Final Results Part 1
Smiths News PLC
12 October 2006
Smiths News PLC
Preliminary Results Announcement
For the twelve months ended 31 August 2006
Smiths News is the UK's leading newspaper and magazine wholesaler delivering
over 60 million publications to 22,000 retailers every week.
OPERATIONAL HIGHLIGHTS
• Major contracts renegotiated - 81% of revenues covered by contracts with
average remaining term of four years until expiry
• Additional £50m of annualised sales revenue won from magazine
distributor Frontline
• Consolidation of newspaper sales and marketing operation from 36 depots
to 2 centres of excellence
• Good start to 2007:
+ New contracts won from Northcliffe Newspapers and Johnston Press to
distribute titles in the Plymouth and Peterborough areas
+ The Returns Company is working with Waterstone's to process book
returns from Ottakars stores during integration
FINANCIAL HIGHLIGHTS - CONTINUING
• Trading profit(1) up 5.9% to £39.5m (2005: £37.3m) (2)
• Profit before interest and tax up 4.3% to £34.3m (2005: £32.9m) (2)
• Profit before tax up 0.9% to £32.0m (2005: £31.7m) (2)
• Free cash flow of £27.5m (2)
• Basic earnings per share up 6.3% to 15.1p (2005: 14.2p) (2)
• Dividend proposed of 4.0p
FINANCIAL HIGHLIGHTS - GROUP (Including discontinued operations)
• Basic earnings per share of 33.7p (2005: 26.6p)
(1) Profit before interest and tax stated before central overheads, share based
payments and pension service charges
(2) Stated on a continuing basis
Commenting on the results, Mark Cashmore, Chief Executive said:
'Despite the challenging trading environment, these positive results highlight
the inherent strengths of the Smiths News business.
The newspaper and magazine distribution markets continue to provide
opportunities for growth and development. Trading in the first 5 weeks of 2007
has been in line with expectations. In terms of future trading prospects, whilst
we believe strongly in the resilience of the newspaper and magazine markets, we
are planning on the basis of limited underlying sales growth this year, probably
similar to the levels achieved in 2006.
The combination of a resilient market place, a programme of cost savings and
efficiencies and the business's strong market position underpins the Board's
confidence in the underlying prospects for Smiths News in its first year as a
public company.'
Enquiries (for 12 October only):
Smith News PLC
Alan Humphrey Investor Relations 020 7404 5959
Mark Charlton Media Relations 020 7404 5959
Brunswick
Kate Holgate 020 7404 5959
Giles Croot
An interview with Mark Cashmore in video/audio and text is available on: http://
www.smithsnews.co.uk and on http://www.cantos.com
OPERATIONAL REVIEW
Smiths News has made good progress in a busy year, which culminated in the
separation from the Retail business of WHSmith PLC as an independent company.
Smiths News produced a market leading performance in a challenging trading
environment with increased profitability, improved service delivery to our
publishers and retailers and the successful renewal of key contracts, together
with some new contract gains. In addition, Smiths News has laid the foundations
for developing new revenue growth opportunities.
During the year to 31 August 2006, Smiths News successfully renewed its
contracts with Associated Newspapers, Financial Times, Guardian Newspapers and
Northern & Shell. Consequently, Smiths News now has approximately 81% of its
revenue covered by contracts with an average remaining term of four years until
expiry. In addition, we were delighted to win new contracts with publishers in
the Derby area and extend our existing contract with Frontline, principally in
Newcastle, Northamptonshire, Oxfordshire and Cambridgeshire.
The newspaper market has remained resilient over the year with a continuation of
the trends seen in the last few years of publishers increasing cover prices to
counter-balance circulation declines. The magazine market continues to show
innovation with a number of new launches, predominantly in the weeklies market,
which has offset the declines in the monthlies market as consumers switch to
weekly titles.
Smiths News has continued to focus on driving business efficiency in order to
improve service to publishers and retailers and reduce costs. We have re-sited
our newspaper buying and marketing processes from 36 depots into two centres of
excellence to both improve customer service levels and reduce costs. In
addition, we have improved our order picking and distribution processes. In
anticipation of more challenging market conditions, we implemented a plan in the
autumn of 2005 to reduce costs across all areas of head office.
In July 2006 the Office of Fair Trading issued a draft opinion on the status of
magazine and newspaper distribution contracts under competition law. It also
announced its intention to review the Newspaper Code of Practice that was
established after the Monopolies and Mergers Commission enquiry into newspaper
distribution in 1993. A final opinion is expected in the spring of 2007,
together with the outcome of the Newspaper Code review. We believe the current
arrangements serve consumers well. For some time our plans have recognised the
market is becoming more retailer focused. Regardless of the outcome, our
strategy of improving service and efficiency will not alter, and the business is
well placed to respond to change and capitalise on opportunities that may arise.
Smiths News has made progress this year in developing new growth opportunities.
In the core business, Smiths News has recently won contracts with two regional
newspaper publishers to distribute regional newspaper titles in the Plymouth
(Northcliffe Newspapers) and Peterborough (Johnston Press) areas. The annualised
sales value of these two contracts is expected to be £8m.
The Returns Company is working with Waterstone's to process the return of books
from Ottakars during its integration into the Waterstone's estate. This
demonstrates the opportunities available to Smiths News as a result of the
separation from the Retail business of WHSmith ('Retail Business'). Smiths News
is continuing to work with SAP to develop the Newsworks business.
FINANCIAL REVIEW
Smiths News PLC completed the separation of the Retail Business on 31 August
2006. The results of the Retail Business are classified in the financial
statements as discontinued operations for the years ended 31 August 2005 and
2006.
The information disclosed in this financial review relates solely to the
continuing Smiths News business, unless otherwise stated.
Smiths News has made good progress over the year. Sales and profitability have
continued to grow in a more challenging market. This has been achieved through
management's continued focus on cost control and high levels of service for
publishers and retailers.
Smiths News profit before interest and tax of £34.3m is up 4.3% from £32.9m in
2005. Profit before tax of £32.0m is up 0.9% from £31.7m. Basic earnings per
share from continuing operations increased by 6.3% to 15.1p (2005: 14.2p).
The Directors of Smiths News PLC have proposed a dividend of 4.0p.
REVENUE
Underlying
sales
Growth growth (1)
£m 2006 2005 % %
_______________________________________________________________________________
Revenue
Reported revenue 1,094.7 1,074.1 1.9%
Sales to WH Smith PLC(2) 115.9 113.0 2.5%
________________________________________________________________
Total revenue 1,210.6 1,187.1 2.0%
________________________________________________________________
Comprising:
Newspapers 628.7 620.0 1.4% 2.3%
Magazines 531.6 519.8 2.3% (0.9%)
Other 50.3 47.3 6.3% 6.3%
_______________________________________________________________________________
Total revenue 1,210.6 1,187.1 2.0% 1.1%
_______________________________________________________________________________
(1) Underlying sales growth excludes publisher contract gains and one-off
prior year book promotions.
(2) Smiths News' sales to the Retail Business are reported as inter-segment
sales to discontinued operations and are not included in reported
revenue.
Total sales were up 2.0% to £1,210.6m (2005: £1,187.1m). Underlying sales growth
was 1.1%.
Newspaper sales increased by 1.4% on last year. This figure includes new
business gained in the recent contract renegotiation process, mainly in the
Derby area. This partially compensated for the loss of the book promotional
sales carried out by Associated Newspapers and Northern and Shell (Express
Newspapers) in 2005, which have not been repeated in 2006. Excluding these two
items, underlying newspaper sales growth was 2.3%, driven by price increases
which more than offset volume declines.
Total Magazines sales were up 2.3% in the year. In April 2006 we won additional
territories with the magazine distributor Frontline, equating to circa £50m of
annualised revenue. This more than compensated for the loss of some Bauer
business in April 2005. If these contract changes are excluded underlying
magazines sales were 0.9% down year on year.
We have experienced differing trends in the weekly, monthly and partwork
components of our magazine business.
Weekly sales have been buoyant, fuelled by the continued growth in the celebrity
and men's lifestyle sectors and new launches. By contrast monthly magazines, as
expected, have declined in the year as there has been significant switching by
consumers from monthly to weekly titles. Overall the net position of weeklies
and monthlies is broadly flat compared to last year. Partwork sales have fallen
by 25% in the year ended 31 August 2006. However, this performance needs to be
viewed in the context of two exceptional years, fuelled by CD/DVD collectable
product. Partwork sales have now reverted to the levels experienced in 2003.
The growth in other revenues is driven by our two fledgling new businesses,
Newsworks and The Returns Company. Other revenues also comprise income from
publisher services and carriage service charges.
PROFITS
Growth
________________________________________________________________
£m 2006 2005 %
________________________________________________________________
Revenue 1,210.6 1,187.1 2.0%
________________________________________________________________
Gross contribution 129.1 130.8
Operating costs (90.9) (93.9)
Profits on property transactions 1.3 0.4
________________________________________________________________
Trading profit(1) 39.5 37.3 5.9%
Central costs (5.2) (4.4)
________________________________________________________________
Profit before interest and tax 34.3 32.9 4.3%
Finance costs (2.3) (1.2)
________________________________________________________________
Profit before taxation 32.0 31.7 0.9%
________________________________________________________________
(1) Profit before interest and tax stated before central overheads, share based
payments and pension service charges.
Gross contribution was down £1.7m in 2006, largely due to margin dilution
arising from the renewal of contracts and a change in the sales mix. This has
reduced gross margin from 11.0% to 10.6%.
Operating costs reduced by £3.0m compared to 2005. These cost savings have been
achieved through process consolidation, greater efficiency and tight cost
management. On process consolidation, we have this year, re-sited our newspaper
buying and marketing processes into 2 centres of excellence, whereas in the past
this was carried out in the majority of our depots. Our focus on service has
brought savings in rectification costs, enabling us to reduce significantly our
overtime and agency costs. In addition, costs were reduced across all areas of
head office.
Trading profit(1) of £39.5m is up 5.9% on the previous year, which represents a
50% increase on the trading profit of £26.0m reported in the year ended 31
August 2001.
Central costs of £5.2m included share based payments, defined benefit pension
service charges and central overheads.
Profit before interest and tax of £34.3m (2005: £32.9m) is up 4.3%. Finance
costs for 2006 are £1.1m higher than last year due to increased pension
interest. Profit before tax of £32.0m is up 0.9% (2005: £31.7m).
Taxation
The tax charge for the year was £6.4m (2005: £7.3m). The effective tax rate on
continuing activities was 20% benefiting from settling some of the outstanding
prior year issues. This compares to 23% last year.
We anticipate that our effective tax rate will continue to be lower than the
standard rate in the medium term.
Earnings per share and dividend
Smiths News generated basic earnings per share from continuing operations of
15.1p (2005: 14.2p), an increase of 6.3%. See Appendix 1 for further detail.
The Board has proposed a dividend of 4.0p per ordinary share. Subject to
shareholder approval, the dividend will be paid on 9 February 2007 to
shareholders registered at the close of business on 12 January 2007.
The Board intends to adopt a progressive dividend policy, targeting a dividend
that would, over time, be broadly covered twice by earnings.
Pro forma
At the balance sheet date the Group had drawn down £50m of term loan. At 1
September 2006 £20m was drawn from the revolving credit facility, bringing the
total debt drawn to £70m, from which a one-off payment of £25m was made into the
pension fund. The effect of these transactions, had they taken place at 1
September 2005, would have been to increase finance costs by circa £2.7m for the
year ended 31 August 2006. This comprises increased interest and fee
amortisation on the credit facilities being partially offset by reduced pension
interest.
On this pro forma basis we estimate profit before tax for the year ended 31
August 2006 would be £29.3m and taking into account the group's effective tax
rate for the year of 20%, earnings per share would be 13.6p.
Discontinued Operations
Following the demerger of the Retail Business on 31 August 2006, the results of
the Retail Business have been classified as discontinued operations for both the
year ended 31 August 2005 and 2006.
The profit after tax from the discontinued business was £32m (2005: £22m). An
exceptional charge after tax of £12m in relation to costs associated with the
demerger were charged against the discontinued operations in the Group Income
Statement. A £3m exceptional gain after tax was also recognised in the year
against discontinued operations as a result of post retirement medical benefit
liabilities being settled.
Basic earnings per share including the discontinued business was 33.7p (2005:
26.6p).
CASH FLOW
Continuing Operations
£m
2006
___________________________________________________________________________
Profit before interest and tax 34.3
Depreciation & Amortisation 6.6
Non cash items 1.2
Working capital (8.1)
Capital expenditure (2.1)
Tax (4.4)
___________________________________________________________________________
Free cash flow 27.5
___________________________________________________________________________
A reconciliation to the statutory cash flow is included in Appendix 2.
The outflow on working capital in 2006 is the reversal of timing differences,
from which we had benefited in 2005.
Capital expenditure was tightly managed during the year. Going forward we would
expect capital expenditure to be broadly in line with depreciation.
BALANCE SHEET
£m
___________________________________________________________________________
Non current assets 21.6
___________________________________________________________________________
Working capital (36.1)
Deferred tax asset 13.8
Corporation tax (14.6)
Provisions (1.3)
___________________________________________________________________________
Operating liabilities employed (16.6)
___________________________________________________________________________
Net debt (41.7)
___________________________________________________________________________
Net liabilities excluding pension liability (58.3)
___________________________________________________________________________
Pension liability (49.0)
___________________________________________________________________________
Total net liabilities (107.3)
___________________________________________________________________________
Smiths News PLC is financed through a mixture of debt, comprising a term loan
and revolving credit facility, finance leases and equity.
On 26 June 2006, Smiths News entered into a £100m facility agreement with
Alliance and Leicester Commercial Bank plc, Barclays Bank plc, Lloyds TSB Bank
plc and The Royal Bank of Scotland plc comprising a £50m term loan facility, and
a £50m revolving credit facility. At 31 August 2006, the Group had drawn down
£50m of the term loan facility. This was used principally to settle intercompany
indebtedness arising on the demerger of the Retail Business.
At 31 August 2006 net debt of £42m comprised £11m cash, £50m floating rate debt
and £3m finance leasing. Subsequent to 31 August 2006, the Group drew down £20m
from the available revolving credit facility to fund a one-off £25m contribution
to the Smiths News section of the WH Smith Pension Trust.
On a pro forma basis, taking into account these transactions, net debt would
have been £67m. On 1 September 2006 the Group entered into an interest rate swap
to fix 75% of the term loan facility at 5.13% for 5 years.
Pensions
In September 2005, the Trustees of the Pension Trust adopted a new investment
policy in order to substantially reduce the volatility in the fund. The assets
in the investment fund were restructured in order to adopt this policy. This
involved the assets being invested such that they are expected to alter in value
in line with changes in the pension liability caused by changes in interest and
inflation ('a Liability Driven Investment 'LDI' policy').
On the date of demerger, 31 August 2006, the assets and liabilities of the
Pension Trust and WH Smith Retirement Savings Plan were split between Smiths
News and the WH Smith Retail business by way of a 'sectionalisation', and are
expected to be apportioned 35% to Smiths News and 65% to WH Smith Retail. Each
section contains the accounts of members who are or were employed by the
relevant business.
At 31 August 2006, the Smiths News gross defined benefit pension deficit under
IAS 19 was £49m, approximately £34m net of related deferred taxes.
On 1 September 2006, a one-off contribution of £25m was made to the Smiths News
section of the Pension Trust.
In addition to the one-off payment Smiths News has agreed with the Trustees to
make aggregate ongoing pension deficit funding payments of approximately £5m
each year for the next five years.
Appendix 1 - Earnings per share
Profit after tax from continuing operations 26
(£m)
Basic number of shares (millions) 172
Diluted
Basic EPS 15.1p
Diluted number of share (millions) 173
Diluted EPS 15.0p
Appendix 2 - Free cash flow
Continuing Discontinued
Operations Operations Group
£m 2006 2006 2006
Profit before interest and tax 34 60 94
Depreciation & Amortisation 7 37 44
Non cash items 1 1 2
Working capital (8) 9 1
Capital expenditure (2) (29) (31)
Tax (4) (2) (6)
Net interest paid - (5) (5)
Net provisions spend - (3) (3)
_______________________________________________________________________________
Free cash flow 28 68 96
_______________________________________________________________________________
This information is provided by RNS
The company news service from the London Stock Exchange
Latest directors dealings
- 17 minutes ago SSE
- 1 hour ago Judges Scientific
- 1 hour ago AB Dynamics
- 1 hour ago Henry Boot
- 1 hour ago TPXimpact Holdings