11th Oct 2007 07:00
WH Smith PLC11 October 2007 11 October 2007 WH SMITH PLC PRELIMINARY RESULTS ANNOUNCEMENT FOR THE YEAR ENDED 31 AUGUST 2007 Strong profit performance from the GroupKEY POINTS • Profit before tax and exceptional items up 29% to £66m (2006: £51m). Profits from trading operations are: • High Street profit up 5% to £44m(1) (2006: £42m) • Travel profit up 16% to £36m(1) (2006: £31m) • Total Group profit before tax of £76m (2006: £44m). • Like-for-like (LFL) sales down 4% reflecting our strategy to rebalance the mix of our High Street business towards our core categories. • High Street LFL sales down 6%, with total sales down 6% • Travel LFL sales up 2%, with total sales up 6% • Gross margin has improved by 230 basis points year on year. • Cost savings of £10m, with £3m delivered ahead of plan; further incremental cost savings of £11m identified. • Strong free cash flow of £81m (2006: £68m). • Underlying earnings per share(2) up 26% to 29.3p (2006: 23.3p). • Basic earnings per share up 82% to 33.1p (2006: 18.2p)(3). • Final dividend proposed of 8.1p, up 31% on the prior year. Total dividend per share of 11.8p up 27% on prior year(4). Commenting on the results, Kate Swann, Group Chief Executive said: "We have delivered another year of strong profit performance, with Groupprofits(5) up 29% and strong free cash flow of £81m. Our Travel business grewstrongly, and our High Street business made further progress in line with itsplan. In an uncertain consumer environment, we expect the key Christmas seasonto be very competitive, however we have planned accordingly." (1) High Street and Travel profit is stated after directly attributable definedbenefit pension service costs and share-based payment costs and before centralcosts, exceptional items, interest and taxation (2) Based on profit after tax and before exceptional items - diluted (3) EPS as per IAS 33 - diluted. Includes non cash exceptional gain of £10m in the current year and net exceptional charge of £7m in the prior year (4) Prior year figure is proforma based on two thirds / one third split of yearend and interim dividend per WH Smith PLC Circular dated 7 July 2006 (5) Profit before tax and exceptional items - Ends - Enquiries: WH Smith PLCSarah Heath Media Relations 020 7851 8850Mark Boyle Investor Relations 020 7851 8820 BrunswickTom Buchanan 020 7404 5959Pam Small GROUP INCOME STATEMENT Revenue Group revenue decreased from £1,340m to £1,299m over the year, as we focused onprofitable sales, in a tough trading environment. The LFL sales decline over theperiod was 4%. ===============================================================================£m 2007 2006 Growth % LFL Sales Growth %-------------------------------------------------------------------------------High Street 961 1,021 (6%) (6%)Travel 338 319 6% 2%-------------------------------------------------------------------------------Total 1,299 1,340 (3%) (4%)=============================================================================== High Street sales were down 6% and on a LFL basis down 6%, reflecting ourstrategy to rebalance the mix of our business. Travel sales growth of 2% on aLFL basis has been driven by the airports business, up 5% on a LFL basisdelivered through improved ranges, effective promotions and successfullyrebalancing sales from landside to airside. Total sales in Travel were up 6%driven by new business development gains and our expansion into the motorwayservice area market, both reflecting our strategy to grow the Travel business. Books LFL sales were up 1% as we continued to focus on rebuilding our authorityas a popular book specialist and maximising profitability. Excluding the HarryPotter release in the second half, LFL sales for the year were flat, with grossmargin slightly down including Harry Potter and up excluding Harry Potter. Wemaintained our strong performance versus the general high street, a trend whichhas continued for over 2 years now. We are particularly pleased to havemaintained this performance during the second half of the year in the face ofvery strong competition on Harry Potter. During the year, we saw strong sharesin some of the front list books, both over the key Christmas period on titleslike Peter Kay, The Sound of Laughter, and then with further strong shares onkey summer titles such as Cook Yourself Thin and the Richard & Judy Summer Read.Improvements to category planning and management have delivered good results,notably through improved ranges, innovative promotions and a focus on specificgenres, such as Kids. Stationery LFL sales were down 3% reflecting the stationery market which hasbeen soft throughout the year. Gross margin was up driven by intra category mix,sourcing benefits and better markdown management. In this broad and diversecategory we are seeing some areas of strong growth while others are weaker. Wecontinue to focus on improving our ranges through a programme of categoryreviews. During the year we have carried out successful reviews of categoriessuch as Pens and PC consumables, delivering improved performance in terms ofboth sales and margin. In Travel, we have extended the premium fashionstationery ranges on offer, especially in our Rail stores, with positivecustomer feedback. News and Impulse LFL sales were up 1% year on year with an improvement in grossmargin. The magazine market has been challenging during the year, especially partworksand monthlies. However, our share in news and magazines remained stable,supported by successful promotions with major newspapers. The introduction of anautomated category management system has also allowed us to improve the way wetailor magazine ranges to the sales profile of specific stores. We have seenfurther strong growth in snacking and confectionery, driven by range reviews andstrong promotions. In Entertainment, we continued with our strategy to reduce steadily our relianceon entertainment and as we do this, we are optimising profitability.Entertainment LFL sales were down 32% in an extremely competitive market withcontinuing price deflation. During the second half of the year we made a numberof improvements to our offer to maximise the sales from the space dedicated tothis category; for example, improving our ranges to ensure that the most populartitles are available in all our stores. Stock continues to be tightly controlledto reflect sales patterns while maintaining availability levels in line withlast year. Profit before exceptional items and taxation =============================================================================== Profit Growth£m 2007 2006 %-------------------------------------------------------------------------------High Street(1) 44 42 5%Travel(1) 36 31 16%-------------------------------------------------------------------------------Trading operations profit(1) 80 73 10%Central costs (14) (14)Internal rents 1 1-------------------------------------------------------------------------------Operating profit(2) 67 60 12%Net finance charges (1) (9)-------------------------------------------------------------------------------Profit before taxation(2) 66 51 29%=============================================================================== (1) Trading operations profit is stated after directly attributable definedbenefit pension service costs and share-based payment costs and before centralcosts, exceptional items, interest and taxation. (2) Stated before exceptional items The Group generated a profit before tax and exceptional items of £66m (2006:£51m), an increase of 29% year on year. Operating profit(2) increased by 12% from £60m to £67m as a result of strong improvements in trading operations. High Street High Street delivered a profit(1) increase of 5% to £44m (2006: £42m), in linewith expectations, as we continued with our strategy to rebalance the mix of thebusiness. Markets were as challenging as we expected in the first half, but webenefited in the second half from the publication of Harry Potter, the poorsummer weather and the absence of a major sporting event following the 2006World Cup. We continued to focus on rebuilding authority in our core categories,optimising margins, tight cost control and delivering the retail basics. Gross margin improved, driven by rebalancing the mix of our business, sourcingbenefits, better buying and improved markdown management. High Street delivered £10m of cost savings during the period, £3m ahead of plan.Cost savings were delivered from a number of areas of the business, for example,further efficiencies in IT through outsourcing and renegotiated contracts, andbetter use of not-for-resale purchasing, resulting in savings on cleaning,energy and facilities management. The High Street business now operates from 544 stores, which occupy 3.0m squarefeet (2006: 3.0m square feet). We opened 4 new stores and closed 3 stores duringthe period and continued to manage our store portfolio actively. We announced plans to open 71 Post Office concessions in our High Street stores.The rollout is on schedule with 23 opened to date, a further 10 planned to openin 2007 and the remainder in 2008. Customer feedback has been good with improvedenvironment and service levels highlighted. The integration of the Post Officewithin our stores is operationally complex but the execution is progressing toplan. A separate management team has been established within our High Streetbusiness to ensure that the Post Office rollout is as smooth as possible withminimal disruption to the operation of the store. Travel Travel delivered another good performance with profit(1) increasing by 16% to £36m (2006: £31m). This was achieved as a result of increased sales combined with improved gross margin and tight cost control. Gross margin has increased during the year through good category mix managementand further buying improvements, resulting in more sales in higher margincategories such as confectionery and books. We have improved average transactionvalue by focusing on mix changes and improved promotional activity. The Travel business now operates from 309 units, including motorway service areafranchise units. Excluding motorway service area franchise units, Traveloccupies 0.2m square feet (2006: 0.2m square feet). We have made good progress on new business development. We successfully renewed20 contracts in airports and in rail. We also opened 18 new units: 15 inairports, 2 in rail and one in the Royal Cornwall Hospital. One unit closed inthe year. Since our announcement in November 2006 of plans to open stores in motorwayservice areas, we have made good progress to establish a strong presence in thisnew channel. We have completed a challenging rollout plan ahead of schedule andnow have 50 Moto and 35 Welcome Break stores open. The stores are trading welland initial customer feedback is encouraging. We are working on otheropportunities in this market, specifically leasehold opportunities, with othermotorway service area operators. One of these stores, with Swayfield, hasalready opened at Cullompton. (1) High Street and Travel profit is stated after directly attributable definedbenefit pension service costs and share-based payment costs and before centralcosts, exceptional items, interest and taxation Central costs and internal rents Central support costs were £14m, consistent with the prior year. Internal rentson freehold property owned by the Group remained at the prior year level of £1m. Net finance charges The results include finance costs net of investment income of £1m (2006: £9m).Higher investment income and lower finance charges (as a result of the Group nolonger having a term loan facility) have led to the decrease in net financecharges. In addition, we received a one-off interest receipt of approximately£1.5m associated with a tax refund in the first half of the year. Exceptional items In the prior year a £12m exceptional charge was incurred in relation to costsassociated with the demerger of Smiths News PLC and a £5m exceptional gain wasalso recognised as a result of the settlement of post retirement medical benefitliabilities. In the current year the Group has recognised a £10m non cashcurtailment gain as a result of the closure of the WHSmith Pension Trust todefined benefit service accrual on 2 April 2007. Taxation The tax charge for the year, before tax on exceptional items, was £13m (2006:£10m). The effective tax rate on continuing activities excluding exceptionalitems was 20% (2006: 20%). We expect the effective tax rate to remain below the UK standard rate over themedium term. The exact tax rate achieved will depend on the underlyingprofitability of the Group and continued progress in closing off outstanding taxassessments. Earnings per share The Group's underlying diluted earnings per share was 29.3p (2006: 23.3p) as aresult of improved profitability. The Group generated basic diluted earnings pershare of 33.1p (2006: 18.2p) reflecting a net exceptional charge of £7m in theprior year and the non cash exceptional gain of £10m recognised in the currentyear. Fixed charges cover Fixed charges, comprising property operating lease rentals and net financecharges, were covered 1.4 times (2006: 1.3 times) by fixed charges and profitbefore tax and exceptional items. Management Investment Plan In the current year, the Board intends to introduce a new management investmentplan, which will cover the three financial years to 31 August 2010, and forwhich formal approval will be sought at the AGM on 31 January 2008. Furtherdetails on this will be included in the Annual Report and Accounts published inNovember 2007. Dividends The Board is proposing a final dividend of 8.1p per ordinary share, an increaseof 31% on the prior year. This gives a total dividend for the year of 11.8p perordinary share, up 27%. Subject to shareholder approval the dividend will bepaid on 6 February 2008 to shareholders registered at the close of business on11 January 2008. The Board has a progressive dividend policy and expects thatover time dividends would be broadly covered twice by earnings calculated on anormalised tax basis. CASH FLOW The Group has delivered strong operating free cash flow, which amounted to £81mcompared with £68m in the previous year. ===============================================================================£m 2007 2006------------------------------------------------------------------------------- Operating profit(1) 67 60Depreciation, amortisation & amounts written off fixed assets 41 37Working capital 9 9Capital expenditure (32) (29)Tax (8) (2)Net interest received / (paid) 2 (5)Net provisions (2) (3)Other items 4 1-------------------------------------------------------------------------------Free cash flow 81 68=============================================================================== (1) Stated before exceptional items Cash generation has strengthened due to improved profitability and good workingcapital control. Tax paid has increased year on year due to the utilisation of tax losses in theprior year and the growth in profit before tax in the current year. Net interest received, which here does not include some £1.5m interest receivedin respect of a tax refund, has increased due to the strong cash position of thebusiness and lower finance charges. Other items relate to share-based payment charges of £6m (2006: £6m) and profitson disposal of fixed assets of £2m (2006: £5m). There have also been impairmentcharges of £3m (2006: £3m) in the year. Capital expenditure ===============================================================================£m 2007 2006------------------------------------------------------------------------------- New stores and store development 12 11Refurbished stores 7 7Systems 9 7Other 4 4-------------------------------------------------------------------------------Total 32 29=============================================================================== The Group has continued to invest in maintaining our retail properties withrefurbishments being undertaken at units including Hammersmith, Victoria stationand Gatwick North Terminal. During the year we have opened more units than inthe prior year, including Travel units at Durham station and Heathrow Terminal3, and High Street stores at Nantwich and Newmarket. We have also completed ourinvestment in new units at Heathrow Terminal 5 with trading commencing in Spring2008. Capital expenditure in relation to IT systems in 2007 included thesignificant rollout of new EPOS equipment to all our units in Travel and themerging of the High Street and Travel operations' financial systems. Net Funds The movement in the net funds position is as follows: =============================================================================== £m-------------------------------------------------------------------------------Opening net funds 42Free cash flow 81Pension deficit funding (35)Equity dividends paid (17)Tax refund and associated interest received 14Net purchase of own shares (12)Corporate advisory costs (6)Sale & leaseback and fixed asset disposal proceeds 2Other items (5)-------------------------------------------------------------------------------Closing net funds 64=============================================================================== During the year, the Group contributed £35m to the WHSmith Pension Trust. Thiscomprised the one off payment of £25m on 1 September 2006 as part of thedemerger from Smiths News PLC and £10m as part of our agreed annual deficitfunding. The Group received a tax refund and associated interest of £14m. The bulk ofthese proceeds has been used to purchase shares to satisfy the Group'sshare-based employee benefit obligations. Corporate advisory costs of £6m relate to fees paid in relation to the prioryear demerger from Smiths News PLC. GROUP BALANCE SHEET =============================================================================== £m £m------------------------------------------------------------------------------- Goodwill and other intangible assets 35Property plant and equipment 176 -------- 211Available for sale investments 4Inventories 141Payables less receivables (161) --------Working capital (20)Net deferred tax asset 3Current tax liability (25)Provisions (10)-------------------------------------------------------------------------------Operating assets employed 163Net funds 64-------------------------------------------------------------------------------Net assets excluding pension liability 227-------------------------------------------------------------------------------Pension liability --------------------------------------------------------------------------------Total net assets 227=============================================================================== The movement of net assets over the year is as follows: =============================================================================== £m £m-------------------------------------------------------------------------------Opening net assets 168 Profit before tax and exceptional items 66Tax on above (13) -------- 53Employee share schemes and share-based payments (2)Dividends paid (17)Tax effected movement in pension scheme deficit 15Available for sale investments 3-------------------------------------------------------------------------------Net assets before exceptional items 220Exceptional items (net of associated tax) 7-------------------------------------------------------------------------------Closing net assets 227=============================================================================== The Group's net assets have increased from £168m at the end of 2006 to £227mthis year. Return on Capital Employed Total capital employed and ROCE were as follows: =============================================================================== ROCE% with Operating operating Capital leases Employed £m ROCE % capitalised------------------------------------------------------------------------------- High Street 160 28% 13%Travel 33 109% 24%-------------------------------------------------------------------------------Retail 193 41% 16%Central items and property (30)-------------------------------------------------------------------------------Operating assets employed 163 41% 15%=============================================================================== For the prior year, comparable average returns were 35 per cent (17 per cent -after capitalised operating leases). Pensions The Group has made significant progress since 2003 in substantially reducing theGroup's gross IAS 19 pension deficit from £152m at 31 August 2003 to £nil at 31August 2007. The LDI structure we put in place two years ago is performing well. During the year, the Group has made significant contributions to the WHSmithPension Trust. At demerger from Smiths News PLC, the Group made a one offcontribution of £25m. In addition, £10m of agreed annual deficit funding wascontributed and will continue for the next four years as agreed with the WHSmithPension Trust Trustees. On 2 April 2007, the WHSmith Pension Trust was closed to defined benefit serviceaccrual. The actuarial impact of these changes on the liabilities of the WHSmithPension Trust has been reflected in the non cash curtailment gain of £10m. On an ongoing funding basis the gross actuarial defined benefit pension deficitfor WH Smith PLC was approximately £46m (approximately £33m net of relateddeferred taxes) at 31 August 2007 (2006: £116m and £84m net of related deferredtaxes). The actuarial deficit is greater than the IAS 19 deficit primarily dueto the different assumptions and calculation methodologies. The results include net finance costs in respect of pensions of £2m (2006: £3m). Financing and capital structure The Group is financed through a mixture of equity and debt, comprisingoverdrafts and credit facilities, finance leases and loan notes. After our keyChristmas trading period, the Board will review the Company's capital resources,having regard to current and potential future uses of our cash. On 7 September 2006, a capital reduction was undertaken with the nominal valueof ordinary shares reduced from 195p to 20p each, which created £320m ofdistributable reserves. On 15 December 2006, the Company redeemed the oneredeemable preference share of £50,000 in issue. Operating leases The Group's stores are held mainly under operating leases that are notcapitalised and therefore are not included as a debt for accounting purposes.The High Street leases are on standard 'institutional' lease terms, typicallywith a 15 year term, subject to five year upwards-only rent reviews. The Travelstores operate mainly through turnover related leases, usually with minimum rentguarantees, and generally varying in length from five to ten years. The business has an annual minimum net rental commitment of £141m (net of £7m ofexternal rent receivable). The total future rental commitment at the balancesheet date amounted to £883m with the leases having an average life of sixyears. The net present value of these commitments is approximately £613m.Although large, these commitments are characteristic of the retail sector andthe risks associated with them are influenced mainly by the quality and locationof the sites. The Group has contingent liabilities relating to reversionary property leases.Any such contingent liability which crystallises will be apportioned between theGroup and Smiths News PLC in the ratio 65:35 (provided that the Smiths News PLCliability is limited to £5m in any 12 month period). We have estimated theGroup's 65% share of the future cumulative rental commitment at approximately£76m (2006: £102m). CURRENT TRADING As announced on 7 September 2007, the Company will be issuing its first InterimManagement Report on 15 November 2007, which will cover the trading period from1 September 2007 to 10 November 2007. WH Smith PLC Group Income StatementFor the year ended 31 August 2007 ----------------------------------------------------------------------------------------------------- 2007 2006----------------------------------------------------------------------------------------------------- Before Before exceptional Exceptional exceptional Exceptional £m Note items items Total items items Total -----------------------------------------------------------------------------------------------------Continuing operationsRevenue 1 1,299 - 1,299 1,340 - 1,340-----------------------------------------------------------------------------------------------------Operating profit 1,2,3 67 10 77 60 (7) 53Investment income 5 5 - 5 2 - 2Finance costs 6 (6) - (6) (11) - (11)-----------------------------------------------------------------------------------------------------Profit before tax 66 10 76 51 (7) 44Income tax expense 7 (13) (3) (16) (10) (2) (12)-----------------------------------------------------------------------------------------------------Profit after tax fromcontinuing operations 53 7 60 41 (9) 32-----------------------------------------------------------------------------------------------------Profit for the year 53 7 60 41 (9) 32-----------------------------------------------------------------------------------------------------Earnings per share(1)Basic 9 34.3p 18.6pDiluted 9 33.1p 18.2p-----------------------------------------------------------------------------------------------------Non GAAP measuresUnderlying earnings per share(2)Basic 9 30.3p 23.8pDiluted 9 29.3p 23.3pEquity dividends per share(3) 11.8p 9.3pFixed charges cover 1.4x 1.3x----------------------------------------------------------------------------------------------------- (1) Earnings per share is calculated in accordance with IAS 33 'Earnings per share'(2) Underlying earnings per share excludes exceptional items(3) Dividend per share is the final proposed dividend of 8.1p (2006: 6.2p) and the interim dividend of 3.7p (2006: proforma 3.1p). The prior year figure is based on two thirds / one third split of year end andinterim dividend per WH Smith PLC Circular dated 7 July 2006 WH Smith PLC Group Balance SheetAs at 31 August 2007 -------------------------------------------------------------------------------£m Note 2007 2006-------------------------------------------------------------------------------Non-current assetsGoodwill 15 15Other intangible assets 20 20Property, plant and equipment 176 184Deferred tax assets 15 29Trade and other receivables 5 -------------------------------------------------------------------------------- 231 248-------------------------------------------------------------------------------Current assetsInventories 141 143Trade and other receivables 59 69Available for sale investments 4 -Cash and cash equivalents 10 82 66------------------------------------------------------------------------------- 286 278-------------------------------------------------------------------------------Total assets 517 526-------------------------------------------------------------------------------Current liabilitiesTrade and other payables (217) (214)Current tax liabilities (25) (20)Obligations under finance leases 10 (3) (3)Bank overdrafts and other 10 (9) (13)borrowingsShort-term provisions (6) (4)Derivative financial liabilities (1) (1)------------------------------------------------------------------------------- (261) (255)-------------------------------------------------------------------------------Non-current liabilitiesRetirement benefit obligation 4 - (66)Deferred tax liabilities (12) (13)Long-term provisions (4) (8)Obligations under finance leases 10 (6) (8)Other non-current liabilities (7) (8)------------------------------------------------------------------------------- (29) (103)-------------------------------------------------------------------------------Total liabilities (290) (358)-------------------------------------------------------------------------------Total net assets 227 168-------------------------------------------------------------------------------Total equity 227 168------------------------------------------------------------------------------- WH Smith PLC Group Balance SheetAs at 31 August 2007 (continued) -------------------------------------------------------------------------------£m Note 2007 2006-------------------------------------------------------------------------------Shareholders' equityCalled up share capital 37 357ESOP reserve (29) (22)Revaluation reserve 4 3Hedging reserve (1) (2)Translation reserve (2) (2)Retained earnings 383 -Other reserve (165) (166)-------------------------------------------------------------------------------Total equity 227 168------------------------------------------------------------------------------- WH Smith PLC Group Cash Flow StatementFor the year ended 31 August 2007 -------------------------------------------------------------------------------£m Note 2007 2006------------------------------------------------------------------------------- Net cash inflow from operating activities 11 83 82-------------------------------------------------------------------------------Investing activitiesInterest received 5 2Proceeds on disposal of property, plant and equipment 2 9 Proceeds on settlement of loan notes - 11Non-operating disposal costs (3) (3)Purchase of property, plant and equipment (26) (24)Purchase of intangible assets (6) (5)-------------------------------------------------------------------------------Net cash (outflow) from investing activities (28) (10)-------------------------------------------------------------------------------Financing activitiesInterest paid (2) (7)Dividend paid (17) (15)(Purchase) / issue of shares for employee share schemes (12) 4Repayments of borrowings (4) (76)Repayments of obligations under finance leases (3) (4)Derivative cash movements (1) (1)Repurchase of 'C' shares equity portion - (3)Movement in funding balances with Smiths News PLC - 57-------------------------------------------------------------------------------Net cash used in financing activities (39) (45)-------------------------------------------------------------------------------Net increase in cash and cash equivalents - continuing operations 19 19Net (decrease) / increase in cash and cash equivalents - discontinued operations (3) 8-------------------------------------------------------------------------------Net increase in cash and cash equivalents in year 16 27-------------------------------------------------------------------------------Opening net cash and cash equivalents 66 39-------------------------------------------------------------------------------Closing net cash and cash equivalents 82 66------------------------------------------------------------------------------- Reconciliation of net cash flow to movement in net funds / (debt) -------------------------------------------------------------------------------£m Note 2007 2006-------------------------------------------------------------------------------Net funds / (debt) at beginning of the year 42 (58)IAS 39 - 'B' and 'C' shares classified as financial liabilities - (7)Increase in cash and cash equivalents 16 27Decrease in debt 4 76Net movement in finance leases 2 4-------------------------------------------------------------------------------Net funds at end of the year 10 64 42------------------------------------------------------------------------------- WH Smith PLC Group Statement of Recognised Income and ExpenseFor the year ended 31 August 2007 -------------------------------------------------------------------------------£m 2007 2006------------------------------------------------------------------------------- Actuarial gains / (losses) on defined pension schemes (Note 4) 23 (24)UK deferred tax attributable to pension scheme liabilities (13) 5UK current tax attributable to the additional pension scheme contributions 5 3Exchange differences arising on translation of foreign operations - (2)Loss on cash flow hedges - (2)-------------------------------------------------------------------------------Net income / (expense) recognised directly in equity 15 (20)Profit for the year 60 32-------------------------------------------------------------------------------Total recognised income and expense for the year 75 12------------------------------------------------------------------------------- Total recognised income and expense for the year is fully attributable to theequity holders of the parent company. WH Smith PLC Reconciliation of Movements in EquityFor the year ended 31 August 2007 ------------------------------------------------------------------------------------------------------------------- Hedging and Share 'B' and 'C' translation Revaluation ESOP Other Retained£m capital share reserves reserves reserve reserve reserve earnings Total-------------------------------------------------------------------------------------------------------------------Balance at 1 September 2005 353 10 - 3 (26) (234) (1) 105Cumulative adjustment forimplementation of IAS 39 - (7) - - - - - (7)-------------------------------------------------------------------------------------------------------------------Balance restated at 1September 2005 for adoption of IAS 39 353 3 - 3 (26) (234) (1) 98Total recognised income andexpense for the year - - (4) - - - 16 12Recognition of share-basedpayments - - - - - - 4 4Dividends paid - - - - - - (15) (15)Employee share schemes 4 - - - 4 2 (4) 6Repurchase of shares - (3) - - - - - (3)Movement in funding balances with the News business - - - - - 66 - 66-------------------------------------------------------------------------------------------------------------------Balance at 1 September 2006 357 - (4) 3 (22) (166) - 168Total recognised income andexpense for the period - - 1 - - - 74 75Recognition of share-basedpayments - - - - - - 6 6Dividends paid - - - - - - (17) (17)Employee share schemes - - - - (9) 1 - (8)Court approved capital reduction (320) - - - - - 320 -Transfer to available forsale financial investments - - - 1 2 - - 3-------------------------------------------------------------------------------------------------------------------Balance at 31 August 2007 37 - (3) 4 (29) (165) 383 227------------------------------------------------------------------------------------------------------------------- WH Smith PLC Notes to Accounts 1. Segmental analysis of results For management purposes, the Group is currently organised into two operatingdivisions - High Street and Travel. These divisions are the basis on which theGroup currently reports its primary business segment information. Prior to itsdisposal in 2004, USA Travel Retail was a separate business segment. This hasbeen disclosed within discontinued operations. i) Segmental analysis by business segments a) Group revenue -------------------------------------------------------------------------------£m 2007 2006-------------------------------------------------------------------------------Continuing operations:High Street 961 1,021Travel 338 319-------------------------------------------------------------------------------Group revenue 1,299 1,340------------------------------------------------------------------------------- b) Group results -------------------------------------------------------------------------------£m 2007 2006-------------------------------------------------------------------------------Continuing operations:High Street 44 42Travel 36 31-------------------------------------------------------------------------------Trading profit 80 73Unallocated costs (13) (13)-------------------------------------------------------------------------------Group operating profit before exceptional items 67 60Exceptional items (Note 3) 10 (7)-------------------------------------------------------------------------------Group operating profit 77 53Investment income 5 2Finance costs (6) (11)Income tax expense (16) (12)-------------------------------------------------------------------------------Profit for the year 60 32------------------------------------------------------------------------------- c) Balance Sheet ---------------------------------------------------------------------------------------------------------------------- 2007 2006------------------------------------------------------------------ --------------------------------------------------- High Continuing Discontinued High Continuing Discontinued £m Street Travel operations operations Group Street Travel operations operations Group------------------------------------------------------------------ --------------------------------------------------- AssetsSegment assets 344 75 419 - 419 359 55 414 - 414Unallocatedassets - - 98 - 98 - - 112 - 112------------------------------------------------------------------ ---------------------------------------------------Consolidatedtotal assets 344 75 517 - 517 359 55 526 - 526------------------------------------------------------------------ ---------------------------------------------------LiabilitiesSegmentliabilities (186) (43) (229) (5) (234) (183) (35) (218) (6) (224)Unallocatedliabilities - - (56) - (56) - - (134) - (134)------------------------------------------------------------------ ---------------------------------------------------Consolidatedtotalliabilities (186) (43) (285) (5) (290) (183) (35) (352) (6) (358)------------------------------------------------------------------ ---------------------------------------------------Net Assets 232 (5) 227 174 (6) 168------------------------------------------------------------------ --------------------------------------------------- d) Other Segmental Items ---------------------------------------------------------------------------------------------------------------------- 2007 2006------------------------------------------------------------------ --------------------------------------------------- High Continuing Discontinued High Continuing Discontinued £m Street Travel operations operations Group Street Travel operations operations Group------------------------------------------------------------------ --------------------------------------------------- Capitaladditions 22 11 33 - 33 24 5 29 - 29Depreciationand amortisation of non -current assets (33) (5) (38) - (38) (29) (5) (34) - (34)Impairment losses (3) - (3) - (3) (3) - (3) - (3)------------------------------------------------------------------ --------------------------------------------------- Segment assets include intangible assets, property, plant and equipment,inventories, receivables and operating cash. Segment liabilities compriseoperating liabilities. The prior year comparatives for the segmental analysishave been amended as the directors' believe this gives a more appropriateanalysis of business segments. ii) Segmental analysis by geographical area The total Group revenue and operating profits for these periods originate fromthe UK/Europe region. The Directors consider this to be one segment. 2. Group operating profit -------------------------------------------------------------------------------£m 2007 2006-------------------------------------------------------------------------------Turnover 1,299 1,340Cost of sales (708) (761)-------------------------------------------------------------------------------Gross profit 591 579 Distribution costs (444) (434) Administrative expenses (75) (97)-------------------------------------------------------------------------------Pre-exceptional operating items (85) (90)Exceptional operating items(1) 10 (7)-------------------------------------------------------------------------------Other income(2) 5 5-------------------------------------------------------------------------------Group operating profit 77 53------------------------------------------------------------------------------- (1) The exceptional operating items are detailed in Note 3. (2) Other income is profit attributable to property and the sale of plant andequipment. During the period there was a £3m impairment charge for property,plant and equipment and other intangible assets included in distribution costs(2006:£3m). -------------------------------------------------------------------------------£m 2007 2006-------------------------------------------------------------------------------Cost of inventories recognised as an expense 748 786Write-down of inventories in the period 6 12Depreciation and amounts written off property, plant and equipment 35 33Amortisation and amounts written off intangible assets 6 4Net operating lease charges - land and buildings 148 147 - equipment and vehicles 1 1Other occupancy costs 53 50Staff costs 180 192Auditors' remuneration (see below) - 2 Fees payable to Deloitte & Touche LLP, the Group's auditors, included in theincome statement relate to: Fees payable to the Group's auditors for the auditof the Group's annual accounts 0.2 0.1Fees payable to the Group's auditors for otherservices to the Group including the audit of the Company's subsidiaries 0.1 0.1-------------------------------------------------------------------------------Total audit fees 0.3 0.2Non-audit fees including corporate finance and other services 0.1 1.9------------------------------------------------------------------------------- 0.4 2.1------------------------------------------------------------------------------- 3. Exceptional items Exceptional items are material items of income or expense that are disclosedseparately due to their nature or amount. They are disclosed and describedseparately in the financial statements where it is necessary to do so to providefurther understanding of the financial performance of the Group. -------------------------------------------------------------------------------£m 2007 2006-------------------------------------------------------------------------------Pension curtailment 10 -Costs of demerger from Smiths News PLC - (12)Settlement of Post Retirement Medical Benefit Scheme - 5------------------------------------------------------------------------------- 10 (7)------------------------------------------------------------------------------- On 2 April 2007 the WHSmith Pension Trust was closed to service accrual. Thishas led to a non cash curtailment gain of £10m. Further details are included inNote 4. The Group incurred a £12m exceptional charge in relation to costs associatedwith the demerger from Smiths News PLC in the prior year. In September 2005, members of the Post Retirement Medical Benefit Scheme wereoffered the option to be bought out of the scheme, which was accepted by themajority of members. A gain of £5m (before tax) arose from the settlement ofthis scheme, which has been recognised in the income statement for the period.Further details are included in Note 4. 4. Retirement benefit obligation WH Smith PLC has operated a number of defined benefit and defined contributionpension plans. The main pension arrangements for employees are operated througha defined benefit scheme, WHSmith Pension Trust, and a defined contributionscheme, WH Smith Retirement Savings Plan. The most significant is WHSmithPension Trust, which is described in Note 4 a) i). The scheme is independent ofthe Company and is administered by a Trustee. The Trustee of the Pension Trusthas extensive powers over the pension plan's arrangements, including the abilityto determine the levels of contribution. The scheme has been closed to newmembers since 1996 and was closed to defined benefit service accrual on 2 April2007. On the date of demerger, 31 August 2006, the assets and liabilities of thePension Trust and the WH Smith Retirement Savings Plan were split between theSmiths News business and the Retail business by way of a 'sectionalisation'.Each section only contains the accounts of members who are or were employed bythe relevant business. There is no cross-subsidies or cross-guarantees betweenthe sections of the Pension Trust. The assets and liabilities of the definedbenefit scheme were allocated to the Smiths News business section and theWHSmith Retail business section in proportions that reflected the relatedliabilities of active, deferred, pensioner and orphan members belonging to therespective Smiths News and Retail businesses. The amounts recognised in the balance sheet within non-current liabilities inrelation to these plans are as follows: -------------------------------------------------------------------------------£m 2007 2006-------------------------------------------------------------------------------Present value of the obligations (657) (674)Fair value of plan assets 657 608-------------------------------------------------------------------------------Retirement benefit obligation recognised in the balance sheet - (66)-------------------------------------------------------------------------------Deferred taxation - 20-------------------------------------------------------------------------------Net retirement obligation - (46)------------------------------------------------------------------------------- On 2 April 2007, the WHSmith Pension Trust was closed to defined benefit serviceaccrual. The actuarial impact of this change on the liabilities of the WHSmithPension Trust has been reflected in the non cash curtailment gain of £10m. During the year, the Group made a one-off post demerger cash contribution of£25m and a further contribution of £10m in relation to the agreed pensiondeficit funding to the WHSmith Pension Trust. A full actuarial valuation of the Scheme is carried out every three years withinterim reviews in the intervening years. The latest full actuarial valuation ofthe Pension Trust was carried out as at 31 March 2006 by independent actuaries,Mercer Limited, using the projected unit basis. On an ongoing funding basis thegross actuarial defined benefit pension deficit at 31 August 2007 for WH SmithPLC was approximately £46m (approximately £33m net of related deferred taxes) (2006: approximately £116m and £84m net of related deferred taxes) for thePension Trust. The ongoing deficit is greater than the IAS 19 deficit primarilydue to the different assumptions and calculation methodologies. In September 2005, the Pension Trust Trustee adopted a new investment policy inorder to substantially reduce the volatility in the underlying investmentperformance and reduce the risk of a significant increase in the deficit in thefund. The assets in the investment fund were restructured in order to adopt thispolicy. This involved the assets being invested such that they are expected toalter in value in line with changes in the pension liability caused by changesin interest and inflation ('a Liability Driven Investment 'LDI' policy'). The key features of this new investment policy were that: - 94% of the Pension Trust's assets were invested in an LDI policy with a leading international institutional fund manager; and- 6% of the Pension Trust's assets were used to purchase a portfolio of long-dated equity call options. These represented a notional exposure to underlying equities of some £210m. The impact of this change in investment policy is to substantially reduce thevolatility in the fund and the resultant risk of a significant increase in theoverall deficit whilst enabling the fund to continue to benefit from anypotential higher returns in the equity markets. a) Defined benefit pension scheme i) The WHSmith Pension Trust The valuation of the defined benefit pension scheme used for the IAS 19disclosures is based upon the most recent valuation. Scheme assets are stated attheir market value at the relevant reporting date. The principal long-term assumptions used in the actuarial valuation were: -------------------------------------------------------------------------------% 2007 2006-------------------------------------------------------------------------------Rate of increase in salaries 4.24 4.00Rate of increase in pension payments and deferred pensions 3.24 3.00Discount rate 5.53 5.10Inflation assumptions 3.24 3.00------------------------------------------------------------------------------- The amounts recognised in the income statement were as follows: -------------------------------------------------------------------------------£m 2007 2006-------------------------------------------------------------------------------Current service cost (4) (6)Curtailment gain 10 -Interest cost (34) (32)Expected return on scheme assets 32 29------------------------------------------------------------------------------- 4 (9)------------------------------------------------------------------------------- The charge for the current service cost and the exceptional curtailment gainhave been included in administrative costs. The interest cost net of theexpected return on scheme assets has been included in finance costs (Note 6).Actuarial gains and losses have been reported in the statement of recognisedincome and expense. Movements in the present value of the defined benefit scheme obligations in thecurrent year were as follows: -------------------------------------------------------------------------------£m 2007 2006-------------------------------------------------------------------------------At 1 September (674) (651)Current service cost (4) (6)Interest cost (34) (32)Actuarial gains and losses 22 (7)Curtailment gain 10 -Benefits paid 23 22-------------------------------------------------------------------------------As at 31 August (657) (674)------------------------------------------------------------------------------- Movements in the fair value of defined benefit scheme assets in the year were asfollows: -------------------------------------------------------------------------------£m 2007 2006-------------------------------------------------------------------------------At 1 September 608 598Expected return on scheme assets 32 29Actuarial gains and losses 1 (17)Contributions from the sponsoring companies 39 20Benefits paid (23) (22)-------------------------------------------------------------------------------As at 31 August 657 608------------------------------------------------------------------------------- An analysis of the defined benefit scheme assets at the balance sheet date isdetailed below. -------------------------------------------------------------------------------£m 2007 2006-------------------------------------------------------------------------------Cash 645 584Inflation swaps (29) (14)Equity call options 41 38------------------------------------------------------------------------------- 657 608------------------------------------------------------------------------------- The expected rate of return on the defined benefit scheme assets is calculatedas a weighted average of the expected return on the LDI fund and the equity calloptions. At 31 August 2007 this was 5.01 per cent (2006: 5.01 per cent). Priorto 22 September 2005, the overall expected rate of return on the Trust's assetswas calculated as a weighted average return based on the distribution of theassets (between equities, bonds and cash, at the accounting date). The mortality assumptions (in years) underlying the value of the accruedliabilities for both 2006 and 2007 are: ------------------------------------------------------------------------------- Male Female-------------------------------------------------------------------------------Life expectancy at age 65Member currently aged 65 20.1 22.9Member currently aged 45 21.4 24.1-------------------------------------------------------------------------------Life expectancy at age 60Member currently aged 60 24.9 27.7Member currently aged 45 25.9 28.7------------------------------------------------------------------------------- The mortality assumptions are based on the standard PA92 medium cohort tables(as published by the Institute of Actuaries). The mortality rates underlying thetable have been increased by 25 per cent to reflect the Trust's actualexperience. The five year history of experience adjustments is as follows: -------------------------------------------------------------------------------£m 2007 2006 2005 2004 2003-------------------------------------------------------------------------------Present value of defined benefitobligations (657) (674) (651) (612) (585)Fair value of scheme assets 657 608 598 473 441-------------------------------------------------------------------------------Deficit in the scheme - (66) (53) (139) (144)-------------------------------------------------------------------------------Experience adjustments on schemeliabilitiesAmount (£m) 22 (7) (75)Percentage of scheme liabilities(%) (3) 1 11---------------------------------------------------------------Experience adjustments on schemeassetsAmounts (£m) 1 (17) 48Percentage of scheme assets (%) - (3) 8--------------------------------------------------------------- ii) Post retirement medical benefits The WH Smith Group provides retirement medical benefits to certain pensioners.Total premiums paid by the Group during the period in respect of these benefitswere £0.1m (31 August 2006: £0.1m). The present value of the future liabilitiesunder this arrangement at each reporting date has been assessed by independentactuaries (Mellon Human Resources & Investor Solutions (Actuaries & ConsultantsLimited)) and this amount was included on the balance sheet within retirementbenefit obligations. In September 2005, the members were offered the option to be bought out of thisscheme, which was accepted by the majority of the members. The impact of thesettlement was a £5m reduction in the net deficit. A small number of membersopted to remain in the scheme and the present value of the remaining futureliabilities is valued at £0.1m net of deferred taxation. b) Defined contribution pension scheme The pension cost charged to income for the Group's defined contribution scheme,WH Smith Retirement Savings Plan, amounted to £2m for the year ended 31 August2007 (31 August 2006: £2m). 5. Investment income -------------------------------------------------------------------------------£m 2007 2006-------------------------------------------------------------------------------Interest on bank deposits 4 2Interest from prior period tax overpayments 1 -------------------------------------------------------------------------------- 5 2------------------------------------------------------------------------------- 6. Finance costs -------------------------------------------------------------------------------£m 2007 2006-------------------------------------------------------------------------------Interest payable on bank loans and 1 6overdraftsNet charge on pension schemes (Note 4) 2 3Unwinding of discount on provisions 1 1Interest on obligations under finance leases 1 1Loss on cash flow hedges 1 -------------------------------------------------------------------------------- 6 11------------------------------------------------------------------------------- 7. Income tax expense -------------------------------------------------------------------------------£m 2007 2006-------------------------------------------------------------------------------Tax on profit before exceptional items 23 4Standard rate of UK corporation tax 30%Adjustment in respect of prior year UK corporation tax (8) (7)-------------------------------------------------------------------------------Total current tax charge before exceptional items 15 (3)Deferred tax - current year (2) 13-------------------------------------------------------------------------------Tax on profit before exceptional items 13 10Tax on exceptional items 3 2-------------------------------------------------------------------------------Tax on profit after exceptional items 16 12-------------------------------------------------------------------------------Effective tax rate on continuing activitiesbefore exceptional items 20% 20%------------------------------------------------------------------------------- Reconciliation of the taxation charge -------------------------------------------------------------------------------£m 2007 2006-------------------------------------------------------------------------------Tax on profit before exceptional items at standard rate of UK corporation tax 30% 20 15Tax effect of items that are not deductible or not taxable in determining taxable profit 1 2Deferred tax charge in relation to retirement benefit obligation adjustments 3 2Adjustment in respect of prior years (8) (7)-------------------------------------------------------------------------------Tax charge after exceptional items 16 12------------------------------------------------------------------------------- 8. Dividends Amounts recognised as distributions to shareholders in the period are asfollows: -------------------------------------------------------------------------------£m 2007 2006-------------------------------------------------------------------------------DividendsInterim - paid 6 5Final - paid 11 10------------------------------------------------------------------------------- 17 15------------------------------------------------------------------------------- The proposed dividend of 8.1p per share is not included as a liability in thesefinancial statements and, subject to shareholder approval, will be paid on 6February 2008 to shareholders on the register at the close of business on 11January 2008. 9. Earnings per share These are derived from continuing operations. a) Earnings -------------------------------------------------------------------------------£m 2007 2006-------------------------------------------------------------------------------Underlying earnings attributable to shareholders 53 41Exceptional items net of related taxation 7 (9)-------------------------------------------------------------------------------Profit attributable to shareholders 60 32------------------------------------------------------------------------------- b) Basic earnings per share -------------------------------------------------------------------------------Pence 2007 2006-------------------------------------------------------------------------------Underlying earnings per share (note i) 30.3 23.8Exceptional items net of related taxation 4.0 (5.2)-------------------------------------------------------------------------------Earnings per share (note ii) 34.3 18.6------------------------------------------------------------------------------- i) Underlying earnings per share has been calculated using profit after tax butbefore exceptional items. ii) Basic earnings per share has been calculated using profit after tax andexceptional items. c) Diluted earnings per share -------------------------------------------------------------------------------Pence 2007 2006-------------------------------------------------------------------------------Underlying earnings per share 29.3 23.3Exceptional items net of related taxation 3.8 (5.1)-------------------------------------------------------------------------------Earnings per share 33.1 18.2------------------------------------------------------------------------------- Diluted earnings per share takes into account various share awards and shareoptions including SAYE schemes, which are expected to vest, and for which a sumbelow fair value will be paid. d) Weighted average share capital -------------------------------------------------------------------------------£m 2007 2006-------------------------------------------------------------------------------Weighted average shares in issue for earnings per share 175 172Add weighted average number of ordinary shares under option 6 4-------------------------------------------------------------------------------Weighted average ordinary shares for diluted earnings per share 181 176------------------------------------------------------------------------------- 10. Analysis of net funds / (debt) Movements in net funds / (debt) can be analysed as follows: -------------------------------------------------------------------------------£m 2006 Cash flow Non-cash 2007-------------------------------------------------------------------------------Cash and cash equivalents 66 16 - 82Debt- Sterling floating rate (13) 4 - (9)Obligations under finance leases (11) 3 (1) (9)-------------------------------------------------------------------------------Net funds 42 23 (1) 64------------------------------------------------------------------------------- IAS 32 and 39 £m 2005 reclassifications Cash flow Non-cash 2006-------------------------------------------------------------------------------Cash and cashequivalents 39 - 27 - 66Debt- Sterling floating rate (50) (7) 44 - (13)- Sterling fixed rate (32) - 32 - -Obligations under finance leases (15) - 4 - (11)-------------------------------------------------------------------------------Net funds /(debt) (58) (7) 107 - 42------------------------------------------------------------------------------- Cash and cash equivalents comprise cash held by the Group and short-term bankdeposits with an original maturity of three months or less. The carrying amountof these assets approximates their fair value. At 31 August 2007 floating rate debt comprises £9m of unsecured loan notes(redeemable at par on demand up until expiry on 28 February 2008) bearinginterest at a rate of 100 basis points below six month LIBOR (2006: £13m). Borrowing facilities At 31 August 2007, the Group had a five-year committed revolving credit facilityof £90m, which is due to mature on 26 June 2011. This facility was not drawn asat the balance sheet date. 11. Net cash inflow from operating activities -------------------------------------------------------------------------------£m 2007 2006-------------------------------------------------------------------------------Operating profit from continuing operations 77 53Operating exceptional items (10) 7Adjustment for pension funding (35) (12)Depreciation of property, plant and equipment 33 30Profit on sale of property, plant and equipment (2) (5)Impairment of property, plant and equipment 2 3Amortisation of intangible assets 5 4Impairment of intangible assets 1 -Share-based payments 6 6Decrease in inventories 2 6(Increase) / decrease in receivables (6) 7Increase / (decrease) in payables 13 (4)Income taxes received / (paid) 5 (2)Cash spend against provisions (2) (3)-------------------------------------------------------------------------------Net cash inflow from operating activities before exceptional items 89 90Cash outflow relating to exceptional operating items (6) (8)-------------------------------------------------------------------------------Net cash from operating activities 83 82------------------------------------------------------------------------------- 12. Analysis of Retail Stores and Selling Space Number of stores-------------------------------------------------------------------------------- 1 September 2006 Opened Closed 31 August 2007--------------------------------------------------------------------------------High Street 543 4 (3) 544Travel 129 7 (1) 135--------------------------------------------------------------------------------Total 672 11 (4) 679-------------------------------------------------------------------------------- A Travel store may consist of multiple units within one location. On anindividual unit basis, Travel stores and the motorway stores (operated underfranchise and not included in the store numbers above) can be analysed asfollows: Number of Travel units-------------------------------------------------------------------------------- 1 September 2006 Opened Closed 31 August 2007--------------------------------------------------------------------------------Travel 205 19 (1) 223Motorway franchiseunits - 86 - 86--------------------------------------------------------------------------------Total 205 105 (1) 309-------------------------------------------------------------------------------- Retail selling square feet (000's) -------------------------------------------------------------------------------- 1 September 2006 Opened Closed Redeveloped 31 August 2007--------------------------------------------------------------------------------High Street 2,999 11 (9) (4) 2,997Travel 220 18 (1) 2 239--------------------------------------------------------------------------------Total 3,219 29 (10) (2) 3,236-------------------------------------------------------------------------------- Travel Retail selling square feet does not include motorway franchise units. 13. Preparation of the Preliminary Announcement a) Basis of preparation The preliminary announcement for the 12 months to 31 August 2007 has beenprepared on the basis of the financial accounting policies set out in theAccounting Policies section of the WH Smith PLC Annual Report and Accounts 2006. b) Preliminary announcement The financial information for the 12 months to 31 August 2007 and 12 months to31 August 2006 does not comprise statutory accounts for the purpose of Section240 of the Companies Act 1985 and has been extracted from the Company'sconsolidated accounts for the year to 31 August 2007. The statutory accounts forWH Smith PLC for the 12 months to 31 August 2006 have been filed with theRegistrar of Companies and those for the 12 months to 31 August 2007 will befiled following the Company's annual general meeting. The auditors' reports onthe accounts for the 12 months to 31 August 2007 were unqualified and did notinclude a statement under Section 237 (2) or (3) of the Companies Act 1985. Whilst the financial information included in this preliminary announcement hasbeen prepared in accordance with the recognition and measurement criteria ofIFRSs, this announcement does not itself contain sufficient information tocomply with IFRSs. The Company intends to publish full financial statements that comply with IFRSs.The Annual Report and Accounts or Annual Review and Summary Financial Statementwill be posted to shareholders in November 2007. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Wh Smith