25^th July 2012

 

MECOM GROUP PLC

INTERIM RESULTS FOR THE SIX MONTHS ENDED 30^th JUNE 2012

 

Mecom Group plc ("Mecom" or "the Group"), one of Europe's largest consumer publishing companies, announces its results for the half year to 30^th June 2012.

 

FINANCIAL HIGHLIGHTS

 

•     Subscription revenue from ongoing operations in line with prior year at €182.8 million

•     Advertising revenue from ongoing operations of  €203.1 million, down 14 per cent (€32 million) after adjustment for closed titles

•     Total revenue from ongoing operations down 8 per cent at €492.0 million

•     Total costs from ongoing operations reduced by 6 per cent to €454.1 million

•     Adjusted EBITDA from ongoing operations down €12.6 million to €37.9 million

•     Adjusted earnings per share from ongoing operations of 6.9 euro cents per share (2011: 10.9 euro cents per share). Total adjusted earnings per share, including disposed and discontinued operations = 17.3 euro cents per share (2011: 18.1 euro cents per share)

•     Closing net debt of €109.7 million (30^th June 2011: €301.9 million; 31^st December 2011: €258.5 million); leverage ratio of 1.1 times ongoing EBITDA (30^th June 2011: 2.0 times)

•     Interim dividend of 6.0 euro cents per share, comprising 2.5 euro cents per share from ongoing operations and an additional dividend of 3.5 euro cents per share reflecting earnings contributed by the disposed Edda Media operations, to be paid on 31^st August 2012

 

OPERATIONAL HIGHLIGHTS

 

•     Restructuring programme ahead of plan: 2012 full year savings to exceed target by at least €10 million

•     180,000 downloads of iPad apps for Top 10 titles; 500,000 smartphone app downloads

•     Extended distribution collaboration in the Netherlands: approximately €5 million additional EBITDA benefit by 2014

•     Edda Media disposal completed, enabling €195 million debt repayment

•     Wegener minority interest acquired and delisting completed

 

 

 

STRATEGIC REVIEW AND BOARD CHANGE

 

As announced on 19^th July 2012, given recent trading conditions, particularly in the advertising markets in which it operates, the Group will be conducting a Strategic Review to examine all options for maximising shareholder value (the "Strategic Review").  Such options include, but are not limited to, the disposal of some or all of the Group's subsidiaries and operations.

As a consequence of this decision, the strength of the divisional management teams and the diminished need for central leadership within the Group, the Board has agreed with Tom Toumazis that he will step down from his role as Chief Executive Officer in September 2012.  Until then, Mr Toumazis will provide transitional support to Stephen Davidson, who will resume his previous role as Executive Chairman. Mr Toumazis will not be replaced as Chief Executive Officer.

 

FINANCIAL SUMMARY

 

€m unless otherwise indicated	Six months to 30th June 2012	Six months to 30th June 2011	2012 vs. 2011
Advertising revenue	203.1	238.9	(15)%
Circulation revenue	217.6	223.7	(3)%
Other revenue	71.3	69.9	2%
Total revenue1	492.0	532.5	(8)%
Costs1	(454.1)	(482.0)	6% lower
Adjusted EBITDA1,3	37.9	50.5	(12.6)m
Adjusted operating profit1	19.8	30.7	(10.9)m
Adjusted earnings per share (euro cents) - ongoing operations1	6.9 cents	10.9 cents	(4.0) cents
Adjusted earnings per share (euro cents)2	17.3 cents	18.1 cents	(0.8) cents
Profit/(loss) for the period, after tax	43.1	(10.1)	€53.2m higher
Earnings/(loss) per share, after exceptional items and intangibles amortisation	39.2 cents	(9.0) cents	48.2 cents
Net debt	109.7	301.9	€192.2m lower

 

 Notes

 

1.     Revenue, costs, EBITDA, operating profit and adjusted earnings per share for ongoing operations include amounts from ongoing businesses (that is, excluding the results of Presspublica in the six month period to 30 June 2011) and are stated before exceptional items and amortisation of acquired intangibles.

2.     Adjusted earnings per share stated before exceptional items and the amortisation of acquired intangibles.

3.     Including the results of Presspublica, which the Group sold in October 2011, adjusted EBITDA for the Group's entire continuing businesses in the half-year of 2011 was €49.8 million from total revenues of €568.3 million.

 

 

Tom Toumazis, Chief Executive Officer, said:

 

"Despite the challenging environment in the first half, we have made strong progress with our restructuring and modernisation programme, taking significant cost out of our business and improving our financial position. Print advertising is being particularly hard-hit across the whole of our industry, but we have focussed on taking actions to mitigate the impact from this. Given the significant recent changes in the operating environment, however, we believe that a review of Mecom's options for maximising shareholder value, which we announced last week, is a logical step for the Company."

 

Enquiries:

 

Mecom Group plc                               +44 (0) 207 925 7200

Tom Toumazis, Chief Executive Officer

Henry Davies, Group Finance Director

 

Pendomer Communications LLP       +44 (0) 20 3603 5220

Ben Foster                                           

Rosie Oddy

 

A webcast briefing for analysts and investors will take place today at 9:00 am (BST) on the following details:

 

Webcast: a link to the webcast is available on www.mecom.com 

 

The presentation slides used at this briefing and a recording of the webcast briefing will be available on the "Investors" section of the Mecom website (http://www.mecom.com/investor-relations.aspx).

 

About Mecom

 

Mecom is one of Europe's largest consumer publishing companies, with leading multi-platform brands in the Netherlands, Denmark, and Poland. It is focused on delivering premium, local and unique content and providing effective marketing platforms to its local and national advertisers. The Group is committed to pursuing a paid-for subscriber model across all of its platforms, leveraging the strength of its pre-existing relationships with its 1.2 million print subscribers - more subscribers than any of its European peer group.

CHIEF EXECUTIVE'S REVIEW

 

In the context of difficult trading conditions, as a Group we have made substantial progress in the first half of 2012 on the modernisation of our products, a substantial reduction of our cost base and the improvement of our financial position.  We have started our move to a fully paid model for our top ten titles with the launch of iPad applications for our major titles and expect to enter 2013 with substantially all of our news products published across all platforms on a paid basis.  We are also on track to exceed the delivery of cost savings in 2012 as part of the €70 million cost reduction programmes announced in January.  And finally we completed the disposal of our Norwegian business, Edda Media, for €195 million, reducing our gearing to 1.1 times EBITDA as at 30^th June 2012.

 

Trading

 

As is explained in more detail in the financial review below, trading in the first six months of 2012 has been substantially affected by recessionary economic conditions in the Netherlands and related difficulties in print advertising.  EBITDA for the first six months was down €13 million year-on-year in our Dutch business, driven by a €23 million, or 16 per cent, reduction in advertising (€22 million, or 15 per cent, adjusting for the effect of terminating the advertising sales agreement with Mountain Media in respect of the De Pers freesheet). Print advertising has been affected by the marked deterioration in consumer confidence and business sentiment in the first half of 2012, with recruitment and property advertising suffering the most pronounced year-on-year declines.  Some categories, such as family announcements and travel, have fared better.  Overall, though, it is clear that print advertising, across the entire Dutch publishing sector, is losing market share to television and online publishing, and we believe that this negative trend, whilst currently exacerbated by economic conditions, will continue over the coming years.

 

Advertising in Denmark and Poland also fell at a greater rate than previously.  In Denmark, this included the effect of closing the daily commuter freesheet Urban, but also reflected continuing tough economic conditions and a comparative period that included benefits from the relaunch of the Berlingske title in early 2011.  Advertising revenues were down 16 per cent in Poland, on a constant currency basis, continuing the significant pressure being exerted by online and television advertising on print.

 

Our subscription revenue, which represents approximately 85 per cent of total circulation revenue, was flat year-on-year at €183 million, with average revenue per user (ARPU) rising by 5 per cent as volume declines were offset by price increases.  These volume declines includes a 3 per cent decline in the Netherlands and Poland and a 14 per cent decline in Denmark, where three titles were closed and a change to subscription marketing led to a decrease in the number of trial and discounted subscriptions. We raised subscription rates by four per cent in the Netherlands at the start of the year, and on our main title in Denmark, Berlingske, by three per cent in the second quarter.  As we highlighted in our trading update of 6^th June 2012, single copy sales of our tabloid BT title in Denmark have fallen at a faster rate than previously, which, together with continuing pressure in Media Regionalne of predominantly non-subscription newspaper sales, led to total circulation revenue down 3 per cent.

 

Growth in other revenue continued, up 2 per cent to €71 million, driven by higher Sweetdeal sales and an increase in third-party distribution revenues.  We announced in the first half that our current distribution collaboration with other Dutch publishers would be extended, ultimately with the intention of establishing a joint venture company to provide distribution services on a lower cost basis to all the major Dutch newspaper publishers.   We anticipate that this will result in an annual EBITDA benefit in the order of €5 million to Mecom by the end of 2014.

 

Costs were down 6 per cent, or €28 million in the first half, including the benefit of a 384 reduction in full-time equivalent ("FTE") employees over the six months, title closures and foreign currency effects in Media Regionalne. We expect combined full year cost savings from the restructuring initiative we announced on 24^th January and the IT outsourcing agreement signed in 2011 to exceed €40 million in 2012, after the effects of inflation. This represents an increase of €10 million or more on our original targets.

 

Overall, EBITDA for the six months was down €13 million, substantially all in the Netherlands. Performance was broadly flat year-on-year in Denmark and Poland.  In both these countries, notwithstanding the sustained pressure on advertising and single copy circulation sales noted above, cost savings arising from the Group's cost programmes were able to offset revenue declines. In the Netherlands, the nature and timing of the restructuring measures being implemented are such that the savings there will be realised more substantially in the second half of the year.

 

As explained in greater detail in the financial review below, adjusted earnings per share were 6.9 euro cents for the ongoing business, compared with 10.9 euro cents in 2011, with the impact of reduced EBITDA partially mitigated by lower depreciation, finance costs and tax.

 

Product development

 

Wegener, our Dutch subsidiary, announced its 'Digital First' programme on 15^th February 2012.  Digital First involves a major overhaul of the Dutch product portfolio, with evolution of our print products, fixed and mobile web services, smartphone and tablet applications and e-papers available on both tablets and the web.  Paid iPad applications were launched at the start of the second quarter for all our daily Dutch titles, initially on a trial basis.  We have recorded over 110,000 application downloads on these titles, adding to the 160,000 downloads we have had on smartphone applications.

 

In the second half of the year, a significant development of the structure and content of our printed papers, the trialling of online pay models (predominantly on a metered basis) and the refreshing of e-papers and applications will all culminate in the new product portfolio which will be the basis for a full pay model involving new customer segmentation, bundling and pricing models in 2013.

 

In Denmark, which publishes three of our top ten titles, iPad app launches have had a similarly positive response in terms of downloads, with 60,000 being recorded to-date, following launch in the first quarter.  Berlingske will trial a metered online pay model during the second half of 2012.  The current balance of advertising between print and web and potential online content revenue for the tabloid BT is different to our other paid titles, and we expect that the BT website will remain free to all.

 

Portfolio

 

We completed the disposal of the Group's Norwegian operations on 28^th June 2012, following receipt of approval from the Norwegian Competition Authorities.  The disposal has allowed us to repay €195 million of the Group's term loan, and therefore has had a significant positive impact on our financial position.

 

Work continues on the review of our Polish business and the weekly freesheets in the West of the Netherlands, and both of these processes will now be incorporated into the broader Strategic Review we announced on 19^th July 2012. Headcount and cost reduction exercises have been implemented in both businesses in the meantime.

 

Finally on portfolio, we completed the purchase of the 13 per cent minority interest in our Wegener business in May.  Having completed this purchase, we have now delisted Wegener and are in the process of simplifying the ownership and management structure within the Netherlands so that all Dutch operations come under the direct management control of Truls Velgaard, the CEO of our Dutch business.

 

Dividend

 

The Board has declared an interim dividend for the financial year ending 31^st December 2012 of 6.0 euro cents per share, comprising 2.5 euro cents per share from continuing operations and an additional dividend of 3.5 euro cents per share reflecting earnings contributed by the discontinued Edda Media operations, both to be paid on 31^st August 2012. 

 

Outlook

 

As we announced on 6^th June 2012, we expect full year EBITDA to be in a range between €85 million and €95 million, with advertising revenue declines in the second half of the year following the trends of the second quarter of the year.

 

RESULTS OVERVIEW - ONGOING OPERATIONS

 

€m unless otherwise indicated	Six months to 30th June 2012	Six months to 30th June 2011	2012 vs. 2011
Revenue by country
The Netherlands	280.2	298.4	(6.1)%
Denmark	186.8	203.7	(8.3)%
Poland	25.0	30.4	(17.8)%
Total	492.0	532.5	(7.6)%
Revenue by category
Advertising	203.1	238.9	(15.0)%
Circulation	217.6	223.7	(2.7)%
Other	71.3	69.9	2.0%
Total	492.0	532.5	(7.6)%
EBITDA by country
The Netherlands	31.4	44.4	(13.0)
Denmark	9.1	8.9	0.2
Poland	0.3	0.1	0.2
Corporate	(2.9)	(2.9)	-
Total	37.9	50.5	(12.6)
Operating profit by country
The Netherlands	22.2	35.0	(12.8)
Denmark	1.4	(0.3)	1.7
Poland	(0.9)	(1.1)	0.2
Corporate	(2.9)	(2.9)	-
Total	19.8	30.7	(10.9)

 

Notes

 

1.     The divisional split of EBITDA in the table above for 2011 has been restated from previously presented 2011 amounts to reflect the disposal of Edda Media.

 

2.     The results set out above and in the tables in the Divisional Reviews are presented for ongoing businesses (that is, excluding the results of Presspublica in the six-month period to 30 June 2011) before exceptional items and the amortisation of acquired intangibles.  In the case of operations in non-euro currencies, the results are presented in euros, translated using the average foreign currency exchange rate prevailing in each period. Previously, when a greater proportion of the Group's results were in non-euro currencies, results were presented on a constant currency basis.

 

3.     Including the results of Presspublica, which the Group sold in October 2011, adjusted EBITDA for the Group's entire continuing businesses in the half-year of 2011 was €49.8 million from total revenues of €568.3 million.

 

 

Revenue, costs and operating results - ongoing operations

 

(The financial performance in the table above and throughout this review of revenue, costs and operating results has been presented to include the Group's ongoing businesses only, that is excluding the results of the Presspublica (which was sold in October 2011) from the Poland segment in the six months to 30^th June 2011.  A reconciliation between this basis and the reported statutory results is set out in Note 4 to the condensed consolidated financial statements.  The commentary in this section of the Results Overview excludes the effect of exceptional items and the amortisation of acquired intangibles.  Further detail on revenue, costs and operating results is set out in the Divisional Reviews below.)

 

Total revenue in the six months to 30^th June 2012 was €492.0 million, lower by €40.5 million, or 8 per cent, than 2011.  The fall was largely caused by further reductions in advertising revenue, which was down €35.8 million as described in more detail below.  Circulation revenue was down 3 per cent, but other revenue was up by 2 per cent as a result of increases in distribution revenues and growth arising from the Group's Sweetdeal business.

 

Advertising revenue was 15 per cent down year-on-year at €203.1 million.  In the Netherlands advertising was down 16 per cent (15 per cent, after adjusting for the termination of the De Pers contract).  Advertising in Denmark was down by 13 per cent (9 per cent, excluding the effect of the closure of the Urban freesheet title), whilst in Poland it fell by 21 per cent (16 per cent before the effect of currency exchange rate movements).  Print advertising fell by 15 per cent in the first six months (after adjusting for De Pers and Urban), whilst online newspaper revenue grew by 7 per cent. Revenue from standalone websites declined by 7 per cent, with the largest single cause of this decline being a reduction in bundled (i.e. print plus online) recruitment advertising revenues.

 

Circulation revenue was down 3 per cent year-on-year at €217.6 million, with subscription revenue stable at €182.8 million.  Circulation revenue was up by 2 per cent in the Netherlands, a predominantly subscription market, as price increases more than offset the effect of volume declines.  In Denmark, circulation revenue was down 8 per cent reflecting amongst other things the continuing pressure experienced by the tabloid BT.  Finally, in Poland circulation revenue fell by 15 per cent (8 per cent before the effect of currency exchange movements), again largely driven by lower single copy sales.

 

Other revenue was up 2 per cent, with growth in distribution revenues resulting from extended collaboration arrangements in the Netherlands and growth in Sweetdeal revenues more than offsetting some falls in third party print revenue and in traditional consumer sales.

 

Operating costs were €27.9 million, or 6 per cent, lower at €454.1 million, reflecting a number of influences in the six month period.  Staff costs were €11.7 million, or 5 per cent, lower than in 2011, as a result of further reduction in FTE employees, which were down from 6,308 at 30^th June 2011 to 5,810 at 30^th June 2012.  Direct costs were lower by €12.2 million, or 7 per cent, reflecting the discontinuation of the De Pers contract in the Netherlands, the closure of the Urban freesheet in Denmark and lower circulation volumes in all countries.  Other costs were down €4.0 million, or 5 per cent, to €83.2 million.

 

EBITDA in the six month period was €37.9 million, €12.6 million lower than in 2011, with an EBITDA margin of 7.7 per cent (2011: 9.5 per cent).  EBITDA fell in the Netherlands (by €13.0 million) but was up by €0.2 million in both Denmark and Poland.

 

Depreciation was €1.7 million lower than in 2011, including the effect of changes to lease categorisation of certain IT assets involved in the Group's IT outsourcing arrangements. 

 

This combination of lower EBITDA and lower deprecation resulted in a decrease in operating profit of €10.9 million, and an operating margin of 4.0 per cent (2011: 5.8 per cent).

 

Net profit, cash flow and financial position

 

The Group's adjusted net interest charge was €8.4 million, down €0.9 million from the first half 2011 net charge of €9.3 million, reflecting lower average net debt levels.

 

The Group's effective tax rate on adjusted profit before tax was 25.0 per cent, lower than the 2011 rate of 34.3 per cent, including the effect of certain prior year releases.

 

Adjusted earnings per share were 17.3 euro cents, comprising 10.4 euro cents from the discontinued Edda Media operations and 6.9 euro cents from continuing operations.  This compares with total adjusted earnings per share in 2011 of 18.1 euro cents a share, comprising 7.2 euro cents from discontinued and disposed operations and 10.9 euro cents a share from ongoing operations.  The increase in the earnings per share from discontinued operations results in the main from the cessation of depreciation on assets held for sale.

 

The Group's ongoing operations recorded exceptional items totaling €29.1 million (€22.6 million after tax) in the six month period to 30^th June 2012 (2011: €12.9 million; €10.2 million after tax).  These charges included staff redundancy costs of €25.0 million.  An impairment charge of €4.0 million (€3.2 million after tax) was recorded in the first half of 2012 to write-down intangible assets in the Group's Media Regionalne operations in Poland. 

 

Cash outflow before acquisitions, disposals and dividends paid to equity shareholders of €51.7 million (2011: inflow of €12.8 million) was after exceptional operating cash charges of €64.8 million (2011: €21.2 million) and net capital expenditure and other investments of €13.5 million (2011: €7.0 million).  Exceptional operating cash charges include €38.9 million relating to the termination of an onerous contract with Mountain Media and €7.7 million of expenditure on the Group's IT outsourcing. Net capital expenditure and other investments includes €10.0 million in respect of IT outsourcing. The Group invested €1.4 million in minor acquisitions during the six month period (2011: €3.3 million). 

 

The net debt impact of the disposal of Edda Media was an inflow of €212.0 million, which included the deconsolidation of overdraft balances of €15.8 million in addition to net cash proceeds received of €196.2 million (after relevant expenses).  The Group paid dividends of €10.9 million to the Group's equity shareholders as a 9.9 euro cents a share final dividend (2011: nil).  Non-cash movements in net debt were €1.3 million (2011: €0.6 million).

 

As a result of which, net debt as at 30^th June 2012 was €109.7 million, down by €192.2 million from 30^th June 2011 and by €148.8 million from 31^st December 2011, as explained further in Note 13 to the condensed consolidated financial statements.  The Group's leverage (expressed as net debt divided by adjusted ongoing EBITDA) was at 1.1 times on a twelve-month ended basis, well below the 1.8 times as at 31 December 2011 and keeping the Group at the lowest margin level payable under its facility agreement.

 

 

DIVISIONAL REVIEWS

 

(The financial results set out below in the Divisional Reviews include amounts from ongoing businesses and are stated before exceptional items and amortisation of acquired intangibles).

 

The Netherlands

 

€m unless otherwise indicated	Six months to 30th June 2012	Six months to 30th June 2011	2012 vs. 2011
Advertising	124.0	146.8	(15.5)%
Circulation	131.0	128.5	1.9%
Other revenue	25.2	23.1	9.1%
Total revenue	280.2	298.4	(6.1)%
Total costs	(248.8)	(254.0)	2.0% lower
EBITDA	31.4	44.4	(13.0)
EBITDA margin	11.2%	14.9%	(3.7) ppts
Operating profit	22.2	35.0	(12.8)
Operating profit margin	7.9%	11.7%	(3.8) ppts

 

Advertising revenue was down 16 per cent in the first six months of 2012. The Netherlands has experienced year-on-year GDP decline of 0.8 per cent for each of the last two quarters and unemployment is at its highest level for seven years. These indicators, combined with an uncertain political situation (Parliament was dissolved in April and elections are set for the autumn) and a comprehensive package of austerity measures, have resulted in historically low levels of consumer confidence.

 

The advertising declines in the first half are a product both of the economic environment and a continuing shift of advertisers in certain categories away from printed newspapers and towards other media, notably television and the internet. For example, the Group's Dutch business experienced declines in recruitment and real estate advertising of €6.5 million (41 per cent) and €3.0 million (26 per cent), respectively, in the first half. Conversely, revenue from family announcements declined by only €0.1 million) 1 per cent, and travel advertising was down €0.2 million (4 per cent).

 

Circulation revenue increased by 2 per cent in the first half of 2012 due to two rounds of subscription price increases in July 2011 (average 3 per cent) and January 2012 (average 4 per cent). These price rises more than offset a 3 per cent fall in average subscriber numbers.

 

Other revenue increased by 9 per cent, as the Group's distribution revenues continued to benefit from the collaboration agreement signed with Telegraaf Media Groep in 2011. The Group's Dutch subsidiary, Wegener, announced in April 2012 that it would participate in wider industry collaboration on distribution, which is expected to contribute additional EBITDA in 2013 and 2014 and which ultimately should lead to the creation of a standalone distribution company providing services to much of the Dutch newspaper publishing sector.

 

Costs in the first half were €5.2 million (2 per cent) lower than in the same period in 2011, as the impact of wage and general cost inflation was offset by the first savings from the previously announced IT outsourcing and restructuring initiatives. The termination, effective 31^st March 2012, of the contract with Mountain Media in respect of the De Pers free newspaper also contributed €2 million of the total cost reduction, although this had no net impact on EBITDA.

 

EBITDA as a result was €31.4 million, down €13.0 million from the first half of 2011. EBITDA margin was 11.2 per cent, compared with 14.9 per cent in 2011. Depreciation was €0.2 million higher than in 2011. As a result, operating profit was down €12.8 million, or 37 per cent.

 

Denmark

 

€m unless otherwise indicated	Six months to 30th June 2012	Six months to 30th June 2011	2012 vs. 2011
Advertising	69.2	79.5	(13.0)%
Circulation	74.6	81.1	(8.0)%
Print and other revenue	43.0	43.1	-
Total revenue	186.8	203.7	(8.3)%
Total costs	(177.7)	(194.8)	8.8% lower
EBITDA	9.1	8.9	0.2
EBITDA margin	4.9%	4.4%	0.5 ppts
Operating profit	1.4	(0.3)	1.7
Operating profit margin	0.7%	(0.1)%	0.8 ppts

 

Advertising revenue fell by 13 per cent in the first half of 2012, though this included the impact of closing the commuter freesheet, Urban, in January. Adjusting for this closure, the underlying decrease in advertising was 9 per cent. The most severe decline occurred at the Group's national quality newspaper, Berlingske, where advertising revenue fell by 15 per cent, albeit in comparison to a strong first half of 2011 during which the title was relaunched and in which advertising revenues increased. In contrast, advertising revenues at the national tabloid, BT, increased by 2 per cent in the first half, driven by strong online advertising growth of 37 per cent. Digital advertising now accounts for around 40 per cent of total advertising revenue at BT.

 

Across all Danish titles (excluding Urban), display advertising fell by 6 per cent, whilst classified advertising declined by 19 per cent, further highlighting the continuing migration of many traditional classified services towards online providers. The Group's Danish business was a beneficiary, as well as a victim, of this shift, as the relaunch of the BT website in April 2012 and increased traffic through better cross-marketing of Berlingske Media's various brands generated total online advertising revenue growth of 8 per cent in the first half.

 

Circulation revenue fell by 8 per cent in the first half of 2012, primarily driven by a 16 per cent decline in single copy sales. The Group's national titles in Denmark, particularly BT, do not benefit from the same high level of subscription sales that characterise the Dutch business, and as such circulation revenues in Denmark are more susceptible to price competition, consumers' changes in news preference, and the availability of sports, entertainment and otherwise headline-generating news events.

 

Other revenues were flat in the first half as declines in third-party printing and distribution were offset by continued strong growth in revenues from the Group's social buying platform, Sweetdeal, and from e-commerce activities. Together, these consumer revenues increased by 49 per cent.

 

Total costs were cut by €17.1 million (9 per cent), of which €4.7 million relates to the closure of Urban. Other savings were derived primarily from a substantial headcount reduction announced in January 2012, and direct costs were also lower partly as a result of the decline in circulation.

 

These cost reductions fully mitigated the impact of the declines in advertising and circulation revenue, such that EBITDA was €0.2 million ahead of 2011, at €9.1 million, and EBITDA margin was 4.9 per cent, 0.5 percentage points higher. Depreciation was €1.7 million lower than in 2011, as a result of the Group-wide IT outsourcing programme, which has resulted in the write-off of certain fixed assets, with a corresponding increase in lease costs recognized in operating expenses. As a result, the Danish operations recorded an operating profit of €1.4 million in the first half of 2012, in contrast to the operating losses generated in the first halves of both 2011 and 2010.

 

Poland

 

€m unless otherwise indicated	Six months to 30th June 2012	Six months to 30th June 2011	2012 vs. 2011
Advertising	9.9	12.6	(21.4)%
Circulation	12.0	14.1	(14.9)%
Print and other revenue	3.1	3.7	(16.2)%
Total revenue	25.0	30.4	(17.8)%
Total costs	(24.7)	(30.3)	18.5% lower
EBITDA	0.3	0.1	0.2
EBITDA margin	1.2%	0.3%	0.9 ppts
Operating profit	(0.9)	(1.1)	0.2
Operating profit margin	(3.6)%	(3.6)%	-

 

(The information presented in the table above and commented on in detail below is that of the Group's continuing Polish business, the regional publishing operations of Media Regionalne. All amounts are translated using the average foreign exchange rate prevailing during each respective financial period, and are therefore not presented on a constant currency basis.)

 

Advertising revenues in the Group's remaining Polish business, Media Regionalne, were 21 per cent lower on a euro basis in the first half of 2012. This was due in part to a weakening of the Polish zloty; on a constant currency basis the decline was 16 per cent. The underlying decline reflects Polish advertisers' growing preference for television and online media, as well as slower economic conditions.

 

Circulation revenues also fell, by 15 per cent (8 per cent on a constant currency basis). As in Denmark, this decline reflects lower single copy "stand" sales, with media trends exacerbated by a reduction in retail outlets by the third party providers who distribute newspapers in Poland. Subscription revenues, which comprise only 26 per cent of total circulation revenue in Poland, were down only 1 per cent on a constant currency basis.

 

Other revenues were down 16 per cent, reflecting lower consumer sales. Media Regionalne has changed its approach to Sweetdeal in the first half of 2012, focusing on cities in which it has an established publishing presence in order to leverage its consumer relationships and cross-selling opportunities.

 

Despite the significant reduction in total revenue of €5.4 million (18 per cent) in the first half, EBITDA for the Group's Polish operations was ahead of the first half of 2011, due to the impact of "Metamophosis", Media Regionalne's targeted cost reduction programme. Phase 1 of Metamorphosis was implemented in the fourth quarter of 2011 and the first quarter of 2012, and has resulted in a headcount reduction of approximately 150. The second phase of the programme has been scoped and will be implemented in the second half of 2012 and 2013, with further cost savings expected therefrom.

 

Depreciation of €1.2 million was recognised in the first half, resulting in an operating loss of €0.9 million, a net improvement of €0.2 million over the same period in 2011.

 

GOING CONCERN

The Group announced on 6^th June 2012 that prospects for advertising revenues and EBITDA in 2012 had fallen below management's previous expectations.  On 19^th July 2012 the Group announced that it would be conducting a Strategic Review to examine all options for maximising shareholder value, including, potentially, further disposals.  Further material falls in advertising revenue, beyond management's revised expectations, would inevitably make the outcome of this Strategic Review less certain and could also call into question the prospects of the Group refinancing its current banking facilities which, in the absence of any extension, are due to expire in October 2013. The Board also notes that, as previously disclosed in the full year consolidated financial statements, in the event that the current facility remains in place with unmodified terms and on the basis of the Board's current trading expectations, there would be a breach of one specific financial covenant under the current facility in July 2013.  This covenant relates to an absolute level of free cash flow which was set for the Group including Edda Media, without an adjustment capability following disposals.

 

The Board believes that borrowing facilities will continue to be available to the Group as it undertakes and implements its Strategic Review, either (depending on the outcome of the Strategic Review and the extent of planned disposals, if any) as an extension of the existing bank facility (with necessary modifications to terms to allow for the completion of any disposal processes, including an adjustment to the free cash flow covenant) or through a refinancing from different banks or other lenders.  Discussions with the Group's current banks and prospective lenders have been and continue to be constructive.

 

Accordingly, after making enquiries, the directors have a reasonable expectation that the Group will continue to have adequate resources to continue in operational existence for the foreseeable future and for this reason they continue to adopt the going concern basis in preparing these condensed consolidated financial statements.  Nevertheless, the Board is making full disclosure to indicate that the risks above, when taken together, indicate the existence of a material uncertainty that may cast significant doubt about the Group's ability to continue as a going concern in certain circumstances, including specifically the situation where both the recently announced Strategic Review has an unsatisfactory conclusion concurrently with a failure to refinance the existing facility.  The consolidated financial statements do not include the adjustments that would result if the Group were unable to continue as a going concern.

 

 

PRINCIPAL RISKS AND UNCERTAINTIES

 

The principal risks and uncertainties affecting the business activities of the Group are broadly the same as those detailed on pages 32 to 35 of the 2011 Annual report and accounts, a copy of which is available on the Company's website at www.mecom.com.  However, the directors have set out below additional risks, these being eurozone risk and the risks described above in "Going Concern" related to the Group's financing.  These risks and uncertainties could have an impact on the Group's performance over the remaining six months of the financial year and could cause actual results to differ from expected or historical results. The Board continues to pay particular attention to the effectiveness of the Group's mitigation of risk and the progress of management is closely monitored in each area. The principal risks are summarised below as required by DTR 4.2.7R of the Disclosure and Transparency Rules:  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk	Description
Inability to successfully implement the Group's strategy	The successful implementation of the Group's strategy could be impaired because of: ·     insufficient skills to implement changes to the business model, particularly the ability to innovate to secure new revenue streams; ·     lack of the economic resources needed to invest in new products and services; and ·     poor governance over the many change programmes that will be driven by the new strategy and that are essential to its success   It is also possible that the rate at which the Group is able to implement its strategy may not be sufficiently quick or profitable to offset a further decline in the traditional newspaper profits of the business.
Advertising revenue lost during the current economic downturn	In common with the majority of newspaper publishing businesses, the Group's revenues are traditionally heavily dependent on advertising. Recent economic conditions have affected all categories of advertising with print adverts for employment, property and motor vehicles more affected than other groups. The negative effects on advertising revenue remained significant in the first half of 2012 and the outlook remains uncertain for the rest of 2012.
Negative effect of internet advertising on traditional advertising	Across the market, the print media's share of advertising is declining as customers exercise their choice to advertise in other forms, notably the internet, and more recently tablet and smartphone, rather than in newspapers. Furthermore, customers are increasingly demanding cross-media reach in combination with lower rates. This shift in demand brings with it increased competition from large digital players, including search and social media businesses such as Google and Facebook who are becoming attractive to Mecom customers who have typically been loyal to the Group's local brands. Therefore, the ability of the Group to deal effectively with demand fluctuations in the market-place brought about by increased competition becomes increasingly important.
Erosion of demand for printed newspapers	In common with the newspaper industry in general, the Group's newspapers have experienced circulation volume declines over recent years and there is a risk that it will be less successful in the future in compensating volume declines with increases in cover price and subscription rates.
Operating improvements may not be achieved	The Group's strategy for enhancing margins includes identifying operating improvements which are often achieved through reorganisations, the introduction of more efficient work practices and realising economies of scale. However, the cost of structural change in continental European economies is potentially very high. In addition, the Group operates in countries with labour laws and agreements that differ from the UK and where employees generally enjoy stronger protection. This sometimes means that the pace of change is slower than changes in market conditions. The Group's ability to generate the cost savings that it has announced on a timely basis may also be hampered by strikes, illegal industrial action or new regulation from governments in any of the jurisdictions in which we operate.
Risk	Description
Lack of business continuity	The Group is highly dependent on the continuous operation of its print plants, distribution channels and supporting IT infrastructure to get its print products to its customers. It also depends on the high availability of its many websites which allow its customers access to online products and services. A significant and extended loss of a major facility, whether through natural causes, deliberate acts or breakdown, could result in a loss of revenue.
Eurozone risk and related political and economic measures	Recent conditions in the eurozone have resulted in a higher risk of disruption and business failure from the potential of an exit of one or more countries from the euro. In addition, steps at a national level to reduce government borrowing through so-called austerity measures (for example in the Netherlands where the Group has significant operations) could have a further negative effect on consumer confidence and through this the Group's revenues.
The Group may not be able to comply with banking covenants or refinance the existing borrowings facility	The Group is financed by bank borrowings, as well as shareholders' equity, and faces the risk of not being able to comply with the covenants under its revised bank facility agreement. The Group has remained with its covenants since the renegotiation of the Group's borrowings in 2009. Although this risk is being adequately mitigated, it remains an important item on the Board agenda.     As described above under 'Going Concern', the Group faces the risk of not being able to amend or to refinance its existing borrowings. Specifically in the situation where the recently announced Strategic Review has an unsatisfactory conclusion concurrently with a failure to refinance the existing facility, the directors have indicated the existence of a material uncertainty about the Group's ability to continue as a going concern. However, the directors have a reasonable expectation that the Group will continue to have adequate resources to continue in operational existence for the foreseeable future.
Key management	The Group's success depends on its ability to attract, motivate and retain highly qualified employees who have extensive experience and knowledge of the industry at a strategic level.

 

Certain risks and uncertainties arise through factors that are outside the control of management, for example, inflation or interest rates. In other cases risks may appear that are presently unanticipated as the Group adopts its new strategy.

 

 

DIRECTORS' RESPONSIBILITY STATEMENT

 

The directors confirm to the best of their knowledge that the condensed set of financial statements for the six months to 30^th June 2012 have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU and the interim management report herein includes a fair review of the information required by:

 

(a)  DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of the important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

(b)  DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the Group during that period; and any changes in the related party transactions described in the last Annual report and accounts that could do so.

 

By order of the Board

 

 

Tom Toumazis                                    Henry Davies

Chief Executive Officer             Group Finance Director

 

This Interim Management Report contains certain statements that are forward-looking. These statements involve risk and uncertainty because they relate to events or circumstances which may or may not occur in the future. Accordingly actual results or developments may differ in material respects from those expressed in or implied by these forward-looking statements. Although the forward-looking statements reflect the knowledge and information available at the date of this report, no assurance is given as to their reasonableness or probability.

Consolidated income statement

for the six months ended 30 June 2012