Interim Results

Smith WH PLC 12 April 2006 12 April 2006 WH SMITH PLC INTERIM RESULTS ANNOUNCEMENT FOR THE SIX MONTHS ENDED 28 FEBRUARY 2006 Good profit performance across all divisions KEY POINTS • Profit before tax and exceptional items up 4% to £71m (2005: £68m)(1). Divisional profits are: - Travel Retail up 18% to £13m - High Street Retail up 6% to £57m - News Distribution up 5% to £20m • Total like-for-like (LFL) sales down 3% to £1.3bn reflecting the continued tough trading environment and our strategy not to chase unprofitable sales - Travel Retail LFL sales up 3% - High Street Retail LFL sales down 6% - News Distribution LFL sales down 2% • Headline(2) earnings per share of 32.6p (2005: 28.4p per share) • Basic earnings per share of 33.1p (2005: 23.5p per share) • Strong free cash flow of £62m (2005: £54m) • Interim dividend increased by 13% to 5.1p (2005: 4.5p) • Intention to separate the Retail and News Distribution businesses Commenting on the results, Kate Swann, Group Chief Executive said: 'We have maintained our focus on Group profitability. Our Travel Retail business has had a strong first half with good sales growth, outperforming passenger growth, and an 18% increase in profit. In a challenging environment High Street Retail has increased its profitability by 6% and is on track in the delivery of its plan. News Distribution continues to make good progress, delivering an industry-leading performance through service improvements and tight cost control. Overall, we continue to be cautious about consumer spending. However, we remain confident in the outcome for the full year. 'We have today announced our intention to separate our Retail and News Distribution businesses. This separation will enable these distinct businesses to benefit from increased focus and to pursue their strategies to maximum effect.' (1) Reported profit before tax of £76m (2005: £60m including discontinued items) (2) Headline: Continuing profit before tax, exceptional items and IAS 19 pension interest - undiluted - Ends - Enquiries: WH Smith PLC Louise Evans Media Relations 020 7851 8850 Mark Boyle Investor Relations 020 7851 8820 Brunswick Tom Buchanan Pam Small 020 7404 5959 A summary of WH Smith PLC's Interim Results 2006 will be published in The Times newspaper on Thursday, 13 April 2006. WH Smith PLC's Interim Results 2006 are also available at www.whsmithplc.com and a copy of the Interim Results 2006 will shortly be available for inspection at the UK Listing Authority, 25 The North Colonnade, London, E14 5HS. CURRENT TRADING In the 6 weeks to 8 April 2006, Retail LFL sales* were down 3% and gross margin was up on last year. News Distribution sales were up 1%. * Due to the difference in the timing of Easter, this year's current trading period is not comparable with last year's current trading period. FINANCIAL REVIEW Group Summary The Group's profit has continued to increase despite the tough trading environment. Travel Retail improved its divisional profit by 18% to £13m. This strong performance, with good sales and margin growth, was driven by improvements to ranges and space management. High Street Retail divisional profit has improved by 6% to £57m as we focused on good category mix management and cost control. News Distribution improved its divisional profit by 5% to £20m and continues to make good progress, delivering an industry leading performance through service improvements and tight cost control. Overall, the Group generated a profit before tax and exceptional items of £71m (2005: £68m), an increase of 4% on the prior year, reflecting interest costs and non-cash charges. Profit before tax was £76m (2005: £60m including discontinued items). Headline earnings per share increased by 15% to 32.6p (2005: 28.4p) with basic earnings per share of 33.1p (2005: 23.5p), up 41%. Cash generation was strong due to the improved trading performance in the businesses and good stock and debtor control. Group free cash flow was £62m (2005: £54m). The increase in net assets to £91m (2005: £65m) reflects the significant reduction in the net pension liability. In light of the Group's improved profit performance and its future prospects, the Board has declared an interim dividend of 5.1p per share (2005: 4.5p), an increase of 13%. We also today announce our intention to separate our Retail and News Distribution businesses, conditional upon shareholder approval. The separation will allow increased focus on their respective strategies as independent businesses. An independent News Distribution business will be even more responsive to publisher needs and will invest further in publisher facing service. It will also be able to work more effectively with other retailers, free of the link to a key retail competitor and it will be better placed to maximise its technological investments, win new business and develop new revenue streams. WHSmith Retail will benefit from greater focus, enabling High Street Retail to continue the delivery of its recovery plan and Travel Retail to continue on its growth path. The separation is likely to be via a demerger of the Retail business. No timetable has been set at present. Further details of the separation will be given in due course. Business Results NB: All divisional profit and loss figures in this section are stated before allocation of share based payment charges of £4m (2005: £2m), pension charges of £5m (2005: £5m), interest and taxation. Retail Retail sales fell by 6% to £771m (2005: £816m) with LFL sales down 5%. Despite challenging trading conditions Retail divisional profit increased by 8% to £70m (2005: £65m) as we maintained our focus on profit maximisation, cost control and not chasing unprofitable sales. High Street Retail sales were down 7% at £621m (2005: £670m) and down 6% on a LFL basis (adjusting for selling space). Travel Retail sales grew by 3% to £150m, up 3% on a LFL basis. High Street Retail divisional profit increased by £3m to £57m for the period and Travel Retail divisional profit rose by £2m to £13m for the period. Book LFL sales were down 4% with gross margin up year on year as we focused on stabilising our market share versus the general high street and maximising profitability. We achieved this by delivering profitable promotional events while creating a very competitive Christmas offer. We also focused on improving the retail basics in the category. In Children's books for example to improve our customer offer we reviewed the range architecture, we improved the use of space to reflect seasonality of products and delivered better promotions. This resulted in increased sales and market share. We intend to replicate this focus in other book sub-categories going forward. We continue to trial new store environments, increased ranges and different levels of service in books. In the second half of the year we will increase the space devoted to books in more stores. Stationery LFL sales were down 4% versus last year. Sales were impacted by reduced consumer spending in the market and our decision to remove unprofitable sub-categories such as electronics. This action had a negative impact on sales but a positive impact on profit. Stationery gross margin also improved in the period from the continued benefits of Far East sourcing, improved mix management and consolidation of suppliers. Our stationery trial store in Barnet performed well in the period and we will incorporate the findings into some of our standard stores. We will also expand the amount of space we devote to stationery and introduce new ranges through the summer period. News and Impulse LFL sales were up 2% year on year with an improvement in gross margin. We held share in newspapers and magazines by delivering focused promotional activity. We also implemented further changes in the magazine supply chain, which have improved efficiency and productivity in store. We grew our snacking and confectionery ranges by making better use of our space. The monthly magazine market remained depressed and partwork sales softened over the period as a consequence of a poor release schedule. We believe the partwork category has now reverted to its traditional levels after a couple of years with strong releases led by DVD collections. The entertainment market was extremely competitive, with a weaker release schedule than in 2004/05 and on-going price deflation. LFL sales fell by 17% with an improvement in gross margin year on year as again we focused on delivering our plan. Stock was tightly controlled to reflect sales patterns, without any detrimental impact on availability levels, and this coupled with our move to the consolidator, E.UK, will allow us to rebalance an element of our entertainment space in the second half of the year to our other core categories. Travel Retail delivered another strong performance, with divisional profit up 18% driven by good sales and margin growth combined with tightly controlled costs. Total LFL sales improved by 3% with sales growth in airports up 6%, well ahead of passenger growth, driven by improvements to our product ranges and more efficient use of our space. Total Rail LFL sales were down 1%. In particular, London Rail remains subdued. Gross margin has improved in Travel Retail over the period as buying improvements and mix changes delivered more sales in higher margin categories such as snacking. Average transaction value also increased as a result of these mix changes and improved promotional activity. In Travel Retail we continue to develop new store formats in both airports and stations. The airport bookstores we have opened at Gatwick North and London Luton airport are performing well and we will open a further airport bookstore at Bristol airport in May 2006. In addition, we opened a new bookstore in Liverpool Street station and two stationery stores at London Bridge and Charing Cross stations. We are also testing further channel opportunities and have opened two franchise stores with Moto, the motorway service stations operator. Retail costs, including store occupancy costs, fell during the period despite cost inflation of approximately 3%. This was due to successful and focused cost control, which has led to £3m of cost savings, announced previously, being delivered ahead of schedule. We are on track to deliver 3-year cost savings of £48m. The Retail business operates from 674 stores, which occupy 3.3m square feet (2005: 3.3m square feet). We opened 5 new stores in the period (Beverley, Barnet, Kidderminster, Sudbury and Liverpool Street Station). We relinquished some space in a number of our stores and the net effect on occupancy is broadly neutral. News Distribution Total sales were down 2% to £587m (2005: £599m) for the period. Newspaper sales were down 1% with price increases partially offsetting volume declines. Magazine sales were down 3%, as a result of the drop in monthly magazine sales, with part-works and one-shots down 13%. Against this backdrop, the market for weekly magazines has grown by 1% and it has benefited from new product launches such as Love It and Real People. Divisional profit increased by £1m to £20m based on tight cost control and efficiency savings, together with the benefits of house closures we announced last year. News Distribution continues to implement solutions to deliver service improvements for its publishing and retail customers. To this end, during 2005 we introduced market leading, transparent key performance indicators (KPIs) that allow full visibility of our logistics performance. The KPIs are agreed in conjunction with publishers, distributors and retailers and have generated a step change in service performance. Performance is now measured across core logistics areas such as timely delivery, accuracy of supplies and returns, and product tracking to and from stores. Performance improvement has been delivered through the introduction of new measurement tools, a dedicated support team plus clear accountability and ownership at all levels in the business. The benefits of improving our service are cost savings and reduced wastage, as well as building better customer relations across the supply chain. News Distribution has also continued to roll out its sales-based replenishment (SBR) system during the year; a total of 20 out of 22 news houses now have SBR capability. We have expanded the SBR offer and tailored the service to the specific needs of individual retailers. For retailers the benefit of SBR is improved availability of product, less unsold stock and therefore reduced stock handling for stores. We intend to roll out SBR to the remaining two news houses in the second half of the year so that we can offer SBR to more retailers, including independent retailers, on a nationwide basis. We have also invested in new revenue streams and are now processing all the book returns for the High Street Retail business at our returns warehouse in Stratton. We will be rolling this out to Travel Retail in the second half of the year. Contract renewals with publishers have progressed well in the first half of the year and we have now contracted circa 85% of our revenue. The average length of the new contracts is five years. We have also won a number of new contracts including new business for Northern & Shell and Comag in Derby and Frontline's distribution in Newcastle, Blackpool, Croydon, Derby, Oxford, Northampton, Cambridge and Bury St Edmunds. The Office of Fair Trading announced in March that they will issue a new draft opinion on the distribution arrangements for newspapers and magazines at the end of May 2006, with a view to publishing their final opinion in the autumn of 2006. We believe we are well placed to adapt to any changes in the market and we remain focused on continuing to deliver excellent customer service to both publishers and retailers. Non-operating activities These results include finance costs net of investment income of £6m (2005: £3m). The increase in the net finance charges from last year is primarily due to lower investment income where in the prior year we had circa £200m of proceeds from the disposal of Hodder Headline earning interest for some of the period and interest on the £120m pension funding which was paid in monthly instalments over the year. In addition, net finance charges for the pension fund were £2m (2005: £2m). This represents the difference between interest earned on pension scheme assets and interest charged on pension scheme liabilities. At 28 February 2006, the gross defined benefit pension deficit is £87m (31 August 2005: £96m). In September 2005 we introduced a Liability Driven Investment approach to the pension fund. As a result of the change in investment approach, over the long-term the profile of the scheme has become more predictable. The Group is committed to making pension deficit payments of £15m in the current year, £17m in 2006/07, £20m in 2007/08 and increasing by RPI (capped at 5%) thereafter until the deficit is repaid. Deferred consideration of £11m was received in relation to the early settlement of loan notes received on the disposal of the US Travel Airports business to the Hudson Group in 2004. A £5m exceptional gain was recognised in the period as a result of post retirement medical benefit liabilities being settled. During the period, a repayment of £30m was made against the term debt, leaving net debt of £12m. Subsequent to 28 February 2006, the final tranche of £35m on the term debt has been repaid, one year early, reflecting the benefits of strong cash flow. WH Smith PLC Group Income Statement For the 6 months ended 28 February 2006 12 months to 31 6 months to 28 Feb 2006 6 months to 28 Feb 2005 Aug 2005 ------------------------------ ------------------------------ ------- Before Before exceptional Exceptional exceptional Exceptional £m Note items items Total items items Total Total ------------------ ----- ------- ------- ------ ------- ------- ------ ------- Continuing operations Revenue 2 1,302 - 1,302 1,359 - 1,359 2,497 ------------------ ----- ------- ------- ------ ------- ------- ------ ------- Operating profit 2,3 77 5 82 71 - 71 80 Investment income 1 - 1 3 - 3 3 Finance costs (7) - (7) (6) - (6) (12) ------------------ ----- ------- ------- ------ ------- ------- ------ ------- Profit before tax 71 5 76 68 - 68 71 Income tax expense 6 (17) (2) (19) (17) - (17) (16) ------------------ ----- ------- ------- ------ ------- ------- ------ ------- Profit after tax from continuing operations 54 3 57 51 - 51 55 Loss for the period from discontinued operations 4 - - - - (8) (8) (8) ------------------ ----- ------- ------- ------ ------- ------- ------ ------- Profit for the period 54 3 57 51 (8) 43 47 ------------------ ----- ------- ------- ------ ------- ------- ------ ------- Continuing earnings per share Basic earnings per share 8 33.1p 27.9p 31.1p Diluted earnings per share 8 32.7p 27.9p 30.7p Earnings per share Basic earnings per share 8 33.1p 23.5p 26.6p Diluted earnings per share 8 32.7p 23.5p 26.3p ------------------ ----- ------- ------- ------ ------- ------- ------ ------- Non-GAAP measures Headline profit before tax(1) £73m £70m £73m Headline earnings(1) - continuing 8 £56m £52m £56m Headline earnings per share(1) Basic earnings per share - continuing 8 32.6p 28.4p 31.6p Diluted earnings per share - continuing 8 32.1p 28.4p 31.3p Dividend per share(1) 5.1p 4.5p 13.7p Fixed charges cover 9 1.7x 1.7x 1.4x ------------------ ----- ------- ------- ------ ------- ------- ------ ------- (1) Headline earnings per share is calculated using profit after tax, but before exceptional items and IAS 19 pension interest net of taxation WH Smith PLC Group Balance Sheet As at 28 February 2006 At At At £m Note 28 Feb 2006 28 Feb 2005 31 Aug 2005 ------------------------------ ----- -------- -------- -------- Non-current assets Goodwill 15 15 15 Other intangible assets 17 20 18 Property, plant and equipment 204 207 219 Deferred tax assets 33 48 57 ------------------------------ ----- -------- -------- -------- 269 290 309 ------------------------------ ----- -------- -------- -------- Current assets Inventories 171 181 162 Trade and other receivables 115 139 111 Current asset investment - 60 - Derivative financial assets 1 - - Cash and cash equivalents 10 63 35 46 ------------------------------ ----- -------- -------- -------- 350 415 319 ------------------------------ ----- -------- -------- -------- Total assets 619 705 628 ------------------------------ ----- -------- -------- -------- Current liabilities Trade and other payables (307) (322) (303) Current tax liabilities (21) (28) (27) Obligations under finance leases 10 (5) (4) (6) Bank overdrafts and other borrowings 10 (50) (26) (45) Short-term provisions (7) (7) (5) ------------------------------ ----- -------- -------- -------- (390) (387) (386) ------------------------------ ----- -------- -------- -------- Net current (liabilities) / assets (40) 28 (67) ------------------------------ ----- -------- -------- -------- Non-current liabilities Bank loans and other borrowings 10 (9) (67) (37) Retirement benefit obligation 5 (87) (145) (103) Deferred tax liabilities (15) (14) (16) Long-term provisions (8) (11) (12) Obligations under finance leases 10 (11) (6) (14) Other non-current liabilities (8) (10) (8) ------------------------------ ----- -------- -------- -------- (138) (253) (190) ------------------------------ ----- -------- -------- -------- Total liabilities (528) (640) (576) ------------------------------ ----- -------- -------- -------- Total net assets 91 65 52 ------------------------------ ----- -------- -------- -------- Shareholders' equity Called up share capital 4 4 4 Deferred shares and 'C' shares reserve 146 153 153 Share premium account 17 15 17 Other reserves 187 187 187 Retained earnings (263) (294) (309) ------------------------------ ----- -------- -------- -------- Total equity 91 65 52 ------------------------------ ----- -------- -------- -------- WH Smith PLC Group Cash Flow Statement For the 6 months to 28 February 2006 6 months to 12 months to £m Note 28 Feb 2006 28 Feb 2005 31 Aug 2005 -------------------------------- ----- -------- -------- -------- Net cash from operating activities 11 65 (68) (22) -------------------------------- ----- -------- -------- -------- Investing activities Interest received 1 3 4 Proceeds on disposal of property, plant and equipment 8 - 2 Proceeds on disposal of subsidiary - 215 222 Proceeds on settlement of loan notes 11 - - Non-operating disposal costs (2) (9) (10) Purchase of property, plant and equipment (12) (10) (32) -------------------------------- ----- -------- -------- -------- Net cash from investing activities 6 199 186 -------------------------------- ----- -------- -------- -------- Financing activities Interest paid (4) (3) (6) Dividend paid (16) (14) (21) 'C' share dividend paid on capital reorganisation - (143) (143) Purchase of shares for employee share schemes - (12) (12) Money returned to ESOP Trust after share capital reorganisation - 5 5 Issue of shares to satisfy employee share schemes - - 2 Repurchase of 'C' shares - (62) (62) Repayments of borrowings (30) - - Repayments of obligations under finance leases (4) (3) (6) New bank loans raised (net of financing costs) - 72 61 -------------------------------- ----- -------- -------- -------- Net cash used in financing activities (54) (160) (182) -------------------------------- ----- -------- -------- -------- Net increase / (decrease) in cash and cash equivalents - continuing operations 8 (20) (8) Net increase / (decrease) in cash and cash equivalents - discontinued operations 9 (9) (10) -------------------------------- ----- -------- -------- -------- Net increase / (decrease) in cash and cash equivalents in period 17 (29) (18) -------------------------------- ----- -------- -------- -------- Opening net cash and cash equivalents 46 64 64 -------------------------------- ----- -------- -------- -------- Closing net cash and cash equivalents 63 35 46 -------------------------------- ----- -------- -------- -------- Reconciliation of net cash flow to movement in net (debt) / funds -------------------------------- ----- -------- -------- -------- Net (debt) / funds at beginning of the period - as reported (56) 35 35 IAS 39 - Deferred shares and 'C' shares classified as financial liabilities (7) - - Increase / (decrease) in cash and cash equivalents 17 (29) (18) Decrease / (increase) in debt 30 (74) (63) Current asset investment - 60 - Net movement in finance leases 4 - (10) -------------------------------- ----- -------- -------- -------- Net (debt) / funds at end of the period 10 (12) (8) (56) -------------------------------- ----- -------- -------- -------- WH Smith PLC Group Statement of Recognised Income and Expenses For the 6 months to 28 February 2006 6 months to 12 months to £m 28 Feb 2006 28 Feb 2005 31 Aug 2005 ------------------------------------- ----------- ----------- ----------- Exchange differences arising on translation of foreign operations (1) (1) - Actuarial gains / (losses) on defined pension schemes 2 (19) (42) UK deferred tax attributable to pension scheme liabilities (2) (14) (27) UK current tax attributable to the additional pension scheme contributions 2 18 39 ------------------------------------- ----------- ----------- ----------- Net income recognised directly in equity 1 (16) (30) Profit for the period 57 43 47 ------------------------------------- ----------- ----------- ----------- Total recognised income and expense for the period 58 27 17 ------------------------------------- ----------- ----------- ----------- Total recognised income and expense for the period is fully attributable to equity holders of the parent company. Reconciliation of movements in equity For the 6 months to 28 February 2006 Deferred Hedging and Share Shares and Share Translation Capital Revaluation Other Retained £m Capital 'C' shares Premium Reserves Reserve Reserve Reserve Earnings Total ------------- ------ ------- ------- ------- ------ -------- ------ ------ ------ Balance at 1 September 2005 4 153 17 - 218 3 (34) (309) 52 Cumulative adjustment for implementation of IAS 39 (net of deferred tax) - (7) - - - - - - (7) ------------- ------ ------- ------- ------- ------ -------- ------ ------ ------ Balance restated at 1 September 2005 for adoption of IAS 39 4 146 17 - 218 3 (34) (309) 45 Total recognised income and expense for the period - - - - - - - 58 58 Recognition of share-based payments - - - - - - - 4 4 Dividends paid - - - - - - - (16) (16) ------------- ------ ------- ------- ------- ------ -------- ------ ------ ------ Balance at 28 February 2006 4 146 17 - 218 3 (34) (263) 91 ------------- ------ ------- ------- ------- ------ -------- ------ ------ ------ On 1 March 2006, the deferred shares were transferred to the Group for a total consideration of one pence. The effect on the balance sheet will be to reduce the deferred shares and 'C' shares reserve by £143m and increase the capital reserve by £143m. WH Smith PLC Notes to the Interim Financial Statements For the 6 months to 28 February 2006 1 Basis of preparation The Group has previously prepared its financial statements under UK Generally Accepted Accounting Principles ('UK GAAP'). From 1 September 2005, the Group is required to prepare its annual consolidated financial statements in accordance with International Financial Reporting Standards ('IFRS') as adopted by the European Union and implemented in the UK. This interim report has been prepared using IFRS accounting policies consistent with those that the Group expects to use in the preparation of its first annual report and financial statements using IFRS for the year ending 31 August 2006. These accounting policies were included in the Group's 'Restatement of financial information under International Financial Reporting Standards' document which was published in full on 29 November 2005 and is available on the Group's website at www.whsmithplc.com/grp/ WHSPLC-IR-Reports.htm. As the 2006 annual financial statements will include comparatives for 2005, the Group's transition date to IFRS is 1 September 2004. The 2005 comparatives have been restated accordingly with the exception of the adoption of IAS 32 'Financial Instruments: Presentation and Disclosure' and IAS 39 'Financial Instruments: Recognition and Measurement'. As permitted by IFRS 1 'First time adoption of IFRS' the Group elected to defer implementation of IAS 32 and IAS 39 until the year ending 31 August 2006. The adjustments required for the adoption of IAS 32 and IAS 39 as at 1 September 2005, together with the IAS adjustments required as at 31 August 2005 and the comparative six month period to 28 February 2005 for this set of interim statements, are set out in notes 12 to 15 of this report. The interim financial statements are unaudited but have been reviewed by the auditors. The scope of this review was substantially less than an audit in accordance with Auditing Standards. The full year accounts for the year ended 31 August 2005 were prepared under UK GAAP. The auditors' report on these accounts was unqualified and did not include a statement under Section 237 (2) or (3) of the Companies Act 1985. 2 Segmental analysis of results For management purposes, the Group is currently organised into three operating divisions - High Street Retail, Travel Retail and News Distribution. These divisions are the basis on which the Group reports its primary business segment information. 1) Segmental analysis by business segments a) Group revenue 6 months to 12 months to £m 28 Feb 2006 28 Feb 2005 31 Aug 2005 ------------------------------ -------- -------- --------- Continuing operations: Retailing High Street Retail 621 670 1,112 Travel Retail 150 146 311 ------------------------------ -------- -------- --------- Total 771 816 1,423 ------------------------------ -------- -------- --------- News Distribution Total revenue 587 599 1,187 Internal revenue (56) (56) (113) ------------------------------ -------- -------- --------- Total 531 543 1,074 ------------------------------ -------- -------- --------- Group revenue 1,302 1,359 2,497 ------------------------------ -------- -------- --------- Travel retail includes revenue of £3.0m generated from Continental Europe (February 2005: £3.0m and August 2005: £5.6m). WH Smith PLC b) Group operating profit 12 months to 6 months to 28 Feb 2006 6 months to 28 Feb 2005 31 Aug 2005 ----------------------------------------- ----------------------------------------- ---------- Share Share Divisional based Divisional based £m Profit Pensions payments Total Profit Pensions payments Total Total --------------- ---------- -------- -------- -------- ---------- -------- -------- ------- ------- Continuing operations: Retailing High Street Retail 57 (3) (2) 52 54 (3) (1) 50 36 Travel Retail 13 - - 13 11 - - 11 25 --------------- ---------- -------- -------- -------- ---------- -------- -------- ------- ------- Total 70 (3) (2) 65 65 (3) (1) 61 61 News Distribution 20 (1) (1) 18 19 (1) (1) 17 34 --------------- ---------- -------- -------- -------- ---------- -------- -------- ------- ------- Trading 90 (4) (3) 83 84 (4) (2) 78 95 profit Unallocated costs (4) (1) (1) (6) (6) (1) - (7) (15) --------------- ---------- -------- -------- -------- ---------- -------- -------- ------- ------- Group operating profit before exceptional items 86 (5) (4) 77 78 (5) (2) 71 80 --------------- ---------- -------- -------- -------- ---------- -------- -------- ------- ------- Divisional profit comprises operating profit before exceptional items, pension service cost and charges in respect of share based payments. Travel retail includes profit of £0.4m generated from Continental Europe (February 2005: £0.3m and August 2005: £0.6m). c) Geographical split The total Group revenue and operating profit stated in notes 1 (a) and 1 (b) above originate from the UK / Europe region. d) Analysis of retailing stores and selling space Number of stores 1 Sept 2005 Opened Closed 28 Feb 2006 ------------------------------ -------- -------- -------- -------- High Street Retail 542 4 - 546 Travel Retail 127 1 - 128 ------------------------------ -------- -------- -------- -------- Total Retailing Businesses 669 5 - 674 ------------------------------ -------- -------- -------- -------- Retail selling square feet (000's) Sapce 1 Sept 2005 Opened reduction 28 Feb 2006 ------------------------------ -------- -------- -------- -------- High Street Retail 3,035 14 (11) 3,038 Travel Retail 216 1 (1) 216 ------------------------------ -------- -------- -------- -------- Total Retailing Businesses 3,251 15 (12) 3,254 ------------------------------ -------- -------- -------- -------- 3 Exceptional items In September 2005, members of the post retirement medical benefits scheme were offered the option to be bought out of the scheme, which was accepted by the majority of members. A gain of £5m (before tax) arose from the settlement of this scheme, which has been recognised in the Income statement for the period. Further details are included in Note 5. 4 Discontinued operations 1) Results from discontinued operations The results from discontinued operations were as follows: 6 months to 12 months to £m 28 Feb 2006 28 Feb 2005 31 Aug 2005 ------------------------------ -------- -------- --------- Revenue Publishing Business Total revenue - 14 14 Internal revenue - (3) (3) ------------------------------ -------- -------- --------- Total revenue - 11 11 ------------------------------ -------- -------- --------- USA Travel Retail - - - ------------------------------ -------- -------- --------- Total revenue - discontinued operations - 11 11 ------------------------------ -------- -------- --------- Loss after tax Publishing Business - - - USA Travel Retail - (8) (8) ------------------------------ -------- -------- --------- Loss after tax - discontinued operations - (8) (8) ------------------------------ -------- -------- --------- The cash flows attributable to discontinued operations comprise: 6 months to 12 months to £m 28 Feb 2006 28 Feb 2005 31 Aug 2005 ------------------------------ -------- -------- --------- From operating activities - - - From investing activities 9 (9) (10) From financing activities - - - ------------------------------ -------- -------- --------- Net increase / (decrease) in cash and cash equivalents 9 (9) (10) ------------------------------ -------- -------- --------- 2) Net loss on sale of discontinued operations There are no results recorded in the period to 28 February 2006 for the sale of discontinued operations. In the prior year, the following results were recorded: a) Provisions for discontinued businesses An amount of £8m was charged to the Income statement for the six months to 28 February 2005 relating to the disposal of discontinued businesses. Of this amount, £7m relates to an impairment review of certain loan notes received as deferred consideration in respect of the disposal of the Group's USA businesses. The balance relates to closure and exit provisions. b) Publishing Business disposal On 25 September 2004, the Group completed the disposal of its Publishing Business, Hodder Headline Limited. The net profit on disposal was £nil. 5 Retirement benefit obligation The Group's pension arrangements for employees are operated through a defined benefit scheme (the WHSmith Pension Trust) and a defined contribution scheme, WHSmith Pension Builder. The most significant scheme is the defined benefit WHSmith Pension Trust. The assets of the pension plans are administered by Trustees, which are independent of the Group's finances. The Trustees have extensive powers over the plan's arrangements, including the ability to determine the levels of contribution. In September 2005, the Trustees of the WHSmith Pension Trust adopted a new investment policy in order to limit the volatility in the underlying investment performance and reduce the risk of a significant increase in the deficit in the fund. The assets in the investment fund were restructured in order to adopt this policy. This involved the expected liabilities of the scheme being matched by assets that will alter in value as interest and inflation rates change, matching the movements at the same rate as the pension liability changes ('a Liability Driven Investment 'LDI' policy'). The key features of this fund restructuring are as follows: - 94% of the fund's assets are invested in an LDI structure with a leading international institutional fund manager; and - 6% of the fund's assets are invested in a portfolio of long-dated equity Call options. These represent a notional exposure to underlying equities of some £350m. The impact of this change in investment policy is to limit the volatility in the fund and the resultant risk of a significant increase in the overall deficit whilst enabling the fund to continue to benefit from any potential higher returns in the equity markets. The market value of the assets in the schemes and the present value of the liabilities in the schemes were: £m At At At 28 Feb 2006 28 Feb 2005 31 Aug 2005 ------------------------------- --------- --------- --------- Present value of the obligations (1,033) (896) (967) Fair value of plan assets 946 758 871 ------------------------------- --------- --------- --------- Deficit in the pension scheme (87) (138) (96) Retirement medical benefit liabilities - (7) (7) ------------------------------- --------- --------- --------- Retirement benefit obligation recognised in the balance sheet (87) (145) (103) Deferred taxation 26 43 30 ------------------------------- --------- --------- --------- Net retirement obligation (61) (102) (73) ------------------------------- --------- --------- --------- In accordance with IAS 19 'Employee benefits', the liability recognised in the balance sheet represents the difference between the present value of the defined benefit obligation, using the projected unit credit method, and the fair value of the plan assets, as at the balance sheet date. The retirement benefit obligation and the associated deferred tax asset are shown within different line items on the face of the balance sheet. Movement in retirement benefit obligation during the period (excluding post-retirement medical benefit liabilities) 6 months to 12 months to £m 28 Feb 2006 28 Feb 2005 31 Aug 2005 ------------------------------- --------- --------- --------- At beginning of period (96) (206) (207) Current service cost (5) (5) (10) Interest cost (2) (2) (2) Contributions 15 71 142 Settlement - 3 3 Disposal of subsidiary pension fund - 20 20 Actuarial gain / (loss) 1 (19) (42) ------------------------------- --------- --------- --------- At end of period (87) (138) (96) ------------------------------- --------- --------- --------- Post retirement medical benefits WH Smith PLC provides retirement medical benefits to certain pensioners. In September 2005, the members were offered the option to be bought out of this scheme, which was accepted by the majority of the members. The impact of the settlement was a £5m reduction in the net deficit. A small number of members opted to remain in the scheme and the present value of the remaining future liabilities is valued at £0.2m net of deferred taxation. The remaining liability and the associated deferred tax asset are shown within different line items on the face of the balance sheet. The valuation has been assessed by independent actuaries (Buck Consultants (Healthcare) Limited). 6 Income tax expense 6 months to 12 months to £m 28 Feb 2006 28 Feb 2005 31 Aug 2005 -------------------------------- -------- ------ -------- Current tax - current year 2 22 24 - prior year (5) (5) (5) Deferred tax 22 - (3) -------------------------------- -------- ------ -------- Income tax expense for the period 19 17 16 -------------------------------- -------- ------ -------- Effective tax rate - continuing operations 23% 25% 25% -------------------------------- -------- ------ -------- Income tax for the period, using the domestic corporation tax rate, is charged at 30% (28 February 2005: 30% and 31 August 2005: 30%). WH Smith PLC 7 Dividends Amounts recognised as distributions to shareholders in the period are as follows: 6 months to 12 months to 28 Feb 2006 28 Feb 2005 31 Aug 2005 -------------------------------- -------- ------ -------- Dividend per share Interim - paid - - 4.5p Final - paid 9.2p 8.0p 8.0p 'C' share dividend per share 'C' share dividend paid on capital reorganisation - 85.0p 85.0p -------------------------------- -------- ------ -------- £m -------------------------------- -------- ------ -------- Dividends Interim - paid - - 7 Final - paid 16 14 14 -------------------------------- -------- ------ -------- 16 14 21 'C' share dividends 'C' share dividend paid on capital reorganisation - 143 143 -------------------------------- -------- ------ -------- 16 157 164 -------------------------------- -------- ------ -------- The Group also paid a dividend of £140,600 on 28 February 2006 (28 February 2005: £104,441 and 31 August 2005: £156,647) in respect of 'C' shares, and paid dividends on the 'B' shares of £40,563 on 28 February 2006 (28 February 2005: £44,914 and 31 August 2005: £45,192). In addition, the directors are recommending an interim dividend in respect of the period ending 28 February 2006 of 5.1p per ordinary share (2005: 4.5p), which will absorb an estimated £9m of shareholders' equity (2005: £7m). This will be paid on 15 June 2006 to shareholders registered at the close of business on 19 May 2006. 8 Earnings /(loss) per share a) Earnings 6 months to 12 months to £m 28 Feb 2006 28 Feb 2005 31 Aug 2005 -------------------------------- -------- ------ -------- Continuing operations: Profit for the period attributable to shareholders 57 51 55 Operating exceptional items net of related taxation (3) - - Pension interest net of related taxation 2 1 1 -------------------------------- -------- ------ -------- Headline earnings attributable to shareholders - continuing operations 56 52 56 -------------------------------- -------- ------ -------- Discontinued operations: Loss for the period attributable to shareholders - (8) (8) Pension interest net of related taxation - - - -------------------------------- -------- ------ -------- Headline earnings attributable to shareholders - discontinued operations - (8) (8) -------------------------------- -------- ------ -------- Total profit for the period attributable to shareholders 57 43 47 -------------------------------- -------- ------ -------- Total headline earnings attributable to shareholders 56 44 48 -------------------------------- -------- ------ -------- b) Basic earnings / (loss) per share 6 months to 12 months to 28 Feb 2006 28 Feb 2005 31 Aug 2005 -------------------------------- -------- ------ -------- Continuing operations: Earnings per share 33.1p 27.9p 31.1p Exceptional items net of related taxation (1.7)p - - Pension interest net of related taxation 1.2p 0.5p 0.5p -------------------------------- -------- ------ -------- Headline earnings per share - continuing operations 32.6p 28.4p 31.6p -------------------------------- -------- ------ -------- Discontinued operations: Loss per share - (4.4)p (4.5)p Pension interest net of related taxation - - - -------------------------------- -------- ------ -------- Loss per share - discontinued operations - (4.4)p (4.5)p -------------------------------- -------- ------ -------- Total basic earnings per share (note a) 33.1p 23.5p 26.6p -------------------------------- -------- ------ -------- Total headline earnings per share (note b) 32.6p 24.0p 27.1p -------------------------------- -------- ------ -------- c) Diluted earnings / (loss) per share 6 months to 12 months to 28 Feb 2006 28 Feb 2005 31 Aug 2005 -------------------------------- -------- ------ -------- Continuing operations: Earnings per share 32.7p 27.9p 30.7p Exceptional items net of related taxation (1.7)p - - Pension interest net of related taxation 1.1p 0.5p 0.6p -------------------------------- -------- ------ -------- Headline earnings per share - continuing operations 32.1p 28.4p 31.3p -------------------------------- -------- ------ -------- Discontinued operations: Loss per share - (4.4)p (4.4)p Pension interest net of related taxation - - - -------------------------------- -------- ------ -------- Loss per share - discontinued operations - (4.4)p (4.4)p -------------------------------- -------- ------ -------- Total diluted earnings per share (note a) 32.7p 23.5p 26.3p -------------------------------- -------- ------ -------- Total diluted headline earnings per share (note b) 32.1p 24.0p 26.9p -------------------------------- -------- ------ -------- a) Basic earnings per share and diluted earnings per share is calculated using profit after tax for the period. b) Basic headline earnings per share and diluted headline earnings per share is calculated using profit after tax but before exceptional items and net interest charges on pension schemes. c) Diluted earnings per share takes into account various share awards and share options, including SAYE schemes, which are expected to vest at 28 February 2006, and for which a sum below fair value will be paid. d) Weighted average share capital 6 months to 12 months to Millions 28 Feb 2006 28 Feb 2005 31 Aug 2005 -------------------------------- -------- ------ -------- Weighted average shares in issue for earnings per share 172 183 177 -------------------------------- -------- ------ -------- Add weighted average number of ordinary shares under option 3 - 2 -------------------------------- -------- ------ -------- Weighted average ordinary shares for fully diluted earnings per share 175 183 179 -------------------------------- -------- ------ -------- The weighted number of ordinary shares in issue is stated after excluding 8,928,064 (2005: 8,961,515) shares held solely for the purpose of satisfying obligations under employee share schemes. 9 Fixed charges cover 6 months to 12 months to £m 28 Feb 2006 28 Feb 2005 31 Aug 2005 -------------------------------- -------- ------ -------- Finance costs less investment income 6 3 9 Operating lease rentals 76 72 149 Property taxes 21 18 37 Other property costs 5 6 10 -------------------------------- -------- ------ -------- Total fixed charges 108 99 205 Profit before tax 76 68 71 -------------------------------- -------- ------ -------- Profit before tax and fixed charges 184 167 276 -------------------------------- -------- ------ -------- Fixed charges cover 1.7x 1.7x 1.4x -------------------------------- -------- ------ -------- Fixed charges cover is calculated by dividing profit before tax and fixed charges by total fixed charges. 10 Analysis of net debt At At At £m 28 Feb 2006 28 Feb 2005 31 Aug 2005 ----------------------------------- -------- -------- -------- Cash and cash equivalents 63 35 46 Current asset investment - 60 - Debt due within one year (50) (26) (45) Finance leases (16) (10) (20) Debt due after more than one year (9) (67) (37) ----------------------------------- -------- -------- -------- Net debt (12) (8) (56) ----------------------------------- -------- -------- -------- Movements in net debt can be further analysed as follows: At Cash flow Non-cash IAS 32 and 39 At £m 28 Feb 2006 Cash flow Non-cash reclassification 31 Aug 2005 ------------------------ -------- ------- ------- ------------ -------- Cash and cash equivalents 63 17 - - 46 Debt - Sterling floating rate (30) 20 - - (50) - Sterling fixed rate (22) 10 - - (32) - 'B' and 'C' shares classified as financial liabilities (7) - - (7) - Finance lease creditor (16) 4 - - (20) ------------------------ -------- ------- ------- -------- -------- Net (debt) / funds (12) 51 - (7) (56) ------------------------ -------- ------- ------- -------- -------- At 28 February 2006, floating rate debt constitutes (1) £15m of unsecured term loan bearing an interest rate of one month LIBOR plus 155 basis points and (2) £15m of unsecured loan notes (which are repayable at par on demand up until expiry on 28 February 2008) which bear an interest rate of 100 basis points below six month LIBOR. Fixed rate debt constitutes (1) £20m of unsecured term loan bearing an interest rate of 6.47% and (2) £2m of undated 5.125% unsecured (redeemable at par) loan stock. On 27 March 2006, the company repaid both the £15m unsecured floating term loan and the £20m fixed unsecured term loan. 11 Net cash inflow / (outflow) from operating activities 6 months to 12 months to £m 28 Feb 2006 28 Feb 2005 31 Aug 2005 -------------------------------- -------- ------ -------- Operating profit / (loss) 82 71 80 Operating exceptional items (5) - - Adjustment for pension funding (9) (126) (132) Depreciation of property, plant and equipment 18 22 43 Profit on sale of property, plant and equipment (note a) (4) - - Impairment of property, plant and equipment (note a) 2 - - Amortisation of intangible assets 3 2 4 Share based payments 4 1 2 (Increase) / decrease in inventories (9) (13) 6 (Increase) / decrease in receivables (18) (20) 1 Increase / (decrease) in payables 4 8 (7) Income taxes paid - (3) (4) Corporate advisory costs - (8) (9) Cash spend against provisions (1) (2) (6) -------------------------------- -------- ------ -------- Net cash inflow / (outflow) from operating activities before exceptional items 67 (68) (22) Cash outflow relating to exceptional operating item (PRMB settlement) (2) - - -------------------------------- -------- ------ -------- Net cash inflow / (outflow) from operating activities 65 (68) (22) -------------------------------- -------- ------ -------- a) High Street Retail generated £3m of the profit on sale of property, plant and equipment, with the balance relating to News Distribution. During the period there was a £2m impairment charge for property, plant and equipment in High Street Retail. 12 First time adoption of IAS 39 'Financial Instruments: Recognition and Measurement' As permitted by IFRS 1 'First time Adoption of International Financial Reporting Standards', the Group has elected to defer the implementation of IAS 39 until the year ending 31 August 2006. The effect of the adoption of IAS 39 is to reduce net assets by £7m resulting from the reclassification of non-equity share capital to financial liabilities. The Group has designated the majority of its foreign exchange derivatives as cash flow hedges as at 1 September 2005; there was no effect on the balance sheet in respect of this. The adjustments on the balance sheet as at 1 September 2005 are summarised below: At Transitional At £m 31 Aug 2005 adjustments 1 Sept 2005 -------------------------------- -------- ---------- -------- Non-current liabilities Bank loans and other borrowings (37) (7) (44) -------------------------------- -------- ---------- -------- Shareholders' equity Deferred shares and 'C' shares reserve 153 (7) 146 -------------------------------- -------- ---------- -------- 13 Summary of the impact of IFRS on the comparative periods - Income Statement The adjustments to the Income statement for the comparative periods are summarised below: 6 months to 28 February 2005 12 months to 31 August 2005 As reported IFRS As restated As reported IFRS As restated £m UK GAAP adjustments IFRS UK GAAP adjustments IFRS --------------------- ------- ------- ------- ------- ------- ------- Continuing operations Revenue 1,370 (11) 1,359 2,508 (11) 2,497 --------------------- ------- ------- ------- ------- ------- ------- Operating profit 72 (1) 71 80 - 80 Investment income 3 - 3 3 - 3 Finance costs (6) - (6) (11) (1) (12) --------------------- ------- ------- ------- ------- ------- ------- Profit before tax 69 (1) 68 72 (1) 71 Income tax expense (18) 1 (17) (18) 2 (16) --------------------- ------- ------- ------- ------- ------- ------- Profit after tax - continuing operations 51 - 51 54 1 55 Loss for the year from discontinued operations (8) - (8) (8) - (8) --------------------- ------- ------- ------- ------- ------- ------- Profit for the year 43 - 43 46 1 47 --------------------- ------- ------- ------- ------- ------- ------- The adjustments made to the Income statement as a result of the transition to IFRS are analysed further below: 6 months to 28 12 months to 31 £m Feb 2005 Aug 2005 ------------------------------- ------------- ------------- Revenue IFRS 5 'Non-current assets' - reclassification of revenue (11) (11) ------------------------------- ------------- ------------- Operating profit IFRS 2 'Share based payments' - recognition of share based payments (1) (2) IAS 17 'Leasing' - reclassification of operating leases as finance leases - 1 IAS 19 'Employee benefits' - recognition of holiday pay (1) - IFRS 3 'Business combinations' - reversal of goodwill amortisation 1 1 ------- ----- (1) - Finance costs IAS 17 'Leasing' - reclassification of operating leases as finance leases - (1) Income tax expense Tax effect of IFRS adjustments to Income statement 1 2 ------------------------------- ------------- ------------- Net effect on Income statement on transition to IFRS - 1 ------------------------------- ------------- ------------- 14 Summary of the impact of IFRS on the comparative periods - Balance sheet The adjustments to the Balance sheets for the comparative periods are summarised below: At 28 February 2005 At 31 August 2005 As reported IFRS As reported As reported IFRS As reported £m Note UK GAAP Adjustments IFRS UK GAAP Adjustment IFRS ------------------- ----- ------- ------- ------- ------- ------- ------- Non-current assets Goodwill a 14 1 15 14 1 15 Other intangible assets a - 20 20 - 18 18 Property, plant and equipment b 219 (12) 207 231 (12) 219 Deferred tax assets c - 48 48 20 37 57 ------------------- ---- ------- ------- ------- ------- ------- ------- 233 57 290 265 44 309 ------------------- ---- ------- ------- ------- ------- ------- ------- Current assets Inventories 181 - 181 162 - 162 Trade and other receivables d 140 (1) 139 112 (1) 111 Current asset investment 60 - 60 - - - Cash and cash equivalents 35 - 35 46 - 46 ------------------- --- ------- ------- ------- ------- ------- ------- 416 (1) 415 320 (1) 319 ------------------- --- ------- ------- ------- ------- ------- ------- Total assets 649 56 705 585 43 628 ------------------- --- ------- ------- ------- ------- ------- ------- Current liabilities Trade and other payables e (328) 6 (322) (319) 16 (303) Current tax liabilities (28) - (28) (27) - (27) Obligations under finance leases f - (4) (4) (3) (3) (6) Bank overdrafts and loans (26) - (26) (45) - (45) Short-term provisions g - (7) (7) - (5) (5) ------------------- ---- ------- ------- ------- ------- ------- ------- (382) (5) (387) (394) 8 (386) ------------------- ---- ------- ------- ------- ------- ------- ------- Net current assets / (liabilities) 34 (6) 28 (74) 7 (67) ------------------- ---- ------- ------- ------- ------- ------- ------- Non-current liabilities Bank loans and other borrowings (67) - (67) (37) - (37) Retirement benefit obligation h (101) (44) (145) (71) (32) (103) Deferred tax liabilities i - (14) (14) - (16) (16) Long-term provisions j (31) 20 (11) (31) 19 (12) Obligations under finance leases k - (6) (6) (9) (5) (14) Other non-current liabilities l (2) (8) (10) (1) (7) (8) ------------------- ---- ------- ------- ------- ------- ------- ------- (201) (52) (253) (149) (41) (190) ------------------- ---- ------- ------- ------- ------- ------- ------- Total liabilities (583) (57) (640) (543) (33) (576) ------------------- ---- ------- ------- ------- ------- ------- ------- Total net assets 66 (1) 65 42 10 52 ------------------- ---- ------- ------- ------- ------- ------- ------- Shareholders' equity Called up share capital 4 - 4 4 - 4 Deferred and 'C' shares reserve 153 - 153 153 - 153 Share premium account 15 - 15 17 - 17 Other reserves 187 - 187 187 - 187 Retained earnings m (293) (1) (294) (319) 10 (309) ------------------- ---- ------- ------- ------- ------- ------- ------- Total equity 66 (1) 65 42 10 52 ------------------- ---- ------- ------- ------- ------- ------- ------- The principal IFRS transition adjustments made to the Balance sheets for the comparative periods are summarised below: £m At 28 February 2005 At 31 August 2005 ------------------------------------- ----------- ----------- a) Intangible assets IFRS 3 'Business Combinations' - reversal of goodwill amortisation 1 1 IAS 38 'Intangible assets' - reclassification of capitalised software as intangible assets 20 18 b) Property, plant and equipment IAS 38 - reclassification of capitalised software as intangible assets (20) (18) IAS 17 'Leases' - reclassification of operating leases as finance leases 10 8 IAS 36 'Impairment of assests' - recognition of impairment of fixed assets (2) (12) (2) (12) ------ ------ c) Deferred tax assets IAS 19 'Employee benefits' - reclassification of deferred tax asset on pension liability 43 30 IAS 37 'Provisions, contingent assets and contingent liabilities' - transfer of non-current deferred tax provision to non-current assets 2 2 Deferred tax assets created from IAS adjustments to opening reserves 3 48 5 37 ------ ------ d) Trade and other receivables IAS 17 - reversal of operating lease prepayment on reclassification of operating leases to finance leases (1) (1) e) Trade and other payables IAS 10 'Events after balance sheet date' - de-recognition of dividend accrual 7 16 IAS 19 - recognition of holiday pay accrual (1) 6 - 16 ------ ------ f) Obligations under finance leases IAS 17 - recognition of the current liabilities relating to finance lease creditors previously classified as operating leases under UK GAAP (4) (3) g) Short term provision IAS 37 - reclassification of provisions as short-term (7) (5) h) Retirement benefit obligation IAS 19 - transfer deferred tax asset element of pension deficit to deferred tax asset (43) (30) IAS 19 - effect of mid price to bid price pension valuation (1) (44) (2) (32) ------ ------ i) Deferred tax liabilities IAS 37 - reclassification of deferred tax liability element of the tax provision (15) (16) Changes to deferred tax liabilities arising from IAS adjustments to opening reserves 1 (14) - (16) ------ ------ j) Long-term provisions IAS 37 - effect of reclassification of provisions into correct IAS balance sheet headings 20 19 k) Obligations under finance leases IAS 17 - recognition of the non-current liabilities relating to finance lease creditors previously classified as operating leases under UK GAAP (6) (5) l) Other non-current liabilities IAS 17 - re-instatement of lease incentives under IAS, previously taken to income under UK GAAP (8) (7) ------ ------ m) Cumulative effect on retained earnings (1) 10 ------------------------------------- ------ ------ ------ ------ 15 Summary of the impact of IFRS on date of transition - Balance sheet The adjustments to the Balance sheet at the date of transition (1 September 2004) are summarised below: As reported IFRS As reported £m Note UK GAAP Adjustment IFRS -------------------- ------- ------- ------- ------- Non-current assets Goodwill a 164 (149) 15 Other intangible assets a - 23 23 Property, plant and equipment b 237 (21) 216 Deferred tax assets c - 68 68 -------------------- ------ ------- ------- ------- 401 (79) 322 -------------------- ------ ------- ------- ------- Current assets Inventories d 184 (17) 167 Trade and other receivables e 212 (75) 137 Cash and cash equivalents 64 - 64 -------------------- ------ ------- ------- ------- 460 (92) 368 -------------------- ------ ------- ------- ------- Assets held for sale f - 247 247 -------------------- ------ ------- ------- ------- 460 155 615 -------------------- ------ ------- ------- ------- Total assets 861 76 937 -------------------- ------ ------- ------- ------- Current liabilities Trade and other payables g (367) 51 (316) Current tax liabilities (30) - (30) Obligations under finance leases h - (4) (4) Bank overdrafts and loans (17) - (17) Short-term provisions i - (10) (10) -------------------- ------ ------- ------- ------- (414) 37 (377) -------------------- ------ ------- ------- ------- Net current assets / (liabilities) 46 192 238 -------------------- ------ ------- ------- ------- Non-current liabilities Bank loans and other borrowings (2) - (2) Retirement benefit obligation j (149) (65) (214) Deferred tax liabilities k - (17) (17) Long-term provisions l (38) 25 (13) Obligations under finance leases m - (6) (6) Other non-current liabilities n (2) (8) (10) -------------------- ------ ------- ------- ------- (191) (71) (262) -------------------- ------ ------- ------- ------- Non current assets held for sale o - (37) (37) -------------------- ------ ------- ------- ------- Total liabilities (605) (71) (676) -------------------- ------ ------- ------- ------- Total net assets 256 5 261 -------------------- ------ ------- ------- ------- Shareholders' equity Called up share capital 141 - 141 Share premium account 93 - 93 Other reserves 132 - 132 Retained earnings p (110) 5 (105) -------------------- ------ ------- ------- ------- Total equity 256 5 261 -------------------- ------ ------- ------- ------- The principal IFRS adjustments made to the Balance sheet at date of transition (1 September 2004) are summarised below: £m £m ----------------------------------------- ------ ------ a) Intangible assets IFRS 5 'non-current assets held for sale and discontinued operations' - reclassification of Hodder Headline ('Hodder') goodwill as a non-current asset held for sale (149) IAS 38 - reclassification of capitalised software as intangible assets 23 b) Property, plant and equipment ('PPE') IAS 38 - reclassification of capitalised software as intangible assets (23) IFRS 5 - reclassification of PPE held by Hodder as non-current asset held for sale (7) IAS 17 - reclassification of operating leases as finance leases 11 IAS 36 - recognition of impairment of fixed assets (2) (21) ------ c) Deferred tax assets IAS 19 - reclassification of deferred tax asset on pension liability 63 IAS 37 - transfer of non-current deferred tax provision to non-current assets 2 Deferred tax assets created from IAS adjustments to opening reserves 3 68 ------ d) Inventories IFRS 5 - reclassification of inventories held by Hodder as non-current assets held for sale (17) e) Trade and other receivables IFRS 5 - reclassification of trade and other receivables held by Hodder as non-current assets held for sale (74) IAS 17 - reversal of operating lease prepayment on reclassification of operating leases to finance leases (1) (75) ------ f) Assets held for sale IFRS 5 - recognition of the assets and liabilities of Hodder as a non-current asset held for sale 247 g) Trade and other payables IFRS 5 - reclassification of trade / other payables held by Hodder as non-current assets liabilities held for sale 37 IAS 10 - de-recognition of dividend accrual 14 51 ------ h) Obligations under finance leases IAS 17 - recognition of the current liabilities relating to finance lease creditors previously classified as operating leases under UK GAAP (4) i) Short term provision IAS 37 - reclassification of provisions as short-term (10) j) Retirement benefit obligation IAS 19 - transfer deferred tax asset element of pension deficit to deferred tax asset (63) IAS 19 - effect of mid price to bid price pension valuation (2) (65) ------ k) Deferred tax liabilities IAS 37 - reclassification of deferred tax liability element of the tax provision (17) l) Long-term provisions IAS 37 - effect of reclassification of provisions into correct IAS balance sheet headings 25 m) Obligations under finance leases IAS 17 - recognition of the non-current liabilities relating to finance lease creditors previously classified as operating leases under UK GAAP (6) n) Other non-current liabilities IAS 17 - re-instatement of lease incentives under IAS, previously taken to reserves under UK GAAP (8) o) Non-current assets held for sale IFRS 5 - recognition of the non-current liabilities of Hodder as non-current liabilities held for sale (37) ------ p) Cumulative effect on retained earnings 5 ------ ----------------------------------------- ------ ------ 16 Approval of Interim Statement The Interim Statement was approved by the Board of Directors on 12 April 2006. INDEPENDENT REVIEW REPORT TO WH SMITH PLC Introduction We have been instructed by the Company to review the financial information for the six months ended 28 February 2006 which comprises the Group income statement, the Group balance sheet, the Group cash flow statement, the Group statement of recognised income and expenses, the reconciliation of movements in equity and related notes 1 to 16. We have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the financial information. This report is made solely to the Company in accordance with Bulletin 1999/4 issued by the Auditing Practices Board. Our work has been undertaken so that we might state to the Company those matters we are required to state to them in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our review work, for this report, or for the conclusions we have formed. Directors' responsibilities The interim report, including the financial information contained therein, is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the interim report in accordance with the Listing Rules of the Financial Services Authority which require that the accounting policies and presentation applied to the interim figures are consistent with those applied in preparing the preceding annual accounts except where any changes, and the reasons for them, are disclosed. International Financial Reporting Standards As disclosed in note 1, the next annual financial statements of the Group will be prepared in accordance with International Financial Reporting Standards as adopted for use in the EU. Accordingly, the interim report has been prepared in accordance with the recognition and measurement criteria of IFRS and the disclosure requirements of the Listing Rules. Review work performed We conducted our review in accordance with the guidance contained in Bulletin 1999/4 issued by the Auditing Practices Board for use in the United Kingdom. A review consists principally of making enquiries of Group management and applying analytical procedures to the financial information and underlying financial data and, based thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review excludes audit procedures such as tests of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit performed in accordance with International Standards on Auditing (UK and Ireland) and therefore provides a lower level of assurance than an audit. Accordingly, we do not express an audit opinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications that should be made to the financial information as presented for the six months ended 28 February 2006. Deloitte & Touche LLP Chartered Accountants London 12 April 2006 -------------------------- This information is provided by RNS The company news service from the London Stock Exchange

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