-
(7.5)
659.2
Circulation
362.1
17.5
-
379.6
284.7
115.5
-
(0.1)
400.1
Advertising
176.7
7.3
-
184.0
177.6
48.8
-
(7.3)
219.1
Other
36.6
1.4
-
38.0
32.3
7.8
-
(0.1)
40.0
Publishing Digital
103.6
3.2
-
106.8
83.9
17.5
-
-
101.4
Display and transactional
91.3
3.2
-
94.5
68.7
17.5
-
--
86.2
Classified
12.3
-
-
12.3
15.2
-
-
-
15.2
Printing
35.6
0.5
-
36.1
31.6
2.7
-
-
34.3
Specialist Digital
8.0
-
(3.6)
4.4
9.6
-
(4.9)
-
4.7
Central
1.3
-
-
1.3
3.5
-
-
-
3.5
Total revenue
723.9
29.9
(3.6)
750.2
623.2
192.3
(4.9)
(7.5)
803.1
(a) Inclusion of Express & Star assuming owned by the Group from the beginning of 2017.
(b) Exclusion of Communicator Corp which was sold in 2018.
(c) Metros handed back to DMGT in December 2017 and other portfolio changes in 2017.
19. Contingent liabilities
There is the potential for further liabilities to arise from the outcome or resolution of the ongoing historical legal issues (note 15). At this stage, due to the uncertainty in respect of the nature, timing or measurement of any such liabilities, we are unable to reliably estimate how these matters will proceed and their financial impact.
20. Acquisition of subsidiary undertakings
The Group announced the proposed acquisition of Northern & Shell's publishing assets ('Express & Star') on 9 February 2018 which was subsequently approved at the General Meeting held on 27 February 2018. The acquisition comprised the UK publishing assets and the Ireland publishing assets.
The UK publishing assets comprise national newspapers and magazines together with associated websites and a print plant in Luton and the Ireland publishing assets comprise a 50% equity interest in Independent Star Limited and 100% equity in International Distribution 2018 Limited. The acquisition is earnings enhancing in the first year of acquisition and the increased scale of the enlarged Group provides increased financial flexibility in the medium term for investment and meeting the enlarged Group's pension obligations.
On 28 February 2018, the Group completed the acquisition of the UK publishing assets by acquiring 100% of the equity in Northern & Shell Network Limited and its subsidiaries for £121.7 million with an initial cash consideration of £42.7 million and an equity consideration of £20.0 million (issue of 25,826,746 shares at 77.44 pence per share) both on completion and deferred consideration of £59.0 million (payable as £18.9 million, £16.0 million, £17.1 million and £7.0 million on the second, third, fourth and fifth anniversaries respectively of the acquisition). There are no conditions attached to the payment of the deferred consideration and the transaction was structured such that no interest accrued on these payments. However, under the sale and purchase agreement the Group has the right to offset agreed claims arising from a breach of warranties and indemnities and can also offset any shortfalls on the contracted advertising from the Health Lottery. The deferred consideration has not been discounted as we do not believe that the impact of such discounting is material. The net cash acquired on acquisition was £1.4 million and in June 2018 a working capital payment of £1.3 million was made. The results from the acquisition are included in the Publishing and Printing segments in continuing operations.
The provisional fair value of the consideration is as follows:
£m
Initial cash consideration
42.7
Equity issued to seller
20.0
Deferred consideration
59.0
Share purchase payment
121.7
Working capital payment
1.3
Fair value of consideration
123.0
The provisional fair value of net assets acquired and the goodwill is as follows:
£m
Other intangible assets
106.1
Fixed assets
28.0
Retirement benefit obligations
(38.3)
Deferred tax assets
18.3
Deferred tax liabilities
(18.0)
Provisions
(2.7)
Working capital
(7.7)
Net cash
1.4
Fair value of net assets
87.1
Goodwill
35.9
Fair value of consideration
123.0
Other intangible assets relates to publishing rights and titles. Working capital includes gross receivables of £10.1 million less provision for doubtful debts of £0.1 million. Provisions relate to property and other (note 15). Goodwill arising on the acquisition is attributed to the significant opportunities arising from combining two large national newspapers and websites which will drive multiple revenue opportunities and cost efficiencies which will enhance revenue and profitability. The goodwill is not expected to be deductible for tax purposes.
The acquisition contributed £159.5 million of revenue (Publishing £156.2 million and Printing £3.3 million) and the revenue of the Group would have increased by £29.9 million (Publishing £29.4 million and Printing £0.5 million) if the acquisition had been made at the beginning of the year. The acquisition contributed a statutory operating profit of £22.8 million profit (Publishing £22.8 million and Printing nil) post acquisition and if the acquisition had been made at the beginning of the year the statutory operating loss of the Group would have increased by £76.6 million (Publishing £76.6 million and Printing nil).
The fair value of consideration will be satisfied as follows:
£m
Cash consideration paid in 2018
44.0
Cash deferred consideration payable in four annual instalments commencing 28 February 2020
59.0
Total cash consideration paid/payable
103.0
Equity issued as part consideration in 2018
20.0
Fair value of consideration
123.0
The cash flow impact of the acquisition in 2018 is as follows:
£m
Initial cash consideration
42.7
Working capital payment
1.3
Net cash acquired on acquisition
(1.4)
Acquisition of subsidiary undertaking
42.6
Initial pension contribution to defined benefit pension schemes
41.2
Transaction costs charged to operating profit
6.3
Acquisition related cash outflow
90.1
Transaction costs of £2.2 million were charged to operating profit in 2017.
On 6 December 2018, the Group completed the acquisition of a 50% equity interest in Independent Star Limited for £4.5 million and 100% equity in International Distribution 2018 Limited for £0.5 million. The total cash consideration paid in 2018 for the acquisition of the two subsidiary undertakings (Northern & Shell Network Limited and International Distribution 2018 Limited) was £43.1 million.
21. Disposal of subsidiary undertaking
In September 2018, the Group disposed of The Communicator Corporation Limited. The net assets at the date of disposal and the profit on disposal were as follows:
£m
Goodwill
3.4
Intangible assets
0.1
Fixed assets
0.3
Trade and other receivables
0.7
Cash and cash equivalents
0.4
Trade and other payables
(0.6)
Net assets
4.3
Profit on disposal
3.4
Total consideration
7.7
Satisfied by:
Cash consideration received
6.8
Deferred cash consideration receivable
0.9
Total consideration
7.7
Net cash flow arising on disposal:
Cash consideration
6.8
Cash disposed
(0.4)
Net cash inflow
6.4
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.ENDFR EAKASALLNEEF
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