7 Mar 2007 07:02
Johnston Press PLC07 March 2007 For Immediate Release 7 March 2007 Johnston Press plc RESULTS FOR THE YEAR ENDED 31 DECEMBER 2006 Johnston Press plc, one of the leading community media groups in the UK andIreland, announces results for the year ended 31 December 2006. KEY FINANCIALS 2006 2005 % Change £'m £'mRevenue 602.2 520.2 +16Profit before tax and non-recurring items * 146.7 155.6 -6Operating profit before non-recurring items * 186.8 180.3 +4 Earnings per share Pence Pence - before non-recurring items* 36.66 38.72 -5 Dividend per share - final 6.20 5.60 +11 - total 9.30 8.40 +11 • Heavy focus on organic revenue growth through developing websites and launching new print titles - now operate 317 local websites and launched record 150 new publications in 2006• Digital revenues up 36% to £11.3m - unique users up 63%, page impressions up 53%• Cost reductions of £13.9m protected margins in the existing businesses - see page 17• £60m Dinnington press site opened ahead of schedule and within budget - first triple width web press in UK• 2005/6 acquisitions accretive to earnings - excellent progress on integration• Dividend growth maintained up 11% on last year• Total UK advertising revenues (including digital) for first 9 weeks of 2007 were down by 2.9% on the prior year PROSPECTS Chairman, Roger Parry said: "In the early weeks of 2007 income from advertising in print products isslightly down on the levels of the same period last year which reflectscontinued growth in property but further declines in motors, recruitment anddisplay. However, the rate of decline is reducing and accordingly the Boardbelieves that we will continue to see an improvement in the year-on-yearperformance over the coming months........Our online revenue continues to growrapidly but from a small base. In the broader context, we believe the mainissues relating to advertising volumes are linked to overall economic conditionsrather than online migration. The investments in our new print operations and ongoing enhancements to ouroperating systems will bring benefits during 2007 but overall we expect revenuesto be at a similar level to 2006. With newsprint and other underlying costsrising, our efforts will continue to be focussed on maximising the efficiency ofthe business and pursuing initiatives to drive new revenue growth both in printand online." * See page 21 For further information please contact: Tim Bowdler, Chief Executive Officer Tel: 020 7466 5000 (today) orStuart Paterson, Chief Financial Officer 0131 225 3361 (thereafter) Buchanan Communications Tel: 020 7466 5000Richard Oldworth/Suzanne Brocks CHAIRMAN'S STATEMENT As shown in the Income Statement Johnston Press achieved a profit before tax andnon-recurring items of £147 million in 2006. This was 6% below 2005 and mainlyreflects a downturn in the advertising cycle which affected all advertisingcategories other than property and was experienced to varying degrees across ourentire geographic footprint. Recruitment advertising was worst affected, in parta result of the reduction in spending by local Government which itself is areflection of Government policy. The Group remains committed to a strategy of optimising local coverage andadvertising reach through a range of media in local communities and to this endduring 2006 we focussed heavily on both developing websites and launching newprint titles. We also invested more than £60 million in new printing facilitiesand modern IT systems to improve our efficiency and customer service. Johnston Press owns more than 250 strong local media franchises and we aredeveloping these rapidly to meet the changing needs of our customers and torespond to the opportunities presented by digital media. Results Total revenues for the year were £602 million, 16% up on 2005 due to theacquisitions in the second half of 2005 and The Scotsman Publications Ltd earlyin 2006. Again due to the benefit of these acquisitions, operating profit beforenon-recurring items was £187 million, an increase of £7 million or 4%.Underlying earnings per share were 36.66p compared to 38.72p in 2005, areduction of 5%, reflecting the difficult trading conditions. Non-recurring items amounted to £15 million. The new press investment programmeis already exceeding expectations and this has allowed us to bring forward ourprinting consolidation plans and has resulted in an accelerated depreciationcharge of £9 million which estimates the shortfall in sale proceeds fromredundant equipment compared to current book values. The remaining £6 millionrelates to the cost of restructuring the existing businesses, and those acquiredin 2005 and 2006, offset by the profit on sale of three properties. Dividend The Board proposes a final dividend of 6.2p per share, making a total of 9.3pper share for the year. This represents a 11% increase and we believe thisfurther above inflation rise of dividend is appropriate as it providesconsistent dividend growth while maintaining a realistic but prudent level ofcover. Our Business Johnston Press serves the local media needs of numerous communities in the UKand Ireland. We aim to be, and in the vast majority of cases are, the principalsource of local news, information, entertainment and comment in thosecommunities. We currently provide our services through 18 daily newspapers, 291 weeklynewspapers and a huge range of related specialist, locally focussed, printpublications. We operate 317 local websites to extend the content and reach ofour print products. These websites reach an estimated monthly audience of about6.6 million. Our main source of income is advertising from providers of local goods andservices wanting to reach our audiences. Johnston Press offers such advertisersa highly effective means of reaching local consumers through our print anddigital publications, a combination which is capable of delivering unparalleledlevels of household penetration and advertiser response. At the start of 2006, we extended our business by completing the acquisition ofThe Scotsman Publications Limited (TSPL). We launched a total of 150 newpublications of which 60 were monthly free distribution community newsletters. Our pilot project of a fully integrated digital newsroom in Preston, Lancashirehas been very successful and attracted considerable interest from within theindustry and the wider media sector. Based on the knowledge gained in Prestonthe digital newsroom model is being rolled out to all of our primary publishinglocations during 2007. This approach will enable us to offer our audiences acontinuous news service through a combination of digital and print channels 24hours a day with audio visual content as well as text and pictures. 2006 saw one of our UK competitors Daily Mail & General Trust plc (DMGT) offerfor sale its local newspaper business, Northcliffe Newspapers (Northcliffe), andthen abandon the sale process. At the end of the year, Trinity Mirror conductedand publicly reported a detailed strategic review which also envisages the saleof some of their regional newspapers. In the USA, a number of significantownership changes took place or are being contemplated, most notably, the saleof Knight Ridder to McClatchy. These developments highlight the widespread stateof flux in the regional newspaper industry which, we anticipate, will result infurther consolidation opportunities both here in the UK and in Ireland over thelonger term. Our Strategy Over the past few years we have continued to observe and build a betterunderstanding of the huge changes going on in the way that people in the UK,Europe and America use local media. As broadband connections take the internet,potentially, into every home in the UK and Ireland, the nature of websites andthe way that they are used as part of normal everyday life is undergoingdramatic change. A technology that less than 10 years ago was a novelty inNorthern California is now a fundamental part of most people's home as well asworking lives. This social revolution throws up huge challenges andopportunities for a local media company like Johnston Press. We take the view that locally focussed websites are not simply web versions ofnewspapers but are local media in their own right. We also believe that theseburgeoning media require new and different skills but that many of our staff canmake, and indeed have made, the transition so that they contribute to both ourprint and online media offerings. Our approach is to provide training and cleardirection to make all of our publishing centres just as successful online asthey continue to be in print. To give added impetus to this aspect of ourbusiness, we will increase expenditure on our digital operations in 2007 by £5million. During 2006 we commissioned a major new printing facility at Dinnington nearSheffield, with a similar installation due to be completed in Portsmouth thisyear. These investments will ensure that we remain at the leading edge of printtechnology, able to offer our readers and advertisers the quality ofreproduction they demand. In parallel with this we have also invested heavily inour digital activities to ensure that they too achieve best of class operatingstandards. As we move forward we expect to grow by extending the reach of the Group intonew communities through the selective acquisition of existing local operatorsand by providing a growing range of digital services. We will also invest in theequipment, systems and skills to continue to improve our operating efficiency. The Board is fully aware of the competitive pressures on print as a local mediumbut the evidence before us suggests that the changes will be slow and that,whilst local communities will turn in greater numbers to digital media for theirneeds, the fundamental requirement for local content and advertising channelswill not change. We believe we are well positioned to remain the principal localcontent provider and thereby to continue to offer advertisers the best meansavailable of achieving high reach and response in local communities. Board During 2006 there were no changes to the Board. However, after the year end wewelcomed Ian Russell as a Non-Executive Director. He was previously CEO ofScottish Power plc having joined as Finance Director in 1994 following a numberof financial roles in the UK and Hong Kong. He joined the Board on 9 January andwas also immediately appointed to the Audit Committee. Two of our longestserving Non-Executive Directors, Harry Johnston and Jimmy Gordon, have decidedto step down at the forthcoming AGM. Harry Johnston joined the Board in 1971 and was a former Managing Director ofJohnston (Falkirk) Ltd. Harry, as well as being a significant shareholder in theGroup, has been a key member of the Board through the development of the Groupfrom a small private business to the substantial publicly quoted company we aretoday. I would like to thank him on behalf of the Board for his considerablecontributions over the last 36 years. Jimmy Gordon has been a much valued member of the Johnston Press Board for 10years, and from his background as one of the pioneers of commercial radio in theUK, has given us an extraordinary insight into the development of local media.On behalf of the Board I extend to him all best wishes for his (very active)retirement and thanks for his invaluable contribution to the growth anddevelopment of Johnston Press. Corporate Issues Throughout 2006, we have complied with the provisions of the 2003 Combined Codeon Corporate Governance and the revised Turnbull guidance. In addition, we havein place all the processes necessary to comply with the provisions of the 2006Combined Code which became effective from 1 January 2007. Prospects In the early weeks of 2007 income from advertising in print products is slightlydown on the levels of the same period last year which reflects continued growthin property but further declines in motors, recruitment and display. However,the rate of decline is reducing and accordingly the Board believes that we willcontinue to see an improvement in the year-on-year performance over the comingmonths. Although migration of classified advertising to websites, both ours andcompetitors, remains small in proportion to total print revenues, it is clearlya factor which our strategy addresses. Our online revenue continues to growrapidly but from a small base. In the broader context, we believe the mainissues relating to advertising volumes are linked to overall economic conditionsrather than online migration. The investments in our new print operations and ongoing enhancements to ouroperating systems will bring benefits during 2007 but overall we expect revenuesto be at a similar level to 2006. With newsprint and other underlying costsrising, our efforts will continue to be focussed on maximising the efficiency ofthe business and pursuing initiatives to drive new revenue growth both in printand online. ROGER PARRYChairman7 March 2007 BUSINESS REVIEW Our Marketplace: The focus of our business is on meeting the wide ranging information needs ofnumerous local communities across many parts of the UK and Ireland. Bymaintaining the position we generally hold of being the market leading providerof such information in the communities we serve, we also offer advertisers theprimary means of reaching those communities to promote their goods and services.Through our portfolios of related print and digital publications, we achieveextremely high levels of household penetration, thereby providing advertiserswith unparalleled levels of market access. From our origins as a publisher of local newspapers, Johnston Press now offersan increasingly wide range of channels which encompass both print and digitalmedia. In a typical Johnston Press marketplace we publish a range of localnewspapers, usually comprising both paid-for and free formats, sometimes dailyas well as weekly, with the market leading title heading our portfolio. Ourcompanies also publish a number of related print publications including freedistribution community newsletters, lifestyle magazines, advertising-onlypublications covering jobs, property, motor vehicles and general items for saleand special interest publications aimed at target groups such as the studentpopulation or particular activities like angling. Our digital operations comprise 317 local websites which cover the entiregeographic spread of our print publications. These websites, whilst reflectingthe brands and content of our local newspapers, offer a far greater range ofregularly updated local news and information in text, pictures and increasinglyaudio visual formats. Embedded within these sites are our classified advertisingwebsites operating under our "Today" brands which are used consistentlythroughout the Group, both online and in print. The range of our digitalservices extends much further than this to include commonly branded localdirectories, auction services, personal announcements, communities of commoninterest, blogs (user-generated web content) and chatrooms. Additionally, we aremaking growing use of mobile communications to further extend the range ofdigital services we offer. The marketplaces in which we operate vary considerably in their size andstructure but, with very few exceptions, they have a well-defined localgeographic focus. We publish in numerous local communities throughout the UK andIreland ranging from rural areas and small towns to larger urban andmetropolitan centres. The common thread in all these cases is our ability toreach all parts of the local community through the range of publishing channelswe offer, irrespective of age or demographic. Apart from 305 daily evening,weekly paid-for and free newspapers targeted at such local communities, we alsoown The Scotsman, Scotland on Sunday, the Yorkshire Post and the (Belfast) NewsLetter, all paid-for morning newspapers. These are based out of three of our keylocal publishing centres but reach a much wider geographic audience with adistinct appeal to particular demographics and interest groups within theircoverage area. The Market Environment: As outlined above, our local publishing operations generally hold market leadingpositions in terms of the provision of local news and information and also inenabling advertisers to achieve high levels of local market reach. Howevercompetition for our audience and our advertisers has been a consistent themewithin our markets for many years and comes in an increasing variety of forms. In some of our markets we face direct competition from another establishedregional newspaper publishing group. In a small number of such cases, we are thesecondary publisher in the market but, in the main, our publications occupy themarket leading position. In a number of markets we face competition fromindependent newspaper publishers, usually, though not invariably, of freenewspapers; some of which are relatively well established although others wereonly launched more recently. With low barriers to entry, such start-ups have notbeen uncommon in the history of our business and some have become establishedplayers in the market. Despite the impact of these competitors, we have in allsuch cases retained market leadership. Competition in the form of other printpublications has been widespread for some years with numerous examples ofadvertising-only publications aimed at the various classified advertisingcategories, lifestyle magazines and very local publications such as parishmagazines. Although many of these publications are individually owned, some arepart of larger media organisations. The presence of these publications has inpart expanded the total market for advertising revenues, whilst also exertingcompetitive pressure. More recently, and with increasing intensity, the emergence of the internet andvarious websites carrying news, information and advertising has been anincreasing challenge. From a news content standpoint, our focus on very localmarkets coupled with our first rate journalistic resource has enabled us tomaintain a strong position, despite growing competition at the local level froma variety of sources including the BBC. Of greater concern is the threat posedby websites aimed at our key advertising categories, particularly major onlinebrands seeking classified advertising content, not least, Google. Through theregular monitoring of market share movements against these online competitors aswell as those in print, the available evidence does not suggest widespreadmigration of advertising content to the web although we are working hard tobuild an equivalent online capability of our own and to promote this as part ofa unique local print and online package so that our advertisers can reach thelargest possible local audience. The concept of total audience, combining ourvarious online and print platforms, is now deeply embedded in our commercial andmarketing processes. In a wider context, the lack of hard evidence illustrating a major movement fromour print-based advertising to the web and the clearly evident cyclical changesin our markets points strongly to the principal cause of the advertisingdownturn witnessed in 2006 being the economic environment. The main factorswhich have impacted employment advertising volumes, the worst affectedadvertising category, include rising unemployment exacerbated by the influx ofimmigrant workers and both public and private sector employers regardingvacancies as an opportunity to reduce headcount. The public sector in particularhas witnessed a sharp reversal in its expansionary growth of recent years. Thegeographic variations in our employment advertising also suggest a cyclicalrather than structural effect, with the south of England suffering much earlierthan the north and latterly exhibiting signs of stabilisation whilst the northstill remains more subdued. Elsewhere, new car sales have been down for thethird year in succession and consumer confidence fell during the course of 2006with some parts of the retail sector badly affected and as a consequence,reducing advertising spend. Advertising Performance: In this Review, reference to like-for-like compares the Group businessesexcluding the acquisitions in the second half of 2005 and TSPL in 2006. Itreflects the businesses that traded in the Group throughout the whole of 2005and 2006. As indicated above, performance across England and Scotland did not follow aconsistent pattern in the employment advertising category which in overall termswas down by 17% on a like-for-like basis. In the south of England, the overalldecline was 9% with the performance year-on-year much improved in the lattermonths. The north of England did not experience any real improvement as the yearprogressed and ended 22% down. On a like-for-like basis, Scotland performed muchbetter, being down only 1%. However at TSPL, the pattern was more closelyaligned to our larger metropolitan centres in the north of England. Whilst therewas no clear evidence of strong migration away from print to the web, onlineemployment advertising did grow strongly overall and there is a risk that thebenefits of any upturn in performance could be taken disproportionately by theinternet. However, the fact that a large element of our employment advertisingrelates to very local jobs, which are primarily aimed at the lower demographicgroupings, does offer a degree of resilience in the face of any online threat,as does our own differentiated offering which packages print and online therebyproviding unparalleled levels of local market penetration. Property advertising was the one category which experienced growth across alldivisions with increases ranging from 4% in the north to 14% in the north westof England. The overall like-for-like increase of 7% reflects a marketplace inwhich transaction volumes have remained healthy but where vendors have had towork harder to sell their properties than was the case a year or two ago.Consistent with that theme, the house builders also advertised more heavilyduring the period. With print advertising volumes now at record highs, theyear-on-year comparatives will make it much more difficult to achieve continuedgrowth in 2007. However, in overall terms, market conditions remain satisfactoryand we have made a positive start to the year. Our Property Today websitecontinues to be well supported by many estate agents with both unique users andpage impressions growing strongly, especially since its relaunch during 2006.Our experience suggests that estate agents continue to value newspaperadvertising. An overall like-for-like decline of 15% reflected continued difficulties in themotors market throughout 2006. With growth of 1%, Scotland was the only marketto be ahead of the previous year. South of the Border, decreases ranged from 12%to 21% reflecting the challenging market conditions faced by motor dealers withnew car sales continuing to reduce and exacerbated by continuing dealerconsolidation. The expectations are for industry restructuring to continue into2007 and for the market to remain difficult. Our Motors Today website was alsorelaunched during the year and continues to carry more cars than its rivals inmany of our local markets. Our commercial strategy is based on working closelywith local motor dealers, offering a combination of platforms including printand online. The "others" category of advertising, which was down by 6% like-for-like,suffered in the second half of 2006 due to the unrepeatable public noticerevenues in the corresponding prior year period as a result of the introductionof new licensing laws in England. With the remaining components of this categoryremaining relatively stable, overall performance ranged from declines of 2% to9% with no discernable geographic pattern other than that associated with thelicensing law change. Although parts of the entertainments advertising componenthave experienced some online migration, particularly cinema advertising, this isnot on a scale to suggest a major structural challenge. The entry of Google intolocal search is a more significant development and one to which we areresponding with our own searchable online directory initiative, described morefully later. Display advertising suffered a difficult year across the board with an overalllike-for-like decline of 8% and performances in each of the divisions being veryclose to that figure. Difficult High Street trading for a number of our keyadvertisers, including some furniture retailers, was an important factor behindthe decline. Reduced Government advertising through the Central Office ofInformation was a further feature. Performance was poorer from the majornational advertising agencies, with a decline of 10% than it was locally, whichfell by 7%. Around three quarters of our display advertising is generated by ourlocal sales teams who attribute the revenue shortfall to cutbacks by our retailcustomers rather than a switch of spending to other media. 2007 will be measuredagainst weaker comparatives but a positive change in consumer sentiment and inthe performance of some of our key retail advertisers will be required if a realimprovement is to be achieved. The overall decline in advertising of 8% can be broken down into a 1% reductionin volumes and a 7% reduction in the average yield. The reduction in yield ismainly due to the mix of advertising where the growth in the lower yieldingproperty and the decrease in higher yielding recruitment categories havedistorted the year-on-year average comparison. In overall terms, advertising performance in Northern Ireland was better thanthe rest of the UK being down by 3.2%, but the lack of a reliable historicbreakdown by advertising category, due to outdated systems, means that adetailed analysis of year-on-year performance is not possible. In terms ofcurrent challenges, apart from the ongoing integration programmes, one of ourprincipal concerns is the review of advertising expenditure being carried out bythe Northern Ireland Executive in an effort to cut costs. Whilst the finaloutcome is not expected for some months, this could well have a negative effecton their overall newspaper advertising spend. Similarly in the Republic ofIreland, we do not have historic data at the category level but in overall termsthis marketplace has remained buoyant with overall year-on-year growth of 7.5%.Forecasts suggest that the Irish economy should remain strong with thechallenges we face being more concerned with the integration process, theintroduction of new systems and managing a series of new product launches tomaximise our market position. Table 1 below provides a divisional analysis of advertising revenue movements bycategory. This compares 2006 with the previous year excluding the effect ofacquisitions made during those two years to provide meaningful like-for-likecomparisons. Table 2 breaks down the advertising revenue by category between thetwo half years. Table 1 - Advertising Revenue by category by division - Like-for-like Employment Property Motors Other Classified Display Total 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 £'m £'m % £'m £'m % £'m £'m % £'m £'m % £'m £'m % £'m £'m % Scotland 2.8 2.8 (1) 3.2 3.0 5 1.8 1.8 1 3.9 4.0 (3) 5.9 6.3 (7) 17.6 17.9 (2)North 35.7 46.0 (22) 26.0 24.9 4 16.3 19.6 (17) 25.8 27.4 (6) 44.6 48.4 (8) 148.4 166.3 (11)Northwest 8.8 10.1 (13) 7.3 6.4 14 4.7 5.9 (21) 9.2 10.1 (9) 14.2 15.3 (7) 44.2 47.8 (7)Midlands 23.1 27.4 (16) 22.0 20.2 9 10.4 11.8 (12) 14.9 15.3 (2) 21.7 23.7 (8) 92.1 98.4 (6)South 9.6 10.7 (9) 9.2 8.8 5 5.0 6.0 (17) 6.3 6.9 (9) 12.7 14.1 (10) 42.8 46.5 (8) Total 80.0 97.0 (17) 67.7 63.3 7 38.2 45.1 (15) 60.1 63.7 (6) 99.1 107.8 (8) 345.1 376.9 (8) Table 2 - Advertising Revenue by category between the two half years Half year to 31 December Half year to 30 June 2006 2005 Change 2006 2005 Change £'m £'m % £'m £'m % Employment 35.9 40.8 (12) 44.1 56.2 (22)Property 31.8 29.8 6 35.9 33.5 7Motors 17.8 20.9 (15) 20.4 24.2 (16)Other Classified 28.9 31.7 (9) 31.2 32.0 (3) Total Classified 114.4 123.2 (7) 131.6 145.9 (10)Display 48.4 52.9 (8) 50.7 54.9 (8) 162.8 176.1 (8) 182.3 200.8 (9) Audience Reach: The growing importance of our digital publishing activities was clearly evidentfrom the substantial like-for-like increases we achieved in page impressions+53% and unique users +63% from our 317 local websites. It is now standardpractice for our sales teams to offer advertisers a package of publicationswhich comprise both print-based and online platforms. This recognises the factthat our audience now extends well beyond the readers of our newspapers and,indeed, where we have research the increase in total audience in a daily eveningcentre can be as high as 50%. The "newsroom of the future" project in Preston has completely restructured theway in which that centre gathers, processes and disseminates news and relatedcontent, transforming it into a genuine multi-media news operation. The resultshave been hugely encouraging with a fourfold increase in unique visitors totheir lep.co.uk website. Based on this success, the Preston template will berolled out across all of the Group's core news operations during 2007 with theobjective of achieving further rapid growth in the number of people attracted toour local websites. The Preston experience also suggests that far from damagingnewspaper sales, there can be a positive benefit from the much increasedinteraction between newspaper and website. The rate of decline in the sale ofthe Lancashire Evening Post fell from 8.1% in the first half to 6.4% in thesecond half of 2006, despite the substantially increased size of their onlineaudience. The continued rapid growth we are experiencing in unique users and pageimpressions underlines the increasing importance of the internet to ourcommunities as a news medium and communications platform, an opportunity whichwe are determined to capitalise upon. At the same time, we have experienced acontinued modest decline in the circulation of our paid-for newspapers with ourdailies down by 6.5% and 6.4% in the first and second halves respectively andour weeklies by 2.5% and 2.8%, over the same period. A number of factors liebehind these declines, including the weaker advertising environment (advertisingcontent is important to readers), distribution challenges (the closure ofnewsagents and a decline in the number of people willing to deliver newspapers),changes in people's shopping habits (particularly the growing importance of themajor supermarkets), and to an extent the growth of internet usage. However, themost important factor by far is changing lifestyles which have impacted most onthe daily titles with frequency of purchase during the week diminishing at asignificantly faster rate than the complete loss of readers. Despite this, weremain totally confident that the newspaper will remain a central and durablepart of the local media mix, reflecting its ongoing attraction to readers andcontinuing value to advertisers seeking to reach local communities. However, wealso recognise the vital importance of building a linked digital capability toextend and supplement the reach and content of our print publications. It is important to emphasise that many of our newspapers, daily as well asweekly, continue to achieve high levels of household penetration, delivering anexcellent response to advertisers. Additionally, during the year and in priorperiods, we have launched a large number of other print publications providingadvertisers with extended audience reach when packaged with our principalnewspaper publications and, of course, further enhancements can be achieved byadding our rapidly growing access to the online community. The appointment of a Newspaper Sales and Marketing Director at the beginning ofthe year has done a great deal to focus efforts more closely on circulationperformance and measures which can be adopted across the Group to bring aboutimprovements. Reflecting the benefits of a progressive cover price increase strategy anddespite modest circulation declines, overall like-for-like circulation revenueswere up by 1.4% for the year with gains of 1.9% and 0.9% for the first andsecond halves. Our experience suggests that regular cover price increases do nothave a significantly adverse effect on newspaper sales, provided the quality anddepth of content appeals to the target audience. Other Revenues: The largest source of non-publishing revenue comes from contract printing whichaccounts for 5% of total Group turnover. This percentage only takes account ofexternal printing revenues of £27 million but, in addition there is a furtheramount of £69 million of inter-group print revenue not reflected in the Group'sturnover. Our contract print businesses include several of the UK's nationalnewspapers, a number of regional newspapers and a range of specialist newspaperformat magazine publications. A number of these jobs are covered by long termagreements, in total accounting for around 60% of our total contract printrevenue. This percentage will grow over the next two years as we increase thevolumes on the long term contracts we have secured to print the Sun and News ofthe World at Dinnington in South Yorkshire and at Portsmouth. These contractswere won as a direct consequence of our decision to invest in majorstate-of-the-art print works in these locations. The market for contract printing is expected to become more competitive as aresult of a number of new investments being made across the industry. From aJohnston Press perspective, contract printing accounts for only 21% of our totalcapacity utilisation and if the work which is contracted on a long term basis isremoved, this figure falls to just 8%. Since our capacity has broadly beenconfigured to meet our own printing requirements, the Group is not undulyexposed to short term commercial pressures in the contract printing market. Our publishing centres are involved in a range of activities which utilise thestrengths of our local brands and operational infrastructure as well as beingcomplementary to our main-stream community media businesses. The largest ofthese activities, much of which is managed by a specialist subsidiary known asLetterbox Direct, is the delivery of leaflets and inserts utilising ournewspaper distribution capability. Total revenues of £12 million represent alike-for-like reduction of 6% from 2005, reflecting the general downturn inadvertising revenues. Delivery volumes have not been helped by the fact that ourdistribution of free newspapers has fallen by 4% in the year resulting in lesscoverage. This reduction is the result of a conscious decision, in part toreduce costs, especially of newsprint. Leaflet distribution is a relativelymature activity and, whilst there are alternative distribution channels, nomajor variations in performance are anticipated. The second largest of these activities is Reader Holidays which accounts formore than £2 million of revenues and makes a strong profit contribution.Promoted through the pages of our newspapers, these are holidays and eventswhich are operated by third parties on our behalf. Given the growth in the broadleisure market and a programme which is aimed at bringing best of classperformance to all parts of the Group by process standardisation, utilisation ofour websites and better coordination, we expect this activity to grow. Withrevenues of around £1.5 million, Premium Lines is the next largest such area andis primarily aimed at assisting users in making social contacts but increasinglyinclude voting lines and the provision of added value services such as textalerts. Again, these services utilise the pages of our newspapers forpromotional purposes. The print based dating services, which are operated by athird party on our behalf, appear at best to have reached a plateau, howeverthere is scope for developing related online revenues by utilising our websites. Sponsorship is an area of good growth, increasing by 7% like-for-like in 2006 toproduce over £1.3 million revenue. This involves the sponsorship of specificsections of our newspapers, related supplements or events by various thirdparties. The success achieved by some of our companies suggests that this is anactivity which can achieve further growth for the Group as a whole. Theorganisation of local events and exhibitions produced around £1.2 millionrevenue in the year though this was down by 11% on the previous period, partlydue to lost share to a new competitor in one of our larger markets but mainlydue to lower exhibition revenues from Outbound Publishing. Typical activitiesinclude Job Fairs, Fashion Shows, Wedding Fairs, and Motor Shows and, ingeneral, we believe that there is scope for growth, in part by utilising theexperience of our better performing centres as a template for others to follow. The syndication of our journalistic copy produced over £900k revenue in theyear. This performance is a direct result of negotiating Group arrangements witha limited number of news agencies and, by that means, extending the serviceacross all of our titles. Further growth should be possible now that themechanisms are in place and working well. Apart from the various activities mentioned above, there are a number of similarinitiatives contributing lesser amounts to overall turnover and thus very smallin relation to the Group as a whole. In addition, we have several specialistpublishing businesses and the largest of these, with total revenues of more than£3 million, publishes the weekly Trials and Motor Cross News and the monthlyDirt Bike Rider. Together these titles occupy the market leading position in thespecialist off-road biking sector and produce a valuable profit contribution.The brands are extremely well established and highly respected in theirindustry, providing a solid foundation for future performance which should beenhanced by the development of a web-based offering. Outbound Publishing, mentioned above, has a range of specialist newspapers aimedat potential emigrants to a number of foreign countries, mainly ex-Commonwealth,and two publications which focus on overseas properties together with a seriesof related exhibitions. The business has a turnover of more than £2 million andalso makes a good profit contribution. Outbound is the leading publisher in theemigration market which, in turn, is greatly influenced by the immigrationpolicies of the countries concerned. Due to several such adverse policy changes,this resulted in a revenue reduction in the year and suggests that significantgrowth will be difficult to achieve. The recent launch of our Emigrate2 websiteis designed to enhance performance and initial results are encouraging. Theoverseas property market is highly fragmented and very competitive. Outbound isnot one of the leading players and our strategy for growth is based on thedevelopment of a related online listings service with the promotional benefit ofa connection to our Property Today website. GROUP STRATEGY The essence of Johnston Press' corporate strategy lies in the definition of ourbusiness as a community media company. Our long-held company slogan "Life isLocal" indicates very clearly that we concentrate on meeting the news, content,information and advertising needs of local communities. Our entire strategy isbuilt on the premise that local communities will continue to demand locallyfocussed media services. Based on our very clear and deep understanding of localmedia markets, our central objective is to deliver best of class multi-mediaservices to those communities we serve and to be the pre-eminent community mediacompany, producing financial results which are commensurate with that. Multi-Media Publishing: During the past twelve months, Johnston Press has made very considerableadvances in the development of a genuine multi-media offering to the numerouslocal communities in which we publish. The rationale for pursuing this approachis to ensure that our portfolio of publications and services meets the changingneeds of consumers and advertisers. Whilst newspaper readership, which continuesin modest decline as outlined above, remains strong with high householdpenetrations being achieved in very many of our local markets, there is no doubtthat consumers are increasingly turning to the internet for a range ofinformation and services. In order to preserve our position of being able tooffer advertisers the most effective means of achieving unparalleled marketreach and high levels of response in local communities, it is essential that theGroup harnesses the opportunities which digital publishing channels provide.Indeed by doing so in an effective manner we will be able to achieve even higherlevels of household penetration than hitherto. This objective can be achieved in two distinct ways which, in turn, should notbe regarded as mutually exclusive. These are by organic development of therequired capability or by acquiring existing internet businesses which operatein the same marketplace. Whilst not dismissing the future possibility of suchacquisitions, the Johnston Press strategy is firmly dependent upon the organicdevelopment route. The reasons for this are several: • The transition from newspaper publisher to community media company needsto happen in each and every one of our publishing centres, however small. Thenew opportunities and channels must be embraced by the entire organisation. Thisrequires a major cultural shift which is underway but it can only be achieved bystrong leadership and an extensive training programme. It will not happen bysimply grafting on an acquired business which anyway could be stifled if notgiven the freedom to develop in a manner which suits it best. • Given adequate investment and a clear vision of what needs to beachieved, the organic development route can be delivered with much greatercertainty than the necessarily haphazard nature of an acquisition-led approach.With clear milestones and close management, progress can be carefully monitoredand when required, remedial action taken. • Whilst some acquisitions in this space may prove to be successful, manycarry the real risk of destroying shareholder value. Acquisition multiples aretypically daunting and the target businesses generally immature with untestedbrand loyalty or resilience. With low barriers to entry, there is a constantstream of new start-up internet businesses which, in turn, could easilychallenge existing online players and seriously undermine their performance andvalue. A well judged organic development route will require significantly lesscash to deliver and is more likely to create sustainable long term shareholdervalue. • Our organic approach is aimed at creating a differentiated businessmodel which exploits our trusted brands as well as the unique relationshipbetween our print and digital activities thereby producing a more resilient androbust outcome than would be possible in the online only world. In pursuit of this objective, we have significantly increased the scale of ourdigital publishing operation in Peterborough where the principal design,development and maintenance of our websites takes place. We have upgraded andrelaunched our key classified websites, consistent with our aim for these torepresent best of class in their respective sectors. We have successfullyrestructured our newsroom at the Lancashire Evening Post which is now amulti-media operation capable of audio visual as well as text and picture newsgathering. This template with its new generation website is being rolled outacross the entire Group during 2007. We have launched and are developing avariety of new web offerings and enhancements to our existing services in anongoing process to ensure that our local digital offerings are regarded as thefirst choice destination for the range of local content which we carry. And tosustain this continuing programme, we have rolled out a comprehensive Group-widetraining initiative in conjunction with the Department of Journalism at theUniversity of Central Lancashire (UCLan). The achievements during the past yeargive us confidence that we are well placed to deliver the businesstransformation which this strategy envisages. To accelerate progress in 2007, wewill increase annual expenditure on our digital activities by £5 million whichwill be split between enhanced site development, more sales resource and greatermarketing activity. Market Layering: As indicated above, paid-for daily newspaper circulations have been in modestdecline for some years and although the weeklies have fared rather better, thelong term trend is also downwards. That said, in very many instances, localnewspapers continue to achieve high household penetrations. Johnston Press haspursued a strategy of layering our local markets with a range of printpublications which extend the reach achieved by our principal titles. Bylayering the market in this way and packaging a combination of thesepublications, advertisers can be assured of continuing high market penetrationand commensurate response, a position which has recently been furtherstrengthened by the addition of our growing digital capability. Operational Efficiency: A major element of the strategy which has enabled Johnston Press to produceconsistent industry leading performance has been a willingness to invest inmodern IT systems and production capability coupled with the determination and aclear plan to maximise the related opportunities which such investments afford.This approach remains a consistent and fundamental part of the Johnston Pressbusiness approach. 2006 was an especially important year for the Group in terms of the evolution ofour printing strategy which has seen the progressive retirement of older, lesscapable colour limited presses and their replacement by fewer, larger modernprint centres with full colour capability. The Dinnington investment anddevelopments elsewhere have resulted in a total of 7 of our older print centresclosing during the year. The resultant improvements in quality, waste,reliability, speed and colour availability have been of considerable benefit tothe Group as a whole as well as assisting us in meeting our objectives in termsof increased efficiency and energy consumption. Equally important is our continuing strategy of upgrading our IT systemsinfrastructure and, through that process, achieving standardisation across theGroup. Systems advances have also enabled us to make it easier for advertisersto prepare and transmit their own advertising copy, improving accuracy andreducing errors whilst at the same time enabling later deadlines. There areconsiderable opportunities for more progress in this aspect of our business. As we look ahead, there is no doubt whatsoever that a critical element in makingfurther improvements in performance will be the extent to which we continue toexploit the advantages which modern IT systems and production capabilityprovide. Based on what we have achieved to date, we remain confident in ourability to do this. Our Employees: The rapid transformation of our business and our ability to successfully graspthe opportunities which are offered by the new digital channels and advances inIT systems is entirely dependent upon our employees. To ensure that our staffare equipped with the necessary skills and are well motivated, a high priorityhas been placed on a range of related initiatives which form part of a clearstrategic HR programme. Central to this, is good communications. We continue to improve the way in whichour Employee Forums operate and to take a variety of additional steps to ensurethat the Group's strategy is well understood and that there are open lines ofcommunication on the full range of issues which are of interest and relevance toour staff. Training is equally important and, in addition to the wide-rangingsuite of skill-based courses which have operated within the Group for some time,we have developed a training programme in conjunction with UCLan which is beingused to help all of our companies embrace the digital publishing initiativeswhich are in the process of being rolled out. In that connection, Jane Singer,previously Associate Professor in the School of Journalism and MassCommunication at the University of Iowa, has now taken up her appointment to theJohnston Press Chair in Digital Journalism at UCLan and will be a valuableadditional resource in helping to drive the transitional process. During the year, we have made continued progress with the full implementationand consistent use of the programmes we have for personal development. We havetaken further steps to address the perennial problem of advertising sales staffturnover. We continue to encourage employee share ownership through our variousshare schemes; the Group's Share Incentive Plan paid out for the third year insuccession, albeit at a reduced rate, reflecting the impact of the moredifficult trading conditions on the outcome for the year. We continue to payclose attention to ensuring that our remuneration levels are set fairly and thatwe have attractive and appropriate bonus arrangements in place. In overallterms, we remain acutely conscious of the need to ensure that we have a clear HRstrategy which recognises the need to enable our employees to reach theirpotential and to contribute in a positive manner to the overall objectives wehave set ourselves. That we have achieved so much in a difficult year, speaksvolumes for the dedication and commitment which our staff have demonstrated. Organisational Structure: The management philosophy of Johnston Press is to maintain a flat, leanstructure in which lines of communication are kept as short as possible. TheExecutive Directors are actively involved in the Group's daily operations,travelling extensively around the operating centres and reviewing each of theGroup's 55 businesses formally at least twice a year. Informal communicationsare strong and authority levels are clearly defined with a culture of opennessand rapid decision making. The fundamental management structure of the Group has remained broadly unchangedfollowing the recent expansion through the acquisitions made in 2005 and 2006.The Head Office team has remained constant throughout the period and worksclosely across the full range of business issues. The Group Management Boardmeets formally on a monthly basis and follows a fixed agenda to review overallperformance. After the end of the year, Nigel Eccles joined the Group ManagementBoard in the Business Development Manager role replacing Simon Kennedy who hadearlier moved to Northamptonshire Newspapers as General Manager. As a result of the acquisition of TSPL, the Scottish divisional managementstructure has been strengthened and is now based in Edinburgh. Several newsenior management appointments have been made to the management teams in our twoIrish divisions. In total we have seven publishing divisions. These aresupported by four senior functional heads responsible for HR, IT, DigitalPublishing and Newspapers Sales & Marketing. Divisional meetings chaired by theChief Operating Officer take place monthly. Each publishing division comprises anumber of individual publishing companies with a managing director andfunctional reports. Acquisitive Growth: Over a number of years through the pages of our Annual Reports and elsewhere, wehave consistently stated our view that industry consolidation is set to continueand the shape of the UK's regional press should not be regarded as being in itsfinal form. That view was fully vindicated by various events of 2006, with theultimately abortive sale of Northcliffe by DMGT and the results of the TrinityMirror strategic review which envisages the disposal of significant parts oftheir regional newspaper portfolio. We continue to believe that further industryconsolidation is inevitable and positive for readers and advertisers alike.Given our clear focus on being a successful community media company, we remaininterested in any opportunities for judicious growth. Thus we will examinecarefully all developments in our sector but pursue only those which make goodoperational and financial sense, focussing very clearly on the need for anyacquisition to create additional shareholder value. In identifying the most attractive acquisition targets, we must be convinced ofthe quality of the business to be acquired and the sustainability of itsrevenues; we must be able to see how we can reliably improve the business tomeet our investment hurdles. Whilst competition rules will continue to exert constraints, with only around15% UK market share by number of copies sold or distributed, there will befuture potential acquisitions which ought not to present difficulties with theregulator. Indeed, over time, we would expect an easing of the regulatory viewon market definition and the range of relevant competition, reflecting a betterunderstanding of the competitive environment in which regional and localnewspapers operate. Although we would not preclude venturing outside our existing boundaries of theUK and Ireland, this is not something which falls within our current strategicplans. Nor, as indicated above, are we planning to acquire an internet business,but, again, we do not rule out this possibility in the event that we were toidentify a target which would enhance our existing operations and represent asensible use of our resources. Subsequent to the year end we have agreed to purchase eight Scottish titles fromArchant, subject to clearance from the regulatory authorities. The turnovermultiple is less than two times with a consideration price of £11.2 million. OPERATIONAL REVIEW Print Publications: In pursuit of our policy of layering markets to extend advertisers' reach andgrow our revenue, we launched 150 new publications during 2006. These included60 community newsletters, 4 lifestyle magazines, 14 new free newspapers and 72targeted publications covering specific subjects such as weddings, gardening andhome improvements. Community newsletters are generally aimed at groups of around 4,000-6,000 homesin rural, urban and metropolitan areas where distinct geographic communities canbe identified and these publications provide local High Street advertisers withthe opportunity to reach a very local audience in an extremely cost effectivemanner. Typical launch areas in 2006 were in Oundle near Peterborough, Kirkhamin Lancashire and urban districts in Sheffield such as Dore, Totley and Bradway.Our programme of providing these smaller communities with very localised newswill continue during 2007 and newsletters have already been launched in a numberof markets including the Bruntsfield and Morningside areas of Edinburgh. Weanticipate having around 180 such publications by the end of 2007. Each ismonitored to ensure that it continues to make a positive contribution to profit. Typical lifestyle magazines include Image in Northampton, Lancashire Design andLiving in the Northwest of England, Exclusive in the Midlands and 'Etc' in theSouth. These publications create a high quality environment for advertisers,typically for up-market and luxury items which would not normally be found inthe pages of our newspapers. Lifestyle magazines extend our reach by featuringcontent which attracts an audience that such advertisers are keen to target. During the year we also launched 14 free newspapers, including 10 titles in theRepublic of Ireland under the Weekender brand and 2 in the Northern Irelanddivision. A free weekly was added to our paid-for weekly and related printportfolio in Market Harborough, and in Aylesbury the Commuter Herald wasintroduced for travellers to London, being distributed at railway stations inthe area. The latter has been particularly well received and provides a templatefor other centres to follow. Our focus on revenue growth has been assisted by regular meetings of senioradvertising directors to ensure that new ideas and best practice aredisseminated quickly around the Group. Our Ads4U database, with more than 4,500entries, enables our sales teams to provide a more professional service and toup-sell by having access to an extensive database of high quality and creativeadvertising copy. We also continued with our strategy of producing a number ofcommon advertising platforms such as Food & Drink, Travel, Parent & Child, 50+and an additional supplement for the 2006 World Cup. These were inserted in anumber of our newspapers around the UK and have created an opportunity fornational brand advertising including, for example, Kellogg's, which we would notnormally carry in our mainstream titles. During the year, the sales structures, bonus arrangements and overallremuneration packages of our advertising staff were reviewed and improved inorder to ensure that our sales people are clearly focussed on revenue growth forour increasing range of print and digital publications. Digital Publishing: Total expenditure in the year at our central Digital Publishing operation inPeterborough was £3 million, and staff was increased by 31% to a total of 38.Additionally, a number of new positions were created around the Group to givegreater impetus to our digital publishing activities. Specific training courseshave been designed, and the majority of our sales staff have benefited fromseminars to improve their understanding of digital sales and, in particular, theimpact of the internet on the property, motors and jobs markets. Our relationship with UCLan has been invaluable in helping to create newmulti-media newsrooms capable of providing content both online and in print. Thedigital "newsroom of the future project", which was successfully trialled inPreston, is now being rolled out across the Group and will be largely completedby the middle of 2007 with more than 50 newsrooms equipped with this newcapability. The key features of the newsroom are the ability to provide breakingnews online, the opportunity to use video and audio to add another dimension toour local news offering as well as online only services covering topics notnormally included in our local newspapers. Numerous examples of these servicesinclude breaking stories such as the East Sussex firework factory fire which wasextensively covered by our Lewes website and coverage of the helicopter disasterin the Northwest which was extensively reported on all our websites in theregion. We have established a new digital-only sales operation in London directed atobtaining new online revenues from recruitment agencies. Mediaforce, ourestablished independently-owned national sales operation, has also created anonline only sales team and our local centres have introduced sales unitsfocussed on capturing new online revenues from advertisers who do nottraditionally use our newspapers. In terms of measurable milestones on a monthlybasis we now reach 6.6 million unique users with over 57 million pageimpressions. Encouragingly, our digital revenues grew by 36% with the benefit ofscotsman.com. The greatest increase came from new services such as CV matchingand Local Pages, the former growing by 80% year-on-year. Our CV matching service, which was launched in 2005, achieved revenues in excessof £2 million and we now have 80,000 registered users and 9,200 active CVs onour database. This is proving to be extremely popular with advertisers and oursales systems automatically provide advertising staff with information on thenumber of relevant CVs to facilitate easier sale of the service to customers. Weplan further improvements during 2007, for example with jobseekers being able toupload their CVs electronically as opposed to inputting the relevant data. Following its launch in January 2006, the online directory service Local Pagesachieved revenues of £1.2 million. We have signed an agreement with Miva toenhance this service by incorporating a contextual search capability to generatepay-click revenues from advertisers. This will be part of a portfolio ofdirectory services which will include a common print format across the Group, anonline local directory and the ability to search locally for services andassociated advertising. We have an extensive programme of digital developments in 2007, including thefurther enhancement of our jobs site, in part to ensure that we have fullystructured data from all advertisers to enable comprehensive online searching. Anumber of other developments are under way, including all of our local websiteschanging to an improved format, integration of dating services (print, mobileand online), further developments for motors and property sites (introducing newhomes), and providing more services on mobile platforms such as job alerts. Albeit from a low level, digital revenues have been growing strongly for severalyears and given the increasing level of commitment across the Group, weanticipate further rapid growth. Audience Delivery: 2006 saw a radical shift in the way in which the Group is addressing localaudiences, fundamentally as a direct result of the increasing success and growthof our websites. As a result of this, the total audience we reach is growing ata rapid rate. Whilst there is some duplication between newspaper readers and theusers of the websites, our digital capability has enabled us to reach anentirely new audience. We naturally continue to place considerable emphasis on newspaper sales both ofour weekly and daily titles. A number of initiatives have been introduced as adirect consequence of the appointment of our Newspaper Sales & MarketingDirector, including the establishment of best practice groups for daily andweekly newspaper sales, greater emphasis on high value reader offers andcompetitions and improved market research. Amongst these initiatives, theincreased professionalism and use of market research is having a significantbeneficial impact on our newspapers, as is the growing interaction between printand digital platforms. We have also seen benefits from the growth ofuser-generated content and the development of citizen journalism. All thisactivity enables editors to identify which stories have been of most interest toour readers, creating the opportunity to build upon this both in paper andonline. An important initiative has been building databases of our audience toenable us to target our publications better and stay close to changing mediaconsumption habits. In addition to the growing importance of our websites, we are also makingincreasing use of mobile technology. This enables us to send text alerts toinform our customers of forthcoming content as well as providing them with afurther opportunity to give us feedback and contribute to the stories andfeatures we have been running. IT Systems: Continued progress is being made on the use of modern IT systems to improve theefficiency of our operations and the services we offer to readers andadvertisers. During 2006, we made substantial progress in the introduction of acommon advertising front-end system across the entire Group and this exercisewill be completed in 2007. The benefits include improved service levels toadvertisers such as the ability to see instant examples of their proposedadvertisements, the client's history being immediately available at the point ofcontact providing more information for our sales staff, and reduced costs forthe Group with common training and system management now possible. A number of other key IT projects have been completed or are under way. Theintroduction of a common newspaper sales system has greatly improved themanagement of the newspaper sales function and enabled best practice to beestablished across the Group. We have consolidated the IT functions for bothtraditional and digital publishing to ensure that the digital function is anintegrated part of our business and the introduction of a single Group helpdeskhas removed duplication and improved internal management. The roll-out of Voiceover IP Telephony will also be virtually complete by theend of 2007 allowing the Group to take advantage of the latest internet phonetechnology which both reduces costs and creates the opportunity over time forfurther improvements to voice and data transfer. One of the principal benefitsof our IT investment has been the consolidation of various backroom activities,including the closure of a number of pre-press departments, the centralisationof credit control at a divisional level, a common approach to the planning ofour newspapers and the benefit of a single knowledge base for the technologythat we use. As a direct result of these improvements there has been a headcountreduction in 2006 of over 300 in these areas. With the increasing emphasis on consolidation of infrastructure and the need toprovide a robust platform for a rapidly expanding digital presence, allsubsidiary companies' plans to meet any disruption to business were reviewedduring the year. In 2007, the Group will invest substantially at the hostingcentres where data is stored to improve resilience and further enhancements willbe made to the Group network allowing greater mobility of data both internallyand online. Installation of equipment to enable our journalists to work in sound and videoto provide multi-media reports for our websites was completed for the dailycentres by the end of 2006. All daily publications now have a digital newsroomwhich is fully integrated into our editorial publishing systems and IT staffhave been trained to support the new initiative. Acquisition Integration: The integration of acquisitions made during 2005 and at the beginning of 2006has made excellent progress, and each business has achieved the objectives setout prior to acquisition. TSPL has been established as the hub of our enlarged divisional activities inScotland. Among the key changes are the appointment of a new divisionalmanagement team, the creation of a central function for IT, the separation ofpublishing and printing, the transfer of national advertising sales to the Groupsales house, Mediaforce, and the integration of the award winning scotsman.comwebsite into the Group's digital publishing activities. As a result of thesechanges, total headcount reduced by approximately 20%. In Northern Ireland, the consolidation of Morton Newspapers Limited, CenturyNewspapers Limited and the Derry Journal Limited has been completed, and theGroup approach to common systems fully implemented in the first year ofownership. Belfast News Letter journalists have been moved to a new city centreoffice and centralised backroom facilities relocated to Carn, the former base ofMorton Newspapers allowing the closure of the Century Newspapers site on theoutskirts of Belfast. New free newspapers have been launched by the DerryJournal Ltd and Donegal Democrat Ltd and the organisational structure has beensimplified with the formation of two operating companies. In the Republic of Ireland, the disparate operating companies acquired fromScore Press and the Leinster Leader have been consolidated into three regionaloperating units with new management introduced at both senior and regionallevel. New products and websites have been launched including a range of freenewspapers which will complement the newspapers of record in each of the localcommunities served by our companies. The websites include search engines forjobs, property and motors and whilst these are embryonic they have alreadyproved successful in winning new business, particularly in Limerick, whereProperty Today has become the market leader for property advertising in printand online. During 2007, we will introduce new advertising, editorial andaccounting systems with the latter already integrated into the Group's centralaccounting function. Good progress is also under way to introduce further newproducts with lifestyle magazines and niche publications planned for 2007. Printing: 2006 was a major year for our Printing Division with the completion of the new£60 million press investment at Dinnington, the largest ever project undertakenby the Group, which came in ahead of schedule and under budget. It is now fullyoperational, printing 68 titles and 3 external contracts, including TimesEducational Supplement and titles for News International. The new installationcan print a maximum of 224 pages in colour at speeds of 40,000 copies per hour,or 120 pages in full colour at 86,000 copies per hour from each of its folders.The versatility of a press with three folders means that a combination ofnewspapers can be printed at the same time. Other major benefits include anincrease in operating efficiency, with a productivity gain of 50%, and a verysignificant improvement in print quality. In addition, inserting facilities withstitching and trimming provide opportunities for further revenue growth and theproduction of higher added value publications. As a result of this new installation and other work across the Group, we havebeen able to close five older and less capable pressrooms in Scarborough,Forfar, Wakefield, Hartlepool and Sheffield. A similar installation at Portsmouth will be completed during 2007, which willenhance our printing capability to the point where 90% of our total pages willbe printed in full colour. In Northern Ireland, the ageing pressrooms, which came with acquisitions in2005, in Belfast and at the Derry Journal were closed and plans to enhance ourprinting facilities in Carn are under way. During the year we improved the downstream publishing facilities at Leeds andalso increased the colour capacity on the new full colour press at Peterboroughby 32 to 160 pages through two additional colour towers. The publishing areathere was also refurbished, providing inserting, stitching and trimmingcapability for all products printed in the Midlands. Work began at CaledonianOffset (Edinburgh) to increase colour capacity within the newly acquired presshall which will lead to additional revenue opportunities as well as furtherefficiencies. Staff Development and Welfare: Our focus on health and safety is given the highest priority and this hasresulted in a 26% reduction in the annual accident rate, a 37% reduction inRIDDOR reportable accidents and a decline of 38% in working days lost. The development and training of our staff continues to play a vital part in ourHuman Resource strategy. During the year we delivered 86 different courses tomore than 4,000 staff, involving in excess of 12,000 training days. Our trainingcourses cover all aspects of our business, including Advertising Sales,Editorial, Newspaper Sales, Digital Media, Leadership & Management, Finance,Health & Safety, IT and HR. The Group has introduced new Policies and Proceduresand training to ensure that we comply with the new Age Discriminationlegislation and initial steps have been taken towards the creation of a EuropeanWorks Council as well as preparing for the introduction of new smokingrestrictions in England and Northern Ireland in 2007. PERFORMANCE REVIEW In what has been an extremely challenging trading environment, the business hasresponded well and has managed to mitigate substantially the impact on ourprofit margins of the reduction in advertising revenues in the existingbusinesses which were part of the Group throughout 2005 and 2006. At the sametime the businesses we acquired in 2005 and 2006 have all been earningsaccretive. In order to assess the underlying like-for-like performance of the Group, Table3 summarises the businesses operating at the beginning of 2005, with additionalcolumns for both 2005 and 2006 showing the acquisitions in those years adding tothe reported total figure. Table 3 - Summary of 2006 and 2005 results on a like-for-like basis. 2006 2005 Acquisitions Acquisitions Total 2006 2005 Like-for-like Total 2005 Like-for-like £'m £'m £'m £'m £'m £'m £'m Advertising revenues 430.5 40.9 44.5 345.1 387.5 10.6 376.9Newspaper sales 102.2 14.6 17.1 70.5 73.6 3.9 69.7Contract printing 27.3 0.1 8.3 18.9 21.1 2.3 18.8Digital 11.3 1.3 0.1 9.9 8.3 0.1 8.2Other revenues 30.9 3.6 1.4 25.9 29.7 0.4 29.3 Total revenues 602.2 60.5 71.4 470.3 520.2 17.3 502.9Costs 415.4 49.7 51.6 314.1 340.0 12.0 328.0 Operating profit* 186.8 10.8 19.8 156.2 180.2 5.3 174.9 Operating margin* 31.0% 17.9% 27.7% 33.2% 34.6% 30.6% 34.8% *Pre non-recurring items In the like-for-like performance, the existing Johnston Press businesses managedto deliver cost reductions of £13.9m in the last year. Although some of thesecost savings relate to the reduced trading volumes, a significant proportion are"permanent" savings and reflect costs that have been removed from the businessand will not return even with increased volumes. Specific points to note are: a) The mitigation of increased newsprint costs. The cost of newsprintincreased by around 7.0% on the levels charged in 2005 but this has been offsetby reductions in the weight and web width of paper used along with reducedwastage levels by closing older less efficient printing presses. b) The reduction in the production costs of £6.2m not only reflects thereduced volumes but also the fruits of the ongoing investment programmes whichthe Group has undertaken over recent years. The opening of our new "state of theart" printing and distribution operation at Dinnington has facilitated olderpress closures, delivering labour savings of around £2.0m per annum. The ongoinginvestment in production and operating systems has allowed the Group to continuewith its streamlining and centralising of pre-press operations whilst at thesame time offering improved services to our advertisers. c) Overhead cost savings of £7.7m have been made despite inflationarypressures. Reductions in headcount reflecting reduced advertising volumes havebeen further augmented by increased efficiencies in our back room activities.Like most other industries we have had to contend with significantly increasedutility costs and, despite the consolidation of our printing operations intomore efficient presses referred to above, this is an increased cost the businesshas been forced to absorb. The overall operating margin in the existingbusinesses has decreased by 1.6% points to 33.2%. The businesses acquired in 2005 and 2006 performed well during 2006. Due to theinfluence of the Republic of Ireland, where advertising revenues grew by 7.5%,the pressure on the top line was not as great as in the existing businesses. Theproforma operating margin of these combined businesses prior to theiracquisition was 22.4% and over the last year we have managed to increase this to23.2% through benefits of being part of a larger group, better procurement, theintroduction of new systems and the consolidation of back room activities. Thisincrease in margin has been achieved notwithstanding a decrease in totalrevenues. The acquisition of TSPL was completed on 4 January 2006 and in the period ended31 December 2006 the business achieved an operating profit of £10.8m, a marginof 17.9%, compared to the profit of £8m achieved in 2005 at a margin of 12.5%.These improvements have been made possible because of the speed of integrationinto our Scottish Division, with TSPL becoming the central hub of that enlargedbusiness. There have also been significant savings related to the consolidationof the back room activities within the enlarged Group. The above clearly demonstrates a very creditable performance in what have beenextremely challenging market conditions across the sector. The margins achievedby the Group are still the benchmark for the rest of the industry and havelargely been protected despite the significant reductions in like-for-liketurnover. The acquisitions have all exceeded the investment criteria which the Group hasconsistently applied, namely an acquisition should be earnings enhancing in itsfirst full year, before any restructuring and integration costs, and; that anyacquisition should be value enhancing by the end of the third full year suchthat the rate of return on the investment should exceed our weighted averagecost of capital (WACC). In the year ended 31 December 2006, the first full yearfor the acquisitions, the incremental interest cost that the business incurredwas £25.6m, £5m lower than the incremental operating profit generated by theacquired businesses. Looking forward the performance of the Group will be dependent on a number offactors: a) The advertising cycle and our ability to ensure that we maintain ourmarket leadership at a local level. b) Our ability to grow new revenue streams in our existing markets. This willcertainly include digital media through our ever increasing internet basedpresence but will also include new print and related revenue streams throughexploiting our penetration of local markets with well established and trustedbrands. c) Our ability to find further acquisition opportunities within our currentareas of operation which can add value to the Group and which can be suitablyfinanced. d) Our ability to continue to improve the efficient operation of our businessthrough appropriate investment in technology which improves both customerservice and our methods of operation. e) Our ability to adapt to our consumers' needs in terms of how they wish toaccess and address their local media information needs in such a way that wecontinue to offer our advertisers an unparalleled penetration in the localmarket. Non-Recurring Items The Group incurred non-recurring net costs in the year of £15.1m pre-tax. Thesecame from structural changes in four different aspects of the business: i) With the successful opening and ramp up of our new printing press atDinnington, we have managed to accelerate ahead of our expectation the closureof some of our older presses. This, together with the assumption that we canreplicate this performance at our other new press investment in Portsmouth, hasled the Directors to shorten their estimate of the remaining useful life ofcertain of our presses as well as reducing the net book value of those pressescloser to their potential realisable value in the secondhand market. This hasled to a one-off, non-cash, incremental depreciation charge of £9.0m. ii) There have been one-off costs associated with the closure of the olderpresses as well as structural changes in the existing business which havecontributed to the cost savings disclosed above. The total of thesenon-recurring redundancy and reorganisation costs in the existing business was£5.0m. iii) During 2006 we also incurred a significant level of non-recurring costsassociated with the reorganisation and integration of the businesses acquired in2005/06. The total costs associated with these changes, which in turn have ledto the structural improvement in these businesses is £3.8m with a future benefitto operating margins. This process of reorganisation and integration willcontinue into 2007 and we would expect a further cost associated with thesechanges of £3-£4m in the coming year. iv) Finally, the business disposed of three freehold properties which wereexcess to requirements having historically housed old presses which have closed.These disposals resulted in gains of approximately £2.7m which partially offsetthe costs detailed above. Finance Income/Costs Net finance income was £3.4m as the expected return on our pension fund assetsexceeded the interest cost on our pension liabilities by that amount. The levelof expected return has proved prudent in the last year with actual returns being£7.8m higher and these are recognised in the Group Statement of RecognisedIncome and Expense. Finance costs in the year were £44.1m with a blendedeffective rate of 5.8%. Tax Rate The Group tax rate for the year was 27.3% with the UK tax rate of 30% beingreduced proportionately by the businesses in the Isle of Man and Republic ofIreland where the corporation tax rates are considerably lower, the Isle of Manrate now being zero. The Group rate has also benefited because no tax has beenprovided on the profit on sale of properties because rollover relief will beclaimed. A significant element of this tax charge is in deferred tax as thecapital allowances on our recent press investment programme are in excess ofdepreciation. Earnings per Share/Dividends Basic earnings per share at 33.24p were well down on 2005 because of thesignificantly higher level of non-recurring items detailed above. Excludingthose non-recurring items, the earnings per share at the basic level was 36.66pdown 5.3% on 2005 reflecting the difficult market environment experienced by thesector over the course of 2006. Subject to approval at the Annual GeneralMeeting on 27 April 2007, the total dividend for the year will be 9.3p, anincrease of 11%. This increase will continue the move made last year to reducethe level of dividend cover which had grown to levels which the Board consideredto be unnecessarily prudent. Investment Strategy As mentioned above when reviewing the performance of our acquisitions, the Boardhas clearly defined criteria when evaluating such investments. As well asconsidering the returns criteria (noted above) the Board also takes account ofthe alternative opportunities available when making any investment including thepotential buy back of our own shares. When looking at capital investmentproposals, with the exception of those that represent replacement/maintenancecapital, the Board consistently examines the payback period as well as theearnings impact and cash flows associated with any capital investment in excessof £250k. All investments in excess of this are routinely reappraised one yearafter completion both locally and at Board level to ensure that the expectedoutcomes have been delivered. Finance Strategy/Net Debt Group policy has been historically, and continues to be where possible, tofinance all investments through debt. This strategy has been followed because ofthe strong levels of cash generation within the business. Periodically the Groupdoes re-examine lease versus buy options, especially where these have associatedtax related benefits, to determine if there is any sustainable advantage to begained. The Group's policy continues to be that borrowings should be arranged atthe lowest possible cost and with covenants within which it can comfortablyoperate. The policy requires that a minimum of 50% of the debt should be hedgedagainst potential movements in interest rates whilst the balance is kept underconstant review. At 31 December 2006, £440m of the debt was hedged or fixed foran average of 4 years. The only other significant financial risk the Group facesis in relation to its investments in the Republic of Ireland which are obviouslyEuro denominated. The debt drawn down to finance the acquisition of The LeinsterLeader Group in December 2005 was in Euros, and this provides a natural hedge,whilst at the same time minimising our borrowing costs. In terms of working capital, the Group's largest investment is in Trade Debtors.The management of Trade Debtors is therefore seen as a key task which is subjectto both Executive reviews and forms part of local management incentivearrangements. Net debt at the end of the year, allowing for the fixed rate of our currencyhedges, was £746m, a reduction of £37m from the peak debt of £783m immediatelyafter the acquisition of The Scotsman Publications Limited on 4 January 2006.This reduction was achieved despite the higher than normal levels of capitalexpenditure in the year. The acquisition was financed by a combination of anextension of our existing 5 year bank facilities and a new private placementloan note issue of £83m with terms varying between 8 and 10 years. Financial Reporting There have been no significant changes in the Financial Reporting regulationswhich have materially impacted the Group this year, other than the format ofthis report. We have endeavoured to comply with best practice through earlyadoption, in terms of content and structure, of the Business Review as outlinedin the Companies Act. This is our second Annual Report and Accounts under International FinancialReporting Standards and therefore the year-on-year impact of any changes islimited. As mentioned last year, under the requirements of InternationalAccounting Standard 12 (IAS 12) the Group is required to provide for deferredtax on the value of the intangible assets (publishing titles) acquired. Theacquisition of TSPL increased the Group's intangible assets by £143.3m whichnecessitates an increase in our deferred tax balance of £43.0m with the offsetin goodwill. This increases the deferred tax balance related to the valueattributed to Publishing titles acquired to £397.4m. As mentioned in last year'sreport, the Board believes it is important to communicate to shareholders and tothe wider investment and financial community that we do not agree with the logicof this adjustment and the Board would ensure that, other than any enforceddisposals, any titles sold would be within a company structure. This wouldresult in no tax being payable. As permitted under the relevant accounting standard, the Group has taken theopportunity to re-state certain of the fair value entries made in regard of theacquisition of Score Press Limited and Local Press Limited. At the time of lastyear's accounts, the value of publishing titles acquired had not been brokendown to an individual title level. Now that this exercise has been completed thedeferred tax position as noted above in relation to IAS 12 requires to bere-stated at the date of acquisition for those titles in the Republic of Irelandwhere the tax rates applicable are lower. The adjustment made is purely betweendeferred tax and the offsetting goodwill adjustment with no impact on net assetsor net income in the period. Pensions Aided by improved market conditions, the steps taken by the Group in recentyears to address the pension fund deficit continue to bear fruit and, allowingfor taking on the deficit of £6.0m in The Scotsman Pension Plan, the overallpension deficit has reduced by £15.8m in the year. Control Processes As discussed in the Directors' report the Group operates what it views asrigorous internal control processes which assist in the efficient operation ofour business. With all the General Ledgers, Fixed Asset Registers, Expenses,Payables Systems and Payrolls being controlled through our shared service centrein Peterborough, we can ensure a consistently high level of control right acrossour geographically spread operations. This is further augmented by our recentmoves to consolidate our credit control and cash processing into larger regionalcentres of excellence. Group Income StatementFor the year ended 31 December 2006 2006 2005 Before Before non-recurring Non- non- Non- recurring recurring recurring items items Total items items Total Notes £'000 £'000 £'000 £'000 £'000 £'000 Revenue 602,221 - 602,221 520,154 - 520,154Cost of sales (304,806) - (304,806) (244,781) - (244,781) Gross profit 297,415 - 297,415 275,373 - 275,373Operating expenses 2 (110,642) (15,143) (125,785) (95,163) (2,614) (97,777) Operating profit 186,773 (15,143) 171,630 180,210 (2,614) 177,596Investment income 3 583 - 583 371 - 371Net finance income on 4a 3,382 - 3,382 521 - 521 pension assets/liabilities Finance costs 4b (44,101) - (44,101) (25,538) (1,668) (27,206)Share of results of 60 - 60 81 - 81associatesProfit before tax 146,697 (15,143) 131,554 155,645 (4,282) 151,363Tax 5 (41,204) 5,305 (35,899) (44,857) 1,285 (43,572) Profit for the year 105,493 (9,838) 95,655 110,788 (2,997) 107,791 Earnings per share (p)Earnings per share - Basic 7 36.66 3.42 33.24 38.72 1.05 37.67Earnings per share - 7 36.54 3.41 33.13 38.47 1.04 37.43Diluted All of the above revenue and profit is derived from continuing operations. Group Statement of Recognised Income and ExpenseFor the year ended 31 December 2006 Hedging and Revaluation Translation Retained Reserve Reserve Earnings Total £'000 £'000 £'000 £'000 Profit for the year - - 95,655 95,655Actuarial gain on definedbenefit pension schemes (net of tax) - - 8,778 8,778Revaluation adjustment (65) - 65 -Exchange differences ontranslation of foreign operations - (374) - (374)Change in fair value of financial - 9,749 - 9,749instrumentsDeferred taxation - (1,941) - (1,941) Total recognised income and expense (65) 7,434 104,498 111,867 For the year ended 31 December 2005 Profit for the year - - 107,791 107,791Actuarial loss on definedbenefit pension schemes (net of tax) - - (803) (803)Revaluation adjustment (249) - 249 -Exchange differences on translation of foreign operations - (43) - (43)Change in fair value of financial - 12,990 - 12,990instruments Total recognised income and expense (249) 12,947 107,237 119,935 Group Reconciliation of Shareholders' EquityFor the year ended 31 December 2006 Hedging and Translation Share-based Reserve Total Share Share Payments Revaluation Own Restated Retained Restated Capital Premium Reserve Reserve Shares Note 10 Earnings Note 10 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 Opening balancesas previously 29,772 327,437 2,770 2,587 (749) (9,277) 123,975 476,515reportedAdjustment inrespect of - - - - - 5,955 - 5,955prior year - Note10Revised opening 29,772 327,437 2,770 2,587 (749) (3,322) 123,975 482,470balances Total recognisedincome and expense - - - (65) - 7,434 104,498 111,867 Recognised directlyin equityDividends (note 6) - - - - - - (25,113) (25,113)New share capital 121 3,852 - - - - - 3,973subscribedOwn shares - - - - (1,665) - - (1,665)purchasedAmounts written off - - - - 786 - - 786Provision forshare-basedpayments - - 1,495 - - - - 1,495 Net changes 121 3,852 1,495 - (879) - (25,113) (20,524)directly in equity Total movements 121 3,852 1,495 (65) (879) 7,434 79,385 91,343 Equity at the end 29,893 331,289 4,265 2,522 (1,628) 4,112 203,360 573,813of the year For the year ended 31 December 2005 Opening balancespre IAS 39 29,638 323,670 1,474 2,836 (795) - 38,564 395,387adjustmentIAS 39 adjustment - - - - - (16,269) - (16,269) Revised opening 29,638 323,670 1,474 2,836 (795) (16,269) 38,564 379,118balances Total recognisedincome and expense - - - (249) - 12,947 107,237 119,935 Recognised directlyin equityDividends (note 6) - - - - - - (21,826) (21,826)New share capital 134 3,767 - - - - - 3,901subscribedOwn shares - - - - (567) - - (567)purchasedAmounts written off - - - - 613 - - 613Provision forshare-basedpayments - - 1,296 - - - - 1,296 Net changes 134 3,767 1,296 - 46 - (21,826) (16,583)directly in equity Total movements 134 3,767 1,296 (249) 46 12,947 85,411 103,352 Equity at the endof the year 29,772 327,437 2,770 2,587 (749) (3,322) 123,975 482,470 Group Balance SheetAt 31 December 2006 2005 Restated 2006 Note10 Notes £'000 £'000 Non-current assetsGoodwill 130,271 87,257Other intangible assets 1,353,462 1,213,186Property, plant and equipment 268,342 222,178Available for sale investments 2,712 2,712Interests in associates 33 48Trade and other receivables 467 893 1,755,287 1,526,274 Current assetsInventories 5,776 4,861Trade and other receivables 81,877 70,204Cash and cash equivalents 24,636 25,114 112,289 100,179 Total assets 1,867,576 1,626,453 Current liabilitiesTrade and other payables 73,670 73,351Tax liabilities 7,993 16,854Obligations under finance leases 5 60Retirement benefit obligation 4,272 4,350Borrowings 8 2,290 47,604 88,230 142,219 Non-current liabilitiesBorrowings 8 750,753 588,821Obligations under finance leases - 12Derivative financial instruments 11,539 9,234Retirement benefit obligation 41,167 50,839Deferred tax liabilities 399,174 347,530Trade and other payables 431 2,821Long term provisions 2,469 2,507 1,205,533 1,001,764 Total liabilities 1,293,763 1,143,983 Net assets 573,813 482,470 EquityShare capital 29,893 29,772Share premium account 331,289 327,437Share-based payments reserve 4,265 2,770Revaluation reserve 2,522 2,587Own shares (1,628) (749)Hedging and translation reserve 4,112 (3,322)Retained earnings 203,360 123,975 Total equity 573,813 482,470 Group Cash Flow StatementFor the year ended 31 December 2006 Year Year ended ended 2006 2005 Notes £'000 £'000 Cash generated from operations 9 187,140 182,055Income tax paid (37,489) (44,564) Net cash from operating activities 149,651 137,491 Investing activitiesInterest received 583 371Dividends received from associated undertakings 75 91Proceeds on disposal of property, plant and equipment 8,738 2,221Proceeds on disposal of business 3,277 -Proceeds on disposal of available for sale investments - 28Purchases of property, plant and equipment (65,040) (63,642)Acquisition of businesses (165,535) (308,356)Net cash in businesses acquired 5,225 9,931 Net cash used in investing activities (212,677) (359,356) Financing activitiesDividends paid (25,113) (21,826)Interest paid (42,918) (23,955)Interest paid on finance leases (15) (15)Repayments of borrowings (29,685) (157,679)New borrowings 163,043 443,604Arrangement fees on new borrowings (548) (1,505)Principal payments under finance leases (52) (16)Issue of shares 3,973 3,901Purchase of own shares (1,665) (567)Decrease in bank overdrafts (4,472) (5,082) Net cash from financing activities 62,548 236,860 Net increase in cash and cash equivalents (478) 14,995Cash and cash equivalents at the beginning of the year 25,114 10,119 Cash and cash equivalents at the end of the year 24,636 25,114 Notes to the Financial Information 1.Basis of Preparation The financial information set out in the announcement does not constitute theCompany's statutory financial statements for the years ended 31 December 2006 or2005 for the purposes of S.240 of the Companies Act 1985. The financialinformation for the year ended 31 December 2005 is derived from the statutoryfinancial statements for that year which have been delivered to the Registrar ofCompanies. The auditors reported on those financial statements; their reportwas unqualified and did not contain a statement under s. 237 (2) or (3)Companies Act 1985. The statutory financial statements for the year ended 31December 2006 will be finalised on the basis of the financial informationpresented by the Directors in this preliminary announcement and will bedelivered to the Registrar of Companies following the Company's Annual GeneralMeeting. While the financial information included in this preliminary announcement hasbeen computed in accordance with International Financial Reporting Standards(IFRSs), this announcement does not itself contain sufficient information tocomply with IFRSs. The Company expects to publish full financial statementsthat comply with IFRSs in March 2007. 2 Non-Recurring Items An analysis of structural changes is as follows: Year ended Year ended 2006 2005 £'000 £'000 Restructuring costs of acquired businesses 2,109 591Restructuring costs of existing business 6,717 2,925Write down of value of presses in existing businesses 9,000 -Profit on sale of property in existing business (2,683) (902) 15,143 2,614 3 Investment Income Year ended Year ended 2006 2005 £'000 £'000 Income from fixed asset investments 79 265Interest receivable 504 106 583 371 4 Finance Costs Year ended Year ended 2006 2005 £'000 £'000a) Net finance income on pension assets/liabilitiesInterest on pension liabilities 19,217 16,505Expected return on pension assets (22,599) (17,026) (3,382) (521)b) Finance costsInterest on bank overdrafts and loans 43,752 24,553Interest on obligations under finance leases 15 17Amortisation of term debt issue costs 334 968 44,101 25,538Non-recurringWrite off of term debt issue costs on old bank facility repaid - 1,668 44,101 27,206 5 Tax Year ended Year ended 2006 2005 £'000 £'000 Current tax 28,528 36,806Deferred tax 7,371 6,766 35,899 43,572 UK corporation tax is calculated at 30% (2005 - 30%) of the estimated assessableprofit for the year. Taxation for other jurisdictions is calculated at the ratesprevailing in the relevant jurisdiction. The tax charge for the year can be reconciled to the profit per the incomestatement as follows: Year ended Year ended 2006 2005 £'000 % £'000 % Profit before tax 131,554 100.0 151,363 100.0 Tax at 30% 39,466 30.0 45,409 30.0Tax effect of share of results of associate (18) - (24) -Tax effect of expenses that arenon deductible in determining taxable profit 137 0.1 102 0.1Tax effect of investment income (24) - (32) -Effect of different tax rates of subsidiaries (2,677) (2.1) (1,004) (0.7)Gain on sale of properties rolled over (805) (0.6) - -Over provision in prior years (180) (0.1) (879) (0.6) Tax expense for the year and effective rate 35,899 27.3 43,572 28.8 6 Dividends Year ended Year ended 2006 2005 £'000 £'000Amounts recognised as distributions toequity holders in the period: Final dividend for the year ended31 December 2005 of 5.6p (2004 - 4.8p) 16,072 13,695 Interim dividend for the year ended31 December 2006 of 3.1p (2005 - 2.8p) 8,889 7,979 Preference Dividends13.75% Cumulative Preference Shares 104 10413.75% "A" Preference Shares 48 48 25,113 21,826 The proposed dividend to be considered by shareholders at the Annual GeneralMeeting is 6.2p per share making a total for the year of 9.3p. If approved atthe Annual General Meeting, the proposed dividend will be paid on 11 May 2007 toordinary shareholders on the register at 27 April 2007. 7 Earnings per Share The calculation of earnings per share are based on the following profits andweighted average number of shares: Year ended Year ended 2006 2005 £'000 £'000Earnings Profit for the year 95,655 107,791Preference dividend (152) (152) Earnings for the purposes of basic and dilutedearnings per share 95,503 107,639Non-recurring items (after tax) 9,838 2,997 Earnings for the purposes of underlyingearning per share 105,341 110,636 2006 2005 No. of shares No. of shares Number of sharesWeighted average number of ordinary sharesfor the purpose of basic earnings per share 287,327,428 285,762,958Weighted average number of preference sharesfor the purpose of basic earnings per share 954,185 1,826,349 Number of shares for the purposes of diluted earnings per share 288,281,613 287,589,307 Earnings per share (p)Basic 33.24 37.67Underlying 36.66 38.72Diluted 33.13 37.43 Underlying figures are presented to show the effect of excluding non-recurringitems from earnings per share. The preference shares are considered to be equity under IAS 32. In line with IAS33, the preference dividend and the number of preference shares are excludedfrom the calculation of earnings per share. The 2005 calculations have beenamended to reflect this but the difference is immaterial. 8 Borrowings 2006 2005 Restated Note 10 £'000 £'000 Bank overdrafts 2,119 6,591Bank loans 546,408 443,604Guaranteed loan stock 8,272 60,7612003 Private placement of 10 year senior notes 118,701 126,8302006 Private placement of 8 and 10 year senior notes 79,118 - 754,618 637,786 The borrowings are repayable as follows: On demand or within one year 2,686 47,892In the second year - -In the third to fifth years inclusive 554,113 463,064After five years 197,819 126,830 754,618 637,786Less amount due for settlement within one year (2,686) (47,892) Amount due for settlement after one year 751,932 589,894 The borrowings are shown in the balance sheet net of term debt issue costs of£1,575,000 of which £396,000 is deducted from current liabilities (2005 -£1,361,000 of which £288,000 is deducted from current liabilities). The Group's net debt is: Gross borrowings as above 754,618 637,786Finance leases 5 72Term debt issue costs (1,575) (1,361)Cash and cash equivalents (24,636) (25,114)Impact of hedge contracted rates 18,009 5,955 Net debt at currency hedge contracted rate 746,421 617,338 9 Notes to Cash Flow Statement 2006 2005 £'000 £'000 Operating profit 171,630 177,596Adjustments for:Depreciation of property, plant and equipment 29,785 19,923Currency differences (328) 41Own shares written off 786 613Cost of share based payments 1,495 1,296Profit on disposal of property, plant and equipment (3,175) (891)Movement on pension provision (1,652) (16,566) Operating cash flows before movements in working capital 198,541 182,012 (Increase)/decrease in inventories (151) 371(Increase)/decrease in receivables (5,405) 3,890Decrease in payables (5,845) (4,218) Cash generated by operations 187,140 182,055 Cash and cash equivalents (which are presented as a single class of assets onthe face of the balance sheet) comprise cash at bank and other short-term highlyliquid investments with a maturity of three months or less. 10 Restatements The 2005 accounts have been restated in respect of two adjustments, neither ofwhich had any impact on the net income reported in the 2005 period. a) Goodwill has been reduced by £14,378,000 with a correspondingadjustment to deferred taxation. This relates to an amendment to the provisionalfair value accounting of the overseas publishing titles acquired in 2005.Deferred taxation was provided at the UK rate of 30% until the split of thevalue of the publishing titles acquired was finalised. This was completed in2006 and the adjustment reflects the impact of the reduced rate of taxation onthe value of the titles acquired in the Republic of Ireland in line with IAS 12. b) In 2005 the dollar denominated senior notes were translated at thehedge contracted rate. The opening balances for these senior notes and therelated hedging translation reserve have been restated at the applicable yearend rate. The impact of this adjustment was to reduce borrowings by £5,955,000as at 31 December 2005 with an offsetting movement recorded in the hedgingtranslation reserve. This information is provided by RNS The company news service from the London Stock Exchange
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