Final Results

Smith WH PLC 16 October 2003 16 October 2003 WH SMITH PLC PRELIMINARY RESULTS ANNOUNCEMENT FOR THE TWELVE MONTHS ENDED 31 AUGUST 2003 Total sales down 1% to Â£2.9bn â€¢ UK Retail sales down 2% to Â£1,476m â€¢ USA Travel Retail sales down 16% to Â£181m â€¢ ASPAC Retail sales up 9% to Â£150m â€¢ News Distribution sales up 1% to Â£1,080m â€¢ Publishing sales up 5% to Â£144m Profit before tax, exceptional items and goodwill amortisation down 13% to Â£102m â€¢ UK Retail profits down 7% to Â£90m â€¢ USA Travel Retail trading losses held flat at Â£16m â€¢ ASPAC Retail profits flat at Â£5m â€¢ News Distribution profits up 10%, on a comparable basis, to Â£32m â€¢ Publishing profits flat at Â£19m â€¢ FRS 17 pension expense increased by Â£11m Exceptional items before tax Â£46m (primarily Â£35m asset impairment in USA Travel Retail and Â£12m surplus property provision) Profit before tax down 38% to Â£52m EPS before exceptional items and goodwill amortisation down 10% to 29.1p EPS down 51% to 9.4p Strong cash generation with free cash inflow of Â£61m (Â£38m in prior year) Final dividend maintained at 13p (total dividend for the year unchanged at 19p) GROUP CHIEF EXECUTIVE'S COMMENTS Commenting on the results, Richard Handover, Group Chief Executive said: 'UK Retail has had a difficult year following a disappointing Christmas trading period. In the second half we have seen a good performance in the books category and our stationery and news & express categories have traded satisfactorily. However, as previously disclosed, weak sales within the entertainment category, reflecting the challenging music market, continued throughout the year and severely restricted overall profitability. 'We are pleased to have announced the sale of our US Airport and Hotel retailing businesses on 18 September. As well as being significantly earnings enhancing, the disposals allow us to give greater management attention to our core UK Retail business. 'News Distribution continued its recovery driven by a focus on delivering improved customer service and further efficiencies in all aspects of the business. 'Hodder Headline maintained its profits despite its educational business being adversely affected by the well publicised funding shortfalls in schools. Best selling titles included 'Maura's Game' by Martina Cole and 'The Kindness of Strangers' by Kate Adie. 'The Group's cash position and balance sheet remain strong. 'This year has started the way we finished last year, with extremely testing trading conditions. As we enter the all important Christmas trading period our markets remain intensely competitive. However we believe that we have strengthened our offer in terms of product, value and advertising compared to last year.' Enquiries: WH Smith PLC Richard Handover - Group Chief Executive 020 7409 3222 John Warren - Group Finance Director 020 7409 3222 Mark Boyle - Investor Relations 020 7514 9630 Louise Evans - Media Relations 020 7514 9624 Brunswick Timothy Grey 020 7404 5959 CHIEF EXECUTIVE'S REVIEW UK RETAIL Overall, in the UK Retail business, sales were down by 2% and profits were down by 7%. Despite a more promotional stance in the second half of the year, the recovery in sales growth was slower than anticipated due to a tougher competitive environment, exacerbated by the unusually hot weather over the summer period and the impact of the Iraq war on our UK Travel Retail business. Gross margin improved by 1 percentage point helped by the sourcing of increased levels of stationery product from Asia. In the High Street business we saw a strong rebound in book sales in the second half with like for like ('lfl') sales up 11% versus a fall in lfl sales of 4% in the first half. Excluding the Harry Potter release, lfl sales in books in the second half were up 5%, although gross margin fell by 3 percentage points as a result of discounting on Harry Potter and focused book promotions. Lfl sales of entertainment product fell 6% in the second half, continuing the trend of the first half. Gross margin in entertainment fell by 3 percentage points, primarily due to competitive pricing of music CDs. Despite the overall weak performance in entertainment, we maintained our strong growth of DVD sales (up 68% versus last year). Sales in the stationery category were flat versus the previous year. Sales of our 'Core Essentials' and 'Fashion' stationery ranges were up 11% lfl and 8% lfl respectively. The overall flat performance reflects a fall in sales of 'Toys and Games'. Gross margin improved by 2 percentage points which reflects the better buying terms on increased volume of product sourced directly from Asia, now accounting for 10% of total stationery sales. In the News & Express category lfl sales fell by 3%. This was largely due to a fall in the sale of phonecards, which are a low margin product. As a result, the gross margin in the News & Express category increased by 3 percentage points. We continue to invest significant amounts of capital in the High Street business. Average retail space was increased by 1% and this rate of expansion will continue in 2003/04 with a further 9 'edge of town' format stores of which 5 will be open in time for Christmas 2003. On 1 August we opened our concept store in Guildford to trial a new mix of space for our core categories, new range positionings, new products, a new store environment and new service levels. Initial results are encouraging. The UK Travel Retail business had a good first half performance with lfl sales up 4%. Lfl sales in the second half were up by 2%. We experienced a fall in sales at international airports in the third quarter following the SARS outbreak but sales recovered in the fourth quarter. ASPAC RETAIL ASPAC Retail has traded well, particularly in view of the disruption caused to the travel stores following the outbreak of SARS in the second half. We have commenced the implementation of a new systems platform, SAP, for our Australian business and will draw on our experiences in New Zealand where SAP has already been successfully implemented. The investment in SAP will provide a solid base for the continued growth of the Australian business. USA TRAVEL RETAIL Despite having taken further action to control the fixed cost base of the business, the USA Travel Retail business continued to incur material losses as a result of the continued slowdown in the US economy. The Iraq war and the outbreak of SARS in the second half compounded an already weak trading performance. We have subsequently agreed to sell the Airport business to the Hudson Group and the Hotel business to former management. PUBLISHING Publishing achieved a satisfactory result on the back of three outstanding years. The result has been affected by a more conservative approach towards providing for unearned authors' advances, and the educational business suffering from the well-publicised funding shortfalls in schools. Given this context, the underlying Hodder Headline business performed robustly, with an outstanding performance from the Headline division. NEWS DISTRIBUTION News Distribution continued its recovery. Good magazine sales, up 4% on the previous year as a result of the continuing interest in the celebrity market, combined with operational efficiencies and tight cost control, contributed to the increase in profit. The basis of the business' long term health is the delivery of improved service to both retail customers and publisher clients. Increased transparency of performance through the publication of half yearly customer satisfaction survey results, the first ever in the industry, has helped to drive up customer service standards. To further improve service levels, we have commenced a programme of upgrading our News warehouse network. During the year we resited our major newspaper distribution centre at Dalston to a new purpose built site at Hornsey. A further three resites are planned for the current financial year. We also invested Â£2m during the year refurbishing the existing network. This focus on improved customer service, together with continued efficiencies in all aspects of the business, assisted by our industry-leading SAP systems platform, means that the business is well placed to continue its steady profits growth. DIVIDEND Despite the fall in Group profits in 2003, the Group's cash flow and balance sheet remain strong. The Board is therefore recommending that the dividend should be maintained. EVENTS OCCURRING AFTER THE YEAR END On 18 September, we announced the sale of our US Airport and Hotel retailing businesses for Â£41m and Â£8m respectively. This marks a complete withdrawal from the US market where, prior to the terrorist attacks of 11 September and the recent subdued economic climate, WHSmith operated profitably for sixteen years. The sales are subject to obtaining landlord consent on the assignment of the various airport and hotel leases. We hope to complete on the sale of these businesses in the near future. On completion the deals will be significantly earnings enhancing. CURRENT TRADING In the 6 weeks to 11 October 2003, total UK Retail lfl sales are flat. In the USA Travel business, lfl sales are up 3%. ASPAC Retail's lfl sales for the period are up 7%. News Distribution's comparable sales are up 4% and Publishing's sales are up 12%. FINANCIAL REVIEW OVERVIEW The Group delivered a mixed set of results with overall profits falling due to a disappointing performance from UK Retail and a material increase in the charge for pensions as a result of the deficit in the Company's defined benefit pension schemes. ASPAC Retail traded robustly despite the severe impact on sales of SARS. Publishing had a creditable performance although was held back by higher levels of provisioning and the impact of the schools funding crisis towards the end of the year. News Distribution traded well, driven by cost efficiencies across the business. The USA Travel Retail businesses had a year of restructuring, although economic weakness and the Iraq war suppressed overall recovery. In September 2003, we announced the separate sales of the airport and hotel divisions of the USA Travel Retail business. The results for this business in the year are shown as part of continuing operations, but will become discontinued following completion of both transactions which are expected to be in the first half of the current financial year. Earnings per share were 9.4p (2002 - 19.1p) whilst adjusted earnings per share before exceptional items and amortisation of goodwill were 29.1p (2002 - 32.5p). Despite the disappointing profit performance in the year, cash generation across the Group was strong, with Â£61m of free cash flow, and the balance sheet remains healthy. Trading results The trading results can be summarised as follows: Â£m 2003 2002 Growth % LfL Sales Growth % _________________________________ _______ _______ ____________ _________ Sales UK Retail 1,476 1,501 (2%) (1%) USA Travel Retail 181 216 (16%) 1% ASPAC Retail 150 138 9% (2%) _________________________________ _______ _______ ____________ _________ Total Retailing 1,807 1,855 (3%) (1%) Publishing 1, 2 144 138 5% 2% WHSmith News Distribution 1, 3 1,080 1,069 1% 2% Internal sales (131) (126) _________________________________ _______ _______ ____________ _________ Total 2,900 2,936 (1%) 0% _________________________________ _______ _______ ____________ _________ (1) includes sales to other WHS businesses (2) includes Helicon sales of Â£1m in prior year 3 lfl sales growth adjusted for phonecards and newspaper price discounting Â£m 2003 2002 Growth % __________________________________________ ________ ______ ________ Operating profit UK Retail 90 97 (7%) USA Travel Retail (16) (16) - ASPAC Retail 5 5 - __________________________________________ ________ ______ ________ Total Retailing 79 86 (8%) Publishing 4 19 19 - WHSmith News Distribution 32 29 10% Connect2U - (2) __________________________________________ ________ ______ ________ Trading profit 130 132 (2%) Support costs (14) (14) - Internal rents 3 4 Pension service costs 5 (13) (13) __________________________________________ ________ ______ ________ Operating profit before exceptionals and goodwill 106 109 (3%) Exceptional items (53) (28) Goodwill amortisation (4) (5) __________________________________________ ________ ______ ________ Total 49 76 (36%) __________________________________________ ________ ______ ________ 4 includes Helicon loss of Â£1m in prior year 5 prior year restated per FRS 17 'Retirement Benefits' RETAILING The results for retailing businesses comprise: Â£m 2003 2002 Growth % LfL Sales Growth % _________________________________________ _____________ ___________ ___________ ___________ Sales High Street 1,177 1,189 (1%) (2%) UK Travel Retail 291 306 (5%) 3% WHSmith Online 8 6 30% 30% _________________________________________ _____________ ___________ ___________ ___________ UK Retail 1,476 1,501 (2%) (1%) USA Travel Retail 181 216 (16%) 1% ASPAC Retail 150 138 9% (2%) _________________________________________ _____________ ___________ ___________ ___________ International Retailing 331 354 (6%) (1%) _________________________________________ _____________ ___________ ___________ ___________ Total Retailing 1,807 1,855 (3%) (1%) _________________________________________ _____________ ___________ ___________ ___________ Operating profit High Street 73 79 (8%) UK Travel Retail 19 21 (10%) WHSmith Online (2) (3) _________________________________________ _____________ ___________ ___________ ___________ UK Retail 90 97 (7%) USA Travel Retail (16) (16) ASPAC Retail 5 5 _________________________________________ _____________ ___________ ___________ ___________ International Retailing (11) (11) _________________________________________ _____________ ___________ ___________ ___________ Total Retailing 79 86 (8%) _________________________________________ _____________ ___________ ___________ ___________ UK Retail UK Retail sales fell by 2% to Â£1,476m (2002 - Â£1,501m), with lfl sales down 1%. In the High Street business sales fell by 1% to Â£1,177m, down 2% on a like for like basis. In the UK Travel Retail business sales fell by 5% to Â£291m, reflecting the strategic decision to withdraw from selling phonecards, but were up by 3% on a lfl basis. Market share was maintained or increased in the core product categories of books, stationery and magazines. Book sales grew by 1%, with a strong performance in the second half, up by 8%, as a result of successful promotional activity and the release of the latest Harry Potter novel. Stationery sales were flat with core stationery ranges of 'fashion, lifestyle and essentials' up by 9%. News and Express sales were flat on last year largely due to declining sales in phonecards. Entertainment sales fell by 6%, with a decline in music, VHS and multimedia sales only partially offset by another strong year for DVDs, up 68%. Sales in the UK Travel Retail business were affected in the third quarter by reduced passenger numbers due mainly to the impact of SARS, although there was a significant improvement in the last quarter. As a consequence, London airport lfl sales were only up by 2% in the second half having grown by 9% in the first half of the year. Sales in London stations were weak across the year, falling by 2%. Gross contribution increased by Â£4m with the decline in volume being more than offset by a strong improvement in rate and favourable product mix. The rate improvement was primarily driven by increased levels of stationery product sourced from Asia and the exit from selling phonecards in the Travel business. Product sourced from the Far East now accounts for 10% of total stationery sales. Overall, the gross margin percentage increased by 1.0 percentage point. Costs increased in line with inflation but have grown as a proportion of sales by 1.4 percentage points due to the overall decline in sales. As a consequence, overall net margin for the UK Retail business decreased by 0.4 percentage points to 6.1%. The Retek systems platform, which has been delivered on time and to budget, is now fully implemented and operational. The UK Retail business now operates from 677 stores which occupy 3.2 million square feet. Five new stores were opened in the year including edge of town stores in Preston and Stratford upon Avon. A further nine edge of town stores are due to open in the next 12 months, with five opening in time for Christmas at Greenwich, Bournemouth, Borehamwood, Rotherham and Beckton. Thirteen small loss-making stores were closed in the year. USA Travel Retail USA Travel Retail sales fell by 16% to Â£181m (2002 - Â£216m) due to the closure of airport and hotel stores and the impact of adverse currency fluctuations. On a lfl basis, sales were up 1%. Trading in the US continued to be difficult in the year with continued weakness in the US economy and the Iraq war suppressing recovery. However, trading in the last quarter improved considerably with lfl sales up 3%. Losses were held flat at Â£16m (2002 - Â£16m) as a result of action taken to mitigate any further deterioration. These included withdrawing from 69 loss-making hotel stores (108 since September 2001), restricting airport contract renewal to only key locations, minimising capital expenditure and reducing head office costs. The businesses benefited from a reduction in depreciation and goodwill amortisation following the write down of fixed assets in the prior year and at February 2003 as part of the asset impairment review. However, this was offset by rent relief, secured only in the prior year in respect of trading in the period immediately after 11 September 2001. ASPAC Retail ASPAC Retail's sales grew by 9% to Â£150m (2002 - Â£138m), but were down 2% on a lfl basis as a result of SARS, which particularly affected our travel stores in Hong Kong and Singapore. The acquisition of a further 25% stake in Calendar Club increased sales by Â£5m in the year and favourable foreign exchange movements improved sales by Â£9m. Gross contribution increased by Â£6m with gross margin improving by 0.8 percentage points as a result of the acquisition of the higher margin Calendar Club business. Costs increased as a percentage of sales by 1.3 percentage points, due to one-off costs relating to the implementation of SAP in the Angus and Robertson business in Australia. As a result, profits were held at Â£5m and net margins fell to 3.3% (2002 - 3.8%). Publishing Publishing sales increased by 5% to Â£144m (2002 - Â£138m), following a particularly strong performance in the first half. Internal sales increased by Â£3m to Â£22m (2002 - Â£19m). In the Hodder Headline base business, sales increased by 2% to Â£136m (2002 - Â£134m) with best sellers from James Patterson, Martina Cole, Michel Thomas, Kate Adie and Hilary Clinton. In the second half of the year, Hodder Educational was affected by the schools funding crisis which depressed sales for this division. The prior year acquisitions, John Murray and Robert Gibson, have traded well with sales of Â£8m (2002 - Â£3m) in line with our expectations. Gross contribution increased by Â£3m with the gross contribution percentage broadly level year on year. A more conservative approach towards providing for unearned authors' advances has been adopted which offset a strong underlying improvement in gross margin. Operating costs increased by Â£3m or by 0.5 percentage points as a proportion of sales largely as a result of the acquired operations. As a result, profit was flat year on year at Â£19m and overall net margin decreased to 13.2% (2002 - 13.8%). News Distribution Sales increased by 1% to Â£1,080m (2002 - Â£1,069m). Magazine sales increased by 4%, driven by celebrity titles, newspapers were up 1% and one-shots were down by 12%. Phonecard sales continued to decline, due to the market, falling by 55%. Overall sales included Â£109m (2002 - Â£107m) of sales to the WHSmith retailing businesses. Gross contribution increased by Â£5m, with a 0.3 percentage points increase in overall gross margin due primarily to the impact of 'red-top' newspaper discounting and improvements in waste management. Tight cost control, at both the house and head office levels, meant operating costs were held flat as a percentage of sales. As a consequence, net margin increased by 0.3 percentage points to 3.0% (2002 - 2.7%). Prior year profit numbers include a loss of Â£2m relating to Connect2U. Underlying profits increased by 10% to Â£32m (2002 - Â£29m). Other operating profit items Centrally controlled support costs were held flat at Â£14m. Internal rents on freehold property owned by the Company, which are charged to the businesses, were Â£3m, a Â£1m decrease on last year, due to the sale of freehold property in the year. Exceptional items The exceptional items can be summarised as follows: Â£m ______________________________________________________ ____________ USA Travel Retail 35 Surplus properties 12 Fixed asset write down 6 Profit on disposal of fixed assets (7) ______________________________________________________ ____________ 46 ______________________________________________________ ____________ Impairment and write down of USA Travel Retail assets During the first half of the financial year, a review of the carrying value of assets in the USA Travel Retail operations was undertaken. It was concluded that as a result of the continuing significant impact of the events of 11 September 2001 on the trading prospects of the business, the value of certain assets were further impaired and an exceptional impairment charge Â£35m was recognised against goodwill Â£9m and fixed assets Â£26m. The Board has again reviewed the carrying value of the US business following the write down of the assets taken at the half year. As a result of the most recent review, no further impairment charge has been taken. The Company announced the sale of the US Travel Hotel and Airports Retailing businesses in September 2003. On completion of these transactions, anticipated to be in the first half of next financial year, any loss on disposal will be disclosed as exceptional in accordance with FRS 3. This will include the Â£39m of goodwill from the original acquisition which, although written off to reserves some years ago, will be charged through the profit and loss account in accordance with FRS 10. Surplus property provisions As a result of sub-tenant defaults and a deterioration in the London commercial property market in the last 12 months, there is a requirement to significantly increase the provision for onerous leases by Â£12m. This provision relates to the net present value of future lease commitments on vacant or sub-let property after deducting any rental income received. In the year, the sub-tenants in two of our major London office properties experienced trading difficulties materially increasing the overall requirement for provision. Of the overall provision increase of Â£12m, Â£8m relates to these two locations. Write down and sale of fixed assets In the UK Retail business, certain impaired assets with a net book value of Â£6m have been written down. These assets relate to loss making stores and other sundry impaired short life assets. In August 2003, UK Retail completed the sale and leaseback of 20 properties and sold a further four properties. The profit on sale in respect of these transactions was Â£6m. In August 2003, ASPAC Retail also completed the sale and leaseback of three properties in New Zealand. The profit on the sale of these properties was Â£1m. Interest (including impact of FRS 17) The Group has adopted FRS 17 'Retirement Benefits' (FRS 17), relating to pension accounting, for the first time this year. This has resulted in a Â£3m charge within interest payable compared with a restated Â£8m credit in the prior year. This Â£11m adverse movement reflects the change in the financial position of the Group's defined benefit pension schemes which had a Â£1m deficit at 1 September 2001, compared with a Â£144m deficit at 1 September 2002 (before accounting for deferred tax). In addition there was a further Â£1m of interest payable, which was non-pension related. Taxation The tax charge for the year is Â£29m, including Â£1m charged against international profits. The effective tax rate, excluding exceptional items, is 30% (2002 - 32%); in line with prevailing UK tax rates. Operating leases The Company's stores are held mainly under operating leases, which are not regarded as debt for accounting purposes. The UK High Street leases are on standard 'institutional' lease terms, now typically with a 15 year term subject to five year upwards-only rent reviews. The Travel Retail stores operate mainly through turnover related leases, usually with minimum rent guarantees, and generally varying in length from 5 to 10 years. The business has an annual minimum net rental commitment of Â£179m (net of Â£14m of external rent receivable). The total future rental commitment at the balance sheet date amounted to Â£1.1bn with the leases having an average life of 6 years. The net present value of these commitments is approximately Â£0.7bn. Although large, these commitments are characteristic of the retail sector and the risks associated with them depend on their liquidity, influenced mainly by the quality and location of the sites. These are considered to be satisfactory. Fixed charges cover A key measure of financial strength for the businesses is fixed charges cover. The fixed charges comprise operating lease rentals, property taxes, other property costs and interest. These were covered 1.4 times by profits before fixed charges (excluding goodwill amortisation, exceptional items and tax) (2002 - 1.5 times). The fall in this measure is due partly to the adverse movement in interest income/payable relating to the defined pension scheme liability. Excluding the US business, fixed charges cover is 1.6 times (2002 - 1.7 times). Earnings per share Earnings per share were 9.4p (2002 - 19.1p) whilst adjusted earnings before exceptional items and amortisation of goodwill were 29.1p (2002 - 32.5p). Dividends The Board is proposing a final dividend of 13 pence per share in line with last year. This will be paid on 30 January 2004 to shareholders registered at the close of business on 5 January 2004. This will give a dividend for the full year of 19 pence per share in line with last year. The total cost of the dividend will be Â£47m. Excluding goodwill amortisation and exceptional items, the proposed dividend is covered 1.5 times by earnings. Free cash flow and cash balances The operating free cash flow available for the payment of dividends (before acquisitions, exceptional items and financing items) amounted to Â£61m compared with Â£38m in the previous year. Â£m 2003 2002* ____________________________________________ _______________ _____________ Profit before tax, goodwill and exceptional items 102 117 Depreciation/amortisation 49 52 ____________________________________________ _______________ _____________ Cash Profit 151 169 Working capital (8) (28) Capital expenditure (47) (66) Disposal of assets 1 2 Tax paid (32) (36) Provision spend (4) (3) ____________________________________________ _______________ _____________ Free Cash Flow 61 38 ____________________________________________ _______________ _____________ *restated for FRS 17 The reduction in depreciation charge primarily reflects a lower charge in the USA Travel Retail business as a result of the exceptional asset impairment write down taken in the first half. The movement in working capital is Â£20m better than the previous year, largely due to the timing of payments to creditors at the year end, as shown below: Â£m 2003 2002 ____________________________________________ _______________ ____________ Stock 3 (7) Debtors (17) (9) Creditors 6 (12) ____________________________________________ _______________ ____________ Working Capital (8) (28) ____________________________________________ _______________ ____________ The increase in debtors is largely accounted for by the net additional investment in advances to authors in Hodder, amounting to Â£46m (2002 - Â£40m), and an increase in business partner loans in USA Travel Retail of Â£9m (2002 - Â£4m). We have continued to invest in the business and capital expenditure is analysed below: Â£m 2003 2002 ________________________________________ ______________ ____________ New stores 6 13 Refurbished stores 19 23 Systems 20 29 Other 2 1 ________________________________________ ______________ ____________ Total 47 66 ________________________________________ ______________ ____________ Expenditure on the opening of new stores ran at a slower rate than the prior year due to the lack of availability of suitable sites in the UK. As stated above, the store opening programme will see an acceleration in the current year. Investment in systems continued at a high rate, with major investments in UK Retail (Retek and new Epos equipment) and in Australia (SAP) being the main driving focus. The movement in the net cash position is as follows: Â£m ____________________________________________________________ __________ Opening net funds 44 Free cash flow 61 Dividends (47) Pension deficit funding (6) Proceeds from sale and leaseback 25 Acquisition of businesses (2) Cash in subsidiaries acquired 1 Purchase of shares for employee share schemes (10) Premium on issue of shares 2 Cash flow relating to exceptional items (2) Currency translation differences 2 ____________________________________________________________ __________ Closing net funds 68 ____________________________________________________________ __________ Balance Sheet The net assets comprise: Â£m Â£m _________________________________________________ _________ _________ Tangible assets 272 Goodwill 228 Investments 27 _________ 527 Stock 257 Creditors less debtors (163) _________ Working Capital 94 Provisions (27) Dividends (32) Corporation Tax (39) _________________________________________________ _________ _________ 523 Net Cash 68 _________________________________________________ _________ _________ Net Assets excluding pension liabilities 591 _________________________________________________ _________ _________ Pension liabilities (156) _________________________________________________ _________ _________ Total Net Assets 435 _________________________________________________ _________ _________ Tangible assets include Â£24m, (2002 - Â£42m) for the Company's interest in freehold and long leasehold property, comprising the Company's offices and depot in Swindon and other sundry stores. Return on Capital Employed Total capital employed and returns thereon are as follows: 2003 Operating ROCE % with Capital 2003 operating leases Employed Â£m ROCE % capitalised _______________________________ _____________ ____________ __________________ High Street 221 33% 15% UK Travel Retail 30 63% 38% WHSmith Online 8 - - _______________________________ _____________ ____________ __________________ UK Retail 259 35% 18% International Retailing 54 - - _______________________________ _____________ ____________ __________________ Total Retailing 313 25% 15% Publishing 266 7% 6% WHSmith News Distribution (14) - - _______________________________ _____________ ____________ __________________ Trading Operations 565 23% 16% Central items and property (42) - - _______________________________ _____________ ____________ __________________ Total Operating Assets Employed 523 20% 14% _______________________________ _____________ ____________ __________________ For the prior year, comparable average returns were 19% (14% after operating leases capitalised). Pensions The Company has adopted FRS 17 with effect from 1 September 2002. The adoption of FRS 17 has required a change to the accounting treatment of pensions and other post-retirement benefits and the prior year results have been restated accordingly. The financial position of the Company is sensitive to the financial position of its defined benefit pension schemes, which had Â£631m of assets as valued at 31 August 2003. The present value of the schemes' liabilities has been calculated at Â£846m as at 31 August 2003. The resulting deficit in the pension schemes is Â£215m, with the net deficit, i.e. including the related deferred tax asset, equal to Â£151m. An additional net Â£5m liability arises relating to post-retirement medical benefits for certain pensioners. The size of the calculated deficit in the pension schemes is highly sensitive to changes in financial conditions in the equity and bond markets. For example, a 10% movement in equity markets would (all other factors being equal), alter the gross deficit by approximately Â£41m, and a 0.5% movement in real bond yields (used to discount the liabilities), would alter the gross deficit by approximately Â£70m. In combination, therefore, movements of this magnitude could, if favourable, reduce the deficit by roughly half and, if unfavourable, increase it by the same amount. Pension fund assets are held by a trustee-administered fund to meet long-term pension liabilities to past and some present employees. The Company has undertaken to meet any shortfalls against the liabilities should they arise. The Company closed its main defined benefit scheme to new members in 1995 but continues to fund the benefits accruing in respect of the remaining 4,050 active members. Employees who have joined the Company since 1995 are able to benefit from a defined contribution pension arrangement. Financing The Company has committed bank facilities of Â£200m available of which Â£67m matures in May 2004 and Â£133m in May 2007. Currency Approximately 12% of the Company's turnover is earned in foreign currencies. The effect of fluctuations in exchange rates was to decrease sales by Â£9m and increase profits by Â£2m. Currency exposures mainly relate to the translation of foreign income. The supply of products from outside the UK is mainly paid for in sterling. Accounting for goodwill Accounting for goodwill is regulated by FRS 10, which requires goodwill on acquisitions to be capitalised and effectively permits the non-amortisation of goodwill if the value of goodwill is not less than the amount in the accounts, can be calculated, and is durable. The directors continue to take the view that these conditions apply to the goodwill on the original acquisition of Hodder Headline PLC and the subsequent purchase of Wayland, John Murray and Robert Gibson. Accordingly, no amortisation has been provided on this goodwill, which amounts to Â£190m. The Â£0.7m goodwill arising from the acquisition of a further 25% holding of the share capital of Angus & Robertson Bookworld Calendar Club Pty Limited and Calendar Club New Zealand Limited is regarded as having a useful life of 20 years. ESOP share purchase In November 2002 the Company purchased 2.7m of its own ordinary shares of nominal value of 55.55p each with an aggregate market value of Â£10m. These shares are held for the sole purpose of satisfying obligations under the employee share schemes. Group Profit and Loss Account For the 12 months to 31 August 2003 2003 2002 ___________ ___________ __________ ___________ ___________ __________ Before Before exceptional Exceptional exceptional Exceptional items & items & items & items & goodwill goodwill goodwill goodwill amortisation amortisation Total Â£m Note amortisation amortisation Total As restated As restated As restated ______________________________________ ____ __________ ___________ __________ ___________ ___________ __________ Sales 1 2,900 - 2,900 2,936 - 2,936 ______________________________________ ____ ___________ ___________ __________ ___________ ___________ __________ ______________________________________ ____ __________ ___________ __________ ___________ ___________ __________ Operating profit 1, 2 106 (57) 49 109 (33) 76 ______________________________________ ____ __________ ___________ __________ ___________ ___________ __________ Profit on sale of fixed assets 2 - 7 7 - - - Interest 5 (4) - (4) 8 - 8 ______________________________________ ____ __________ ___________ __________ ___________ ___________ __________ Profit on ordinary activities before 102 (50) 52 117 (33) 84 taxation Tax on profit on ordinary activities 6 (31) 2 (29) (37) - (37) ______________________________________ ____ __________ ___________ __________ ___________ ___________ __________ Profit on ordinary activities after 71 (48) 23 80 (33) 47 taxation Minority interests - - - - - - ______________________________________ ____ __________ ___________ __________ ___________ ___________ __________ Profit attributable to shareholders 71 (48) 23 80 (33) 47 Dividends 7 (47) - (47) (47) - (47) ______________________________________ ____ ___________ ___________ __________ ___________ ___________ __________ Retained earnings / (losses) 24 (48) (24) 33 (33) - ______________________________________ ____ ___________ ___________ __________ ___________ ___________ __________ All results derive from continuing operations Earnings per share 8 9.4p 19.1p Diluted earnings per share 8 9.4p 19.0p Adjusted earnings per share 8 29.1p 32.5p Dividends per share 7 19.0p 19.0p Net assets per share 174p 204p Net assets per share excluding net 236p 245p pension liabilities Fixed charges cover - times 9 1.4x 1.5x Dividend cover - times 7 0.5x 1.0x Dividend cover before exceptional items 7 1.5x 1.7x and goodwill amortisation - times Tax rate - before exceptional items and 6 30% 32% goodwill amortisation Group Balance Sheet As at 31 August 2003 2002 Â£m Note 2003 As restated ___________________________________ _____________________ _______________ _______________ Fixed assets Goodwill 12 228 240 Fixed assets 13 272 326 Investments 13 27 17 ___________________________________ _____________________ _______________ _______________ Total fixed assets 527 583 Current assets Stock 14 257 254 Debtors 14 209 192 Cash at bank and in hand 16 90 98 ___________________________________ _____________________ _______________ _______________ 556 544 Creditors due within one year Debt 16 (20) (52) Other 14 (443) (432) ___________________________________ _____________________ _______________ _______________ (463) (484) ___________________________________ _____________________ _______________ _______________ Net current assets 93 60 ___________________________________ _____________________ _______________ _______________ Total assets less current liabilities 620 643 ___________________________________ _____________________ _______________ _______________ Creditors due after more than one year Debt 16 (2) (2) Other - (2) ___________________________________ _____________________ _______________ _______________ (2) (4) Provisions for liabilities and charges 15 (27) (25) ___________________________________ _____________________ _______________ _______________ Net assets excluding pension liabilities 591 614 Net pension liabilities 3 (156) (104) ___________________________________ _____________________ _______________ _______________ Total net assets 435 510 ___________________________________ _____________________ _______________ _______________ Share capital 17 139 139 Share premium 18 93 91 Capital redemption reserve 18 156 156 Revaluation reserve 18 4 8 Profit and loss account 18 39 111 ___________________________________ _____________________ _______________ _______________ Equity shareholders' funds 431 505 Non equity share capital 17 2 2 ___________________________________ _____________________ _______________ _______________ Shareholders' funds 433 507 Minority interests 2 3 ___________________________________ _____________________ _______________ _______________ Total equity 435 510 ___________________________________ _____________________ _______________ _______________ Approved by the Board of Directors on 16 October 2003. Richard Handover John Warren FCA Chief Executive Finance Director Group Cash Flow Statement For the 12 months to 31 August 2003 2002 Â£m Note 2003 As restated _________________________________________________________ _____ ______ ________ Net cash inflow from operating activities 19 135 128 Returns on investment and servicing of finance (4) 8 Taxation (32) (36) Capital expenditure and financial investment _________________________________________________________ _____ ______ ________ Purchase of fixed assets (47) (66) Purchase of shares for employee share schemes (10) (3) Disposal of tangible fixed assets 26 2 _________________________________________________________ _____ ______ ________ Cash outflow from capital expenditure and financial investment (31) (67) _________________________________________________________ _____ ______ ________ Acquisitions and disposals _________________________________________________________ _____ ______ ________ Proceeds on disposal of operation - 2 Acquisitions - cash consideration (2) (22) Net cash in subsidiaries acquired 1 2 _________________________________________________________ _____ ______ ________ Cash outflow from acquisitions and disposals (1) (18) _________________________________________________________ _____ ______ ________ Equity dividends paid (47) (47) _________________________________________________________ _____ ______ ________ Cash inflow / (outflow) before financing 20 (32) _________________________________________________________ _____ ______ ________ Financing _________________________________________________________ _____ ______ ________ Premium on issue of shares 2 2 Decrease in debt 16 (32) (9) _________________________________________________________ _____ ______ ________ Cash outflow from financing (30) (7) _________________________________________________________ _____ ______ ________ Decrease in cash (10) (39) _________________________________________________________ _____ ______ ________ 2002 Reconciliation of net cash flow to movement in net funds 2003 As restated __________________________________________________________ _____ _______ _________ Net funds at the start of the period 44 75 Decrease in cash in the period (10) (39) Decrease in debt 32 9 Currency translation differences 2 (1) __________________________________________________________ _____ _______ _________ Net funds at the end of the period 68 44 __________________________________________________________ _____ _______ _________ Group Statement of Total Recognised Gains and Losses For the 12 months to 31 August 2003 2002 Â£m Note 2003 As restated _____________________________________________________________ __________ ____________ _____________ Profit attributable to shareholders 23 47 Actuarial loss relating to the pension schemes (77) (142) UK deferred tax attributable to the pension schemes liabilities 21 43 UK current tax attributable to the additional pension schemes 2 - contributions Net actuarial loss on post retirement medical benefits (2) - Currency translation differences 4 (10) _____________________________________________________________ __________ ____________ _____________ Total recognised losses for the financial period (29) (62) _____________________________________________________________ __________ ____________ _____________ Prior year adjustment for FRS 17 3 (104) _____________________________________________________________ __________ ____________ _____________ Total recognised losses since last annual report (133) _____________________________________________________________ __________ ____________ _____________ Reconciliation of Movements in Group Shareholders' Funds For the 12 months to 31 August 2003 Â£m Note 2003 2002 As restated ____________________________________________________________ _____ ____________ _____________ Shareholders' funds at beginning of period as previously stated 611 614 Prior year adjustment for FRS 17 3 (104) - ____________________________________________________________ _____ ____________ _____________ Shareholders' funds at beginning of period as restated 507 614 Retained losses (24) - Premium on issue of shares 2 2 Other recognised gains and losses (52) (109) ____________________________________________________________ _____ ____________ _____________ Net deductions to shareholders' funds (74) (107) ____________________________________________________________ _____ ____________ _____________ Shareholders' funds at end of period 433 507 ____________________________________________________________ _____ ____________ _____________ Notes to Preliminary Announcement For the 12 months to 31 August 2003 1. Segmental analysis of results (a) Analysis of Retailing Stores and Space 1 Sept 2002 31 Aug Number of stores As restated Opened Closed 2003 ___________________________________________________ __________ ________ ________ ________ WHSmith High Street 553 2 (10) 545 UK Travel Retail (note a) 132 3 (3) 132 ___________________________________________________ __________ ________ ________ ________ UK Retailing 685 5 (13) 677 USA Travel Retail - Hotels 345 2 (69) 278 USA Travel Retail - Airports 183 11 (34) 160 ASPAC Retail 200 13 (9) 204 ___________________________________________________ __________ ________ ________ ________ Total Retailing Businesses 1,413 31 (125) 1,319 ___________________________________________________ __________ ________ ________ ________ 1 Sept 31 Aug Retail selling square feet (000's) 2002 Opened Closed 2003 ___________________________________________________ __________ ________ ________ ________ WHSmith High Street 3,045 16 (27) 3,034 UK Travel Retail 212 5 (5) 212 ___________________________________________________ __________ ________ ________ ________ UK Retailing 3,257 21 (32) 3,246 USA Travel Retail - Hotels 349 1 (64) 286 USA Travel Retail - Airports 181 9 (36) 154 ASPAC Retail 778 26 (26) 778 ___________________________________________________ __________ ________ ________ ________ Total Retailing Businesses 4,565 57 (158) 4,464 ___________________________________________________ __________ ________ ________ ________ a) UK Travel Retail store numbers have been restated to reflect the number of stores rather than the number of units. 1. Segmental analysis of results (b) Segmental analysis of sales Â£m 2003 2002 ______________________________________________ ____________ _____________ Retailing (note a) WHSmith High Street 1,177 1,189 UK Travel Retail (note b) 291 306 WHSmith Online 8 6 ______________________________________________ ____________ _____________ UK Retailing 1,476 1,501 USA Travel Retail 181 216 ASPAC Retail 150 138 ______________________________________________ ____________ _____________ Total Retailing Businesses 1,807 1,855 ______________________________________________ ____________ _____________ _________________________ ___________________ ___________ _____________ Publishing Businesses - Total sales (note c) 144 138 - Internal sales (22) (19) _________________________ ___________________ ___________ _____________ Publishing Businesses 122 119 _________________________ ___________________ ___________ _____________ WHSmith News Distribution - Total sales 1,080 1,069 - Internal sales (109) (107) _________________________ ___________________ ___________ _____________ WHSmith News Distribution 971 962 _________________________ ___________________ ___________ _____________ Sales 2,900 2,936 _________________________ ___________________ ___________ _____________ a) Like for like sales declined in the UK Retailing business by 1% (consisting of WHSmith High Street; down 2% and UK Travel Retail; up 3%) and for ASPAC Retail like for like sales fell by 2%. In USA Travel Retail, like for like sales increased by 1%. b) In the year to 31 August 2002, UK Travel Retail generated sales from phonecards of Â£19m and stores sold to TM Retail of Â£6m. Since October 2002, phonecards have not been sold in the UK Travel Retail business. Sales include Â£6m (2002; Â£6m) generated in continental Europe. c) Publishing Businesses includes sales from Hodder Headline of Â£136m (2002; Â£134m) and Â£8m (2002; Â£4m) from acquisitions and disposals in the prior year. 1 Segmental analysis of results (c) Segmental analysis of operating profits 2003 2002 As restated Total Total Base Exceptional Goodwill operating Base Exceptional Goodwill operating Â£m business items amortisation profit business items amortisation profit _________________________ ________ _________ __________ _________ _______ _________ _________ ________ Retailing WHSmith High Street 73 (6) (1) 66 79 1 (1) 79 UK Travel Retail (note a) 19 - - 19 21 - - 21 WHSmith Online (2) - (1) (3) (3) - (1) (4) _________________________ ________ _________ __________ _________ _______ _________ _________ ________ UK Retailing 90 (6) (2) 82 97 1 (2) 96 USA Travel Retail (16) (35) (1) (52) (16) (27) (2) (45) ASPAC Retail 5 - (1) 4 5 - (1) 4 _________________________ ________ _________ __________ _________ _______ _________ _________ ________ Total Retailing Businesses 79 (41) (4) 34 86 (26) (5) 55 Publishing Businesses (note b) 19 - - 19 19 (2) - 17 News Distribution 32 - - 32 29 - - 29 Connect2U - - - - (2) - - (2) _________________________ ________ _________ __________ _________ _______ _________ _________ ________ Trading profit 130 (41) (4) 85 132 (28) (5) 99 Support functions (14) (12) - (26) (14) - - (14) Pension service costs (note c) (13) - - (13) (13) - - (13) Internal rents (note d) 3 - - 3 4 - - 4 _________________________ ________ _________ __________ _________ _______ _________ _________ ________ Operating profit 106 (53) (4) 49 109 (28) (5) 76 _________________________ ________ _________ __________ _________ _______ _________ _________ ________ a) UK Travel Retail includes profits of Â£1m (2002; Â£1m) generated in continental Europe. b) In the 12 months to 31 August 2003, Hodder Headline generated profits of Â£17m (2002; Â£20m) and profits from acquisitions in the prior year of Â£2m (2002; Â£nil). Helicon, sold in the prior year, incurred losses of Â£1m in the year to 31 August 2002. c) The annual pension service costs have been allocated between the businesses based on pensionable salaries as follows: WHSmith High Street Â£7m (2002; Â£7m), UK Travel Retail Â£1m (2002; Â£1m), Publishing Â£1m (2002; Â£1m), News Distribution Â£3m (2002; Â£3m) and Support Functions Â£1m (2002; Â£1m). d) The results for the Retailing Businesses are reported after an internal arm's length market rent on freehold and long leasehold properties owned and occupied by the Group. The internal income generated of Â£3m (2002; Â£4m) is shown as a separate credit to the profit and loss account giving a nil net effect to operating profit. Exceptional items incurred during the year are analysed in Note 2. 1 Segmental analysis of results (d) Geographical split Sales Profit before Net assets taxation Â£m 2003 2002 2003 2002 2003 2002 ____________________________________ ________ ______ _______ ________ ________ ________ UK / Europe 2,545 2,558 112 129 465 480 USA 181 216 (16) (16) 26 64 Asia / Pacific 174 162 6 4 32 26 ____________________________________ ________ ______ _______ ________ ________ ________ 2,900 2,936 102 117 523 570 Exceptional items and goodwill amortisation (50) (33) - - ____________________________________ ________ ______ _______ ________ ________ ________ 52 84 523 570 Unallocated net liabilities (88) (60) ____________________________________ ________ ______ _______ ________ ________ ________ 435 510 ____________________________________ ________ ______ _______ ________ ________ ________ Sales are disclosed by origin. There is no material difference in sales by destination. Net operating assets by division are analysed in Note 10. 2 Exceptional items Â£m 2003 2002 _______________________________________________________________ ____________ ____________ USA impairment (note a (2002; note e)) (35) (27) Surplus property provision (note b) (12) - Write-down of fixed assets (note c) (6) - Disposal of High Street stores (note f) - 1 Post acquisition costs (note g) - (2) _______________________________________________________________ ____________ ____________ Operating exceptional items before taxation (53) (28) Sale of fixed assets (note d) 7 - _______________________________________________________________ ____________ ____________ Exceptional items before taxation (46) (28) Tax thereon - relating to surplus property provision 3 - - relating to sale of fixed assets (1) - _______________________________________________________________ ____________ ____________ Exceptional items after taxation (44) (28) _______________________________________________________________ ____________ ____________ Exceptional items in the current year (a) Further impairment and write down of USA Travel Retail assets During the first half of the previous financial year, a review of the carrying value of assets in the USA Travel Retail operations was undertaken. It was concluded that as a result of the significant impact of the events of 11 September 2001 on the trading prospects of the business, the value of certain assets was impaired and an exceptional impairment charge Â£27m was recognised (see below for details). In arriving at this charge, assumptions were made about the rate of recovery of the US travel market. However, these assumptions proved optimistic and a further impairment charge was taken at the half year. At the half year, an exceptional write down of $55m (Â£35m) was charged to operating profit. The charge has been applied against goodwill US$15m (Â£9m) and fixed assets US$40m (Â£26m). The Board have reviewed the carrying value of the US business following the write down of the assets taken at the half year. As a result of the most recent review, no further impairment charge has been taken. As identified in Note 20, the Group announced the conditional sale of the USA Travel Retail Hotel and Airports businesses on Thursday 18 September 2003. (b) Surplus property provisions As a result of a sub-tenant default and a deterioration in the London commercial property market in the last 12 months, there is a requirement to significantly increase the provision for onerous leases. Following a review of the provision at year end, it has been increased by Â£12m. (c) Write down of fixed assets WHSmith High Street have written down surplus fixed assets of Â£6m. These assets relate to loss making stores and other sundry impaired short life assets. (d) Sale of fixed assets In August 2003, WHSmith High Street completed the sale and leaseback of twenty freehold properties and sold a further four freehold properties. The profit on the sale of these transactions was Â£6m. In August 2003, ASPAC Retail also completed the sale and leaseback of three properties in New Zealand. The profit on the sale of these properties was Â£1m. In accordance with FRS 3 'Reporting financial performance', this has been disclosed separately in the profit and loss account. Exceptional items in the prior year (e) Impairment and write down of USA Travel Retail assets The Group undertook a review of USA Travel Retail following the events of 11 September 2001 and made adjustments to reflect the effect on asset carrying values. The adjustment made to stock was US$10m (Â£6.9m), to debtors was US$1.6m (Â£1.1m), to provisions was US$7.5m (Â£5.2m), to tangible fixed assets was US$7.5m (Â£5.2m) and to goodwill was US$11.3m (Â£7.8m). Associated restructuring costs of US$1.1m (Â£0.8m) were also incurred. (f) Disposal of WHSmith High Street stores On 22 July 2002, WHSmith High Street sold ten of its stores based in hospitals to TM Retail. The total proceeds for the fixed assets and stock were Â£1.8m. The related profit on disposal was Â£1.2m. (g) John Murray post-acquisition exceptional costs John Murray (Publishers) Limited was acquired on 8 May 2002. Following the acquisition, a distribution contract that was no longer required was terminated at a cost of Â£1.1m. In addition, associated reorganisation and redundancy costs were incurred at a cost of Â£0.6m. 3 Pensions arrangements (a) Restatement of comparatives Financial Reporting Standard 17 'Retirement benefits' (FRS 17) has been adopted with effect from 1 September 2002. The adoption of FRS 17 has required a change to the accounting treatment of pensions and the prior year results have been restated accordingly as follows: (i) Consolidated balance sheet Other debtors Other creditors Provisions for Net due within one due after more liabilities and pension Profit and loss Â£m year than one year charges liabilities account _____________________________ _____________ _____________ _____________ _____________ _____________ At 31 August 2002 196 (3) (28) - 215 Adoption of FRS 17 (4) 1 3 (104) (104) _____________________________ _____________ _____________ _____________ _____________ _____________ 31 August 2002 restated 192 (2) (25) (104) 111 _____________________________ _____________ _____________ _____________ _____________ _____________ Under FRS 17, the difference between the market value of the assets of the Group's principal defined benefit pension funds and the present value of accrued pension liabilities is shown as an asset or liability on the balance sheet, net of deferred tax. Previously, the only balance sheet items were a prepayment representing the cumulative difference between pension charges included in the profit and loss account, and actual payments made to the scheme and a provision for un-funded pension obligations and other post retirement benefits. (ii) Consolidated profit and loss account Â£m Operating profit Interest Profit attributable to shareholders _______________________________________ __________________ ____________ ______________________________ At 31 August 2002 89 - 52 Adoption of FRS 17 (13) 8 (5) _______________________________________ __________________ ____________ ______________________________ 31 August 2002 restated 76 8 47 _______________________________________ __________________ ____________ ______________________________ The profit and loss charge, under Statement of Standard Accounting Practice 24 ' Accounting for pension costs' (SSAP 24), comprised a regular pension cost net of spreading of the surplus over the average remaining service lives of the relevant employees and a notional interest credit. Under FRS 17, the following items are included in the profit and loss account: Charged to operating profit - the full service cost of pension provision relating to the period, together with the costs of any benefits relating to past service. Included in interest - a charge equal to the expected increase in the present value of the scheme liabilities, because the benefits are closer to settlement and netted against this. - a credit equivalent to the Group's long-term expected return on assets based on market value of the scheme assets at the start of the period. Included in the statement of total recognised gains and losses is the difference between the expected return on pension assets at the start of the period and the actual return achieved along with the differences, which arise from experience or assumption changes, in pension liabilities. 3 Pensions arrangements (b) Pension plans The Group operates pension plans in a number of countries around the world. Pension arrangements for UK employees are operated through two defined schemes (the WHSmith Pension Trust and Hodder Headline Staff Retirement Benefits Plan) and a defined contribution scheme, WHSmith Pension Builder. The most significant is the defined benefit WHSmith Pension Trust for the Group's UK employees. In other countries, benefits are determined in accordance with local practice and regulations and funding is provided accordingly. There are defined benefit arrangements in the UK and the United States of America with the remainder being either defined contribution or state sponsored schemes. The assets of the pension plans are held in separate funds administered by Trustees, which are independent of the Group's finances. The WHSmith Pension Trust The latest full actuarial valuation of the Scheme was carried out as at 31 March 2003 by independent actuaries, Mercer Human Resource Consulting, using the market value basis. A full actuarial valuation of the Scheme is carried out every three years with interim reviews in the intervening years. This scheme was closed in September 1995 and under the projected unit method the current service cost would be expected to increase as members approach retirement and the aged profile of members increases. The Group has reached agreement with the pension trustees to substantially increase the contributions to fund the deficit. Annual cash contributions of Â£42m have been approved for the year ended 31 August 2004. This will be subject to an annual review. Hodder Headline Staff Retirement Benefits Plan The latest full actuarial valuation of the Scheme was carried out as at 1 July 2001 by independent actuaries, Mercer Human Resource Consulting, using the projected unit method. A full actuarial valuation of the Scheme is carried out every three years with interim reviews in the intervening years. Annual cash contributions of Â£2m have been approved for the year ended 31 August 2004. This will be subject to an annual review. Pension valuations The valuation of the Group's defined benefit pension schemes used for the FRS 17 disclosures are based upon the most recent actuarial valuations. These have been updated by professionally qualified actuaries (Mercer Human Resource Consulting) to take into account the requirements of FRS 17 and to assess the liabilities of the schemes at 31 August 2003. Scheme assets are stated at their market value at 31 August 2003. The weighted average principal long term assumptions used in the actuarial valuation were: % 2003 2002 2001 ________________________________________________________ ______________ ______________ ______________ Rate of increase in salaries 4.4% 4.2% 4.3% Rate of increase in pensions payments and deferred pensions 2.7% 2.4% 2.5% Discount rate 5.5% 5.6% 5.8% Inflation assumptions 2.7% 2.4% 2.5% 3 Pensions arrangements (b) Pension plans (cont.) The aggregate fair values of the assets in the Group's defined benefit schemes, the aggregate net pension liabilities and their expected weighted average long-term rates of return at 31 August 2003 were: 2003 2002 As restated 2001 As restated Â£m % Â£m % Â£m % _____________________________________ _________ _________ _________ _________ _________ _________ Equities 408 7.6 372 7.5 475 8.0 Bonds 219 4.6 219 4.5 213 4.8 Cash 4 4.6 5 4.2 5 5.7 _________ _________ _________ _________ _________ _________ Total fair value of assets 631 596 693 Present value of schemes liabilities (846) (740) (694) _________ _________ _________ Deficit in the schemes (215) (144) (1) Related deferred tax asset 64 43 - _________ _________ _________ Net defined benefit schemes liabilities (151) (101) (1) Net retirement medical benefits (5) (3) (3) _________ _________ _________ Net pension liabilities (156) (104) (4) _________ _________ _________ (i) Defined benefit pension schemes Analysis of the amount charged to operating profit Â£m 2003 2002 ________________________________________________________________ _____________ _____________ Current service cost (13) (13) ________________________________________________________________ _____________ _____________ Analysis of the amount (charged) / credited to interest Â£m 2003 2002 ________________________________________________________________ _____________ _____________ Expected return on pension scheme assets 38 47 Interest on pension scheme liabilities (41) (39) ________________________________________________________________ _____________ _____________ (3) 8 ________________________________________________________________ _____________ _____________ 3 Pensions arrangements (b) Pension plans (cont.) Analysis of the actuarial loss in the statement of total recognised gains and losses Â£m 2003 2002 ___________________________________________________________________ _____________ _____________ Actual return less expected return on pension scheme assets 6 (117) Experience gains and losses arising on the scheme liabilities 3 (19) Changes in assumptions underlying the present value of the scheme liabilities (86) (6) ___________________________________________________________________ _____________ _____________ (77) (142) ___________________________________________________________________ _____________ _____________ Â£2m (2002; Â£1m) of actuarial loss relates to the US pension scheme. Movement in scheme deficit during the period 2002 Â£m 2003 As restated __________________________________________________________________ _____________ _____________ At beginning of period (144) (1) Current service cost (13) (13) Contributions 22 4 Interest (cost) / income (3) 8 Actuarial loss (77) (142) __________________________________________________________________ _____________ _____________ Deficit in scheme (215) (144) __________________________________________________________________ _____________ _____________ History of the weighted average experience gains and losses 2002 2003 As restated 2001 _______________________________________________________________ _________ _________ _________ Difference between actual and expected returns on assets: Amount (Â£m) 6 (117) (180) % of scheme assets 1% (20%) (26%) Experience gains and losses on scheme liabilities: Amount (Â£m) 3 (19) - % of present value of the scheme liabilities 1% (3%) - Total amount recognised in Statement of Total Recognised Gains and Losses: Amount (Â£m) (77) (142) (215) % of present value of the scheme liabilities (9%) (20%) (31%) 3 Pensions arrangements (b) Pension plans (cont.) Post retirement medical benefits WH Smith PLC provides retirement medical benefits to certain pensioners. Total premiums paid during the year in respect of those benefits were Â£0.4m (2002; Â£0.3m). The present value of the future liabilities under this arrangement have been assessed by our actuary (Mellon Human Resources & Investor Solutions (Actuaries & Consultants) Limited) and this amount is included on the balance sheet, net of deferred taxation under pension and other post retirement liabilities as follows: Â£m 2003 2002 __________________________________________________________________ _____________ _____________ Post retirement medical benefits (5) (3) __________________________________________________________________ _____________ _____________ (ii) Defined contribution pension scheme The Group's pension cost charge to its defined contribution scheme, WHSmith Pension Builder, for the period amounted to Â£2m (2002; Â£2m). 4 Operating lease commitments The total annual commitment for continuing businesses of Â£179m (2002; Â£179m), comprises Â£20m (2002; Â£13m) expiring within one year, Â£76m (2002; Â£87m) between two and five years, and Â£83m (2002; Â£79m) over five years. The annual net rental is further analysed as follows: 2003 2002 Future Annual cumulative Annual net lease net lease Average lease net lease commitment commitment Term commitment Â£m Â£m (years) Â£m __________________________________________ _____________ ______________ ___________ ____________ WHSmith High Street 82 776 10 80 UK Travel Retail 39 110 5 39 __________________________________________ _____________ ______________ ___________ ____________ UK Retailing 121 886 8 119 USA Travel Retail 31 100 3 37 ASPAC Retail 18 78 4 14 __________________________________________ _____________ ______________ ___________ ____________ Total Retailing Businesses 170 1,064 7 170 Publishing Businesses 4 21 5 4 WHSmith News Distribution 4 37 10 3 Support functions 8 21 2 9 Property sublet to third parties 10 62 6 9 __________________________________________ _____________ ______________ ___________ ____________ Gross rental commitment 196 1,205 6 195 Less - external rent receivable (14) (61) 4 (13) - internal rent receivable (3) (31) 10 (3) __________________________________________ _____________ ______________ ___________ ____________ Total 179 1,113 6 179 __________________________________________ _____________ ______________ ___________ ____________ (i) WHSmith High Street lease commitments include internal rent of Â£3m (2002; Â£3m) relating to those properties which are owned by the Group. The cumulative future costs of internal rent are taken as the book value of those properties in the balance sheet at Â£31m, all of which relates to WHSmith High Street. (ii) External rent receivable relates to properties let by the Group to third parties. Of the total external rent receivable, Â£5m (2002; Â£5m) relates to USA Travel Retail which sublets retail space in airports where it operates a master contract and Â£9m (2002; Â£9m) represents income on subletting surplus property. Of the future cumulative external rent receivable, Â£18m (2002; Â£20m) relates to USA Travel Retail. (iii) Outstanding contingencies under previous assignments of leases where the liability would revert to the Group if the lessee defaulted are estimated at Â£17m (2002; Â£17m) per year with a future cumulative rental commitment of approximately Â£141m (2002; Â£149m), and an average lease term of around eight years (2002; nine years). (iv) For those leases that are turnover related leases, the annual net lease commitment is calculated using the minimum lease liability. The aggregate lease liability for these stores with minimum guaranteed leases is Â£65m (2002; Â£70m) and relates to UK Travel Retail and USA Travel Retail stores. 5 Interest 2002 Â£m 2003 As restated ______________________________________________ ________________ ____________________ Interest payable on bank loans and overdrafts (2) (3) Net (charge) / return on pension schemes ( Note 3) (3) 8 Interest receivable 1 3 ______________________________________________ ________________ ____________________ Interest (expense) / income (4) 8 ______________________________________________ ________________ ____________________ 6 Taxation Â£m 2003 2002 ________________________________________________________________________ _______ _________ Tax on profit before exceptional items and goodwill amortisation 40 37 - Standard rate of UK corporation tax 30% (2002; 30%) Adjustment in respect of prior year UK corporation tax (6) (4) Foreign tax 1 1 ________________________________________________________________________ _______ _________ Total current tax charge 35 34 Deferred tax - origination and reversal of timing differences (4) 3 ________________________________________________________________________ _______ _________ Tax on profit on ordinary activities before exceptional items and goodwill amortisation 31 37 Tax on exceptional items and goodwill amortisation (2) - ________________________________________________________________________ _______ _________ Tax on profit on ordinary activities after exceptional items and goodwill amortisation 29 37 ________________________________________________________________________ _______ _________ Effective tax rate before exceptional items and goodwill amortisation (2002; As 30% 32% restated) The effective tax rate for the prior year has been restated as a result of the adoption of FRS 17 'Retirement benefits' giving rise to a decrease in profit before tax. Reconciliation of the taxation charge 2002 Â£m 2003 As restated _________________________________________________________________________________ ___________ _________ Tax on profit on ordinary activities before exceptional items and goodwill amortisation at 31 35 standard rate of UK corporation tax 30% (2002; 30%) Capital allowances for period in excess of depreciation (1) (3) Other short term timing differences 3 - Depreciation for which no tax relief is available 2 2 Losses not available for group relief 5 7 Adjustment in respect of prior years (6) (4) Other 1 (3) _________________________________________________________________________________ ___________ _________ Total current tax charge before exceptional items and goodwill amortisation 35 34 Tax on exceptional items and goodwill amortisation at standard rate of UK corporation tax (15) (10) of 30% (2002; 30%) Losses not available for group relief - 8 Goodwill 1 2 Write off of tangible and intangible assets 13 - Non-taxable income (1) - _________________________________________________________________________________ ___________ _________ Total current tax charge after exceptional items and goodwill amortisation 33 34 _________________________________________________________________________________ ___________ _________ Other than an unprovided deferred tax asset in respect of overseas losses of approximately Â£16m (2002; Â£15m) which have yet to be agreed with overseas tax authorities, there are no items which are likely to materially affect ongoing tax charges in future years. The losses will be utilised if and when suitable taxable profits are made in the relevant territories. 7 Dividends 2003 2002 ___________________________________________________________________ ____________ _____________ Interim 6.0p 6.0p Final 13.0p 13.0p ___________________________________________________________________ ____________ _____________ Total dividend per share 19.0p 19.0p ___________________________________________________________________ ____________ _____________ Â£m 2003 2002 ___________________________________________________________________ ____________ _____________ Interim 15 15 Final - proposed 32 32 ___________________________________________________________________ ____________ _____________ Total dividend 47 47 ___________________________________________________________________ ____________ _____________ 2002 2003 As restated ___________________________________________________________________ ____________ _____________ Dividend cover - times 0.5x 1.0x ___________________________________________________________________ ____________ _____________ Dividend cover before exceptional items and goodwill amortisation - times 1.5x 1.7x ___________________________________________________________________ ____________ _____________ The final dividend will be paid on 30 January 2004 to shareholders registered at the close of business on 5 January 2004. At 31 August 2003, the Group had 250,437,430 (2002; 249,890,474) ordinary shares in issue. 8 Earnings per share (a) Earnings per share 2003 2002 _______ _______ __________ _________ ________ ________ Â£m Basic Diluted Â£m Basic Diluted _____________________________________________________ _______ _______ __________ _________ ________ ________ Profit attributable to shareholders as previously stated 23 9.4p 9.4p 52 21.1p 21.0p Prior year adjustment - - - (5) (2.0p) (2.0p) _____________________________________________________ _______ _______ __________ _________ ________ ________ Profit attributable to shareholders as restated 23 9.4p 9.4p 47 19.1p 19.0p Exceptional items 44 18.1p 18.1p 28 11.4p 11.3p Amortisation of goodwill 4 1.6p 1.6p 5 2.0p 2.0p _____________________________________________________ _______ _______ __________ _________ ________ ________ Adjusted earnings 71 29.1p 29.1p 80 32.5p 32.3p _____________________________________________________ _______ _______ __________ _________ ________ ________ In the current period, earnings per share was not diluted by shares under option, as the average share option price was higher than the fair market value of all shares in the year to 31 August 2003. (b) Weighted average share capital Millions 2003 2002 ______________________________________________________________________ ________ ________ Weighted average shares in issue for earnings per share 244 246 Add weighted average number of ordinary shares under option - 2 ______________________________________________________________________ ________ ________ Weighted average ordinary shares for fully diluted earnings per share 244 248 ______________________________________________________________________ ________ ________ The weighted average number of ordinary shares in issue is stated after excluding 6,541,345 shares held in the Employee Share Trust. 9 Fixed charges cover 2002 Â£m 2003 As restated ______________________________________________________ ________________ ______________ Interest expense / (income) 4 (8) Operating lease rentals 206 207 Property taxes 36 36 Other property costs 13 15 ______________________________________________________ ________________ ______________ Total fixed charges 259 250 Profit before exceptional items, goodwill amortisation and tax 102 117 ______________________________________________________ ________________ ______________ Profit before exceptional items, goodwill amortisation and tax and 361 367 before fixed charges ______________________________________________________ ________________ ______________ Fixed charges cover 1.4x 1.5x ______________________________________________________ ________________ ______________ Fixed charges cover is calculated by dividing profit before exceptional items, goodwill amortisation, tax and fixed charges by total fixed charges. 10 Segmental analysis of operating assets employed ROCE% after ROCE% after capitalised net capitalised operating net operating Return on leases Return on lease capital including capital including 2002 employed internal rent 2003 employed internal rent as restated as restated as restated Â£m % % Â£m % % __________________________________ ___________ _____________ _____________ ___________ _____________ ____________ WHSmith High Street 221 33% 15% 224 35% 15% UK Travel Retail 30 63% 38% 28 75% 37% WHSmith Online 8 - - 7 - - __________________________________ ___________ _____________ _____________ ___________ _____________ ____________ UK Retailing 259 35% 18% 259 37% 18% USA Travel Retail 26 - - 64 - - ASPAC Retail 28 18% 2% 22 23% 15% __________________________________ ___________ _____________ _____________ ___________ _____________ ____________ Total retailing businesses 313 25% 15% 345 25% 15% WHSmith News Distribution (14) - - (9) - - __________________________________ ___________ _____________ _____________ ___________ _____________ ____________ Trading operations (excl 299 37% 18% 336 34% 17% Publishing) Publishing 266 7% 6% 263 7% 7% __________________________________ ___________ _____________ _____________ ___________ _____________ ____________ Trading operations (incl 565 23% 16% 599 22% 15% Publishing) Freehold property 24 42 Support functions (39) (46) Provisions for liabilities and (27) (25) charges __________________________________ ___________ _____________ _____________ ___________ _____________ ____________ Operating assets employed 523 20% 14% 570 19% 14% Net cash 68 44 __________________________________ ___________ ___________ Net assets excluding pension 591 614 deficit Net pension deficit (156) (104) __________________________________ ___________ ___________ Total net assets 435 510 __________________________________ ___________ ___________ a) Return on Capital Employed is calculated as the operating profit before exceptional items as a percentage of operating capital employed. b) Return on Capital Employed after capitalised net operating leases including internal rent is calculated as adjusted profit as a percentage of operating assets after capitalising leases. Adjusted profit is stated after adding back the annual net rent and charging depreciation on the value of capitalised leases. The value of capitalised leases is based on the net present value of future rent commitments. 11 Acquisitions On 21 October 2002, the Group acquired a further 25% holding of the share capital of Angus & Robertson Bookworld Calendar Club Pty Limited and Calendar Club New Zealand Limited bringing its total ownership in both entities to 75%. Total cash consideration including fees and expenses was Â£2m and the capitalised goodwill arising on the transaction was Â£1m. Since acquisition, these two companies have had sales of Â£5m (proforma 2002; Â£5m) with associated profits of Â£1m (proforma 2002; Â£1m) in the year. No fair value adjustments to the assets acquired were necessary. 12 Goodwill Â£m ________________________________________________________ ________________ Cost: At 1 September 2002 268 Acquisitions (Note 11) 1 ________________________________________________________ ________________ At 31 August 2003 269 ________________________________________________________ ________________ Accumulated amortisation: At 1 September 2002 28 Amortised in period 4 Impairment charge in the period 9 ________________________________________________________ ________________ At 31 August 2003 41 ________________________________________________________ ________________ Net book value ________________________________________________________ ________________ At 31 August 2003 228 ________________________________________________________ ________________ At 1 September 2002 240 ________________________________________________________ ________________ Purchased goodwill is capitalised as an asset and amortised against profits over its useful economic life. In estimating the useful economic life of purchased goodwill, consideration is given to its durability. Goodwill arising on the earlier acquisitions of John Menzies Retail, Internet Bookshop and WGL Retail Holdings Limited is regarded by the Directors as having a useful life of 20 years and is therefore amortised through the profit and loss account over this period. In accordance with FRS 10 'Goodwill and intangible assets', where goodwill is regarded as having an indefinite life, it is not amortised but is subject to an annual test for impairment. As permitted under FRS 10, this represents a departure, for the purposes of giving a true and fair view, from the requirements of the Companies Act 1985, which requires goodwill to be amortised. Goodwill arising on the acquisitions of Hodder Headline (Â£172m), Wayland (Â£3m), John Murray (Â£14m) and Robert Gibson (Â£1m) is regarded as having an indefinite useful life and is therefore not amortised in the profit and loss account. It is considered that the purchased goodwill is durable because these businesses are expected to maintain their market share and profitability in UK publishing over a long period. The majority of titles published and imprint names have significant lifespans due to copyright and licensing arrangements and range and strength of backlist titles. It is also considered that the barriers to entry which exist (and are anticipated to continue) and the nature of competition in the publishing industry are such that scale, relationships with third parties, intellectual property rights and quality of branding will prove this goodwill to be durable. Since it is not possible to identify a finite useful life for goodwill on the purchase of Hodder Headline, Wayland, John Murray and Robert Gibson it is not possible to quantify any amortisation that would be charged. The application of an impairment test (which is carried out annually) supports the value of goodwill and, as a result, no charge for impairment is required at the balance sheet date. 13 Fixed assets and Investments 13(a) Changes in Fixed assets and Investments Â£m Tangible Fixed Assets Investments _______________________________________ _________________________________ ________________ Net book value at 1 September 2002 326 17 _______________________________________ _________________________________ ________________ Additions 47 10 Disposals (22) - Impairment charge in the period (32) - Depreciation (49) - Currency translation differences 2 - _______________________________________ _________________________________ ________________ Net book value at 31 August 2003 272 27 _______________________________________ _________________________________ ________________ 13(b) Analysis of Fixed assets Â£m 2003 2002 _______________________________________ _________________________________ ________________ Freehold and long leasehold property 24 42 Short leasehold 90 109 Fixtures, fittings and equipment 158 175 _______________________________________ _________________________________ ________________ Net book value at 31 August 2003 272 326 _______________________________________ _________________________________ ________________ 14 Working Capital 2002 Â£m 2003 As restated ___________________________ ___________________________________ ___________ _____________ Stock 257 254 ___________________________ ___________________________________ ___________ _____________ Debtors 209 192 ___________________________ ___________________________________ ___________ _____________ Creditors due within one year - Continuing operations (372) (360) - Corporation tax (39) (40) - Dividends (32) (32) ___________________________ ___________________________________ ___________ _____________ (443) (432) ___________________________ ___________________________________ ___________ _____________ 15 Provisions for liabilities and charges Business Non-trading partner property Â£m guarantees Deferred taxation provisions Total ______________________________________ _____________ ____________ __________ ____________ At 1 September 2002 as restated 5 15 5 25 (Credited) / charged during the period - (4) 12 8 Utilised in period (1) - (5) (6) ______________________________________ _____________ ____________ __________ ____________ At 31 August 2003 4 11 12 27 ______________________________________ _____________ ____________ __________ ____________ Business partners guarantees is a provision against exposures with US business partners, and will be utilised in the next financial year. Non-trading property provisions have been made for onerous leases on vacant or surplus properties. The undiscounted provision is Â£16m at 31 August 2003. This provision has been discounted at 10%. It is anticipated that most of the expenditure will take place between 2004 and 2009. In the 12 months to 31 August 2003, the amount spent against non-trading property provisions comprised Â£5m net rent paid and lease termination costs and will be utilised over an average period of 6 years. The deferred tax balance comprises the following: Â£m 2003 2002 ________________________________________________ ___________ ____________ Accelerated capital allowances 16 15 Short term timing differences (5) - ________________________________________________ ___________ ____________ At 31 August 2003 11 15 ________________________________________________ ___________ ____________ 16 Financial assets and liabilities The Group's policies as regards derivatives and financial instruments are set out in the accounting policies. The Group's policies with regards derivatives for managing these risks, which have remained unchanged since 1 September 1998, are reviewed and agreed with the Board. Â£m 2003 2002 As restated _______________________________________________ _______________ _____________ Cash at bank and in hand 90 98 Repayable in one year or less or on demand (20) (52) Repayable in more than five years (2) (2) _______________________________________________ _______________ _____________ Net funds 68 44 _______________________________________________ _______________ _____________ At 31 August 2002, Â£17m stated as being repayable in more than one year but less than five years and Â£22m stated as being repayable in more than five years have now been reclassified as repayable within one year or on demand. Currency translation Â£m 2003 Cashflow differences 2002 _______________________________________________ ___________ _________ ____________ ____________ Cash at bank and in hand (note a) 90 (10) 2 98 Debt - Sterling floating rate (note b) (20) 32 - (52) - Sterling fixed rate (note c) (2) - - (2) _______________________________________________ ___________ _________ ____________ ____________ Net funds 68 22 2 44 _______________________________________________ ___________ _________ ____________ ____________ a) Cash at bank is held on short-term deposit, bearing interest at a weighted average rate of 3.78% during the year. The only material foreign exchange exposure at 31 August 2003 relates to the financial assets and liabilities in USA Travel Retail and ASPAC Retail (in Australia and New Zealand). Cash at bank and in hand includes Â£10m of US dollars (2002; Â£16m), Â£10m of Australian dollars (2002; Â£8m), Â£7m of New Zealand Dollars (2002; Â£8m), Â£1m of Euros (2002; Â£nil), Â£1m of Hong Kong Dollars (2002; Â£nil) and Â£1m of Singapore Dollars (2002; Â£1m). b) Sterling floating rate debt constitutes Â£20m of unsecured loan notes. These loan notes are repayable at par on-demand up until expiry on 28 February 2008 and bear an interest rate of 100 basis points below six month LIBOR. At 31 August 2003, the Group had unutilised multi-currency revolving committed facilities of Â£200m, of which Â£67m, which bears an interest rate of LIBOR plus 45 basis points, expires in May 2004 (with a one year extension option renewable annually until May 2006) and Â£133m, which bears an interest rate of LIBOR plus 50 basis points, expires in May 2007. c) Sterling fixed rate debt constitutes 5.125% undated unsecured (redeemable at par) loan stock of Â£2m (2002; Â£2m). d) In addition to the above, at 31 August 2003 the Group had unredeemed 'B' shares of Â£2m (2002: Â£2m) which carry a net non-cumulative preferential dividend set at 75% of six month LIBOR. 17 Share capital (a) Authorised 2003 2002 _________________________________________ _______________________________ Number of Nominal Number of Nominal shares value shares value (millions) Â£m (millions) Â£m ____________________________________ __________________ _________________ ______________ _____________ Ordinary shares of 55.55p each 333 185 333 185 'B' shares of 53.75p each 286 153 286 153 ____________________________________ __________________ _________________ ______________ _____________ At 31 August 338 338 ____________________________________ __________________ _________________ ______________ _____________ (b) Allotted and fully paid 2003 2002 _________________________________________ _______________________________ Number of Nominal Number of Nominal shares value shares value (millions) Â£m (millions) Â£m ____________________________________ __________________ _________________ ______________ _____________ Ordinary shares of 55.55p each 250 139 250 139 'B' shares of 53.75p each 4 2 4 2 ____________________________________ __________________ _________________ ______________ _____________ At 31 August 141 141 ____________________________________ __________________ _________________ ______________ _____________ The number of shares issued in the year to 31 August 2003 was 546,956 (2002; 571,329 shares) ordinary shares with a nominal value of Â£0.3m relating to share options exercised for a cash consideration of Â£2m (2002; Â£2m). The 'B' shares are redeemable at their nominal value at the shareholder's option during any period declared by the Group, at the Group's option or on maturity on 31 August 2008. Additionally, 'B' shares have no rights to dividends or voting. At 31 August 2003, the number of options held under employee share schemes was 16.7 million shares (2002; 13.8 million). 18 Reserves Share Capital premium redemption Revaluation Profit & loss Â£m account reserve reserve account _______________________________________________ _________ __________ _____________ _____________ Reserves at 1 September 2002 as previously stated 91 156 8 215 Prior period restatement for FRS 17 - - - (104) _______________________________________________ _________ __________ _____________ _____________ Reserves at 1 September 2002 as restated 91 156 8 111 _______________________________________________ _________ __________ _____________ _____________ Loss retained for the period - - - (24) Profit realised on sale of freehold property - - (4) 4 Premium on the issue of shares 2 - - - Currency translation differences - - - 4 _______________________________________________ _________ __________ _____________ _____________ Reserves excluding current period pension deficit 93 156 4 95 Current period net pension deficit adjustment - - - (54) Current period net post retirement medical benefits - - - (2) _______________________________________________ _________ __________ _____________ _____________ Reserves at 31 August 2003 93 156 4 39 _______________________________________________ _________ __________ _____________ _____________ The profit and loss account reserve at 31 August 2003 is stated after writing off previously acquired goodwill of Â£58m - including USA Travel Retail Â£39m. 19 Notes to the cash flow statement Reconciliation of operating profit to net cash inflow from operating activities 2002 Â£m 2003 As restated _______________________________________________________ _____________ ________________ Operating profit 49 76 Adjustment for pension funding (note a) (6) 1 Operating exceptional items 53 28 Depreciation of fixed assets 49 52 Amortisation of goodwill 4 5 Decrease / (increase) in stock 3 (7) Increase in debtors (17) (9) Increase / (decrease) in creditors 6 (12) Cash spend against provisions (4) (3) _______________________________________________________ _____________ ________________ Net cash inflow from operating activities before exceptional items 137 131 Cash outflow relating to operating exceptional items (note b) (2) (3) _______________________________________________________ _____________ ________________ Net cash inflow from operating activities after exceptional items 135 128 _______________________________________________________ _____________ ________________ a) For the year ended 31 August 2003, Â£22m (2002; Â£4m) cash contributions have been made to the pension schemes. The associated profit and loss charge comprises Â£13m (2002; Â£13m) for operating costs and Â£3m charge (2002; Â£8m credit) for financing. The Group has made an additional contribution of Â£6m over and above the required profit and loss charge (2002; Â£1m shortfall). b) Cash outflow relating to exceptional items consists of Â£2m lease termination costs incurred in WHSmith High Street. In the prior year, cash outflow relating to exceptional items consisted of Â£0.8m restructuring costs incurred in USA Travel Retail, and the termination of a distribution contract of Â£1.1m and associated reorganisation and restructuring costs Â£0.6m following the acquisition of John Murray (Publishers) Limited. 20 Post balance sheet events The Group announced the sale of the USA Travel Retail Airports and Hotel businesses on Thursday 18 September 2003 for Â£49m ($76.5m) consideration. Both transactions are conditional on receiving the necessary regulatory approvals and assignment of leases from the respective airport and hotel landlords. The Airports business is being sold to the Hudson Group for Â£41m ($64m) consisting of Â£25m cash and Â£16m deferred consideration payable by way of an interest bearing loan note with a 5% coupon. The Hotels business is being sold to former management for Â£8m ($12.5m), satisfied by way of an interest bearing loan note with a 5% coupon conditional on the trading cash flows of the new company. WH Smith PLC will also provide the new company with a loan facility of up to Â£4m. Both transactions are anticipated to complete by the end of the calendar year. On completion of these transactions, the loss will be disclosed as an exceptional loss on disposal in accordance with FRS 3 'Reporting financial performance'. This will include, inter alia, Â£39m of goodwill previously written off to reserves. This is required to be charged to the profit and loss account on disposal by FRS 10 'Goodwill and intangible assets'. 21 PREPARATION OF PRELIMINARY ANNOUNCEMENT 21 (a) Basis of preparation The preliminary announcement for the 12 months to 31 August 2003 has been prepared on the basis of the accounting policies set out in the Company's Annual Report for the 12 months to 31 August 2002 with the exception of the adoption of the new accounting standard on retirement benefits. Financial Reporting Standard 17 'Retirement benefits' has been adopted with effect from 1 September 2002 and the prior year results have been restated accordingly as set out in Note 3. 21 (b) Preliminary announcement The results for the 12 months to 31 August 2003 and 12 months to 31 August 2002 do not comprise statutory accounts for the purpose of Section 240 of the Companies Act 1985, and have been extracted from the Company's accounts for the 12 months to 31 August 2003. The statutory accounts for the 12 months to 31 August 2002 have been filed with the Registrar of Companies and those for the 12 months to 31 August 2003 will be filed following the Company's annual general meeting. The auditors' reports on these accounts were unqualified and did not include a statement under Section 237 (2) or (3) of the Companies Act 1985. The annual report and accounts will be posted to shareholders in November 2003. Five Year Financial Summary Group Profit and Loss Account 12 months to ____________________________________________________________________ 31 August 31 August 31 August 2002 2001 31 August 31 August Â£m 2003 As restated As restated 2000 1999 ______________________________________________ __________ __________ ___________ ___________ ____________ Total sales 2,900 2,936 2,735 2,584 2,391 ______________________________________________ __________ __________ ___________ ___________ ____________ Operating profit - continuing operations 106 109 130 137 122 Exceptional items & goodwill amortisation (57) (33) (19) (2) (2) ______________________________________________ __________ __________ ___________ ___________ ____________ Operating profit 49 76 111 135 120 Profit on sale of operations - - - 1 - Profit on sale of fixed assets 7 - - - - Amount written off investment in own shares - - - (2) - ______________________________________________ __________ __________ ___________ ___________ ____________ Profit on ordinary activities before interest 56 76 111 134 120 and taxation Interest (4) 8 3 6 14 ______________________________________________ __________ __________ ___________ ___________ ____________ Profit on ordinary activities before taxation 52 84 114 140 134 Tax on profit on ordinary activities (29) (37) (39) (39) (38) ______________________________________________ __________ __________ ___________ ___________ ____________ Profit on ordinary activities after taxation 23 47 75 101 96 Minority interests - - (1) (1) - ______________________________________________ __________ __________ ___________ ___________ ____________ Profit attributable to shareholders 23 47 74 100 96 Dividends (47) (47) (47) (48) (45) ______________________________________________ __________ __________ ___________ ___________ ____________ Retained earnings (24) - 27 52 51 ______________________________________________ __________ __________ ___________ ___________ ____________ All results derive from continuing operations. Earnings per share 9.4p 19.1p 30.1p 40.2p 38.4p Diluted earnings per share 9.4p 19.0p 29.8p 40.0p 38.1p Adjusted earnings per share 29.1p 32.5p 37.4p 41.3p 38.9p Dividend per share apportioned to 12 months 19.0p 19.0p 19.0p 19.0p 18.2p Net assets per share 174p 204p 249p 242p 217p Net assets excluding pension liabilities per share 236p 245p 249p 242p 217p Fixed charges cover * 1.4x 1.5x 1.6x 1.7x 1.8x Dividend cover * 1.5x 1.7x 1.9x 2.1x 2.1x Tax charge * 30% 32% 30% 28% 20% * before exceptional items and goodwill amortisation The 2002 and 2001 figures above have been presented after adjustment for the adoption of FRS 19 'Deferred tax'. Also, the 2002 figures have been presented after adjustment for the adoption of FRS 17 'Retirement benefits'. It has not been practicable to restate comparative years 1999 to 2000. Five Year Financial Summary Group Balance Sheet 31 August 31 August 31 August 2002 2001 31 August 31 August Â£m 2003 As restated As restated 2000 1999 _______________________________________________ ___________ ___________ ___________ ___________ ___________ Fixed assets Goodwill 228 240 236 222 205 Tangible assets 272 326 326 294 273 Investments 27 17 14 1 2 _______________________________________________ ___________ ___________ ___________ ___________ ___________ Total fixed assets 527 583 576 517 480 _______________________________________________ ___________ ___________ ___________ ___________ ___________ Current assets Stock 257 254 255 216 203 Debtors 209 192 185 160 143 Creditors (443) (432) (447) (394) (368) _______________________________________________ ___________ ___________ ___________ ___________ ___________ Net current operating assets / (liabilities) 23 14 (7) (18) (22) _______________________________________________ ___________ ___________ ___________ ___________ ___________ Long term creditors - (2) (2) (4) (2) Provisions for liabilities and charges (27) (25) (23) (14) (19) _______________________________________________ ___________ ___________ ___________ ___________ ___________ Operating capital employed 523 570 544 481 437 Net cash 68 44 75 123 105 _______________________________________________ ___________ ___________ ___________ ___________ ___________ Total equity excluding pension liabilities 591 614 619 604 542 Net pension liabilities (156) (104) - - - _______________________________________________ ___________ ___________ ___________ ___________ ___________ Total equity 435 510 619 604 542 _______________________________________________ ___________ ___________ ___________ ___________ ___________ Return on operating capital employed 20% 19% 24% 28% 28% Average number of shares in issue (millions) 250 250 249 250 250 The 2002 and 2001 figures above have been presented after adjustment for the adoption of FRS 19 'Deferred tax'. Also, the 2002 figures have been presented after adjustment for the adoption of FRS 17 'Retirement benefits'. It has not been practicable to restate comparative years 1999 to 2000. Five Year Financial Summary Group Cash Flow Statement 12 months to ______________________________________________________________________ 31 August 31 August 2002 31 August 31 August 31 August Â£m 2003 As restated 2001 2000 1999 _______________________________________________ ___________ ___________ ___________ ___________ ___________ Cash flow from operating activities 135 128 165 163 145 Returns on investments and servicing of finance (4) 8 3 6 14 Taxation (32) (36) (38) (27) (37) Purchase of fixed assets (47) (66) (68) (60) (60) Purchase of shares for employee share schemes (10) (3) (13) - - Disposal of tangible fixed assets 26 2 2 3 54 _______________________________________________ ___________ ___________ ___________ ___________ ___________ Cash flow from capital expenditure and financial (31) (67) (79) (57) (6) investment _______________________________________________ ___________ ___________ ___________ ___________ ___________ Cash flow for acquisitions and disposals (1) (18) (51) (22) (171) _______________________________________________ ___________ ___________ ___________ ___________ ___________ Equity dividends paid (47) (47) (48) (47) (55) _______________________________________________ ___________ ___________ ___________ ___________ ___________ Cash flow before financing 20 (32) (48) 16 (110) _______________________________________________ ___________ ___________ ___________ ___________ ___________ Premium on issue of shares 2 2 3 2 5 Repurchase of own shares - - (9) - (24) (Decrease) / increase in debt (32) (9) 34 (40) (63) _______________________________________________ ___________ ___________ ___________ ___________ ___________ Cash flow from financing (30) (7) 28 (38) (82) _______________________________________________ ___________ ___________ ___________ ___________ ___________ Decrease in cash (10) (39) (20) (22) (192) _______________________________________________ ___________ ___________ ___________ ___________ ___________ 12 months to ________________________________________________________________ As restated 31 August 31 August 31 August Analysis of free cash flow (before dividends) 31 August 2002 2001 2000 1999 Â£m 2003 As restated As restated As restated As restated ________________________________________________ __________ __________ __________ __________ __________ Profit before tax, exceptional items and goodwill 102 117 133 143 136 amortisation Depreciation 49 52 47 41 41 Movement in working capital (8) (28) (9) (10) (9) Capital expenditure on fixed assets (47) (66) (68) (60) (60) Disposal of tangible fixed assets 1 2 2 1 8 Tax paid (32) (36) (38) (27) (29) Cash spend against provisions (4) (3) (3) (5) (9) ________________________________________________ __________ __________ __________ __________ __________ Free cash flow (before dividends and investment 61 38 64 83 78 activity) Dividends (47) (47) (48) (47) (55) Adjustment for pension funding (6) 1 - - - Premium on issue of shares 2 2 3 2 5 Sale and leaseback proceeds 25 - - - - Proceeds on disposals - 2 - 3 46 Acquisitions (2) (22) (51) (23) (198) Purchase of own shares and ACT on repurchases (10) (3) (22) - (32) Cash outflow relating to exceptional items (2) (3) - - - ________________________________________________ __________ __________ __________ __________ __________ Cash movement in debt 21 (32) (54) 18 (156) Opening net cash 44 75 123 105 266 Cash/(debt) in subsidiaries acquired 1 2 6 - (5) Currency translation movements 2 (1) - - - ________________________________________________ __________ __________ __________ __________ __________ Closing net cash 68 44 75 123 105 ________________________________________________ __________ __________ __________ __________ __________ Five Year Financial Summary Segmental Analysis of Sales and Operating Profit 12 months to __________________________________________________________________ Sales 31 August 31 August 31 August 31 August 31 August Â£m 2003 2002 2001 2000 1999 ____________________________________________ __________ _________ ___________ __________ __________ Retailing WHSmith High Street 1,177 1,189 1,120 1,058 1,033 UK Travel Retail 291 306 287 265 242 WHSmith Online 8 6 8 7 5 ____________________________________________ __________ _________ ___________ __________ __________ UK Retailing 1,476 1,501 1,415 1,330 1,280 USA Travel Retail 181 216 245 192 178 ASPAC Retail 150 138 39 12 8 ____________________________________________ __________ _________ ___________ __________ __________ Total Retailing Businesses 1,807 1,855 1,699 1,534 1,466 Publishing Businesses 144 138 131 119 30 - Less Internal (22) (19) (16) (14) (2) ____________________________________________ __________ _________ ___________ __________ __________ Publishing Businesses 122 119 115 105 28 WHSmith News Distribution 1,080 1,069 1,024 1,047 995 - Less Internal (109) (107) (103) (102) (98) ____________________________________________ __________ _________ ___________ __________ __________ WHSmith News Distribution 971 962 921 945 897 ____________________________________________ __________ _________ ___________ __________ __________ Total Sales 2,900 2,936 2,735 2,584 2,391 ____________________________________________ __________ _________ ___________ __________ __________ 12 months to __________________________________________________________________ 31 August 31 August 31 August 31 August Operating Profit 31 August 2002 2001 2000 1999 Â£m 2003 As restated As restated As restated As restated ____________________________________________ __________ _________ ___________ __________ __________ Retailing WHSmith High Street 73 79 77 70 61 UK Travel Retail 19 21 20 17 14 WHSmith Online (2) (3) (6) (7) (3) ____________________________________________ __________ _________ ___________ __________ __________ UK Retailing 90 97 91 80 72 USA Travel Retail (16) (16) 11 13 14 ASPAC Retail 5 5 (2) - - ____________________________________________ __________ _________ ___________ __________ __________ Total Retailing Businesses 79 86 100 93 86 Publishing Businesses 19 19 16 16 4 News Distribution 32 29 26 38 39 Connect2U - (2) (3) (1) - ____________________________________________ __________ _________ ___________ __________ __________ WHSmith News Distribution 32 27 23 37 39 ____________________________________________ __________ _________ ___________ __________ __________ Trading profit 130 132 139 146 129 Support functions (14) (14) (12) (12) (12) Internal rents 3 4 3 3 5 Net pension costs (13) (13) - - - ____________________________________________ __________ _________ ___________ __________ __________ Operating profit before exceptional items and 106 109 130 137 122 goodwill amortisation Exceptional items and goodwill amortisation (57) (33) (19) (2) (2) ____________________________________________ __________ _________ ___________ __________ __________ Operating profit 49 76 111 135 120 ____________________________________________ __________ _________ ___________ __________ __________ This information is provided by RNS The company news service from the London Stock Exchange

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Flutter shares tank as primary listing moves to New York and the CFO steps aside, JD Sports struggles to impress despite sales growth in challenging market and Nat West buys £1.24bn of its own stock back from the government.

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