Reach plc - Interim Results - 26 weeks to 25 June 2023                                                                 

25 July 2023

Customer Value Strategy driving stronger, more sustainable revenue

Cost actions support stronger H2 performance; full year profit expectations maintained

Jim Mullen Chief Executive

"We continue to execute on our Customer Value Strategy, which is driving higher quality, more sustainable digital revenues. Digital growth for the period has been materially affected by lower referral traffic across the sector, particularly following Facebook's deprioritisation of news content, which has driven page view declines for publishers.

In spite of this and continued macroeconomic uncertainty, our focus on customer data means we're driving more diversified, higher performing revenues, with greater exposure to directly sold, higher value advertising. Our scale audience and base of registered customers supports the growth of first party data, a key advantage in a market moving closer to a future without third party cookies.

The ongoing resilience and predictability of print underpins continued investment in a strong digital offering, with circulation revenue growing and newsprint costs starting to decline. Cash generation is supported by a focus on driving efficiencies, with cost reductions on plan and expected to support a stronger second half performance. We expect full year profits for 2023 to be in line with the current market consensus. The business has a strong balance sheet which supports long term growth, dividend and pension commitments. "

Business Highlights

Digital revenue impacted by sector decline in page views, data-led outperformance improves digital mix

Growing circulation revenue, cost action phasing supports stronger H2 profit delivery

Results Overview

Group revenue down 6.1% - strong circulation performance; page view decline impacting digital

Quarterly Year-on-Year Revenue Movements

Newsprint inflation easing, cost reduction running to plan - savings H2 weighted

Pensions

Cash & Capital Allocation

Full Year Outlook

We remain on track with expectations for the full year, despite macroeconomic uncertainty and the year on year decline in page views. Although external factors are impacting digital growth for 2023, our focus on customer engagement and diversifying digital revenues is helping to mitigate the impact and we expect to benefit from less demanding second half comparatives.

In print, while we annualise the uplift from last year's cover price changes during H2, revenues remain resilient and predictable, with lower newsprint prices supporting profitability.

Plans to reduce full year operating costs by 5-6% are on track with H2 weighted savings supporting profit expectations for 2023 which remain in-line with the current market consensus.⁽⁵⁾

The High Court trial around historic legal issues has now concluded - we expect a judgement on time limitation during the autumn. The balance sheet remains strong with full year cash conversion benefiting from an improved working capital position. We expect a small net debt position at the year end. Reach is well positioned to benefit when external conditions improve, with more diversified revenues, growing customer engagement and audience expansion supporting a stronger digital future.

Notes

Enquiries

Jim Mullen, Chief Executive Officer and Darren Fisher, Chief Financial Officer will be hosting a webcast at 9:00am (BST) on 25 July 2023. It will be followed by a live question and answer session.

The presentation slides will be available on www.reachplc.com from 7.00am (BST). An archive of all materials, including a Q&A transcript will also be available after the event.

You can join the webcast to watch the presentation or listen to the Q&A via the following weblink, which you can copy and paste into your browser: https://edge.media-server.com/mmc/p/9bcqwxcf

To participate in the Q&A session and register to ask a question, please access the following weblink and register your details https://register.vevent.com/register/BI4ad40d19b9cd48bbb4cf13a12c7d0ad4

Please try to allow at least 10 minutes prior to the start time to provide sufficient time to access the event.

Forward looking statements

This announcement has been prepared in relation to the financial results for the 26 weeks ended 25 June 2023. Certain information contained in this announcement may constitute 'forward-looking statements', which can be identified by the use of terms such as 'may', 'will', 'would', 'could', 'should', 'expect', 'seek, 'anticipate', 'project', 'estimate', 'intend', 'continue', 'target', 'plan', 'goal', 'aim', 'achieve' or 'believe' (or the negatives thereof) or words of similar meaning. Forward-looking statements can be made in writing but also may be made verbally by members of management of the Company (including, without limitation, during management presentations to financial analysts) in connection with this announcement. These forward-looking statements include all matters that are not historical facts and include statements regarding the Company's intentions, beliefs or current expectations concerning, among other things, the Company's results of operations, financial condition, changes in global or regional trade conditions, changes in tax rates, liquidity, prospects, growth and strategies. By their nature, forward-looking statements involve risks, assumptions and uncertainties that could cause actual events or results or actual performance or other financial condition or performance measures of the Company to differ materially from those reflected or contemplated in such forward-looking statements. No representation or warranty is made as to the achievement or reasonableness of and no reliance should be placed on such forward-looking statements. The forward-looking statements reflect knowledge and information available at the date of this announcement and the Company does not undertake any obligation to update or revise any forward-looking statement, whether as a result of new information or to reflect any change in circumstances or in the Company's expectations or otherwise.

Chief Executive's Review

Execution of strategy supports long term growth

We are executing our strategy and creating a platform for digitally led growth over the long term. While external market conditions have impacted our financial performance, limiting our near term growth potential, we are committed to strengthening and diversifying our digital offering, ensuring that we're well positioned to grow as the macro environment improves.

Our strategy is focused around getting to know our customers better, using data-led insights to create more relevant content and a more engaging customer experience. And we are delivering. With a greater proportion of revenue now supported by first party data, we are diversifying digital revenues and generating more from higher value advertising while reducing our reliance on the open market. Since implementing the Customer Value Strategy in 2019, we have registered close to 30% of our UK audience, with just over 40% of digital revenue now 'data-driven' which will grow further as advertisers continue to seek alternatives to third party cookie based targeting.

Near term digital performance held back by external factors

In the near term, it's clear that performance reflects significant external headwinds, which have inflated operating costs and suppressed topline growth.

While group revenue continues to benefit from strong and predictable print circulation, digital has been held back by a decline in traffic which is affecting the sector more broadly. Following a three-year period in which the business generated around 10% annual growth in page views (from c.1.3bn per month to 1.7bn per month) recent changes to Facebook's news feed have driven a significant decrease in customers being referred to our sites. As a result, page views during H1 fell by 16% (2% excl. Facebook) to 1.4bn which was a material driver of digital revenue decline in the period.

Driving deeper engagement; growing new audiences

Despite this, we remain the UK's largest commercial publisher and sixth largest digital business with an audience equal to three quarters of the digital population¹. We have 13.2 million registered customers, with 5.4 million active on a monthly basis (up 14%).

Engagement is central to our digital strategy and we're continually exploring new ways to build stronger relationships with our wider audience. During the period, this included both web push browser notifications and the use of WhatsApp Communities, in addition to our well established roster of newsletters, as part of a focus on broadening the ways we directly communicate with customers.

We continue to upgrade our machine learning tools to improve the site experience and extend customer time on site, with further upgrades in content recommendation tools. We're also continuing to drive a better on-site customer experience with the trial of a new front end platform which should improve page load speeds which is key to how our sites rank in search.

The expansion of our US business is progressing well with an editorial staff of more than 30 now up and running in our New York office. We're seeing a good pick up of our US content by aggregators like MSN and expect to drive a growing level of on site traffic during H2 following the recent launch of the Express US site and Mirror, which launches shortly.

Diversifying revenues

As well as using data to grow engagement and differentiate our ad supply, we've continued to focus on areas less dependent on direct customer volumes. Our development of revenues from ecommerce, partnerships and affiliates in particular are all supporting the growing proportion of data-driven revenues.

We've made good progress on the development of curated marketplace revenues, signing new data partnerships with Google, Microsoft and Amazon. The Google Ad Exchange agreement is the first time that publisher data has been used to enrich the value of ad slots on the open market, while the Amazon deal makes Reach the first external partner hosting ads with first party data signals on behalf of the site's own ad sales operation. We're also exploring opportunities for direct customer revenues, testing a metered paywall on the M.E.N. app and introducing a series of paid for newsletters.

Exploring AI opportunities

We continue to explore the ways in which AI could benefit our business, with our ad tech, product and editorial teams working closely on several pilot initiatives as we test and learn. We are in the early stages, focusing on the ways that tools can improve efficiency, for example in interrogating data and information gathering, potentially freeing up time to produce more content. While we do this work, it's important we maintain trust with our audience and advertisers, which is why we've also been establishing editorial principles for transparency, for example, making clear to readers when AI tools have been used in creating a story.

Growth in circulation revenue supports strong print cashflow

The performance of our print business remains resilient. Circulation revenue grew during the period by just over 2%, volumes continue to be predictable and advertising has been robust, moving in-line with newspaper volumes and down c.18%. With over 70% of print revenue generated by circulation, revenue and cashflow are supported by the habitual nature of newspaper consumption - one in five UK adults read a Reach print title last month. Revenue growth in H1 has been driven by cover price increases, but also through the growing use of themed one-off specials. These one-off publications included 'Rising Dragons', a celebration of Wrexham's promotion to league two, 'Treble Winners' a Man City souvenir publication and 'Love TV', a celebration of the best of British television.

We continue to think creatively around maximising value from our print assets. The Reach Sport business continues to grow revenue from programme production and sales for Premier League clubs, with the Rugby World Cup to come during H2. We're also consolidating our archival assets with over 200 million original photographs helping grow revenue through syndication and licensing.

Revenue management is also supported by detailed footfall and frequency modelling which means we align volume supplied and availability by outlet type. Since 2019 we have increased availability from c.80% to c.90% across key national and regional titles to support this. Continuous improvement of production and distribution ensures we maximise sales at lowest cost. We're reducing the cost of energy in print sites with the installation of solar panels, have lowered the cost of ink and printing plates and expect to benefit from reducing newsprint costs during H2.

Telling the stories of our communities

This year our local titles have done a tremendous job telling the stories of their communities, whether uncovering injustices or celebrating the happy moments. The Manchester Evening News has earned well-deserved recognition for their Awaab's Law investigation and campaign. Their exposé into the housing shortfalls in Rochdale and the tragic death of Awaab Ishak earned them Scoop of the Year at the Regional Press Awards, an Orwell Prize shortlisting and an INMA Global Media Award. SussexLive also dug deep into their own local housing crisis, with a special investigation, while Nottinghamshire Live sensitively led the way on the tragic university murders that have shaken the community.

Meanwhile, our national newsbrands continue to break the stories which rock the political landscape, notably this year the Sunday Mail in Scotland which first broke the story on the SNP membership scandal.

And so often our titles excel at bringing out the fun in life. WalesOnline have made the most of Wrexham FC becoming an unlikely celeb hotspot, the Liverpool Echo made themselves the trusted guide to all things Eurovision, and the Daily Star continue to turn heads with their irreverent front pages, whether covering politics or UFOs. Their world-famous Lizzie Lettuce continued her hot streak well into 2023, with the team taking home a bronze from the prestigious Cannes Lions International Festival of Creativity.

We also continue to tell stories in different ways, whether with the written word, snappy videos or with podcasts. Our increasingly popular Curiously TikTok channel has found particular success reaching a younger audience with wellness, pop culture and gaming content and these learnings have also proven useful in informing the video strategies of our more established newsbrands.

We've won several awards for our podcasts this year so far, including the Northern Agenda winning Best Local & Community Podcast at the Publisher Podcast Awards, and our commercial team winning in the branded content category at the Campaign Media Awards for their Let's Talk About Grief Podcast for Co-op, while our D&I team won Best New Podcast at the Quill Podcast Awards for their D&I Spy podcast.

Building our culture around sustainability

The challenges currently faced by businesses, their people, their customers and by society in general are significant. We've made real progress to ensure we're sustainable and able to grow as these challenges subside. The changes we're making are not always easy and I want to recognise the dedication of everyone at Reach and thank them for their hard work and professionalism as we continue to deliver our strategy and evolve.

Now that we have built a formalised ESG framework and strategy, we continue to gather the data we need to build a clearer picture of Scope 3 emissions - this essential work will inform our science based targets and net zero goals. Just to name one example of progress in this area, this summer our teams are working to install 9000m² of solar panels at our print sites in Watford, Glasgow and Oldham, a project which will be not only environmentally friendly but both cost and energy efficient.

A key part of our sustainability roadmap is to better educate and engage all of our colleagues in our efforts, and our newest colleague network, called ReachSustainability, will play a crucial role in this work. Earlier this spring our gender equality network, ReachEquality, and the industry body Women in Journalism, worked together with our Online Safety Editor Dr Rebecca Whittington to deliver a groundbreaking piece of research, which received widespread industry praise and paved the way for further cross-industry cooperation to find solutions. Keeping our journalists safe remains one of our top priorities and we are proud to be leading the way in this area.

Continuing to drive efficiencies

Increased inflation had a significant impact on our profitability during 2022, particularly due to a 60% increase in the like for like cost of newsprint. To help mitigate the impact of external headwinds we announced plans to reduce our operating cost base by 5-6% for the year. We remain on track with those plans which are enabling continued investment in digital expansion and are expected to deliver stronger H2 profits.

Addressing future cashflows - HLI and pensions

The High Court trial relating to allegations of historical voicemail interception and other forms of unlawful information gathering which was heard in May and June, has now completed. We expect a judgement around time limitation during the Autumn.

We have concluded the 2019 triennial valuation review of pension commitments for five of the six Group's defined benefit pension schemes. We are continuing discussions with trustees of the MGN scheme. Discussions on the 2022 triennial valuation reviews are now underway for all of the groups' schemes.

Balance sheet strength underpins cash commitments

The reliability of our cash flows and strength of our balance sheet provides a strong base for the growth in the long term. It ensures we can continue to build our digital capabilities and support all ongoing commitments, to both pension holders and to investors.

Jim Mullen

Chief Executive Officer

25 July 2023

Finance Review

While we continue to deliver our Customer Value Strategy our first half digital performance reflects a significant reduction in page views from Facebook which is impacting the whole sector, and the impact of ongoing macroeconomic uncertainty. Print revenue has been robust, with growth in circulation revenues driven by cover price increases. The cost reduction plans we put in place at the start of the year have helped to mitigate the ongoing impact of inflation, with overall operating costs lower by around 3%, partly offsetting the impact of lower revenue on operating profit.

Our statutory performance reflects a period on period increase in adjusted items, which include the legal costs of the HLI trial and higher restructuring charges in relation to cost reduction plans. The Group has a strong balance sheet and liquidity with a closing cash balance of £11.5m and a £15.0m drawdown on the facilities resulting in a net debt position of £3.5m. The expiry date of the Group's revolving credit facility of £120.0m is November 2026.

Summary income statement

Group revenue fell by £18.0m or 6.1% with print down 2.7% and digital revenue down 16.1%.

Adjusted costs decreased by £7.0m or 2.8%, partially offsetting the decline in revenue. The H1 cost base benefitted from newsprint cost inflation easing and cost savings delivered through the ongoing cost programme. Statutory costs were higher by £5.3m or 2.0%, driven by the increase in operating adjusted items of £12.3m (£24.3m in 2023 versus £12.0m in 2022).

Adjusted operating profit declined £11.1m or 23.5%. The adjusted operating margin of 12.9% in 2023 compares to 15.9% for 2022. Statutory operating profit decreased by £23.4m or 67.8% primarily due to the increase in operating adjusted items.

Adjusted earnings per share decreased by 3.3p or 27.5% to 8.7p. Statutory earnings per share decreased by 6.6p to 1.5p, principally due to the decrease in operating profit.

Revenue

Revenue bridge

Print revenue decreased by £6.1m or 2.7% (2022: down 3.9%).

Strong circulation performance with revenue up 2.4% (2022: down 5.1%) for the period driven by cover price increases, which were above recent historical levels during the second half of 2022.

Print advertising revenue declined 18.3% (2022: down 9.9%). H122 benefited from elevated government spending on public health messaging during the period. Entertainment, media and retail were the biggest drivers on the year on year decline partially offset by growth in holidays and travel and a small decline in telecoms.

Print revenue also includes external or third-party printing revenues and other print-related revenues. Printing revenue decreased by 10.4% (2022: up 19.8%) impacted by the year end closure of one print plant which reduced spare capacity available for third-party printing. Other print revenue decreased marginally by 1.4% (2022: up 18.4%).

Digital revenue decreased by 16.1% to £60.8m (2022: £72.5m). Revenue has been impacted by lower advertising demand in a continued period of macroeconomic uncertainty and due to a material impact from reduced page views following Facebook's deprioritisation of news content which has driven a reduction in referral traffic for publishers across the sector. Strategically driven or 'data-led revenues' of £24.9m were down 1.2% and now represent 41% of digital (2022 35%, FY2019 24%).

Revised data-driven revenue definition

As explained in footnote 1 on page 3, the definition of 'data-driven' revenue has been revised to reflect the continued evolution of the Customer Value Strategy. This includes revenue from advertising activity which utilises data generated via registrations, audience behavioural or Mantis contextual. It also includes other strategically driven revenues, less dependent on audience volumes such as affiliates, partnerships and ecommerce. Comparatives have been restated to reflect this change. As previously disclosed, data-driven revenues were; £12.5m in H12021, £30.6m in FY2021, £22.5m in H12022, £47.7m in FY2022. Under revised definition those comparatives are; £16.6m in H12021, £37.8m in FY2021, £25.2m in H12022, £57.6m in FY2022.

Costs

Adjusted costs of £244.6m (2022: £251.6m) decreased by £7.0m or 2.8%. This was driven by reduction in circulation volumes, in addition to reduced labour costs as a result of our cost reduction programme. Other costs increased due to continued inflation on overheads. Statutory costs were higher by £5.3m or 2.0% primarily due to higher operating adjusted items which were £12.3m higher at £24.3m.

Operating adjusted items included in statutory costs related to the following:

The Group has incurred a £5.9m (2022: £5.9m) increase in the provision for historical legal issues relating to the costs associated with dealing with and resolving civil claims in relation to historical phone hacking and unlawful information gathering.

Restructuring charges of £10.2m (2022: £5.4m) incurred in respect of cost reduction measures are principally severance costs that relate to cost management actions taken in the period.

Pension costs of £2.6m (2022: £2.2m) comprise external pension administrative expenses.

Other adjusted items comprise the Group's legal fees in respect of historical legal issues (£4.6m), adviser costs in relation to the triennial funding valuations (£1.2m), internal pension administrative expenses (£0.3m) and corporate simplification costs (£0.2m), less a reduction in National Insurance costs relating to share awards (£0.4m) and the profit on sale of impaired assets (£0.3m).

In 2022 other adjusted items related to adviser costs in relation to pension valuation costs (£0.8m), less a reduction in National Insurance costs relating to share awards (£1.9m) and the profit on sale of an impaired asset (£0.4m).

Profit

Adjusted operating profit of £36.1m was down £11.1m or 23.5% reflecting the decline in revenue of 6.1% partially offset by a decrease in adjusted operating costs of 2.8%.

This is also reflected in our adjusted operating margin which decreased by 3.0 percentage points from 15.9% in 2022 to 12.9% in 2023.

Reconciliation of statutory to adjusted results

The Group excludes from the adjusted results: operating adjusted items and the pension finance charge. Adjusted items relate to costs or income that derive from events or transactions that fall within the normal activities of the Group, but are excluded from the Group's adjusted profit measures, individually or, if of a similar type in aggregate, due to their size and/or nature in order to better reflect management's view of the performance of the Group.

Items are adjusted on the basis that they distort the underlying performance of the business where they relate to material items that can recur (including impairment, restructuring and tax rate changes) or relate to historic liabilities (including historical legal and contractual issues, defined benefit pension schemes which are all closed to future accrual).

Other items may be included in adjusted items if they are not expected to recur in future years, such as the property rationalisation in the previous years and items such as transaction and restructuring costs incurred on acquisitions or the profit or loss on the sale of subsidiaries, associates or freehold buildings.

Management excludes these from the results that it uses to manage the business and on which bonuses are based to reflect the underlying performance of the business and believes that the adjusted results, presented alongside the statutory results, provide users with additional useful information. Further details on the items excluded from the adjusted results are set out in note 5.

Balance sheet and cash flows

Historical legal issues provision

The historical legal issues provision relates to the cost associated with dealing with and resolving civil claims in relation to historical phone hacking and unlawful information gathering. Payments of £3.5m have been made during the year and the provision has been increased by £5.9m. At the half year a provision of £45.4m remains outstanding and this represents the current best estimate of the amount required to resolve this historical matter. Further details relating to the nature of the liability, the calculation basis and the expected timing of payments are set out in note 15.

Decrease in accounting pension deficit

The IAS 19 pension deficit (net of deferred tax) in respect of the Group's defined benefit pension schemes decreased by £7.5m from £113.9m at year end to £106.4m at the half year. The increase in the discount rate and Group contributions has been partially offset by reductions in asset values. The triennial valuations for funding of the defined benefit pension schemes as at 31 December 2019 have been agreed for five of the schemes, with one scheme outstanding. We continue to work with both the Trustees of the one remaining scheme and the Pensions Regulator. The process to determine the 31 December 2022 valutions has now commenced.

During 2022, the Trustees of the Express Newspapers Senior Managers Pension Fund purchased a bulk annuity (at no cost to the Group) and the scheme now has all pension liabilities covered by annuity policies. In 2021, the Trustees of the West Ferry scheme purchased a bulk annuity and the scheme now has all pension liabilities covered by annuity policies. Group contributions in respect of the remaining four defined benefit pension schemes in the first half were £23.3m (2022: £23.0m) under the current schedule of contributions. Contributions in 2023 are expected to be £55.8m under the current schedule of contributions for the four schemes.

Deferred consideration

Deferred consideration is attributable to the acquisition of the Express & Star. The third and final payment of £7.0m was made on 28 February 2023. There is no remaining liability in relation to deferred consideration.

    Adjusted cash flow

Cash balances

Net debt at the half year is £3.5m, a result of a £28.9m reduction in cash balances during the year, from a net cash position of £25.4m at the end of 2022. The Group has £15.0m drawn down on the Group's revolving credit facility, with the overall total cash position of £11.5m at the half year. The Group has a revolving credit facility of £120.0m, which expires during November 2026.

Cash generated from operations on a statutory basis was £24.8m (2022: £47.5m). The Group presents an adjusted cash flow which reconciles the adjusted operating profit to the net change in cash and cash equivalents, which is set out in note 19. A reconciliation between the statutory and the adjusted cash flow is set out in note 20. The adjusted operating cash flow was £18.9m (2022: £39.2m).

Dividends

The Board paid a final dividend for 2022 of 4.46 pence per share in June 2023. An interim dividend for 2023 of 2.88 pence per share will be paid on 22 September 2023 to shareholders on the register on 11 August 2023.

In declaring interim dividend of 2.88 pence per share for 2023 (2022: 2.88 pence per share), the Board has considered all investment requirements and its funding commitments to the defined benefit pension schemes.

Principal risks and uncertainties

The Group recognises the importance of the effective understanding and management of risk in enabling us to identify factors, both externally and internally, that may materially affect our ability to achieve our goals. There is an ongoing process for the identification, evaluation and management of the principal risks faced by the Group, including emerging risks. Appropriate mitigating actions are in place to minimise the impact of the risks and uncertainties which are identified as part of the risk process. All risks are considered in the context of our strategic objectives, the changing regulatory and compliance landscape and enabling the continuity of our operations.

These principal risks and uncertainties, the risk appetite in relation to these and the resulting actions are set out in the Reach plc 2022 Annual Report which is available on our website at www.reachplc.com.

The principal risks and uncertainties continue to be: deterioration in macroeconomic conditions; print revenue decline acceleration; insufficient digital revenue growth; cyber security breach; data protection failure; supply chain failure; health and safety issue; lack of funding capability; inability to recruit and retain talent and brand reputation damage.

Going concern statement

The directors assessed the Group's prospects, both as a going concern and its longer term viability, at the time of approval of the Group's 2022 Annual Report. Further information is set out in the Reach plc 2022 Annual Report.

At the half year, the directors have reviewed the going concern assessment, specifically any potential impact of the downturn in pages views experienced in the digital market during 2023. The Group undertakes regular forecasts and projections of trading, identifying areas of focus for management to improve delivery of the Strategy and to continue to mitigate the current impact of macroeconomic headwinds. The Group has a strong balance sheet and liquidity with a cash balance of £11.5m. The Group has drawn £15.0m of its revolving credit facility which expires during 2026, with £105.0m remaining available.

Accordingly, the directors have adopted the going concern basis of accounting in the preparation of the Group's half-yearly financial report.

Statement of directors' responsibilities

The directors are responsible for preparing the half-yearly financial report in accordance with applicable laws and regulations. The directors confirm to the best of their knowledge:

By order of the Board of Directors

Darren Fisher

Chief Financial Officer 25 July 2023