Final Results
Smiths News PLC
18 October 2007
Smiths News PLC
Preliminary Results Announcement for the year ended 31 August 2007
Smiths News PLC is the UK's leading newspaper and magazine wholesaler serving
22,000 retailers across England and Wales
FINANCIAL HIGHLIGHTS
2007 2006 2007 2006
Underlying(1) Proforma(2) Increase Increase
----------------------------------------------------------------------------
Revenue £1,232.4m £1,210.6m 1.8% £1,232.4m £1,210.6m 1.8%
Operating profit £36.0m £33.0m 9.1% £41.4m £34.3m 20.7%
Profit before tax £31.0m £28.0m 10.7% £36.4m £32.0m 13.8%
Earnings per share 14.0p 13.0p 7.7% 16.1p 14.9p 8.1%
•Free cash flow of £27.1m(3)
•Final dividend of 4.3p (2006: 4.0p)(4); total dividend 6.4p (2006: 6.0p)(4)
OPERATING HIGHLIGHTS
•Market leading service with continued improvement across the network
•Costs reduced through efficiency improvements and tight cost control
•Significant progress in creating further efficiencies
-depot consolidation in several locations
-customer service and administration rationalisation into regional
centres of excellence
•Agreement with News International to supply South London and Derby areas
commencing June 2008
•Regional press gains in Peterborough, Plymouth, Cambridge, and Manchester
•Continued progress in developing new revenue streams - agreements reached
with Martin McColl, Alpha Retail and Newspread, part of Independent News &
Media PLC
Commenting on the results, Mark Cashmore, Chief Executive said:
'In our first full year as an independent company, Smiths News has delivered a
good performance. We have improved our profitability and cash generation in a
challenging market by continuing to manage costs rigorously while further
consolidating our position as the market leader in terms of scale, technology,
efficiency and service to our customers.
We have made a good start to the new financial year. Looking ahead, a
combination of improving service, new revenues, and continued efficiency savings
throughout the business means we are well placed to deliver another year of
progress.'
The following definitions are applied consistently throughout this preliminary
results announcement:
(1) Underlying 2007 results exclude the actuarial curtailment credit on the
pension scheme of £5.4m and the related tax charge of £1.6m.
(2) Proforma 2006 results assume the £70m of debt funding introduced at the time
of the demerger, and the one off pension payment of £25.0m, had been made at the
beginning of the 2006 period, giving rise to a finance cost of £2.7m, with a
related tax charge of £0.5m. Proforma 2006 results also exclude property
profits of £1.3m.
(3) Excludes the one-off pension funding payment of £25.0m, dividend payment of
£10.9m and finance lease repayments of £1.6m.
(4) 2006 dividend is the Smiths News apportionment of old WH Smith PLC dividend.
For further information:
Smiths News PLC
Alan Humphrey Finance Director 020 7404 5959
Brunswick
Kate Holgate Media Relations 020 7404 5959
Giles Croot
About Smiths News:
Smiths News was formed on 31st August 2006 following the demerger of WH Smith
PLC.
Smiths News is the UK's leading newspaper and magazine wholesaler serving 22,000
retailers across England and Wales. Smiths News also collects and processes
returns, supplies sales information to publishers and provides a range of
services for its retail customers.
Smiths News has an approximate 40 per cent share of the magazine wholesaling
sector and an approximate 35 per cent share of the newspaper wholesaling sector
in the UK.
Smiths News has 44 distribution centres across England and Wales, employing
4,100 staff.
OPERATING REVIEW
In our first year as an independent PLC, we have delivered a good performance.
Even though our markets have remained challenging, rigorous cost management has
enabled the business to increase its profits, whilst making good progress
against all key objectives.
Service & Efficiency
Operational service levels have improved across the business, improving the
consistency of standards throughout the network. The policy of ensuring
transparency of performance at all levels of the business has been successful.
Objectivity of reporting has improved communication with publishers and
retailers, helping all parties to work together to improve mutual performance
and consolidate our position as market leader.
This year a number of improvements were made to the network. In March, a new
depot opened in Plymouth, replacing three old buildings with one modern
facility. As part of the plan to improve service and efficiency in the Thames
Valley area, the newspaper depot in Oxford was fully refurbished which enabled
the closure of the High Wycombe depot. Similarly, the newspaper operation in
Stoke has been consolidated into one building and the magazine packing moved to
Wednesbury, completing the consolidation of depots in the North Birmingham area.
Efficiency initiatives have been pursued at all levels of the business, from
major projects such as the restructuring of customer services and administration
support, down to local initiatives such as the implementation of free fax
facilities to reduce phone calls to depots.
Improvements to the network will continue and there are plans for further new
facilities and consolidations.
Core contracts
There were no major publisher contracts due for renewal during the year, however
regional press gains worth £8m in annualised sales were secured in the
Peterborough, Plymouth, Cambridge and Manchester areas. We have also reached
agreement with News International to supply the South London and Derby areas
commencing in June 2008. This agreement represents an additional £10m in
annualised sales.
The improvements in service levels and performance over the last two years
position Smiths News well for major distribution contracts when they become due
for renewal.
Markets
The newspaper and magazine markets remain large and relatively stable. Market
conditions for newspapers have been challenging, but the long-term trend of
value growth has continued with price increases more than offsetting the impact
of volume declines. This trend is expected to continue although it is likely
there will be only modest underlying revenue growth over the coming year.
The magazine market has seen a reduction in both volume and value. Sales through
Smiths News were boosted by contract gains; although excluding these gains, the
growth of weekly titles was not sufficient to offset the decline in monthlies
and partworks. More recently we have seen increased investment in the weekly
market and signs of stabilisation in monthly magazines.
New revenues
The business continues to seek opportunities to use its competencies to build
new revenue streams. The Group's independence from WH Smith PLC has allowed the
company to build stronger relationships with other retailers.
We continue to strengthen our services providing a comprehensive category
management service by combining our distribution offer with information and
marketing expertise, returns handling, merchandising, and promotional brokerage.
During the year solid progress has been made in this regard. We are due to run a
trial with 100 Tesco stores to broaden our offer to other papershop products and
an agreement has recently been reached with Martin McColl, the largest of the
CTN convenience chains, to manage the magazine ranges and promotions in all of
their 1,400 stores across the UK.
In addition, The Returns Company has recently reached an agreement with Alpha
Retail, one of the UK's leading airport retailers, to handle their returns.
Smiths News is the industry leader in data management, operating a technology
platform facilitating the complex information exchange between retailers,
publishers and Smiths News. We market this under our NewsWorks banner.
Newspread, a subsidiary of Independent News and Media PLC, has engaged NewsWorks to
design a systems solution for their wholesale operation in Ireland.
Pensions
In May 2007, the WH Smith Pension Trust (a defined benefit scheme) was closed to
further accrual. The closure affected 700 staff members, representing 17% of
the total workforce. The decision limits the risk and volatility in the scheme
and helps protect the long-term future of the Trust. We remain committed to
competitive pension provision for all staff, through the WH Smith Retirement
Savings Plan, a defined contribution scheme.
Outlook
We have made a good start to the new financial year with trading in the first
six weeks in line with market expectations. Looking ahead, a combination of
improving service, new revenues, and continued efficiency savings throughout the
business means we are well placed to deliver another year of progress.
FINANCIAL REVIEW
REVENUE
Like for like
Aug 2007 Aug 2006 Change growth (5)
£m £m % %
---------- --------- --------- ----------
Newspapers 640.8 628.7 1.9% 1.0%
Magazines 541.2 531.6 1.8% (3.6%)
Other 50.4 50.3 0.2% 0.2%
-------------------- ---------- --------- --------- ----------
Total revenue 1,232.4 1,210.6 1.8% (1.1%)
-------------------- ---------- --------- --------- ----------
(5) Like for like revenue growth excludes publisher contract gains.
Total revenues are 1.8% above last year with like for like(5) revenues down 1.1% on
last year.
Newspaper revenues of £640.8m are up 1.9% on last year, benefiting from national
newspaper contract gains in Derby and regional press contract gains in Peterborough,
Plymouth, Cambridge and Manchester. Like for like(5) newspaper revenues,
excluding contract gains are up 1.0%.
This year has again seen the continuing trend experienced over the past decade
of value growth in newspapers, with price increases outstripping volume
declines.
Magazine revenues of £541.2m are up 1.8% on 2006 benefiting from additional
business won from the distributor Frontline in April 2006 and contract gains in
Derby in June 2006.
Excluding these contract gains like for like(5) magazine revenues are down 3.6%
on last year. Across our four categories of magazine revenues we have seen
growth in weekly magazines and sticker collection revenues offset by declines in
monthly magazines and partworks.
OPERATING PROFIT
Aug 2007 Aug 2006 Fav/(Adv)
£m £m %
----------- ----------- -------------
Gross profit 125.2 129.1 (3.0%)
Gross margin 10.2% 10.7%
Operating costs (89.2) (96.1) 7.2%
---------------------- ----------- ----------- -------------
Underlying operating profit 36.0 33.0 9.1%
Non-recurring items 5.4 1.3
---------------------- ----------- ----------- -------------
Operating profit 41.4 34.3 20.7%
---------------------- ----------- ----------- -------------
Gross margin has reduced from 10.7% to 10.2% owing to the effect of contract
renewals finalised during the prior year.
Operating costs reduced by £6.9m compared to 2006, despite absorbing additional
costs incurred as a result of becoming an independent plc. We have continued to
drive our cost saving programme at pace knowing that we were facing tough gross
margin pressures.
We have made significant savings from the consolidation of processes such as
newspaper copy marketing and call centre operations, which were previously
carried out in all depots but which now operate from regional centres of
excellence.
Further savings were made through the consolidation of our depot network in
areas such as Plymouth, High Wycombe and Stoke.
We have also made considerable savings in overtime and agency costs through
better management of product flow.
The cost reductions have contributed to an improvement in underlying operating
profit of 9.1% to £36.0m (2006: £33.0m).
Operating profit has improved by 20.7% to £41.4m (2006: £34.3m). Operating profit
has further benefited from a non-recurring item, being an actuarial curtailment
credit of £5.4m in 2007 relating to the closure of the defined benefit pension
scheme. Operating profit in 2006 included a £1.3m one-off profit on the disposal
of freehold properties.
PROFIT BEFORE AND AFTER TAX
Underlying Proforma Increase
Aug 2007 Aug 2006 %
£m £m
----------- ----------- -----------
Operating profit 36.0 33.0 9.1%
Finance Costs (5.0) (5.0)
------------------------ ----------- ----------- -----------
Profit before tax 31.0 28.0 10.7%
Tax (6.1) (5.6)
------------------------ ----------- ----------- -----------
Profit after tax 24.9 22.4 11.2%
------------------------ ----------- ----------- -----------
Underlying profit before tax for 2007 was £31.0m, an increase of 10.7% on the
2006 proforma result.
Proforma results for 2006 exclude the profit on the sale of our Newcastle and
Durham properties of £1.3m and includes additional finance costs of £2.7m to
reflect comparable debt and pension positions post demerger.
The tax charge for the year of £6.1m represents an effective tax rate on
underlying profit of 20%, resulting from the release of a prior year provision of £3.9m.
This is due to the successful conclusion of some prior year matters with HMRC.
Over time we would expect the effective tax rate to trend back to the standard rate of
corporation tax for the UK.
EARNINGS PER SHARE AND DIVIDEND PER SHARE
Underlying Proforma
Aug Aug Aug Aug
2007 2006 2007 2006
--------- --------- ------- -------
Profit after tax from continuing
operations (£m) 24.9 22.4 28.7 25.6
Basic number of shares (millions) 177.8 172.2 177.8 172.2
Basic EPS 14.0p 13.0p 16.1p 14.9p
Dividend per share 6.4p 6.0p 6.4p 6.0p
The increase in EPS has been driven by improved underlying profits. The weighted
average number of shares increased by 5.6m due to the early vesting of some
share schemes and the allocation of share trust assets, both as a direct result
of the demerger.
The Board has proposed a final dividend of 4.3p per ordinary share, which
represents a 7.5% increase on the 4.0p allocation of the old WH Smith PLC
dividend. The dividend will be paid on 8 February 2008 to shareholders
registered at the close of business on 18 January 2008.
Total dividend per share for the year is 6.4p, an increase of 6.7% on last year.
FREE CASH FLOW
Underlying Year to
Year to 31 Aug 2006
31 Aug 2007
£m £m
------------ ----------
Operating profit 36.0 34.3
Working capital 6.4 (8.1)
Depreciation & Amortisation 5.5 6.6
Non cash items 0.5 1.2
Capital expenditure (3.2) (2.1)
Tax (8.1) (4.4)
Net Interest paid (3.8) -
Additional pension deficit funding (6.2) (7.0)
--------------------------------- ------------ ----------
Free cash flow 27.1 20.5
--------------------------------- ------------ ----------
We have generated £27.1m of free cash flow in the year to 31 August 2007.
Tight working capital management, together with some timing benefits added £6.4m
of cash.
Since investing £23m on our IT infrastructure in the period to 2001, the
business has not required significant further investment. During this year,
total capital expenditure of £5.4m, of which £3.2m was financed by cash and
£2.2m by new finance leases, has matched depreciation of £5.5m.
There was a cash outflow in the year of £10.4m (2006: Inflow £3.6m) arising from
a one-off payment into the pension fund of £25.0m, a dividend payment of £10.9m
and repayment of finance lease obligations of £1.6m that offset the free cash
flow of £27.1m.
NET DEBT
Year to
31 Aug 2007
£m
------------
Free cash flow 27.1
Dividend (10.9)
New finance leases (2.2)
--------------------------------- ------------
Decrease in net debt before one-off pension payment 14.0
--------------------------------- ------------
Opening net debt (41.7)
One-off pension payment (25.0)
------------
Proforma opening net debt (66.7)
Decrease in net debt before one-off pension payment 14.0
--------------------------------- ------------
Closing net debt (52.7)
--------------------------------- ------------
Net debt of £52.7m has reduced by £14.0m compared to the proforma net debt at 31
August 2006. The £14.0m reduction arises from a positive free cash flow, offset
by dividend payments and new finance leases.
The total movement in net debt of £11.0m comprises a £10.4m cash outflow and a
net movement in finance leases of £0.6m.
PENSION
Year to
31 Aug 2007
£m
------------
Opening IAS 19 deficit (49.0)
One off contribution 25.0
Additional funding 5.4
Charge to income statement and other cash movement (0.4)
Actuarial gains 23.5
Plan curtailment 5.4
Effect of IAS 19 asset cap (9.9)
--------------------------------- ------------
Closing IAS 19 balance -
--------------------------------- ------------
The Smiths News defined benefit pension deficit under IAS 19 of £49.0m at 31
August 2006 now stands at zero. There have been a number of significant
movements during the year. On 1 September 2006, a one-off contribution of £25.0m
was made to the Smiths News section of the Pension Trust and we have paid the
first of five additional payments of £5.4m per annum as agreed with the
Trustees.
Actuarial gains of £23.5m were achieved in the year, due to the out-performance
of the equity call options and the widening spread between corporate bond yields
and the swap yields underlying the LDI assets. The scheme was closed to future
service accrual in May 2007, resulting in an actuarial curtailment credit of
£5.4m. It is uncertain whether the resultant surplus after these movements can
ever be realised by the Company, therefore an asset cap of £9.9m has been
applied to result in a zero funding position under IAS 19 at 31 August 2007.
Group Income Statement for the year ended 31 August 2007
2007 2006
£m Note Underlying* Non-recurring Total Underlying* Non-recurring Total
items** items**
----- --------- -------- ------- -------- -------- -------
Continuing operations
Revenue 1,232.4 - 1,232.4 1,210.6 - 1,210.6
------------- ----- -------- -------- -------- ------- -------- -------
Operating profit 2 36.0 5.4 41.4 33.0 1.3 34.3
Investment revenues 4 0.7 - 0.7 - - -
Finance costs 5 (5.7) - (5.7) (2.3) - (2.3)
------------- ----- -------- -------- -------- ------- -------- -------
Profit before tax 31.0 5.4 36.4 30.7 1.3 32.0
Income tax expense 6 (6.1) (1.6) (7.7) (6.4) - (6.4)
------------- ----- -------- -------- -------- ------- -------- -------
Profit after tax from
continuing operations 24.9 3.8 28.7 24.3 1.3 25.6
Profit for the year from
discontinued operations - - - 32.1 - 32.1
------------- ----- -------- -------- -------- ------- -------- -------
Profit for the year 24.9 3.8 28.7 56.4 1.3 57.7
------------- ----- -------- -------- -------- ------- -------- -------
Earnings per share
From continuing operations
Basic 8 16.1p 14.9p
Diluted 8 15.8p 14.8p
From continuing and discontinued operations
Basic 8 16.1p 33.5p
Diluted 8 15.8p 33.3p
---------------------------------------------------------------------------------------------------------
Non GAAP Measures
Equity dividends per share 7 6.4p 6.0p
---------------------------------------------------------------------------------------------------------
*Before non-recurring items described below.
**Non-recurring items include an actuarial curtailment credit on the pension
scheme in 2007 and a profit on property disposals in 2006 as set out in
note 2.
Group Balance Sheet at 31 August 2007
£m Note 2007 2006
---------- ----------- ----------
Non-current assets
Intangible assets 3.4 2.6
Property, plant and equipment 18.2 19.2
Deferred tax assets 6.0 15.6
Interest in associate 0.2 0.3
Derivative financial instruments 0.9 -
------------------------- ----------- ----------
28.7 37.7
----------- ----------
Current assets
Inventories 11.9 12.2
Available for sale investments 1.1 -
Trade and other receivables 53.0 70.0
Cash and cash equivalents 0.4 10.8
------------------------- ----------- ----------
66.4 93.0
----------- ----------
Total assets 95.1 130.7
------------------------- ----------- ----------
Current liabilities
Trade and other payables (108.0) (118.5)
Current tax liabilities (8.8) (14.6)
Obligations under finance leases (1.5) (1.3)
Bank loans and other borrowings (5.0) -
------------------------- ----------- ----------
(123.3) (134.4)
----------- ----------
Non-current liabilities
Bank loans and other borrowings (44.6) (49.6)
Retirement benefit obligation 3 - (49.1)
Deferred tax liabilities (1.6) (1.7)
Long-term provisions (0.5) (0.7)
Obligations under finance leases (2.0) (1.6)
Other non-current liabilities (0.5) (0.9)
------------------------- ----------- ----------
(49.2) (103.6)
----------- ----------
Total liabilities (172.5) (238.0)
------------------------- ----------- ----------
Total net liabilities (77.4) (107.3)
------------------------- ----------- ----------
Equity
Called up share capital 9.1 9.1
ESOP reserve (3.7) (7.1)
Other reserve (280.1) (280.1)
Hedging reserve 0.9 -
Retained earnings 196.4 170.8
------------------------- ----------- ----------
Total equity (77.4) (107.3)
------------------------- ----------- ----------
Group Cash Flow Statement for the year ended 31 August 2007
£m Note 2007 2006
------- ---------- ----------
Net cash inflow from operating activities 9 9.0 105.3
------------------------------ ------- ---------- ----------
Investing activities
Interest received 0.7 1.6
Loan repaid by associate 0.1 -
Proceeds on disposal of property, plant and equipment - 10.5
Proceeds on settlement of loan notes - 11.3
Non-operating disposal costs - (3.0)
Net cash in subsidiaries disposed - (66.4)
Purchase of property, plant and equipment (1.4) (26.4)
Purchase of intangible assets (1.8) (5.0)
------------------------------ ------- ---------- ----------
Net cash used in investing activities (2.4) (77.4)
------------------------------ ------- ---------- ----------
Financing activities
Interest paid (4.5) (7.3)
Dividend paid (10.9) (25.0)
Repayments of obligations under finance leases (1.6) (5.6)
New bank loans raised (net of financing costs) - 49.2
Repayments of borrowings - (76.6)
Derivative cash movements - (0.5)
Issue of shares to satisfy employee share - 5.8
schemes
Repurchase of equity component of 'C' shares - (3.3)
------------------------------ ------- ---------- ----------
Net cash used in financing activities (17.0) (63.3)
------------------------------ ------- ---------- ----------
Net (decrease) / increase in cash and cash equivalents - (10.4) 3.6
continuing operations
Net increase in cash and cash equivalents - discontinued - 27.4
operations
Net cash in subsidiaries disposed - discontinued - (66.4)
operations ------- ---------- ----------
------------------------------
Net decrease in cash and cash equivalents in year (10.4) (35.4)
Opening net cash and cash equivalents 10.8 46.2
------------------------------ ------- ---------- ----------
Closing net cash and cash equivalents 0.4 10.8
------------------------------ ------- ---------- ----------
Group Statement of Recognised Income and Expense for the year ended 31 August 2007
£m Note 2007 2006
------ --------- ---------
Exchange differences arising on translation of foreign operations - (2.2)
Gain / (loss) on cash flow hedges 0.9 (2.0)
Actuarial gains / (losses) on defined benefit pension scheme 3 23.5 (32.8)
Effect of asset limit on defined benefit pension scheme 3 (9.9)
UK deferred tax attributable to defined benefit pension scheme liabilities (8.2) 7.3
UK current tax attributable to the additional defined benefit pension scheme
contributions 3.9 4.0
-------------------------------- ------ --------- ---------
Net income/(expense) recognised directly in equity 10.2 (25.7)
Profit for the year 28.7 57.7
-------------------------------- ------ --------- ---------
Total recognised income and expense for the year 38.9 32.0
-------------------------------- ------ --------- ---------
Total recognised income and expense for the year is fully attributable to the
equity holders of the parent company.
Notes to the financial statements
1. Segmental analysis of results
Revenue and profit before tax are derived from the one principal activity of
the group, being the wholesaling of newspapers and magazines. The group operates
solely in the UK.
Revenue for the year to 31 August 2006 includes £115.9m of sales to WH Smith
PLC. Prior to the demerger these were treated as inter-company revenue and
therefore excluded from revenue in the published accounts for the year.
2. Operating profit
Non-recurring items included within operating profit from continuing operations
amounted to £5.4m (2006: £1.3m). These are:
2007: Actuarial curtailment credit of £5.4m included within administrative
expenses arising on the closure of the defined benefit pension scheme, see note
3. There is an associated deferred tax impact of £1.6m which has been
separately disclosed.
2006: One-off property profits of £1.3m included within administrative expenses
arising on the disposal of freehold properties.
£m 2007 2006
----------- -----------
Revenue 1,232.4 1,210.6
Cost of sales (1,107.2) (1,081.5)
-------------------------------- ----------- -----------
Gross profit 125.2 129.1
Distribution costs (60.2) (63.2)
Administrative expenses (23.6) (31.6)
-------------------------------- ----------- -----------
Operating profit 41.4 34.3
-------------------------------- ----------- -----------
The operating profit is stated after charging:
£m 2007 2006
----------- -----------
Cost of inventories recognised as an expense 1,059.4 1,034.7
Depreciation and amounts written off property, plant & equipment 4.5 4.1
Amortisation of intangible assets 1.0 2.5
Net operating lease charges
• land and buildings 5.2 5.2
• equipment and vehicles 2.5 2.9
Staff costs 73.1 76.5
Auditors' remuneration (see below) 0.5 2.2
-------------------------------- ----------- -----------
Fees payable in the continuing & discontinued operations to Deloitte & Touche
LLP, the Group's auditors, included in the income statement related to:
Audit Fees 0.1 0.3
Non-audit fees 0.4 1.9
-------------------------------- ----------- -----------
0.5 2.2
----------- -----------
Fees payable to Deloitte & Touche LLP, the Group's auditors, included in the
income statement relating to audit fees amount to £0.1m (2006: £0.3m),
consultancy services £0.4m (2006: £nil) and fees related to further assurance
services associated with the demerger of WH Smith PLC £nil (2006: £1.9m).
3. Retirement benefit obligation
Pension arrangements for employees are operated through a defined benefit scheme
WH Smith Pension Trust ('Pension Trust'), and a defined contribution scheme, WH
Smith Retirement Savings Plan. The most significant is the Pension Trust which
is described in note 3 (a). The scheme is independent of the Company and is
administered by a Trustee. The Trustee of the Pension Trust has extensive powers
over the pension plan's arrangements, including the ability to determine the
levels of contribution.
On the date of demerger, 31 August 2006, the assets and liabilities of the
Pension Trust and the WH Smith Retirement Savings Plan were split between Smiths
News PLC and WH Smith PLC by way of a 'sectionalisation'. The Smiths News
section only contains the accounts of members who are or were employed by Smiths
News. There is no cross-subsidy or cross-guarantee between the sections of the
Pension Trust.
The assets and liabilities of the Pension Trust were allocated to the Smiths
News section in proportion so as to reflect the related liabilities of active,
deferred, pensioner and orphan members belonging to Smiths News.
The amounts recognised in the balance sheet within non-current liabilities in
relation to these plans are as follows:
£m 2007 2006
------------ -----------
Present value of the obligation (311.3) (334.0)
Fair value of plan assets 321.2 285.0
Amounts not recognised due to asset limit (9.9) -
-------------------------------- ------------ -----------
Deficit - (49.0)
-------------------------------- ------------ -----------
Retirement medical benefit liability - (0.1)
-------------------------------- ------------ -----------
Retirement benefit obligation recognised in the balance sheet - (49.1)
------------ -----------
--------------------------------
An amount of £9.9m has not been recognised in the balance sheet due to the
effect of IAS 19 ('Employee Benefits') paragraph 58b, as it is uncertain whether
this surplus can ever be realised by the Company.
(a) Defined benefit pension scheme
The Pension Trust
On 1 September 2006, a one-off contribution of £25.0m was made to the Pension
Trust by the Group. In addition, the Group has paid £5.4m to the Pension Trust
over the course of the year. As agreed with the Trustees, the Group will make
four further payments of this amount over the next four years.
The Group announced its proposal to change the future benefit structure of the
Pension Trust on 9 January 2007 and issued details of the new arrangements for
consultation. Following a period of consultation the Trust closed to future
service accrual from 1 May 2007. Accrued benefits will be linked to RPI growth
each year (capped at 5 per cent). The closure to future accrual will not affect
the pensions of those who have retired or the deferred benefits of those who
have left service or opted out before 1 May 2007. This amendment to the scheme
has created a £5.4m actuarial curtailment credit included within operating
profit.
A full actuarial valuation of the Scheme is carried out every three years with
interim reviews in the intervening years. The latest full actuarial valuation of
the Pension Trust was carried out as at 31 March 2006 by independent actuaries,
Mercer Human Resource Consulting, using the projected unit basis. On an ongoing
basis, the actuarial gross defined benefit pension deficit at 31 March 2006 was
approximately £63m (approximately £44m net of related deferred taxes) for the
Smiths News PLC section of the Pension Trust. The ongoing deficit was
greater than the IAS19 deficit primarily due to the different assumptions and
calculation methodologies.
The Pension Trust Trustee has adopted a Liability Driven Investment 'LDI' policy
in order to substantially reduce the volatility in the underlying investment
performance and reduce the risk of a significant increase in the deficit in the
fund. The assets are invested such that they are expected to alter in value in
line with changes in the pension liability caused by changes in interest and
inflation.
The key features of the investment policy are:
• 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 represent a notional exposure to
underlying equities of some £98m.
The valuation of the defined benefit pension scheme used for the account
disclosures are based upon the most recent valuation. Scheme assets are stated
at their market value at the relevant reporting date.
The principal long-term assumptions used to calculate scheme liabilities under
IAS 19 are:
% 2007 2006
------------- --------------
Rate of increase in salaries 4.22 4.00
Rate of increase in pension payments and deferred 3.22 3.00
pensions
Discount rate 5.69 5.10
Inflation assumptions 3.22 3.00
--------------------------- ------------- --------------
The amounts recognised in the income statement for continuing and discontinued operations
were as follows:
£m 2007 2006
------------- --------------
Current service cost (2.1) (9.5)
Interest cost (16.9) (46.9)
Expected return on scheme assets 15.7 42.4
Plan curtailment 5.4 -
--------------------------- ------------- --------------
2.1 (14.0)
------------- --------------
The charge for the current service costs and the actuarial curtailment credit
has been included within administrative costs.
Movements in the present value of the defined benefit scheme obligation in the
year were as follows:
£m 2007 2006
------------- -------------
At 1 September (334.0) (967.6)
Current service cost (2.1) (9.5)
Interest cost (16.9) (46.9)
Actuarial gains / (losses) 21.9 (16.6)
Benefits paid 14.4 32.8
Plan curtailment 5.4 -
Subsidiaries disposed - 673.8
--------------------------- ------------- -------------
As at 31 August (311.3) (334.0)
--------------------------- ------------- -------------
Movements in the fair value of defined benefit scheme assets in the year were as
follows:
£m 2007 2006
------------- -------------
At 1 September 285.0 871.5
Expected return on scheme assets 15.7 42.4
Net actuarial gains / (losses) 1.6 (16.2)
Contributions 33.3 28.4
Benefits paid (14.4) (32.8)
Subsidiaries disposed - (608.3)
--------------------------- ------------- -------------
As at 31 August 321.2 285.0
--------------------------- ------------- -------------
An analysis of the defined benefit scheme assets at the balance sheet date is
detailed below:
£m 2007 2006
------------- -------------
Cash 315.8 274.9
Inflation swaps (13.8) (6.9)
Equity call options 19.2 17.0
--------------------------- ------------- -------------
321.2 285.0
------------- -------------
The actual return on plan assets was £17.3m (2006: £26.2m).
The expected rate of return on these investments, calculated as a weighted
average of the expected return on the LDI fund and the equity call options, was
5.68 per cent at 31 August 2007 (5.01 per cent at 31 August 2006).
The mortality assumptions (in years) underlying the value of the accrued
liabilities are:
Male Female
------------- -------------
Life expectancy at age 65
Member currently aged 65 20.1 22.9
Member currently aged 45 21.4 24.1
--------------------------- ------------- -------------
Life expectancy at age 60
Member currently aged 60 24.9 27.7
Member 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 the
table have been increased by 25% to reflect the Trust's actual experience.
The history of experience adjustments is as follows:
£m 2007 2006 2005 2004 2003
------- ------- ------- ------- -------
Present value of defined benefit obligation (311.3) (334.0) (967.6) (883.0) (846.0)
Fair value of scheme assets 321.2 285.0 871.5 678.0 631.0
Amounts not recognised due to asset limit (9.9) - - - -
------------------------- ------- ------- ------- ------- -------
Deficit in the scheme - (49.0) (96.1) (205.0) (215.0)
------------------------- ------- ------- ------- ------- -------
Experience adjustments on scheme liabilities
Amount (£m) 21.9 (16.6) (114.7)
Percentage of scheme liabilities 7% (5%) (12%)
------------------------- ------- ------- ------- ------- -------
Experience adjustments on scheme assets
Amount (£m) 1.6 (16.2) 70.8
Percentage of scheme assets 1% (6%) 8%
------------------------- ------- ------- ------- ------- -------
(b) Defined contribution pension scheme
The pension cost charged to income for the defined contribution scheme, WH Smith
Retirement Savings Plan, amounted to £0.7m for the year ended 31 August 2007
(2006: £3.0m).
(c) Disposals
Year ended 31 August 2006
WH Smith PLC
On 31 August 2006, the assets and liabilities of the Pension Trust were divided
into two different sections (the Smiths News PLC and the WH Smith PLC section).
The gross deficit attributable to WH Smith PLC at the date of disposal was
£65.5m.
On demerger, the post retirement medical benefits of £0.1m were transferred to
WH Smith PLC.
The amount included in non-current liabilities for the WH Smith PLC portion of
the defined benefit scheme is as follows:
£m 2007 2006
----------- -----------
Present value of defined benefit obligation - (673.8)
Fair value of scheme assets - 608.3
--------------------------------- ----------- -----------
Deficit - (65.5)
--------------------------------- ----------- -----------
4. Investment revenues
£m 2007 2006
-------------- -------------
Interest on bank deposits 0.1 -
Interest received on prior year tax overpayment 0.6 -
--------------------------- -------------- -------------
0.7 -
-------------- -------------
5. Finance costs
£m 2007 2006
-------------- -------------
Interest on bank overdrafts and loans 4.3 0.2
Interest payable on finance leases 0.2 0.3
Net charge on pension schemes (Note 3) 1.2 1.8
--------------------------- -------------- -------------
5.7 2.3
-------------- -------------
6. Income tax expense
£m 2007 2006
-------- -------------
Current tax 10.6 10.5
Adjustment in respect of prior year UK corporation tax (3.9) (3.6)
-------------------------------- -------- -------------
Total current tax charge 6.7 6.9
Deferred tax - current year (0.6) (0.5)
Deferred tax - non-recurring items 1.6 -
-------------------------------- -------- -------------
Tax on profit on continuing activities 7.7 6.4
Discontinued operations - 11.8
-------------------------------- -------- -------------
Total tax on profit 7.7 18.2
-------------------------------- -------- -------------
Effective tax rate on continuing activities 21% 20%
The effective tax rate of 21% benefits from the adjustment in respect of prior
year UK corporation tax. Over time it is expected that the effective tax rate
will trend back to the standard rate of UK corporation tax.
Reconciliation of the tax charge
£m 2007 2006
-------- -------------
Profit before tax: continuing operations 36.4 32.0
Profit before tax: discontinued operations - 43.9
-------------------------------- -------- -------------
Total 36.4 75.9
-------- -------------
Tax on profit at the standard rate of UK corporation tax 30% 10.9 22.8
Differences in connection with discontinued operations - (1.4)
Permanent differences 0.7 0.4
Adjustment in respect of prior year UK corporation tax (3.9) (3.6)
-------------------------------- -------- -------------
Total tax charge 7.7 18.2
-------------------------------- -------- -------------
7. Dividends
Amounts recognised as distributions to equity shareholders in the year are as
follows:
£m 2007 2006
--------- ---------
Final dividend for the year ended 31 August 2006 of 4.0p (2005:9.2p) per share 7.1 15.8
Interim dividend for the year ended 31 August 2007 of 2.1p (2006:5.1p) per share 3.8 8.8
--------- ---------
10.9 24.6
'B' share dividend paid on capital reorganisation - 0.1
'C' share dividend paid on capital reorganisation - 0.3
------------------------------------ --------- ---------
10.9 25.0
--------- ---------
--------- ---------
Dividend in specie relating to the demerger of WH Smith PLC - 168.0
--------- ---------
------------------------------------
On demerger, Smiths News PLC paid a dividend in specie of £168.0m representing the
net assets demerged.
The proposed final dividend of 4.3p is subject to approval by shareholders at
the Annual General Meeting and has not been included as a liability in these
financial statements. The proposed dividend will be paid on 8 February 2008 to
shareholders on the register at close of business on 18 January 2008.
8. Earnings per share
2007 2006
Continuing Continuing Discontinued Total
-------- -------- --------- --------
£m £m £m £m
-------- -------- --------- --------
Profit for the financial year 28.7 25.6 32.1 57.7
-------- -------- --------- --------
Number m Number m Number m Number m
-------- -------- --------- --------
Weighted average number of shares in issue 182.9 181.1 181.1 181.1
Shares held by ESOP (weighted) (5.1) (8.9) (8.9) (8.9)
Weighted average number of shares in issue
for basic earnings per share 177.8 172.2 172.2 172.2
Shares issuable (weighted) 3.7 1.3 1.3 1.3
Weighted average number of shares
in issue for diluted earnings per share 181.5 173.5 173.5 173.5
-------- -------- --------- --------
Pence Pence Pence Pence
-------- -------- --------- --------
Basic earnings per share 16.1 14.9 18.6 33.5
Diluted earnings per share 15.8 14.8 18.5 33.3
----------------------- -------- -------- --------- --------
9. Net cash inflow from operating activities
£m 2007 2006
---------- ----------
Operating profit from continuing operations 41.4 34.3
Operating profit from discontinued operations - 52.4
---------- ----------
41.4 86.7
Exceptional items(6) - 7.0
Adjustment for pension funding (11.6) (18.9)
Depreciation of property, plant and equipment 4.5 34.5
Loss / (profit) on sale of property, plant and equipment 0.1 (6.0)
Impairment of property, plant and equipment - 2.6
Amortisation of intangible assets 1.0 6.8
Non cash items 0.5 8.5
Decrease in inventories 0.3 7.3
Decrease / (Increase) in receivables 17.0 (6.7)
(Decrease) / Increase in payables (10.9) 1.3
Income taxes paid (8.1) (6.0)
Decrease in provisions (0.2) (3.3)
----------------------------------- ---------- ----------
Net cash inflow from operating activities before exceptional items 34.0 113.8
One-off pension funding payment (25.0) -
Cash outflow relating to exceptional(6) item (PRMB settlement) - (2.1)
Cash outflow relating to exceptional(6) item (Demerger costs) - (6.4)
---------- ----------
-----------------------------------
Net cash inflow from operating activities 9.0 105.3
----------------------------------- ---------- ----------
(6) Exceptional items are material items of income or expense that are disclosed
separately due to their nature or amount.
10. Preparation of the Preliminary Announcement
(a) Basis of preparation
The preliminary announcement for the 12 months to 31 August 2007 has been
prepared on the basis of the accounting policies set out in the accounting
policies section of the Smiths News PLC Annual Report and Accounts 2006.
(b) Preliminary announcement
The financial information for the 12 months to 31 August 2007 and the 12 months to
31 August 2006 does not comprise statutory accounts for the purpose of Section
240 of the Companies Act 1985 and has been extracted from the Company's
consolidated accounts for the year to 31 August 2007. The statutory accounts for
Smiths News PLC for the 12 months to 31 August 2006 have been filed with the
Registrar of Companies and those for the 12 months to 31 August 2007 will be
filed following the Company's annual general meeting. The auditors' reports on
the accounts for the 12 months to 31 August 2007 were unqualified and did not
include a statement under Section 237 (2) or (3) of the Companies Act 1985.
Whilst the financial information included in this preliminary announcement has
been prepared in accordance with the recognition and measurement criteria of
IFRSs, this announcement does not itself contain sufficient information to
comply 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 Statement
will be posted to shareholders in December 2007.
This information is provided by RNS
The company news service from the London Stock Exchange
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