Interim Results

For the 26 weeks ended 28 March 2009

Dawson Holdings PLC ("Dawson" or "the Group"), the media supply chain integrator for newspapers and magazines, academic books, new media and point of sale materials, today announces its interim results for the 26 weeks ended 28 March 2009.

Financial performance summary:

• All four divisions traded in line with our expectations (before contract losses)

• Revenue £376.4m (2008: £388.7m)

• Operating loss of £16.7m after one off impairment and reorganisation costs £23.5m

• Underlying* operating profit up 10% to £6.8m (2008: £6.2m)

• Underlying* earnings per share up 21% to 6.4p (2008: 5.3p)

• Average net debt, following significant investment, rose marginally to £17.3m (2008: £16.5m)

• Dividend payments suspended: to conserve cash and protect financial position. 

*pre-impairment and restructuring costs (eps: also pre associated tax credit)

Operational summary:

• Dawson News, as previously reported, has lost most of its major wholesaler contracts 

• Continued international expansion of Media Direct

• Dawsonera trading ahead of expectations and continues to show encouraging growth

• New client wins in Marketing Services have resulted in a net gain overall

• Reducing central overheads to a level compatible with the reduced scale of the business 
• Peter Harris, Chief Executive, to step down and be replaced by Hugh Cawley, currently Group Finance Director; Adrian Wood to become Group Finance Director.

Current trading:

• Underlying performance broadly in line with market expectations for the year as a whole 

• Dawson News' contracts are being terminated progressively with effect from June this year, with the majority finishing in the financial year beginning 1 October 2009.

Commenting on the outlook, Nigel Freer, Chairman, said: 

"We have been focusing on mitigating the effects of recent developments whilst at the same time planning for the future, with the intention of preserving value in the group.  

"To achieve the preservation of value we are taking a number of actions: an orderly run down of the remaining contracts in News as profitably and cash generatively as possible; seeking ways in which we can maximise value from News, should regulatory intervention not be forthcoming, or come too late; and, taking steps to ensure that our three other businesses are not adversely impacted, given our confidence in their future." 

Chairman's Statement

Introduction

The first half of the current financial year has been a dramatic and profoundly disappointing one for the Group, following the loss of the majority of its contracts in Dawson News. This is having far reaching consequences for both our business and the industry it supplies. 

Our disappointment stands against a backdrop in which our underlying operating and trading performance and delivery against service standards has been standing up strongly in a challenging economic environment. Fortunately, our other three non-news businesses have remained unaffected by the turmoil and we believe that they can have bright futures.

The financial effects of the issues in Dawson News are evident in these results in the form of significant one-off impairment and reorganisation costs and provisions. 

Dawson News

The future of our biggest division, Dawson News, has been compromised as we face the loss of almost all of our major wholesaler contracts with national newspaper publishers and magazine distributors. The contracts are being terminated progressively with effect from June this year, with the majority finishing in our next financial year (October 2009 - September 2010). 

As a result, the UK's news supply chain has effectively been transformed overnight from one of three national and a number of smaller independent wholesalers into one dominated by two regional monopolies, with the de facto exclusion of our business from the market.

On behalf of the Board, I express our sincere regret that this situation has arisen. This is neither the result of poor service nor a lack of price competitiveness. Our performance on behalf of our retailer customers and publishers and distributor clients is regularly measured and stands up well in comparison to our competition. Dawson News was indeed voted Top Wholesaler of the Year in the 2008 Association of News Retailing Survey through the hard work of our staff. Whilst we recognised the risk of some contract losses, we priced our bids aggressively to try to grow our market share and we do not believe that this worst possible case outcome for Dawson could reasonably have been forecast.

In summary, we have fallen victim to a major restructuring of our industry's supply chain whereby Dawson News, as the smallest of the three major players, has been squeezed out. 

Effective reversal of the OFT's objectives

We believe that this restructuring will have the effect of reversing the objectives underpinning the Opinion on newspaper and magazine distribution in the UK issued by the Office of Fair Trading in October 2008. The OFT, in that Opinion, sought to open up the magazine supply chain to greater competition by allowing passive sales, whereby retailers can choose their wholesale supplier rather than having a supplier imposed on them under an exclusive supply arrangement. 

In effect, by reducing the supply chain to two regional monopolies, the industry has circumvented the OFT Opinion. This outcome, we believe, works against the maintenance of any competitive tension and is against the interests of retailers and consumers. In the longer term, it may also rebound against the interests of publishers and distributors themselves.

Having consulted widely with retailers and trade bodies, it is clear that they share our concerns about the news supply chain. These mutual concerns have been brought to the attention of Government and the competition authorities and we have sought to ensure that the consequences of the recent developments in the market are properly understood. We believe strongly that this situation should be investigated by the UK competition authorities as a matter of urgency so that, if the outcome, or how it was achieved, is found to be contrary to the interests of consumers and in breach of competition law, it can be addressed whilst alternatives still exist in the market.  

The Future

We have been focusing recently on mitigating the effects of these developments whilst at the same time planning for the future, with the intention of preserving value in the Group.  

To achieve the preservation of value we are taking a number of actions:

• undertaking an orderly run down of the remaining contracts in News as profitably and cash generatively as possible; 

• in parallel, we are also seeking ways in which we can maximise value from News, should regulatory intervention not be forthcoming, or come too late;

• taking steps to ensure that our three non-news businesses are not adversely impacted by the problems faced by Dawson News, given our confidence in their future and 

• reducing the Group central overheads to a level compatible with the reduced scale of the business. In this respect, the following measures will be taken:

   

  –      Peter Harris, our Chief Executive, has elected to retire with effect from 31st December 2009 and will step down from his role of Chief Executive when the reorganisation of the Group is substantially complete
  –      As Peter steps down, which we anticipate will happen on 30th June 2009, Hugh Cawley, the Group Finance Director, will become Chief Executive and Adrian Wood will become Group Finance Director in addition to his current responsibilities as Group Company Secretary.
  –      Peter will remain available for advice and support to the new team until 31st December 2009.
  –      Once the reorganisation is complete, the costs of the Board will be repositioned to levels appropriate to the scale of Group operations.

I would like to thank Peter for his valuable contribution to the Group and for creating the succession plan that enables us to transition seamlessly into the new structure. Hugh and Adrian have a wealth of experience and knowledge that positions them well to lead the Group forward and I wish them every success in their new roles.

Dividend

Given the challenges surrounding the News division, the Board believes that its priority is to conserve cash and protect the Group's financial position. We have therefore taken the decision to suspend dividend payments for the immediately foreseeable future. 

People

Through all of the difficulties experienced by the Group in recent months, we have been sustained by the loyalty, excellence and hard work of our colleagues across the whole company. Notwithstanding the issues facing Dawson News, everyone can take pride in the knowledge that all four of our businesses have continued to deliver on their operational strategies. I would like to thank each and every employee for that support and achievement and apologise for the uncertainty that the present circumstances have created and which we will do our utmost to resolve.

Current trading and outlook

Given that most of our News contracts still have some time run, the Group is continuing to trade normally. Despite the tough economic conditions, and in particular the accelerated decline over recent months in the sales of magazines reflecting the recessionary consumer environment, we would, under normal circumstances, expect to deliver an underlying performance broadly in line with market expectations for the year as a whole.

Nigel Freer 

Chairman 

28th May 2009  Chief Executive's Review

Overview

The financial performance of the Group during the first six months of the year, despite the severe downturn in the global economy, has been satisfactory both in terms of underlying profit and cash management.

However, this has been overshadowed by the adverse outcome of the recent round of publisher and distributor contract negotiations in Dawson News. Though most of our existing News contracts still have some considerable time left to run, the impact of their non-renewal on the News division and the Group has been and will be profound.

As a result of the problems encountered in Dawson News, the Group has incurred a number of one-off impairment and reorganisation costs and provisions, totalling £23.5m, which are more fully explained in the Financial Review.

Group results 

Underlying operating profit and eps are up 10 per cent. and 21 per cent. respectively over the prior year. Average net debt, despite significant investment in Dawson News on new IT systems and packing technology, rose only marginally to £17.3m, demonstrating once more the strong cash flow characteristics of the Group.

Operating profit pre-impairment and reorganisation is stated before £23.5m (2008: £nil) of impairment and reorganisation charges. Underlying earnings per share are stated before the £21.5m (2008: £nil) post tax total of impairment and reorganisation charges. 

Divisional operating profits

All four divisions traded in line with our expectations. Higher underlying profits were driven by a 10 per cent. like for like improvement in Dawson News and 25 per cent. growth in Media Direct. Dawson Books was flat against prior year, while Marketing Services, the division most impacted by the economic downturn, was down 37 per cent.

Net finance costs have been kept under control by tight management of cash flows and have further benefited from a one-off credit of £0.2m in respect of interest on the option to acquire the outstanding shares in Solent SD.  Increased banking margins levied on renewal of the facilities have been offset by lower interest rates overall.

Dawson News

The negative long term trends in newspaper and magazine circulation continued - and indeed accelerated - in the half year, particularly in monthly magazines which, as a relatively high-priced item, are particularly susceptible to the economic cycle. A further deterioration has been seen in the opening weeks of the second half year.

The adverse impact of this market weakness has been more than offset by productivity gains from our investment in regionalisation, upgrading our magazine packing equipment and our award-winning newspaper packing technology.

All this good work has, however, been compromised by the outcome of the recent round of publisher and distributor contract negotiations.

In May 2008 we announced that we had been unable to retain a substantial portion of our contracts with News International on terms that would have continued to deliver a positive contribution to divisional operating profit. This will result in a loss of turnover of some £81m per annum, with effect from July 2009, but will not impact operating profit.

Much more seriously, following the publication in October 2008 of the OFT Opinion on the newspaper and magazine supply chain, almost all the other major national newspaper publishers and magazine distributors put their business out to tender, in many cases years in advance of the end of the current contracts. Dawson News has been wholly unsuccessful in all these tenders, resulting in the de facto creation of a two wholesaler distribution network. We have serious concerns over the implications of this move and the underlying motivation for the creation of a two wholesaler network for the long term competitive health of the supply chain. Closer to home, the implications for our News Division are very serious indeed.

A summary of the contracts lost to date is set out below:

(* full year turnover in the year to 27th September 2008)

This comprises some 67 per cent. of the annual turnover of the News division and, in the absence of regulatory intervention, means that the Group will have no viable alternative other than to seek to effect an orderly exit from this market. The timing and implications of such a move are, as yet, uncertain, but we will be looking to maximise value for the stakeholders of the News business and to protect, wherever possible, the jobs of our loyal and highly capable workforce. 

In the meantime, the division continues to trade profitably and meet its contractual service obligations. Further investment in IT systems and packing technology has, however, been suspended, and the expenditure to date on suspended projects written down, until the longer term prospects for the division are clarified.

Dawson Media Direct

Continued geographic expansion, together with benefits from the weakening of sterling, have enabled Media Direct to more than offset the impact of the economic downturn, though this has been particularly severe on the airline industry.

During the half year the UK airline bulk copy market has been subjected to intense scrutiny to ensure that copy supplied complies with circulation audit requirements. This scrutiny will result in some clarification of the circulation rules and we will accordingly amend and develop our existing business processes to ensure the long term health of this important and growing market.

Media Direct is continuing to explore opportunities to further expand the global reach of the business.

Dawson Books

The late autumn of 2008 was a difficult time for Books as the book budgets of our UK academic library customers were constrained by the abrupt escalation in journal pricing as a result of the weakening of sterling. This pressure has eased in recent months and sales have returned to more normal levels. Exports, which benefited from the exchange rate movement, performed well. Our eBook platform, dawsonera, continued to show encouraging growth and is trading ahead of our expectations.  

Dawson Marketing Services

The recessionary environment has made life difficult for Marketing Services, with client activity for marketing, promotional and campaign support fulfilment declining. This has been partially compensated by a solid performance from e-commerce fulfilment and new client wins which, even in these tough times, continue to outweigh client losses.

Organisation

As set out in the Chairman's Statement, we have taken steps to downsize the central overheads of the Group to a level compatible with the reduced scale of our future activities. As one of those steps, I have elected to retire from the Group and anticipate stepping down from my position as Chief Executive with effect from 30th June 2009. I have greatly enjoyed my time at Dawson, though the events of recent months have been stressful and difficult. I would like to thank our Chairman, Nigel Freer and all the Board for their unwavering support and calm guidance. It has also been a source of great pride to see how the Dawson team has pulled together in the face of adversity. I have every confidence that, under the new leadership of Hugh Cawley and Adrian Wood, the task of recovering the fortunes of the Group has been put into very capable hands.

Peter Harris

Chief Executive

28th May 2009

Financial Review

Cash flow and net debt

It has been well documented that the Group experiences significant swings in the levels of borrowings during the course of a month. As a result, the more meaningful measure of overall indebtedness than point-in-time cash is average net debt. Average net debt rose from £16.5m in H1 2008 to £17.3m in H1 2009, as a result largely of the relatively high levels of capital expenditure on the News division's systems, which were being upgraded to meet the continually increasing needs of our retail customers and publisher clients.

The level of interest payable on borrowings nonetheless declined through a combination of lower base and LIBOR rates, together with the effect of the RPI movements on the Solent put option liability.

Taxation

Excluding the £2m tax credit on exceptional items, the underlying tax charge was £1.8m on underlying pre-tax profits of £6.1m.

The effective rate of tax for the half year is estimated at 30 per cent. as against an underlying rate of 34 per cent. for the full year to September 2008. The rate remains higher than the UK corporation tax rate of 28 per cent. as a result principally of disallowable expenses and also of overseas tax rates.

Underlying pre-tax profits of £6.1m are stated before impairment and reorganisation charges of £23.5m (2008: £nil). 

Retirement benefit obligations 

The net retirement benefit obligation for the Group has increased by £4.4m as against September 2008, despite the Group having contributed £0.4m of deficit funding in the period. This reflects primarily the falling asset values owing to current market uncertainty.

During the course of 2008, the Group, recognising the fact that it could no longer, despite its best efforts, afford to offer its employees defined benefit pensions, ceased to accrue further pension benefits in defined benefit scheme after 30th June last year.

Exceptional items, key judgements and potential uncertainties

In preparing the interim financial statements, management are required to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expenses. These estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgements about the carrying value of assets and liabilities that are not readily available from other sources. Actual experience may differ from these estimates.

The notification during early 2009 of the loss of significant contracts in the News division is clearly a significant matter in the context of the overall Group. It is now known that contracts representing some 67 per cent. of the division's, and 60 per cent. of the Group's, turnover for the last financial year will not be renewed as they expire over the period between July 2009 and February 2011.

In order to preserve value for all stakeholders in the Group, an internal reorganisation has been agreed, accompanied by agreement with the banks over revised funding lines. Through an amendment and restatement of the facilities, funds for the News business and for the three non-news businesses have been individually allocated, such that DMD, Books and DMS are financed separately from News, albeit under a Group facility.

There exists a fundamental uncertainty, however, about the ability of the News division to operate successfully through the next twelve months. Although News is currently both profitable and cash-generative, the infrastructure required to support its efficient and effective operation is extensive and costly. As the business which is both supported by and supports this infrastructure begins to fall away, the ability of the division to continue to operate profitably starts to be compromised.  

In the absence of a) intervention by the competent authorities to prevent the emerging duopoly; b) reasonable co-operation with our successful competitors to effect a managed transition to the new distribution arrangements; c) the continuing support of our publisher clients or d) our finding alternative uses for the infrastructure, there can be no certainty around News's ability to continue to trade beyond the period immediately following the close of the calendar year.

As a result, a number of exceptional adjustments have been made to the financial statements, as explained in note 5, almost all of which are non-cash and, in themselves do not affect the ability of the Group to continue to trade profitably or cash-generatively.

Hugh Cawley

Group Finance Director

28th May 2009  

Responsibility Statement of the Directors in respect of the interim financial report

We confirm that to the best of our knowledge:

By order of the Board

Peter Harris                                             Hugh Cawley

Chief Executive                                         Group Finance Director

28th May 2009                                          28th May 2009

        Condensed Consolidated Income Statement

   For the 26 weeks ended 28th March 2009

      Condensed Consolidated Statement of Recognised Income and Expense

      For the 26 weeks ended 28th March 2009

        Condensed Consolidated Balance Sheet

      As at 28th March 2009

        Condensed Consolidated Cash Flow Statement

      For the 26 weeks ended 28th March 2009

  Notes to the Interim Statement

For the 26 weeks ended 28th March 2009

1. Reporting entity

Dawson Holdings PLC (the "Company") is a company incorporated in England and Wales. These condensed consolidated interim financial statements of the Company for the 26 weeks ended 28th March 2009 comprise the Company and its subsidiaries (the "group"). 

2. Basis of preparation and statement of compliance

These condensed consolidated interim financial statements have been prepared in accordance with IAS 34 "Interim Financial Reporting" as adopted by the EU. They do not include all of the information required for full annual financial statements and should be read in conjunction with the group's consolidated financial statements for the 52 weeks ended 27th September 2008 which are prepared in accordance with IFRSs as adopted by the EU.

These condensed consolidated interim financial statements have been prepared in accordance with IAS 34 "Interim Financial Reporting" as adopted by the EU. They do not include all of the information required for full annual financial statements and should be read in conjunction with the group's consolidated financial statements for the 52 weeks ended 27th September 2008 which are prepared in accordance with IFRSs as adopted by the EU.

The abridged information for the 52 weeks ended 29th September 2008 has been extracted from the group's statutory accounts for that period. Those accounts were reported on by the Company's auditors, and delivered to the Registrar of Companies. The report of the auditors (i) was unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 237(2) or (3) of the Companies Act 1985.  

The group's consolidated financial statements for the 52 weeks ended 27th September 2008 are available on request from the Company's registered office (9th Floor (South Wing), AMP House, Dingwall Road,     Croydon, CR0 2LX) or at www.dawson.co.uk.

These condensed consolidated interim financial statements are unaudited, but have been reviewed by KPMG Audit Plc, and their report is set out below.

The condensed consolidated interim financial statements were approved by the Board of Directors on 27th May 2008.

Basis of preparation - going concern

As described in the Chairman's statement, the Chief Executive's Review and the Finance Review, the adverse outcome of the recent round of publisher and distributor contract negotiations has resulted in Dawson News losing 67% of its annual turnover. Though most of the existing News contracts still have some considerable time left to run, the impact of their non-renewal on the News division and the group will be profound. However, the division currently envisages continuing to trade profitably and within banking covenants until the point at which the volume of business is not sufficient to support the News business's infrastructure, and there can be no certainty that the timing of this reduction in business is not accelerated by forces outside the control of the Directors.

In the absence of beneficial outcomes from regulatory intervention resulting in the News business being able to continue to trade profitably, Surridge Dawson Limited would need to be placed into administration.  The Directors have agreed a Group reorganisation and put contingency plans in place and, should Surridge Dawson Limited enter into administration, they expect that the remaining Group can continue to trade profitably following significant rationalisation within the central support function and the Non News Businesses continuing to trade largely unaffected by the events impacting Surridge Dawson Limited. The Directors have prepared detailed cash flow projections for the remaining Group for the period to 30 June 2010 and a full five year plan to 30 September 2014. Based on these projections, the Directors expect that the remaining Group will be able to continue to operate within the existing facilities, and within the existing covenants. The Directors note that the bank facilities allow for 180 days standstill period in the event of Surridge Dawson Limited entering administration, subject to conditions. During this period the Non-News Businesses are required to renegotiate their funding or seek alternative sources of finance, and based on the detailed forecasts and projections, the Directors are confident that suitable financing under terms acceptable to the ongoing Group can be found, although there can be no certainty in this regard.

To support the restructure, the group has already reached agreement with its lenders in order to apportion the burden of debt between the News business and the Non News Businesses. Surridge Dawson Limited is now the primary obligor for £30m of the group's total facility of £37m. In the event that Surridge Dawson Limited ceases trade or breaches the terms in the banking agreement, a cross guarantee exists to allow the bank to recover its debt from the Non News businesses should it not be able to do so from Surridge Dawson. However, the Directors consider the bank utilising this cross guarantee as unlikely owing to the assets available within Surridge Dawson enabling repayment of its share of the banking facilities.  .  Nonetheless, uncertainty over the viability of the Group remains because of the existence of the cross guarantee and the limitation of the standstill period. 

Details of the new banking facilities are given in note 13 to the interim statement.

The Directors have assessed the Going Concern status of the Group. In doing this, the Directors have taken legal and other advice as to the impact of a possible Surridge Dawson Limited cessation upon the rest of the Group and its ability to continue to trade. Whilst there are normal uncertainties associated with general economic risks that may impact the remaining Group businesses, the Directors consider that the following specific risks could impact the Group's ability to continue as a Going concern:

(3) Clearly, if Surridge Dawson Limited were to enter administration, the Non News Businesses would, subject to conditions, have up to 180 days to renegotiate terms of funding or find alternative sources of funding. Whilst the Directors have commenced contingency planning and discussions with their funders, there can be no certainty that funds will be secured.

(4) Whilst the directors have planned for an orderly wind down of business prior to any administration of Surridge Dawson Limited, should this be necessary, there remains a risk that the timing may be governed by supplier or customer actions. Should this be the case, there is an increased risk that the cross guarantee is called, which the remaining group may not be in a position to satisfy.

The above matters represent a material uncertainty that may cast significant doubt on the group's and the parent company's ability to continue as a going concern and therefore the group and parent company may be unable to realise assets and discharge liabilities in the normal course of business. After considering these matters, however, and after making suitable enquiries, the Directors have concluded that it is appropriate to prepare the interim financial statements on a going concern basis. The financial statements do not therefore contain any adjustments that would result from the withdrawal of the group's finance facilities nor any other adjustments that would result from the going concern basis of preparation not being appropriate.

3. Accounting policies

The accounting policies and presentations applied by the group in preparation of the interim financial statements are consistent with those applied in preparation of the consolidated financial statements for the 52 weeks ended 27th September 2008. For the avoidance of doubt, the group has not adopted IFRS 8.

4. Business segments

For management purposes, the group is currently organised into four operating divisions: Dawson News, Dawson Media Direct, Dawson Books and Dawson Marketing Services. These divisions are the basis on which the group reports its primary segment information.

Dawson News provides wholesale and specialist news distribution services.

Dawson Media Direct provides in-flight management services, including specialist distribution to the airline industry.

Dawson Books provides shelf-ready books, and a variety of added value services, to professional, academic, corporate and public library markets throughout the world.

Dawson Marketing Services provides marketing support and logistics services through an effective integration of stock management, web reporting and distribution arrangements.

Segment information about these businesses is presented below:

The classification of central overheads reported for the 26 weeks to 29th March 2008 has been restated to reflect more accurately the split of costs between the Dawson News division and the centre; there is no impact on total profit.   Results from total activities for the 26 weeks ended 28th March 2009

         Results from total activities for the 26 weeks ended 29th March 2008