Final Results

12th Oct 2006 07:00

WH Smith PLC12 October 2006 12 October 2006 WH Smith PLC Preliminary Results Announcement For the twelve months ended 31 August 2006 -STRONG PROFIT PERFORMANCE FOR THE GROUP- KEY POINTS • Profit before tax and exceptional items on continuing operations, up 31% to £51m (2005: £39m). Profits from trading operations are: - High Street profit up 14% to £42m(1) (2005: £37m) - Travel profit up 24% to £31m(1) (2005: £25m) • Total Group profit before tax (2) up 42% to £44m (2005: £31m) • Strong free cash flow of £68m (2005: £44m) • As anticipated, sales of £1.3bn, down 4% like-for-like (LFL), reflecting our strategy to focus on profitable sales in our core categories and the continued tough trading environment - High Street LFL sales down 7% - Travel LFL sales up 3% • Gross margin has improved by 270 basis points year on year • Cost savings delivered faster than planned; further incremental cost savings of £15m over next 3 years identified • Successful separation of the Retail and Smiths News businesses • Headline earnings per share (3) up 43% to 25.0p (2005: 17.5p per share) • Basic earnings per share up 50% to 18.6p (2005: 12.4p per share) • Pension deficit of £41m(4), reduced from £152m in 2003 • Dividend of 6.2p proposed; combined with dividend proposed by Smiths News PLC, giving a full year proforma dividend up 12% to 15.3p (2005: 13.7p) (1) High Street and Travel profit is stated after directly attributable defined benefit pension service costs, share based payment costs and before central costs, exceptional items, interest and taxation (2) Continuing and discontinued operations (3) Profit before tax, exceptional items and IAS 19 pension interest - undiluted (4) On a gross IFRS basis, post the one-off payment of £25m on 1 September 2006 (5) Profit before tax and exceptional items on continuing operations Commenting on the results, Kate Swann, Group Chief Executive said: "The Group has delivered a strong performance, with a 31% improvement in fullyear profit (5) and strong free cash flow of £68m. "Travel has had another good year with a 24% increase in profitability(1).Despite tough trading conditions on the UK high street, High Street has improvedits profitability(1) by 14% and we continue to make progress in improving ourcustomer offer and rebuilding our authority in our core categories. Theseresults reflect the successful implementation of our plan so far. "Spending in our categories remains subdued and we expect the Christmas seasonto be competitive; we have planned accordingly." - Ends - Enquiries: WH Smith PLCLouise Evans/Sarah Heath Media Relations 020 7851 8850Mark Boyle Investor Relations 020 7851 8820 BrunswickTom Buchanan 020 7404 5959Pam Small CURRENT TRADING In the 5 weeks to 7 October 2006, Retail LFL sales were down 3% and gross marginwas up on last year. DEMERGER On 31 August 2006, the Retail and News business were separated via a demergerallowing both businesses to benefit from greater focus on their respectivestrategies as independent businesses. GROUP INCOME STATEMENT Revenue Group revenue decreased from £1,423m to £1,340m over the year, as we havefocused on profitable sales, in a tough trading environment. The LFL salesdecline over the period was 4%. ________________________________________________________________________________£m 2006 2005 Growth % LFL Sales Growth %________________________________________________________________________________ High Street 1,021 1,112 (8%) (7%)Travel 319 311 3% 3%________________________________________________________________________________Total 1,340 1,423 (6%) (4%)________________________________________________________________________________ High Street sales were down 8% and on a LFL basis down 7%. Travel sales growthof 3% (3% on a LFL basis) has been driven by the airports business, up 6% on aLFL basis and 2 percentage points ahead of passenger growth, primarily throughproduct range improvements and more efficient use of space. Books LFL sales were down 5% with gross margin up year on year as we continuedto focus on rebuilding our authority as a popular specialist and maximisingprofitability. Excluding Harry Potter, Books LFL sales were down 3%. AtChristmas we created a very competitive offer via promotions and saw someexcellent shares on top titles such as Sharon Osbourne's Extreme, Jamie Oliver'sJamie's Italy and John Peel's Margrave of the Marshes. Over the year, we alsoachieved our third consecutive period of market share stabilisation versus thegeneral high street and we increased our ranges by expanding our space to booksin 70 stores. We will increase the space devoted to books in more stores duringthe course of this financial year. We also implemented significant changes toour books supply chain so we can carry more stock at no additional stock holdingcost. With a stronger supply infrastructure in place, we have begun to carry outin-depth analysis at a sub-category level to improve our performance andauthority further. In Travel we also increased our range of airport exclusivebooks from 100 to 200 lines. These books offer great value, a degree ofexclusivity and this year we are moving into non-fiction airport exclusives. Stationery LFL sales were down 4% with lower consumer spending in this marketimpacting sales. As planned, we focused on our core categories and removedunprofitable categories like electronics. This had a negative impact on salesbut a positive impact on profit. Gross margin was up strongly driven by intracategory mix and sourcing benefits from low cost countries. In the second halfof the year we began thorough reviews across all stationery categories. We alsotested extended ranges of wrap, art and crafts and core stationery in a smallnumber of large stores as well as testing new ranges such as scrap-booking,card-making and educational toys. We have now added all these ranges into 70stores and we will be making further changes as a result of these reviews duringthis financial year. The stationery trial store in Barnet has performed well andprovided us again with some useful findings, which we are incorporating into ourstandard stores. In the second half of the year, we opened three furtherstandalone stationery-only stores in Orpington, Bangor and Tonbridge to gathermore data. News and Impulse LFL sales were up 3% year on year with an improvement in grossmargin. We held share in news and magazines, supported by strong promotions,despite challenging market conditions with sales declines particularly inmonthly magazines and part works. In both High Street and Travel, we continuedto grow our confectionery and snacking ranges by making better use of our space,putting in new ranges and equipment. In Travel, we also extended our food rangeto 20 more stores and increased choice with more desserts, yoghurts andbreakfast options as well as extending our ranges of healthy snacks - fruit,nuts, fresh juices including introducing branded healthier options such asInnocent Smoothies and granary bars. In July, drinks in Travel benefited fromthe hot weather. Entertainment LFL sales were down 19% in an extremely competitive market with aweaker release schedule than in 2004/05 and continuing price deflation. Wefocused on maximising profit and delivered profitable sales. We anticipateddeclines in entertainment sales as we rebalanced elements of our entertainmentspace to other core categories. We tightly controlled stock to reflect salespatterns while maintaining availability levels in line with the previous year. Profit before exceptional items and taxation ________________________________________________________________________________£m 2006 2005 Profit Growth %________________________________________________________________________________ High Street (1) 42 37 14%Travel (1) 31 25 24%________________________________________________________________________________Trading operations profit (1) 73 62 18%Central costs (14) (16)Internal rents 1 1________________________________________________________________________________Operating profit (2) 60 47 28%Net finance charges (9) (8)________________________________________________________________________________Profit before taxation (2) 51 39 31%________________________________________________________________________________ (1) Trading operations profit stated after directly attributable share based payment and pension service charges (2) Stated before exceptional items The Group generated a profit before tax and exceptional items of £51m (2005:£39m), an increase of 31%. Operating profit2 increased by 28% from £47m to £60mwith the main driver being strong improvements in trading operations. High Street High Street delivered a profit1 increase of 14% to £42m (2004: £37m) as wefocused on rebuilding authority in our core categories, optimising margins,tight cost control and delivering the retail basics. Gross margin improved during the year with the continued benefits of categorymix management, lower cost of goods from improving our buying terms further andincreasing our Far East sourcing, improved promotion management, reducedshrinkage and better markdown management. High Street delivered £22m of cost savings during the year, which is £4m aheadof our expectations of £18m, set in April this year. Cost savings were deliveredfrom a number of areas of the business including logistics, information systems,stores and marketing communications. We have identified a further £15m of costsavings over the next three years from areas including logistics, informationsystems and stores. As a result of these initiatives and the costs savings delivered in the year,net margin for High Street has increased by 80 basis points to 4.1%. This isbefore non-allocated central costs. The High Street business now operates from 543 stores, which occupy 3.0m squarefeet (2005: 3.0m square feet). We opened 7 new stores in the year and closed 6stores. Travel Travel delivered a strong performance with profit1 increasing by 24% to £31m(2005: £25m). This was delivered from increased sales, boosted by the hotweather in July 2006, combined with mix and space changes, range improvementsand tight cost control. Gross margin has increased during the year through buying improvements and mixchanges, resulting in more sales in higher margin categories such as snacking.We have improved average transaction value by focusing on mix changes andimproved promotional activity. The Travel business now operates from 129 stores. During the year we made goodprogress on contracts in airports and rail. In airports we renewed 4 contracts - for the bookstore and CTN* store at Glasgow airport and for CTN stores at Heathrow Terminal 4 and Southampton airports. In airports we also opened 5 new units during the year - a bookstore at Bristol airport and CTN stores at Blackpool, Glasgow, Southampton, and Manchester airports. In rail we renewed successfully 10 contracts, including a key contract withScotRail that represents 12 sites across Scotland. We also opened 3 new units inrail - a bookstore at London Liverpool Street and two standalone stationerystores at London Charing Cross and London Bridge stations. * CTN - confectionery, tobacconist, newsagent Central costs and internal rents Central support costs were £14m, down £2m from the prior year. Internal rents onfreehold property owned by the Group remained at the prior year level of £1m. Net finance charges Net finance charges have increased by £1m in the year with lower debt interestfrom the repayment of the term loan facility during the year being offset byhigher IAS 19 pension interest of £3m (2005: £1m). Pension interest hasincreased due to the impact of the change in investment policy to a LiabilityDriven Investment ('LDI') policy. Exceptional Items The Group has taken a £12m exceptional charge in relation to costs associatedwith the demerger. A £5m exceptional gain was also recognised in the year as aresult of the settlement of post retirement medical benefit liabilities. Taxation The tax charge for the year before tax on exceptional items was £10m (2005:£9m). The effective tax rate on continuing activities, excluding exceptionalitems was 20% (2005: 23%). We expect the effective tax rate to remain below theUK standard rate over the medium term. The exact tax rate achieved will dependon the underlying profitability of the Group and continued progress in closingoff outstanding tax assessments. Earnings per share The Group generated basic earnings per share of 18.6p (2005: 12.4p) whileheadline basic earnings per share from continuing operations was 25.0p (2005:17.5p). The growth has been generated by both improving profitability and a morefavourable effective tax rate. Dividends The Board is proposing a dividend of 6.2p per ordinary share. Subject toshareholder approval the dividend will be paid on 6 February 2007 toshareholders registered at the close of business on 5 January 2007. The Boardintends to have a progressive dividend policy, which over time would be broadlycovered twice by earnings. Fixed charges cover Fixed charges, comprising property operating lease rentals and net financecharges, were covered 1.3 times by profit before fixed charges (2005: 1.3 timescover). CASH FLOW The operating free cash flow amounted to £68m compared with £44m in the previousyear. ________________________________________________________________________________£m 2006 2005________________________________________________________________________________ Operating profit(1) 60 47Non cash items 1 4Depreciation & amounts written off tangible fixed 37 41assets________________________________________________________________________________Cash profit 98 92Working capital 9 (8)Capital expenditure (29) (30)Tax (2) (2)Net interest paid (5) (2)Net provisions (3) (6)________________________________________________________________________________Free cash flow 68 44________________________________________________________________________________ (1) Stated before exceptional items Cash generation has strengthened due to the improved trading performance in thebusinesses and good working capital control. Non-cash items relate to share based payment charges of £6m (2005: £4m) andprofits on disposal of fixed assets of £5m (2005: £nil). There have also beenimpairment charges of £3m (2005: £nil) in the year. The movement in working capital for continuing businesses was £17m favourable tothe previous year, principally as a result of the strong focus on stock levelsand improved control of receivables. This can be further analysed as follows: ________________________________________________________________________________£m 2006 2005________________________________________________________________________________ Inventories 6 5Receivables 7 (12)Payables (4) (1)________________________________________________________________________________Working capital movement 9 (8)________________________________________________________________________________ Capital expenditure ________________________________________________________________________________£m 2006 2005________________________________________________________________________________ New stores and store development 11 11Refurbished stores 7 7Systems 7 7Other 4 5________________________________________________________________________________Total 29 30________________________________________________________________________________ We have continued to invest in maintaining our retail properties. Net Funds The movement in the net funds position is as follows: ________________________________________________________________________________ £m________________________________________________________________________________Opening net debt (58)Free cash flow 68Equity dividends paid (15)Net purchase of own shares (6)Pension deficit funding (12)Corporate advisory and financing costs (6)Sale & leaseback and fixed asset disposal proceeds 9Net disposals of subsidiaries 8Other items (3)Settlement of intercompany account on demerger 57________________________________________________________________________________Closing net funds(1) 42________________________________________________________________________________ (1) Stated before £25m cash contribution to pension liability on 1 September 2006 The amount shown for pension deficit funding of £12m represents £10m ofadditional pension deficit funding in line with our agreement with the Trusteesand £2m in relation to the post retirement medical benefit liability settlement. The net disposals of subsidiaries of £8m includes deferred consideration of £11mreceived in early settlement of loan notes received on the disposal of the USATravel Airports business to Hudson Group in 2004. Corporate advisory and financing costs of £6m includes fees paid in relation tothe demerger. After the year end an additional £25m cash was contributed to the definedbenefit pension scheme as part of the demerger agreement with the WHSmithPension Trust Trustees. GROUP BALANCE SHEET ________________________________________________________________________________ £m £m________________________________________________________________________________ Goodwill and other intangible assets 30Property plant and equipment 184 _________ 214Inventories 143Payables less receivables (149) _________Working capital (6)Net deferred tax asset 16Current tax liability (20)Provisions (12)________________________________________________________________________________Operating assets employed 192Net funds (1) 42________________________________________________________________________________Net assets excluding pension liabilities 234________________________________________________________________________________Pension liability (1) (66)________________________________________________________________________________Total net assets 168________________________________________________________________________________ (1) Stated before £25m cash contribution to pension liability on 1 September 2006 The movement of net assets over the year is as follows: ________________________________________________________________________________ £m £m________________________________________________________________________________Opening net assets 105 Profit before tax and exceptional items 51Tax on above (10) ________ 41Share based payments and employee share schemes 6Dividends paid (15)Tax effected movement in pension scheme deficit (16)Movement of intercompany account on demerger 66Purchase and issue of own shares (6)Other items (4)________________________________________________________________________________Net assets before exceptional items 177Exceptional items (net of associated tax) (9)________________________________________________________________________________Closing net assets 168________________________________________________________________________________ The Group's net assets have increased from £105m at the end of 2005 to £168mthis 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 180 23% 13%Travel 21 148% 47%________________________________________________________________________________Retail 201 36% 18%Central items and property (33) - -________________________________________________________________________________Operating assets employed 168 35% 17%________________________________________________________________________________ For the prior year, comparable average returns were 23 per cent (12 per cent -after capitalised operating leases) Pensions At 31 August 2006, the gross defined benefit pension deficit is £66m (2005:£60m). The pension deficit has increased mainly due to actuarial adjustments inrelation to the lengthening of mortality rates. The results include net financecosts of £3m (2005: £1m). In September 2005, the Company and the Trustees of the WHSmith Pension Trust(the "Pension Trust") agreed that they would adopt a new investment policy inorder to substantially reduce the volatility in the underlying investmentperformance and the risk of a significant increase in the deficit in the definedbenefit fund. The assets in the investment fund were restructured in order toadopt this policy. This involved the assets being invested such that they areexpected to alter in value in line with changes in the pension liability causedby changes in interest and inflation ("a Liability Driven Investment 'LDI'policy"). The key features of this fund restructuring are as follows: - 94% of the fund's assets are invested in an LDI structure with a leading international institutional fund manager - 6% of the fund's assets are invested in a portfolio of long-dated equity call options. These represent a notional exposure to underlying equities of some £350m. 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. On the date of demerger, 31 August 2006, the assets and liabilities of thePension Trust and the WH Smith Retirement Savings Plan (a defined contributionplan) were split between the News business and the Retail business by way of a"sectionalisation". Each section only contains the accounts of members who areor were employed by the relevant business. There will be no cross subsidy orcross guarantees between the sections of the Pension Trust. The assets and liabilities of the defined benefit scheme were allocated to theNews business section and the WH Smith Retail business section in proportionsthat reflected the related liabilities of active, deferred, pensioner and orphanmembers belonging to the respective News and Retail businesses. On 1 September 2006, the Group made a £25m one-off cash contribution to thePension Trust. The Group has agreed with the Pension Trust Trustees to makeaggregate ongoing pension deficit funding payments of approximately £10m eachyear for the next five years. Financing and capital structure The Group is financed through a mixture of debt, comprising overdrafts andcredit facilities, finance leases, loan notes and equity (ordinary andpreference shares). The Group signed a five-year multi-currency £90m revolving credit facilityagreement on 26 June 2006. The agreement contains provisions, obligations andcertain financial covenants, which are customary under such an agreement. In order to facilitate the demerger the Company issued 182,919,970 ordinaryshares to the shareholders of Smiths News PLC on a 1:1 basis. On 7 September2006, a capital reduction was undertaken with the nominal value of ordinaryshares reduced from 195p to 20p each, which created £320m of distributablereserves. 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 £124m (net of £8m ofexternal rent receivable). The total future rental commitment at the balancesheet date amounted to £832m with the leases having an average life of sevenyears. The net present value of these commitments is approximately £558m. Thisis considered to be a satisfactory situation for, although large, thesecommitments are characteristic of the retail sector and the risks associatedwith them depend on their liquidity, influenced mainly by the quality andlocation of the sites. The Group has contingent liabilities relating to reversionary property leases.Pursuant to the terms of the Demerger Agreement, any such contingent liabilitywill be apportioned between the Group and Smiths News PLC in the ratio 65:35(provided that the Smiths News PLC liability is limited to £5m in any 12 monthperiod). We have estimated the Group's 65% share of the future cumulative rentalcommitment at approximately £102m (2005: £118m). Basis of preparation and accounting policy changes In accordance with IFRS 3 'Business Combinations' the financial statements of WHSmith PLC have been prepared as if the continuing operations of the Retailbusiness were in existence for the whole of the period from 1 September 2004through to 31 August 2006. Central costs of the pre demerger group have beenmainly allocated to WH Smith PLC. The Group adopted IAS 32 "Financial Instruments: Presentation and Disclosure"and IAS 39 "Financial Instruments: Recognition and Measurement" at 1 September2005. Group Income Statement for the year ended 31 August 2006 ______________________________________________________________________________________________________________ 2006 2005______________________________________________________________________________________________________________ Before Before exceptional Exceptional exceptional Exceptional£m Note items items Total items items Total______________________________________________________________________________________________________________Continuing operationsRevenue 2 1,340 - 1,340 1,423 - 1,423______________________________________________________________________________________________________________Operating profit 2, 3, 4 60 (7) 53 47 - 47Investment income 2 - 2 3 - 3Finance costs (11) - (11) (11) - (11)______________________________________________________________________________________________________________Profit before tax 51 (7) 44 39 - 39Income tax expense 7 (10) (2) (12) (9) - (9)______________________________________________________________________________________________________________Profit after tax from continuingoperations 41 (9) 32 30 - 30Loss for the year from discontinuedoperations 5 - - - - (8) (8)______________________________________________________________________________________________________________Profit for the year 41 (9) 32 30 (8) 22______________________________________________________________________________________________________________ _______________________________________________________________________________________________________ 2006 2005_______________________________________________________________________________________________________ Note_______________________________________________________________________________________________________Earnings per share (1)Basic - continuing operations 9 18.6p 16.9pDiluted - continuing operations 9 18.2p 16.8pBasic 9 18.6p 12.4pDiluted 9 18.2p 12.3p_______________________________________________________________________________________________________Non GAAP measuresHeadline earnings per share(2)Basic - continuing operations 9 25.0p 17.5pDiluted - continuing operations 9 24.4p 17.3pBasic 9 25.0p 17.5pDiluted 9 24.4p 17.3pEquity dividends per share(3) 6.2pFixed charges cover 1.3x 1.3x_______________________________________________________________________________________________________ (1) Earnings per share is calculated in accordance with IAS 33 'Earnings per share' (2) Headline earnings per share excludes exceptional items and IAS 19 pension interest (3) Dividend per share is the final proposed dividend Group Balance Sheet at 31 August 2006 ________________________________________________________________________________£m Note 2006 2005________________________________________________________________________________Non-current assetsGoodwill 15 15Other intangible assets 15 14Property, plant and equipment 184 197Deferred tax assets 29 38Trade and other receivables 5 16________________________________________________________________________________ 248 280________________________________________________________________________________Current assetsInventories 143 148Trade and other receivables 69 75Cash and cash equivalents 10 66 39________________________________________________________________________________ 278 262________________________________________________________________________________Total assets 526 542________________________________________________________________________________Current liabilitiesTrade and other payables (215) (216)Current tax liabilities (20) (26)Obligations under finance leases 10 (3) (4)Bank overdrafts and other 10 (13) (45)borrowingsShort-term provisions (4) (5)________________________________________________________________________________ (255) (296)________________________________________________________________________________ Non-current liabilitiesBank loans and other borrowings 10 - (37)Retirement benefit obligation 6 (66) (60)Deferred tax liabilities (13) (14)Long-term provisions (8) (11)Obligations under finance leases 10 (8) (11)Other non-current liabilities (8) (8)________________________________________________________________________________ (103) (141)________________________________________________________________________________Total liabilities (358) (437)________________________________________________________________________________________________________________________________________________________________Total net assets 168 105________________________________________________________________________________ Total equity 168 105________________________________________________________________________________ Group Balance Sheet at 31 August 2006 (continued) ________________________________________________________________________________£m Note 2006 Proforma 2005________________________________________________________________________________Total equityCalled up share capital 13 357 353"B" share reserves - 2"C" share reserves - 8ESOP reserves (22) (26)Revaluation reserve 3 3Hedging reserve (2) -Translation reserve (2) -Other reserve (166) (234)Retained earnings - (1)________________________________________________________________________________ 168 105________________________________________________________________________________ Group Cash Flow Statement for the year ended 31 August 2006 ________________________________________________________________________________£m Note 2006 2005________________________________________________________________________________Net cash inflows / (outflows) from operating 12 82 (23)activities________________________________________________________________________________ Investing activitiesInterest received 2 4Proceeds on disposal of property, plant and 9 2equipmentProceeds on disposal of subsidiary - 222Proceeds on settlement of loan notes 11 -Non-operating disposal costs (3) (10)Purchase of property, plant and equipment (24) (29)Purchase of intangible assets (5) (1)________________________________________________________________________________Net cash (outflows) / inflows from investing (10) 188________________________________________________________________________________ Financing activitiesInterest paid (7) (6)Dividend paid (15) (11)"C" share dividend paid on capital - (143)reorganisationPurchase of shares for employee share schemes - (12)Money returned to ESOP Trust after sharecapital reorganisation - 5Issue of shares to satisfy employee share 4 2schemesRepurchase of "C" shares equity portion (3) (62)Repayments of borrowings (76) -Repayments of obligations under finance leases (4) (3)New bank loans raised (net of financing costs) - 61Derivative cash movements (1) -Movement in funding balances with the News 57 (8)business________________________________________________________________________________Net cash used in financing activities (45) (177)________________________________________________________________________________ Net increase / (decrease) in cash and cashequivalents - continuing operations 19 (2)Net increase / (decrease) in cash and cashequivalents - discontinued operations 8 (10)________________________________________________________________________________Net increase / (decrease) in cash and cashequivalents in year 27 (12)________________________________________________________________________________ Opening net cash and cash equivalents 39 51________________________________________________________________________________Closing net cash and cash equivalents 66 39________________________________________________________________________________ Reconciliation of net cash flow to movement innet (debt) / funds________________________________________________________________________________Net (debt) / funds at beginning of the year (58) 26IAS 39 - 'B' shares and 'C' sharesclassified as financial liabilities (7) -Increase / (decrease) in cash and cash 27 (12)equivalentsDecrease / (increase) in debt 76 (63)Net movement in finance leases 4 (9)________________________________________________________________________________Net funds / (debt) at end of the year 10 42 (58)________________________________________________________________________________ Group Statement of Recognised Income and Expense for the year ended 31 August2006 £m 2006 2005________________________________________________________________________________ Exchange differences arising on translation offoreign operations (2) -Loss on cash flow hedges (2) -Actuarial losses on defined pension schemes (Note 6) (24) (27)UK deferred tax attributable to pension scheme 5 (10)liabilitiesUK current tax attributable to the additional pensionscheme contributions 3 13________________________________________________________________________________Net expense recognised directly in equity (20) (24) Profit for the year 32 22________________________________________________________________________________Total recognised income and expense for the year 12 (2)________________________________________________________________________________ Total recognised income and expense for the year is fully attributable to theequity holders of the parent company. Reconciliation of movements in equity_______________________________________________________________________________________________________________ "B" and "C" Hedging and Share share Translation Revaluation ESOP Other Retained£m Capital reserves Reserves Reserve Reserve Reserve Earnings Total_______________________________________________________________________________________________________________ _______________________________________________________________________________________________________________Balance at 1 September 2004 - 2 - - - - - 2Capital reorganisation and pro forma restatement 352 70 - 3 (20) (238) 151 318_______________________________________________________________________________________________________________Restated at 1 September 2004 352 72 - 3 (20) (238) 151 320Total recognised income and expense for the year - - - - - - (2) (2)Recognition of share basedpayments - - - - - - 4 4Dividends paid - - - - - - (154) (154)Repurchase of shares - - - - (11) - - (11)Employee share schemes 1 - - - - 1 - 2Cancellation of shares - (62) - - - - - (62)Money returned to ESOP Trustafter share capitalreorganisation - - - - 5 - - 5Movement in fundingbalances with the Newsbusiness - - - - - 3 - 3_______________________________________________________________________________________________________________Balance at 1 September 2005 353 10 - 3 (26) (234) (1) 105Cumulative adjustment forimplementation of IAS 39 - (7) - - - - - (7)_______________________________________________________________________________________________________________Balance restated at 1 September 2005 for adoption of IAS 39 353 3 - 3 (26) (234) (1) 98Total recognised income and expense forthe period - - (4) - - - 16 12Recognition ofshare-basedpayments - - - - - - 4 4Dividends paid - - - - - - (15) (15)Employee share schemes 4 - - - 4 2 (4) 6Repurchase of shares - (3) - - - - - (3)Movement in fundingbalances with the Newsbusiness - - - - - 66 - 66_______________________________________________________________________________________________________________Balance at 31 August 2006 357 - (4) 3 (22) (166) - 168_______________________________________________________________________________________________________________ Notes 1. Basis of preparation WH Smith PLC (formerly New WH Smith PLC; formerly Pollquote Limited) wasincorporated on 10 August 2004. On 23 June 2006, the company re-registered as apublic limited company. On 31 August 2006, the WH Smith Retail Business was demerged from Smiths NewsPLC, effected by a dividend in specie. The shareholders of Smiths News PLC received a dividend in specie in respect ofthe entire shareholding of New WH Smith PLC. The payment of the dividend waseffected as follows: - Existing shares in WH Smith Retail Holdings Limited (formerly WH Smith PLC), which owned the Retail Business were transferred by Smiths News PLC to New WH Smith PLC (now renamed WH Smith PLC) so that New WH Smith PLC became the holding company of the WH Smith Retail Business; and - In exchange for such transfer, New WH Smith PLC allotted and issued to Smiths News PLC Shareholders one New WH Smith PLC Share, credited as fully paid, for each SmithsNews PLC Share held. On 30 August 2006 New WH Smith PLC changed its name to WH Smith PLC. The sharesof WH Smith PLC were admitted to listing on The London Stock Exchange on 1September 2006. In accordance with the principles of reverse acquisition accounting in IFRS 3 -Business Combinations, the accounts of WH Smith PLC have been prepared as if ithad been in existence in its current group form since 1 September 2004. Thefollowing summarises the accounting principles that have been applied inpreparing the accounts on a reverse acquisition accounting basis: - The income statement for WH Smith PLC has been prepared as if the continuing operations of the WH Smith PLC Group were in existence for the whole of the period from 1 September 2004 through to 31 August 2006. - Share capital and reserves for the prior year consolidated balance sheet have been restated on a pro forma basis including the 2005 capital reorganisation. Differences between these amounts and the previously reported share capital and reserves have been reflected in the other reserve, as set out in the Reconciliation of movements in equity. The proforma restated share capital for the prior year represents the nominal value of shares in issue as if WH Smith PLC had been in existence in its group form since 1 September 2004. - As well as costs borne directly by the Retail Business, the results for the year ended 31 August 2006 and 31 August 2005 include £0.8 million of corporate head office costs of the former ultimate parent company which have historically not been recharged by WH Smith PLC to its business divisions. Services provided by WH Smith PLC included, but were not limited to, treasury, cash management, human resources, accounting, legal and professional services and IT services. These charges may not be representative of the costs that would have been incurred had the business been a standalone entity. International Financial Reporting Standards The consolidated Group financial statements have been prepared in accordancewith International Financial Reporting Standards ('IFRS') as adopted by theEuropean Union and with those parts of the Companies Act 1985 applicable tocompanies reporting under IFRS. These are those standards, subsequent amendmentsand related interpretations issued and adopted by the International AccountingStandards Board ('IASB') that have been endorsed by the European Union at theyear end. The Group previously reported under UK Generally Accepted AccountingPrinciples ('UK GAAP'). The consolidated Group financial statements have also been prepared inaccordance with IFRS adopted for use in the European Union and therefore complywith Article 4 of the EU IAS Regulation. 1. Basis of Preparation (continued) International Financial Reporting Standards (continued) At the date of authorisation of these consolidated Group financial statements,the following Standards and Interpretations which have not been applied in thesefinancial statements were in issue but not yet effective: IFRIC 4 Determining whether an Arrangement Contains a LeaseIFRIC 8 Scope of IFRS 2IFRIC 9 Reassessment of Embedded DerivativesAmendment to IAS 39 Cash Flow Hedge Accounting of Forecast Intragroup Transactions The directors anticipate that the adoption of these Standards andInterpretations in future years will have no material impact on the Groupfinancial statements except for the additional disclosures on capital andfinancial instruments when the relevant standards come into effect for thefinancial year commencing on or after 1 September 2006. Adoption of IAS 32 and IAS 39 The Group implemented IAS 32 'Financial Instruments: Disclosure andPresentation' and IAS 39 'Financial Instruments: Recognition and Measurement' inthe year commencing 1 September 2005. The effect of the adoption of IAS 39 is to reduce net assets by £7 millionresulting from the reclassification of non-equity share capital to financialliabilities. The Group has designated the majority of its foreign exchangederivatives as cash flow hedges as at 1 September 2005 and there was no effecton the balance sheet in respect of this. Accounting convention The financial statements are drawn up on the historical cost basis ofaccounting. The financial information is rounded to the nearest million, exceptwhere otherwise indicated. Basis of consolidation The consolidated Group financial statements incorporate the financial statementsof WH Smith PLC and all its subsidiaries up to the year end date. Subsidiary undertakings are all entities over which the Group has the power togovern the financial and operating policies generally accompanying ashareholding of more than one half of the voting rights so to obtain benefitsfrom its activities. Goodwill arising on acquisition is recognised as an asset and initially measuredat cost, being the excess of the cost of the business combination over theGroup's interest in the net fair value of the identifiable assets, liabilitiesand contingent liabilities recognised. If, after reassessment, the Group'sinterest in the net fair value of the acquiree's identifiable assets,liabilities and contingent liabilities exceeds the cost of the businesscombination, after taking into account recognised goodwill, the excess isimmediately recognised in the income statement. The separable net assets, both tangible and intangible of the newly acquiredsubsidiary undertakings are incorporated into the financial statements on thebasis of the fair value as at the effective date of control, if appropriate. Results of subsidiary undertakings disposed of during the financial year areincluded in the financial statements up to the effective date of disposal. Wherea business component representing a separate major line of business is disposedof, or classified as held for sale, it is classified as a discontinuedoperation. The post-tax profit or loss of the discontinued operations is shownas a single amount on the face of the income statement, separate from the otherresults of the Group. All intercompany transactions, balances and unrealised gains on transactionsbetween Group companies are eliminated. 2. 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 theirdisposal, the Publishing business, USA Travel Retail and ASPAC Retail wereseparate business segments. The information for these businesses, which arepresented as discontinued operations, can be found in Note 5. (i) Segmental analysis by business segments a) Group revenue ________________________________________________________________________________£m 2006 2005________________________________________________________________________________ Continuing operations:High Street 1,021 1,112Travel 319 311________________________________________________________________________________Group revenue 1,340 1,423________________________________________________________________________________ b) Group results ________________________________________________________________________________£m 2006 2005________________________________________________________________________________ Continuing operations:High Street 42 37Travel 31 25________________________________________________________________________________Trading profit 73 62Unallocated costs (13) (15)________________________________________________________________________________Group operating profit before exceptional 60 47itemsExceptional items (note 4) (7) -________________________________________________________________________________Group operating profit 53 47Investment income 2 3Finance costs (11) (11)Income tax expense (12) (9)Loss for the year from discontinued - (8)operations________________________________________________________________________________Profit for the year 32 22________________________________________________________________________________ 2. Segmental analysis of results (continued) (i) Segmental analysis by business segments (continued) (c) Balance Sheet ________________________________________________________________________________________________________________________ 2006 2005___________________________________________________________________ __________________________________________________ High Continuing Discontinued High Continuing Discontinued£m Street Travel operations operations Group Street Travel operations operations Group___________________________________________________________________ __________________________________________________AssetsSegment assets 442 74 516 4 520 458 53 511 3 514Unallocatedassets - - 6 - 6 - - 28 - 28___________________________________________________________________ __________________________________________________Consolidatedtotal assets 442 74 522 4 526 458 53 539 3 542___________________________________________________________________ __________________________________________________LiabilitiesSegmentliabilities (213) (38) (251) (4) (255) (224) (31) (255) (6) (261)Unallocatedliabilities - - (103) - (103) - - (176) - (176)___________________________________________________________________ __________________________________________________Consolidatedtotalliabilities (213) (38) (354) (4) (358) (224) (31) (431) (6) (437)___________________________________________________________________ __________________________________________________Net Assets 168 - 168 108 (3) 105________________________________________________________________________________________________________________________ (d) Other Segmental Items ___________________________________________________________________ __________________________________________________ High Continuing Discontinued High Continuing Discontinued£m Street Travel operations operations Group Street Travel operations operations Group___________________________________________________________________ __________________________________________________Capitaladditions 24 5 29 - 29 26 4 30 - 30Depreciationand amortisation (29) (5) (34) - (34) (36) (5) (41) - (41)of non-current assetsImpairmentlosses (3) - (3) - (3) - - - - -________________________________________________________________________________________________________________________ Segment assets include intangible assets, property, plant and equipment,inventories, receivables and operating cash. Segment liabilities comprise ofoperating liabilities. Information on discontinued operations is shown in Note5. 2. Segmental analysis of results (continued) (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. 3. Group operating profit ________________________________________________________________________________£m 2006 2005________________________________________________________________________________ Turnover 1,340 1,423Cost of sales (761) (847)________________________________________________________________________________Gross profit 579 576 Distribution costs (434) (437) Administrative expenses (97) (92)________________________________________________________________________________Pre-exceptional operating items (90) (92)Exceptional operating items (1) (7) -________________________________________________________________________________Other income (2) 5 -________________________________________________________________________________Group operating profit 53 47________________________________________________________________________________ (1) The exceptional operating items are detailed in Note 4. (2) Other income is attributable to profit on sale of freehold property, plant and equipment. During the period there was a £3 million impairment charge for property, plant and equipment included in Distribution costs (2005:£nil). 3. Group operating profit (continued) ________________________________________________________________________________£m 2006 2005________________________________________________________________________________ Cost of inventories recognised as an expense 786 854Writedown of inventories in the period 12 17Depreciation and amounts written off property, 33 37plant & equipmentAmortisation of intangible assets 4 4Net operating lease charges - land and buildings 147 140 - equipment and vehicles 1 2Other occupancy costs 50 45Staff costs 192 199Auditors' remuneration (see below) 2 1 Fees payable to Deloitte & Touche LLP, the Group's auditors, included in theincome statement related to: Audit fees 0.2 0.2Non-audit fees 1.9 0.2________________________________________________________________________________ 2.1 0.4________________________________________________________________________________ Fees payable to Deloitte & Touche LLP, the Group's auditors, included in theincome statement relating to audit fees amount to £0.2m (2005: £0.2m), andnon-audit fees of £1.9m (2005: £0.2m) which comprise further assurance servicesin respect of the demerger of the business of £1.9m (2005: £nil), tax complianceservices £nil (2005: £0.1m), and IFRS preparation work £nil (2005: £0.lm). 4. Continuing operations 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 2006 2005________________________________________________________________________________ Settlement of Post Retirement Medical Benefit 5 -SchemeCosts of demerger from Smiths News PLC (12) -________________________________________________________________________________ (7) -________________________________________________________________________________ In September 2005, members of the post retirement medical benefits scheme wereoffered the option to be bought out of the scheme, which was accepted by themajority of members. A gain of £5 million (before tax) arose from the settlementof this scheme, which has been recognised in the Income Statement for theperiod. Further details are included in Note 6. The Group has a £12 million exceptional charge in relation to costs associatedwith the demerger from Smiths News PLC. 5. Discontinued operations Results from discontinued operations The results from discontinued operations were as follows: ________________________________________________________________________________£m 2006 2005________________________________________________________________________________ RevenuePublishing businessTotal revenue - 14Internal revenue - (3)________________________________________________________________________________Total revenue - 11________________________________________________________________________________________________________________________________________________________________USA Travel Retail - -________________________________________________________________________________________________________________________________________________________________Total revenue - discontinued operations - 11________________________________________________________________________________ ____________________________________________________________________________________ 2006 2005____________________________________________________________________________________ USA USA Publishing Travel Publishing Travel£m business Retail Total business Retail Total____________________________________________________________________________________ Profit before tax - - - - - -and beforeexceptional itemsIncome Tax - - - - - -Expense____________________________________________________________________________________Profit after tax - - - - - -and beforeexceptional itemsand loss on sale____________________________________________________________________________________ Exceptional - - - - - -trading itemsImpairment onsale of - - - - (8) (8)discontinuedoperationsIncome Tax - - - - - -Expense____________________________________________________________________________________Exceptionalitems after tax - - - - (8) (8)________________________________________________________________________________________________________________________________________________________________________Loss for theperiod from - - - - (8) (8)discontinuedoperations____________________________________________________________________________________ The cash flows of discontinued operations comprise: ________________________________________________________________________________£m 2006 2005________________________________________________________________________________ From operating activities - -From investing activities 8 (10)From financing activities - -________________________________________________________________________________Net increase / (decrease) in cash and cash 8 (10)equivalents________________________________________________________________________________ 5. Discontinued operations (continued) Publishing business disposal On 25 September 2004, the Group completed the disposal of its Publishingbusiness, Hodder Headline Limited. A financial summary of the disposal is shown below: ________________________________________________________________________________£m________________________________________________________________________________ Fixed assets 156Inventories 17Debtors 80Creditors (30)Net pension liabilities (14)________________________________________________________________________________Net assets disposed 209________________________________________________________________________________ Cash consideration 210Cash received in respect of working capital adjustments 5Net assets disposed (209)Transaction costs and other charges (6)________________________________________________________________________________Net result on sale of the Publishing business recognised in the -financial year________________________________________________________________________________ The Group incurred a £5 million cash outflow in respect of transaction costs andother charges relating to the Publishing business disposal. USA Travel Retail £8 million was charged to the Income Statement in the prior year relating to thedisposal of discontinued businesses. Of this amount, £7 million related to animpairment review of the loan notes received as deferred consideration on theprevious disposal of the Groups USA business, and the balance related toclosure and exit provisions. Aspac Retail During the year ended 31 August 2005, £7 million was received for the AspacRetail disposal, which related to deferred consideration and working capitaladjustments. 6. Retirement benefit obligation The WH Smith Group has operated a number of defined benefit and definedcontribution pension plans. The main pension arrangements for employees areoperated through a defined benefit scheme, WHSmith Pension Trust, and a definedcontribution scheme, WHSmith Retirement Savings Plan. The most significant isthe defined benefit WHSmith Pension Trust for the Group's UK employees which isdescribed in note 6 a) (i). The scheme is independent of the Company and isadministered by a Trustee. The Trustee of the Pension Trust has extensive powersover the pension plans' arrangements, including the ability to determine thelevels of contribution. Segregation of assets and liabilities of each pension scheme into two sections On the date of the Demerger, the assets and liabilities of the defined benefitscheme have been split between the WH Smith Retail business (owned by WH SmithPLC) and the News business (owned by Smiths News PLC) by way of a"sectionalisation" of the defined benefit scheme into two different sections(i.e. the WH Smith Retail business section and the News business section). Thetwo sections will remain within the defined benefit scheme. Similarly, theassets and liabilities of the defined contribution scheme will be separated (or"sectionalised") into two different sections, a WH Smith Retail business sectionand a News business section, with each section only containing the accounts ofmembers who are or were employed by the relevant business. The two sections willremain within the WH Smith Retirement Savings Plan. Upon sectionalisation of the defined benefit scheme, the assets and liabilitiesof the defined benefit scheme have been allocated to the WH Smith Retailbusiness section and the News business section in proportions that reflect thenumber of active, deferred, pensioner and orphan members belonging to therespective businesses. Orphan members are members (or spouses of members) whoseemployer had left the group prior to the split but were classified as eitherNews or Retail for the purpose of the sectionalisation. These proportions arecurrently estimated to be 65 per cent, for the WH Smith Retail business and 35per cent, for the News business. The participating employers of the WH SmithRetail business will contribute to the WH Smith Retail business section, and theparticipating employers of the News business will contribute to the Newsbusiness section. Assets apportioned to one section of the Pension Trust will not be able to beused for the purposes of the other section. There will be no cross-subsidy orcross-guarantee between the sections of the Pension Trust. However, foradministration and investment purposes the Pension Trust will operate generallyon a unified basis, except that the principal employers will be replaced with asponsor for each section. On 1 September 2006, a one-off contribution of £25 million was made to thePension Trust by the Company. The amounts recognised in the balance sheet within non-current liabilities inrelation to these plans are as follows: ________________________________________________________________________________£m 2006 2005________________________________________________________________________________ Continuing operationsPresent value of the obligations (674) (651)Fair value of plan assets 608 598________________________________________________________________________________Deficit (66) (53)________________________________________________________________________________ Retirement medical benefit liability - (7)________________________________________________________________________________Retirement benefit obligation recognised in the (66) (60)balance sheet________________________________________________________________________________ Deferred taxation 20 18________________________________________________________________________________Net retirement obligation (46) (42)________________________________________________________________________________ 6. Retirement benefit obligation (continued) a) Defined benefit pension scheme (i) 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 Human Resource Consulting, using the projected unit basis, and as witheach such triennial valuation, the valuation currently remains subject to theformal approval of the Pension Trust Trustee. The scheme was closed in September1995 and under the projected unit method the current service cost would beprojected to increase as members approach retirement and the age profile ofmembers increases. On an ongoing basis the gross actuarial defined benefitpension deficit for WH Smith PLC was approximately £96 million (approximately£67 million net of related deferred taxes) for the Pension Trust. The ongoingdeficit is greater than the IAS 19 deficit primarily due to the differentassumptions 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 was invested in an LDI policy with a leading international institutional fund manager; and - 6% of the Pension Trust's assets was used to purchase a portfolio of long-dated equity call options. These represented a notional exposure to underlying equities of some £350 million. 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. 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: ________________________________________________________________________________% 2006 2005________________________________________________________________________________ Rate of increase in salaries 4.00% 3.70%Rate of increase in pension payments and 3.00% 2.70%deferred pensionsDiscount rate 5.10% 4.90%Inflation assumptions 3.00% 2.70%________________________________________________________________________________ 6. Retirement benefit obligation (continued) (a) Defined benefit pension scheme (continued) (i) The WH Smith Pension Trust (continued) The amounts recognised in the income statement were as follows: ________________________________________________________________________________£m 2006 2005________________________________________________________________________________ Current service cost (6) (6)Interest cost (32) (31)Expected return on scheme assets 29 30________________________________________________________________________________ (9) (7)________________________________________________________________________________ The charge for the current service cost has been included in administrativecosts. Movements in the present value of the defined benefit scheme obligations in thecurrent year were as follows: ________________________________________________________________________________£m 2006 2005________________________________________________________________________________ At 1 September (651) (559)Current service cost (6) (6)Interest cost (32) (31)Actuarial gains and losses (7) (75)Benefits paid 22 20________________________________________________________________________________As at 31 August (674) (651)________________________________________________________________________________ Movements in the fair value of defined benefit scheme assets in the year were asfollows: ________________________________________________________________________________£m 2006 2005________________________________________________________________________________ At 1 September 598 443Expected return on scheme assets 29 30Actuarial gains and losses (17) 48Contributions from the sponsoring companies 20 97Benefits paid (22) (20)________________________________________________________________________________As at 31 August 608 598________________________________________________________________________________ 6. Retirement benefit obligation (continued) (a) Defined benefit pension scheme (continued) (i) The WHSmith Pension Trust (continued) An analysis of the defined benefit scheme assets at the balance sheet date isdetailed below.________________________________________________________________________________£m 2006 2005________________________________________________________________________________ Equities - 265Bonds - 333Cash 584 -Inflation swaps (14) -Equity call options 38 -________________________________________________________________________________ 608 598________________________________________________________________________________ An analysis of the expected rate of return on the defined benefit scheme assetsat the balance sheet date is detailed below.________________________________________________________________________________ 2006 2005________________________________________________________________________________ Equities - 7.00%Bonds - 4.00%Cash (1) - 3.75%Inflation swaps (1) - -Equity call options (1) - -________________________________________________________________________________ (1) The expected rate of return on these investments is calculated as a weightedaverage of the expected return on the LDI fund and the equity call options andat 31 August 2006 was 5.01 per cent. Prior to 22 September 2005, the overall expected rate of return on the Trust'sassets was calculated as a weighted average return based on the distribution ofthe assets (between equities, bonds and cash, at the accounting date). On 22September 2005, the investment strategy was altered to invest in a LiabilityDriven Investment (LDI) fund and a number of equity call options. The mortality assumptions (in years) underlying the value of the accruedliabilities 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. 6. Retirement benefit obligation (continued) (a) Defined benefit pension scheme (continued) (i) The WH Smith Pension Trust (continued) The four year history of experience adjustments is as follows: ________________________________________________________________________________ 2006 2005 2004 2003£m ________________________________________________________________________________Present value of defined benefit (674) (651) (612) (585)obligationsFair value of scheme assets 608 598 473 441________________________________________________________________________________Surplus / (deficit) in the scheme (66) (53) (139) (144)________________________________________________________________________________ Experience adjustments on schemeliabilities Amount (£m) (7) (75) Percentage of scheme liabilities (%) 1 11_____________________________________________________________Experience adjustments on scheme assets Amounts (£m) (17) 48 Percentage 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 £0.1 million (31 August 2005: £0.4 million). The present value of thefuture liabilities under this arrangement at each reporting date has beenassessed by independent actuaries (Mellon Human Resources & Investor Solutions(Actuaries & Consultants Limited)) and this amount was included on the balancesheet within retirement benefit 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 £5 million reduction in the net deficit. A small number ofmembers opted to remain in the scheme and the present value of the remainingfuture liabilities is valued at £0.1 million 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 £2 million for the year ended 31August 2006 (31 August 2005: £2 million). c) Discontinued pension schemes Year ended 31 August 2005 Publishing Business On 25 September 2004, the Group completed the disposal of the Publishingbusiness, including the disposal of that business' pension fund. The grossdeficit at the date of disposal was £20 million. USA Travel Retail Business The Group made a settlement of £3 million in respect of the pension liabilitiesof this business. 7. Income tax expense________________________________________________________________________________£m 2006 2005________________________________________________________________________________ Tax on profit before exceptional items 4 14 Standard rate of UK corporation tax 30%Adjustment in respect of prior year UK (7) (3)corporation tax________________________________________________________________________________Total current tax charge before exceptional items (3) 11________________________________________________________________________________Deferred tax - current year 13 (2)________________________________________________________________________________Tax on profit before exceptional items 10 9Tax on exceptional items 2 -________________________________________________________________________________Tax on profit after exceptional items 12 9________________________________________________________________________________Effective tax rate on continuing activitiesbefore exceptional items 20% 23%________________________________________________________________________________ Reconciliation of the taxation charge________________________________________________________________________________£m 2006 2005________________________________________________________________________________ Tax on profit before exceptional items at standard rate ofUK corporation tax 30% 15 12 Tax effect of items that are not deductible or not taxablein determining taxable profit 2 1Depreciation for which no tax relief is available - 1Utilisation of tax losses (13) -Adjustment in respect of prior years (7) (3)________________________________________________________________________________Current tax charge (3) 11________________________________________________________________________________ 8. Dividends Amounts recognised as distributions to shareholders in the period are asfollows:________________________________________________________________________________ £m 2006 2005________________________________________________________________________________ Dividends Interim - paid 5 4Final - paid 10 7________________________________________________________________________________ 15 11________________________________________________________________________________ "C" share dividends "C" share dividend paid on capital reorganisation - 143________________________________________________________________________________ 15 154________________________________________________________________________________ The proposed dividend of 6.2p per share is not included as a liability in thesefinancial statements and, subject to shareholder approval, will be paid on 6February 2007 to shareholders on the register at the close of business on 5January 2007. 8. Dividends (continued) In the prior year, the Group paid a "C" share dividend of £142,533,945 to theholders of 167,686,994 "C" shares in accordance with the terms of a capitalreorganisation, and upon payment of this dividend, these "C" shares wereconverted to deferred shares, which have now been cancelled in the year ended 31August 2006. The Group also paid a dividend of £282,688 during the year to 31 August 2006 (31August 2005: £156,647) in respect of "C" shares, and paid dividends on the "B"shares of £81,555 during the year to 31 August 2006 (31 August 2005: £45,192). 9. Earnings /(loss) per share a) Earnings ______________________________________________________________________________________ 2006 2005__________________________________________________ _________________________________£m Continuing Discontinued Total Continuing Discontinued Total__________________________________________________ _________________________________ Headlineearningsattributable toshareholders 43 - 43 31 - 31Pensioninterest netof relatedtaxation (2) - (2) (1) - (1)Exceptionalitems net ofrelatedtaxation (9) - (9) - (8) (8) __________________________________________________ _________________________________Profit / (loss)attributable toshareholders 32 - 32 30 (8) 22______________________________________________________________________________________ b) Basic earnings / (loss) per share ______________________________________________________________________________________ 2006 2005__________________________________________________ _________________________________Pence Continuing Discontinued Total Continuing Discontinued Total__________________________________________________ _________________________________ Headlineearnings pershare (note a) 25.0 - 25.0 17.5 - 17.5Pensioninterest netof relatedtaxation (1.2) - (1.2) (0.6) - (0.6)Exceptionalitems net ofrelatedtaxation (5.2) - (5.2) - (4.5) (4.5)__________________________________________________ _________________________________Earnings /(loss) pershare (note b) 18.6 - 18.6 16.9 (4.5) 12.4______________________________________________________________________________________ a) Headline earnings per share has been calculated using profit after tax but before exceptional items and IAS 19 net interest charges on the defined benefit pension scheme. b) Basic earnings per share has been calculated using profit after tax and exceptional items. 9. Earnings /(loss) per share (continued) c) Diluted earnings / (loss) per share ______________________________________________________________________________________ 2006 2005__________________________________________________ _________________________________Pence Continuing Discontinued Total Continuing Discontinued Total__________________________________________________ _________________________________ Headlineearnings pershare 24.4 - 24.4 17.3 - 17.3Pensioninterest netof relatedtaxation (1.1) - (1.1) (0.5) - (0.5)Exceptionalitems net ofrelatedtaxation (5.1) - (5.1) - (4.5) (4.5)__________________________________________________ _________________________________Earnings /(loss) pershare 18.2 - 18.2 16.8 (4.5) 12.3______________________________________________________________________________________ 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 2006 2005________________________________________________________________________________ Weighted average shares in issue for earnings per 172 177shareAdd weighted average number of ordinary shares 4 2under option________________________________________________________________________________Weighted average ordinary shares for diluted 176 179earnings per share________________________________________________________________________________ 10. Analysis of net funds / (debt) Movements in net funds / (debt) can be analysed as follows:________________________________________________________________________________ IAS32 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 - -Obligationsunder financeleases (15) - 4 - (11)________________________________________________________________________________Net (debt) /funds (58) (7) 107 - 42________________________________________________________________________________ ________________________________________________________________________________ £m 2004 Cash flow Non-cash 2005________________________________________________________________________________ Cash and cash equivalents 51 (12) - 39Debt - Sterling floating rate (17) (33) - (50) - Sterling fixed rate (2) (30) - (32)Obligations under finance leases (6) (3) (6) (15)________________________________________________________________________________Net funds / (debt) 26 (78) (6) (58)________________________________________________________________________________ 11. Contingent liabilities and Capital commitments £m 2006 2005________________________________________________________________________________ Bank and other loans guaranteed 6 11________________________________________________________________________________ No amount has been included above for taxation that would arise in the event ofcertain international subsidiaries distributing the balance of their reserves. Other potential liabilities that could crystallise are in respect of previousassignments of leases where the liability could revert to the Group if thelessee defaulted. Pursuant to the terms of the Demerger Agreement, any suchcontingent liability which becomes an actual liability will be apportionedbetween the Group and Smiths News PLC in the ratio 65:35 (provided that theactual liability of Smiths News PLC in any 12 month period does not exceed £5million). The Group's 65% share of these leases has an estimated future grossrental commitment at 31 August 2006 of £102 million (31 August 2005: £118million). Contracts placed for future capital expenditure approved by the directors butnot provided for in this combined financial information amount to £5 million (31August 2005: £4 million). 12. Net cash inflow / (outflow) from operating activities ________________________________________________________________________________£m 2006 2005________________________________________________________________________________Operating Profit from continuing operations 53 47Operating exceptional items 7 -Adjustment for pension funding (12) (90)Depreciation of property, plant and equipment 30 37Profit on sale of property, plant and equipment (5) -Impairment of property, plant and equipment 3 -Amortisation of intangible assets 4 4Share based payments 6 4Decrease in inventories 6 5Decrease / (increase) in receivables 7 (12)Decrease in payables (4) (1)Income taxes paid (2) (2)Cash spend against provisions (3) (6)________________________________________________________________________________Net cash inflow / (outflow) from operating activitiesbefore exceptional items 90 (14)Cash outflow relating to exceptional operating items (8) (9)________________________________________________________________________________Net cash inflow / (outflow) from operating activities 82 (23)________________________________________________________________________________ 13. Share capital a) Authorised ___________________________________________________________________________________ 2006 2005___________________________________________________________________________________ Number of Nominal Number of Nominal value shares value shares (millions) £m (millions) £m___________________________________________________________________________________Equity:Ordinary shares of - - - -£1.00 eachOrdinary shares of£1.95 each 300 585 - -___________________________________________________________________________________Redeemable preference - - - -share of £50,000 each___________________________________________________________________________________Total 300 585 - -___________________________________________________________________________________ b) Allotted and fully paid ___________________________________________________________________________________ 2006 2005___________________________________________________________________________________ Number of Nominal Number of Nominal value shares value shares (millions) £m (millions) £m___________________________________________________________________________________Equity:Ordinary shares of - - - -£1.00 eachOrdinary shares of£1.95 each 183 357 - -___________________________________________________________________________________Redeemable preference - - - -share of £50,000 each___________________________________________________________________________________Total 183 357 - -___________________________________________________________________________________ At 31 August 2005, the authorised share capital of the company was £1,000divided into one thousand ordinary shares of £1.00 each with one share allottedand fully paid up. On 23 June 2006, the authorised share capital was increased by the creation ofone redeemable preference share of £50,000 which was issued as fully paid up. Inaccordance with IAS 32 'Financial instruments: disclosure and presentation',this amount is presented within liabilities. On the same day the company issueda second ordinary share which was fully paid. On 6 July 2006, the authorised share capital was increased by £584,999,000through the creation of a further 584,999,000 ordinary shares of £1.00 each. 76ordinary shares were then issued fully-paid to the existing shareholders. Theissued and unissued ordinary shares were then consolidated on a 39:1 basis intoordinary shares of £39 each which were then subdivided on a 1:20 basis intoordinary shares of £1.95 each. Following this consolidation and subdivision, theauthorised share capital was £585,050,000 divided into 300,000,000 ordinaryshares of £1.95 each and 1 redeemable preference share of £50,000, of which 40ordinary shares and the redeemable preference share were issued and full paid-up. On 31 August 2006, the Company issued 182,919,970 ordinary shares to theshareholders of Smiths News PLC in exchange for acquiring WH Smith RetailHoldings Limited (formerly WH Smith PLC) and its subsidiary entities. On 7 September 2006, the company reduced its authorised share capital throughthe reduction of the nominal value of each ordinary share from £1.95 each to£0.20 each, creating £320 million of distributable reserves. 14. Related party transactions Transactions between businesses within this Group which are related parties havebeen eliminated on consolidation and are not disclosed in this note. Smiths News PLC During the periods, Group companies entered into the following transactions withSmiths News PLC. On 31 August 2006, the Group was demerged from Smiths News PLC. Purchases were made on an arm's length basis. 14. Related party transactions (continued) The amounts outstanding are unsecured and will be settled in cash. No guaranteeshave been given or received. No provisions have been made for doubtful debts inrespect of the amounts owed by related parties. ________________________________________________________________________________£m 2006 2005________________________________________________________________________________ Purchase of goods from Smiths News PLC 115 113Trading amounts owed to Smiths News PLC at end of 6 10yearAmounts owed by Smiths News PLC in respect of prioryears' corporation tax 15 15________________________________________________________________________________ Prior to demerger on 31 August 2006, trading between the Retail and Newsbusinesses was not classified as a related party transaction as they were bothpart of the WH Smith Group. Transitional services agreement on demerger On 7 July 2006, WH Smith PLC and Smiths News PLC entered into a transitionalservices agreement whereby WH Smith PLC has agreed, with effect from thedemerger, to supply certain transitional services to Smiths News PLC. Theseservices include, amongst other things, payroll, tax, and propertyadministration. It is expected that the services will be provided for atransitional period of up to 12 months plus such time as is required to completethe 2005/2006 year end tax computation, following which Smiths News PLC willmake its own arrangements for the provision of these services. The considerationpayable by Smiths News PLC to WH Smith PLC under this agreement from the 12month period is likely to be approximately £800,000 although this could increasedepending on the length of time that the services are provided to Smiths NewsPLC. USA Travel Retail - Hotels The CEO of Travel Traders LLC is Sean Anderson who was Chairman of WH SmithAirports Inc., WH Smith PLC's US subsidiary until September 2003 and he holds a30 per cent stake in Travel Traders LLC. The total consideration of £7 millionfor the USA Travel Retail hotel business was satisfied by way of an interestbearing loan note with a 5 per cent coupon, conditional on the trading cashflows of Travel Traders LLC. Additionally, WH Smith Group Holdings (USA) Inc.holds a 15 per cent equity interest in Travel Traders LLC is also providing aloan facility of up to £4 million to the new company, of which £3 million isdrawn down as at 31 August 2006, (31 August 2005: £3 million). Remuneration of key management personnel The remuneration of the executive directors, who are the key managementpersonnel of the Group, is set out below in aggregate for each of the categoriesspecified in IAS 24 Related Party Disclosures. ________________________________________________________________________________£000 2006 2005________________________________________________________________________________ Short-term employee benefits 2,407 3,048Post-employment benefits 39 38________________________________________________________________________________ 2,446 3,086________________________________________________________________________________ Directors' transactions There are no other transactions with directors. 15. Post Balance Sheet Events WH Smith Pension Trust On 1 September 2006, the Group made a £25 million one -off contribution to theWH Smith Pension Trust. On 7 September 2006, the company reduced its authorised share capital throughthe reduction of the nominal value of each ordinary share from £1.95 each to£0.20 each, creating £320 million of distributable reserves. 16. Analysis of Retail Stores and Selling Space Number of stores 1 September Opened Closed 31 August 2005 2006________________________________________________________________________________________ High Street 542 7 (6) 543Travel 127 2 - 129________________________________________________________________________________________Total 669 9 (6) 672________________________________________________________________________________________Retail sellingsquare feet(000's)________________________________________________________________________________________ 1 September Opened Closed Redeveloped 31 August 2005 2006________________________________________________________________________________________ High Street 3,035 21 (38) (19) 2,999Travel 216 1 - 3 220________________________________________________________________________________________Total 3,251 22 (38) (16) 3,219________________________________________________________________________________________ 17. Preparation of the Preliminary Announcement a) Basis of preparation The preliminary announcement for the 12 months to 31 August 2006 has beenprepared on the basis of the accounting policies set out in the New WH Smith PLCprospectus issued on 7 July 2006. While the financial information included in this preliminary announcement hasbeen computed in accordance with International Financial Reporting Standards(IFRS), this announcement does not itself contain sufficient information tocomply with IFRS. The Company expects to publish full financial statements thatcomply with IFRSs in November 2006. b) Preliminary announcement The financial information for the 12 months to 31 August 2006 and 12 months to31 August 2005 do not comprise statutory accounts for the purpose of Section 240of the Companies Act 1985 and have been extracted from the Company'sconsolidated accounts for the year to 31 August 2006. The statutory accounts forWH Smith PLC (formerly New WH Smith PLC; formerly Pollquote Limited) for theperiod from incorporation on 10 August 2004 to 31 August 2005 have been filedwith the Registrar of Companies and those for the 12 months to 31 August 2006will be filed following the Company's annual general meeting. The accounts forthe period ending 31 August 2005 did not require to be audited. The auditors'reports on the accounts for the 12 months to 31 August 2006 were unqualified anddid not include a statement under Section 237 (2) or (3) of the Companies Act1985. The Annual Report and Accounts will be posted to shareholders in November 2006. This information is provided by RNS The company news service from the London Stock Exchange

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