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Checking the finances

Newspaper groups have multiple audiences; readers, obviously; advertisers, of course; city analysts, uh? The verdict of the money men, particularly in tough economic times, can affect the very survival of newspaper groups. Andrea Kirkby puts herself in their shoes and trawls through the interim statements from the main groups and assesses what the figures tell us about their performance.

By Andrea Kirkby

Recent weeks have seen the publication of interim management statements from the UK quoted newspaper groups.

The headline figures continue to be worrying - even more so than last results season, and that wasn't exactly good news. Many groups are seeing revenue fall by as much as a third.

Trinity Mirror, for instance, saw an 18% decline in group revenue during the first four months of the year. That's substantially worse than a decline of 6.5% for its last full year's trading.

The slide in advertising revenues at Johnston Press has accelerated, too. They're now falling at 34%, compared with 16% in the UK and 22.6% in Ireland last year.

DMGT at first sight looks as if it has managed to do rather better, with group revenues down only 7%. But the group result was shored up by a good performance from B2B media. Dig through the figures a little and you'll see the newspapers did a good deal worse - Associated Newspapers saw a 10% decline in revenues, and Northcliffe 23%.

Margins hit

Margins have been badly damaged. At Associated Newspapers, operating profit more than halved despite the relatively small decline in revenues, and Northcliffe saw an 85% reduction in profits. It's now making just £6m, against £40m in the same period last year, with margins falling from 18 to 4%.

For the group as a whole, operating profit at DMGT fell 30%, from £166m to £116m - again, profits have fallen far more than revenues, with the group's operational gearing working against it. Normalised earnings per share nearly halved, and the only good news for investors was the unchanged dividend. After Trinity Mirror cancelled the final dividend, DMGT is the only group now paying out to its shareholders.

As well as the interim statements, the full year 2008 results have now come through from Archant (since it's not a quoted company, it doesn't have to put results out as quickly). Again the decline seems to have accelerated, with operating profit falling 27% in the full year against only 8.9% at the half way stage. Like the other groups, Archant also saw operational gearing work against it, with a 9% fall in revenues delivering a much larger decline in profits.

It's not just in the UK that newspapers are finding life tough. Mecom, though quoted on the London Stock Exchange, invests in newspapers across Europe - in Poland, Denmark, the Netherlands and Norway. It saw revenues fall 14%, within which, advertising was down 22%.

As if things weren't bad enough, the decline in operating profitability may also force newspaper groups to make exceptional writedowns against assets held on the balance sheet. This time round, DMGT wrote off £188m as an impairment charge against its titles, forcing the statutory results into a £152m loss. Fortunately, stock exchange analysts and major investors tend to look at the normalised figures, which don't include the writeoff. We may see more writeoffs needing to be made if current trends continue - Independent News & Media has already said it needs to make some in the full year results.

Mirroring the economy

Looking at the details of the figures, it's not surprising that property and recruitment ads have suffered the worst, with motors also performing badly as consumers refrain from big ticket purchases. For instance at Trinity Mirror, display ads were down 24%, with recruitment halved and property down 54%, and motors down 35%. It's a fairly obvious reflection of the state of the economy.

At Northcliffe, recruitment nearly halved, property more than halved, and both motors and retail were down by nearly a quarter.

It's also noticeable that the national papers are doing much better than the regionals. At Trinity Mirror, the regionals saw advertising fall by 36%, while the national papers only saw a 17% fall. The comparison is similar at DMGT, where Northcliffe performed much worse than Associated Newspapers.

However what's interesting, though perhaps not statistically significant, is that while the regionals saw the worst fall in the first two months of the year, and the rate of decline has slowed slightly, the nationals now seem to be seeing trading worsen. We'll have to wait for the next results to see whether this actually becomes a trend.

Bottoming out?

Most of the regional papers reported that the advertising decline appears to have slowed in the last couple of months. It may be that the economy is finally stabilising. On the other hand, since the downturn began in early 2008, the comparison is getting easier - the previous year's figures were already weak.

Johnston Press claims it has seen “greater stability over recent weeks”. However, management expressly says that this doesn't mean that ad spend is actually increasing. And while Trinity Mirror's figures show its nationals doing better in May than in the previous four months, with revenues falling only 10% against 17% in the prior period, its regional papers are still seeing ad sales falling by well over 30%. Not much improvement there. Mecom, too, claims some improvement in the rate of decline, but says ad income is “unpredictable”. The trend is still downwards, if not as steeply as before.

Circulation revenue, on the other hand, appears to have been more stable. Most groups are seeing circulations fall, but have recouped revenues by increasing cover prices. Trinity Mirror, for instance, increased prices for the Daily and Sunday Mirror, and the Daily Record, and saw circulation revenues fall 4%. Associated Newspapers saw a fall in circulation, but managed to increase its circulation revenues through increased prices.

Newspaper groups have continued to cut costs. Johnston Press has already cut its cost base by £30m year-on-year; Mecom chopped its costs by 9%, and is to cut €75m in the full year.

At Northcliffe, headcount has already been cut by 500, and costs fell 11% in the first half; but there's more to come, with a 20% cost cut planned, and 1,000 staff to leave by the end of the year. That will cost the group £20m in redundancy and other costs. Even then, it's unlikely that any of these cuts will recoup the fall in advertising in the near term.

Digital down too

Even digital, which had held up well till recently, is now getting savaged. That's particularly the case at Trinity Mirror, where a large slice of digital revenue comes from recruitment and property classifieds sites such as - digital revenues were down 13%. At the annual results, management said economic conditions would slow digital growth - it looks as if things have got worse since then.

At Associated Northcliffe Digital, core revenues were down 14% and the division fell into loss, though part of that reflects one-off marketing costs. And Northcliffe admits that though other digital revenues were still rising, recruitment was down a third.

Archant saw online revenues up 51%, but they're still small in a group context at £3.8m compared to total revenues of £174m. Display advertising did well and so, despite the economic environment, did Still, those were 2008 results - the figures for the first half of this year may not be so good.

Asset selling

Newspaper groups were net acquirers of businesses in the 1990s and the early part of this decade, but now they are prioritising cash flow. Most of them do appear to be generating cash - Trinity Mirror expects debt to fall (it was stable in the first 17 weeks of the year) having cut its capital spending by half. Johnston Press has already managed to reduce its debt pile. Meanwhile, DMGT saw net debt rise by £212m to £1227m - but management says it should fall back in the second half.

But if they're generating cash, they're not spending it. They are now net sellers of assets - if they can get the right price. Mecom has sold its German and North West Norwegian businesses to raise €215m, and has also agreed to sell some of its Dutch businesses; it's also raising money through a rights issue. DMGT has sold a majority stake in the Evening Standard, which while it hasn't contributed much cash, will at least take significant costs out of the group.

Not everyone has been successful in selling off their unwanted assets. Johnston Press has now ended its quest for a buyer for its Irish titles; there were enough bidders, but none of them were willing to pay a price that made sense. And the Independent has various assets up for sale, but has failed to sell its stake in the Australian media business, APN.

That's bad news for both groups, since they are surviving on their bankers' sufferance, if not quite on a wing and a prayer, having large debts that need refinancing.

Johnston Press admits that it will now miss its profit targets and end up in breach of its banking covenants. Management has said it expects to announce new banking facilities before the results are announced in late August.

Independent News & Media has negotiated a standstill agreement with creditors on a €200m bond which needs to be refinanced. That gives it some breathing space - even so, it will still face refinancing of further debt in September 2010, so it's not out of the woods yet.

City’s assessment

City analysts are not impressed with the prospects for newspaper groups. Citigroup has downgraded DMGT from 'hold' to 'sell', and also cut its forecasts for Johnston Press and Independent News & Media. JP Morgan, too, takes a negative view of the sector, and says, “Johnston Press may bear the worst of this downtrend as its business is entirely local”. It has DMGT down as a 'buy', but that's because of the B2B media - not the newspaper side.

It does look as if the newspaper groups are getting their debt under control. But life is not going to be easy; profitability has been very substantially reduced, even taking into consideration the cost cuts.

Richard Jewson, chairman of Archant, says, “It is impossible to know the timing and extent of any recovery and difficult to foresee the shape and scale of our industry in the years ahead.” The second part of that statement shows we are facing more than a temporary downturn.

An even more radical statement came from David Montgomery, chief executive of Mecom, who claimed, “The economic crisis has finally made the industry accept that the traditional operating model for newspapers is defective and the expense unsustainable.”

So, business as usual, only with cost cuts, is no longer an option. Newspapers will have to change - and change fast - if they're not to go under.