Audited Preliminary Results Year Ended 31 Aug 2018

RNS Number : 4153G

Connect Group PLC

06 November 2018

6 November 2018

Connect Group PLC

('Connect Group' or 'the Group')

Audited Preliminary Results Announcement for the year ended 31 August 2018

A year of significant challenge and changes

Connect Group, a leading UK specialist distributor, today announces its audited preliminary results for the year ended 31 August 2018.

Adjusted continuing results	FY18	FY17	% Change
Revenue	£1,534.3m	£1,594.3m	(3.8%)
Profit before tax	£28.4m	£48.0m	(40.8%)
Earnings per share	9.3p	15.5p	(40.0%)
Statutory continuing results
Revenue	£1,534.3m	£1,594.3m	(3.8%)
(Loss)/profit before tax	(£35.5m)	£34.2m	(203.8%)
(Loss)/earnings per share	(15.5p)	11.0p	(240.9%)

Dividend per share	3.1p	9.8p	(68.4%)
Free cash flow	£20.2m	£28.7m	(29.6%)
Net debt	£83.4m	£82.1m	(1.6%)

Headlines:

· Adjusted continuing profit before tax £28.4m, down £19.6m

· Performance driven by losses in Tuffnells and Pass My Parcel and weaker trading in Smiths News

· Free cash flow of £20.2m, down £8.5m

· No final dividend - making a full year dividend of 3.1p, down 68.4% (FY 2017: 9.8p)

· Smiths News - impacted by shortfalls to cost reduction targets and disappointing World Cup sales

· Pass My Parcel closed in light of continued losses

· Tuffnells materially impacted by operational integration, leading to service and efficiency shortfalls, and coinciding with more competitive trading conditions

· Statutory continuing loss before tax of £35.5m, includes a goodwill impairment for Tuffnells of £46.1m

· Appointment of Jos Opdeweegh as Chief Executive Officer from 1 September 2018

· Turnaround actions underway, spearheaded by Tuffnells recovery plan

· Full strategy for recovery and growth, including capital allocation, to be confirmed in January 2019

Gary Kennedy, Chairman, commented:

"A year of significant challenge exposed weaknesses in our strategy and its execution, with a consequent impact on results.

While it is disappointing not to succeed, we have taken decisive action to address underperformance and respond to the lessons learned. I am confident that under the new leadership of Jos Opdeweegh, and a return to more focused operations, we can reenergise the business, restoring stability and confidence."

Enquiries:

Connect Group PLC

Jos Opdeweegh, Chief Executive Officer

Tony Grace, Chief Financial Officer

01793 563641

01793 563721

www.connectgroupplc.com

Buchanan

Richard Oldworth/ Jamie Hooper / Maddie Seacombe

connect@buchanan.uk.com

www.buchanan.uk.com

020 7466 5000

A meeting for analysts will be held at the office of Buchanan, 107 Cheapside, London, EC2V 6DN on 6 November 2018 commencing at 9.30am. Connect Group PLC's Preliminary Results 2018 are available at www.connectgroupplc.com

An audio webcast of the analyst meeting will be available from 12 noon today via the following link:

http://webcasting.buchanan.uk.com/broadcast/5bb4ae6ec6ec681d9e06bbf5

About Connect Group

Connect Group PLC is a UK based specialist distributor and a leading provider of distribution solutions in complex and fragmented markets. The Group's networks are focused on serving high drop density early morning deliveries, and the demands of mixed and irregular sized freight.

The Group's core businesses are each leading players in their markets:

Smiths News is the UK's largest newspaper and magazine wholesaling business with an approximate 55 per cent market share. It distributes newspapers and magazines on behalf of the major national and regional publishers, delivering to approximately 27,000 customers across England and Wales on a daily basis. The speed of turnaround and density of Smiths News' coverage is critical to one of the UK's fastest physical supply chains.

Dawson Media Direct (DMD) supplies newspapers, magazines and inflight entertainment technology, serving 115 airports in 47 countries globally. Delivering to strict time windows with security accreditation, DMD serves the specialist needs of airlines and travel points in the UK and worldwide with printed and digital media.

Tuffnells is a leading distributor of mixed and irregular freight, serving approximately 5,000 small and medium sized enterprises across the UK. Its network of 37 depots collects and delivers mixed parcel freight consignments, specialising in items of irregular dimension and weight ("IDW"), examples of which include bulky furnishings, building materials and automotive parts. With a mix of local and national clients, Tuffnells completes up to 70,000 daily deliveries, offering a range of timed services that are responsive to customer demand.

Notes to Editors

This document contains certain forward-looking statements with respect to Connect Group PLC's financial condition, its results of operations and businesses, strategy, plans, objectives and performance. Words such as 'anticipates', 'expects', 'intends', 'plans', 'believes', 'seeks', 'estimates', 'targets', 'may', 'will', 'continue', 'project' and similar expressions, as well as statements in the future tense, identify forward-looking statements. These forward-looking statements are not guarantees of Connect Group PLC's future performance and relate to events and depend on circumstances that may occur in the future and are therefore subject to risks, uncertainties and assumptions. There are a number of factors which could cause actual results and developments to differ materially from those expressed or implied by such forward looking statements, including, among others the enactment of legislation or regulation that may impose costs or restrict activities; the re-negotiation of contracts or licences; fluctuations in demand and pricing in the industry; fluctuations in exchange controls; changes in government policy and taxation; industrial disputes; war and terrorism. For a more detailed description of these risks, uncertainties and other factors, please see the section titled "Principal Risks" in the preliminary announcement for the full year ended 31 August 2018. These forward-looking statements speak only as at the date of this document. Unless otherwise required by applicable law, regulation or accounting standard, Connect Group PLC undertakes no responsibility to publicly update any of its forward-looking statements whether as a result of new information, future developments or otherwise. Nothing in this document should be construed as a profit forecast or profit estimate. This document may contain earnings enhancement statements which are not intended to be profit forecasts and so should not be interpreted to mean that earnings per share will necessarily be greater than those for the relevant preceding financial period. The financial information referenced in this document does not contain sufficient detail to allow a full understanding of the results of Connect Group PLC. For more detailed information, please see the preliminary announcement for the full-year ended 31 August 2018 which can be found on the Investor Relations section of the Connect Group PLC website - www.connectgroupplc.com. However, the contents of Connect Group PLC's website are not incorporated into and do not form part of this document.

The Group uses certain performance measures for internal reporting purposes and employee incentive arrangements. The terms 'net debt', 'free cash flow', 'adjusted operating profit', 'adjusted profit before tax', 'adjusted earnings per share' 'adjusted EBITDA' and 'Adjusted' are not defined terms under IFRS and may not be comparable with similar measures disclosed by other companies.

(1) The following are the key non-IFRS measures identified by the Group in the consolidated financial statements as Adjusted results:

Adjusted operating profit is defined as statutory operating profit from continuing operations, excluding the impact adjusting items (defined above). This metric is reconciled on the face of the income statement, with detail of each adjusted item disclosed within note 4.

Adjusted profit before tax is defined as statutory profit before tax, excluding the impact of adjusting items (defined above). This metric is reconciled on the face of the income statement, with detail of each adjusted item disclosed within note 4.

Adjusted earnings per share; is defined as adjusted PBT, less taxation attributable to adjusted PBT and including any adjustment for minority interest to result in adjusted profit after tax attributable to shareholders; divided by the basic weighted average number of shares in issue. This metric is reconciled in note 10.

Adjusted items; are items of income or expense that are considered significant, in nature or value, and are excluded in arriving at Adjusted operating profit. The purpose of excluding these items from adjusted measures is to provide additional performance metrics to users of the financial statements that exclude the impact of the items the directors consider to have a significant impact on reported results and do not relate to the underlying trading activity of the Group. The specific items vary between financial years, and for the current year include certain disposal related costs, legal and regulatory provisions, amortisation and impairment of intangibles, impairment of property, plant and equipment, integration costs, business restructuring costs and network re-organisation costs including those relating to strategy changes which are not normal operating costs of the underlying business. They are disclosed and described separately in note 4 of the financial statements to provide further understanding of the financial performance of the Group. A reconciliation of adjusted profit to statutory profit is presented on the income statement.

(2) Free cash flow; is defined as cash flow excluding the following: payment of dividends, dividends from associates, acquisitions and disposals, the repayment of bank loans, EBT share purchase, proceeds of share issues and cash flows relating to pension deficit repair. This measures shows the cash retained by the Group in the year and is considered by the Directors to provide additional information on the cash available for shareholders returns. A reconciliation of free cash flow to the net movement in cash and cash equivalents is shown in note 35.

(3) Adjusted EBITDA is calculated as Adjusted operating profit (as defined above) before depreciation and amortisation. This metric is reconciled on page 16.

(4) Net debt; is calculated as total debt less cash and cash equivalents. Total debt includes loans and borrowings, overdrafts and obligations under finance leases. A reconciliation of net debt is presented in the Group Cash Flow Statement.

(5) Continuing operations excludes the sale of Education and Care sold on 30 June 2017 and Books division which was classified as held for sale as at 31 August 2017 and sold on 14 February 2018. Discontinued profit for the year is the Books division for the period after tax.

(6) FY2018 refers to the full year ended 31 August 2018, FY2017 refers to the full year ended 31 August 2017.

(7) All movements are calculated to round thousands.

OPERATING REVIEW

INTRODUCTION

In what has been a significantly challenging year, weaker trading in Tuffnells and Smiths News (including losses in Pass My Parcel) was compounded by operational inconsistency and shortfalls against efficiency targets. In the light of the underperformance, we have halted our integration and business transformation plans, appointed energetic and experienced new leadership, and taken decisive action to stabilise operations and improve accountability in our core businesses.

In January 2018 the Group announced that as a result of weaker trading it expected full year adjusted profit before tax for its continuing operations to be in the range of £42m to £45m. Following further poor trading, in June 2018 the Group announced that this forecast would not be achieved and the Board had materially reduced its expectations for full year Adjusted profit before tax. In September 2018 the Group further confirmed to the market that following a continuation of the challenging trends it expected the full year trading performance to be below our revised expectations.

Group Adjusted profit before tax for continuing operations of £28.4m is down by 40.8% (FY2017: £48.0m) and Adjusted Earnings per Share is down 40.0% to 9.3p.

Following an impairment of £46.1m in the goodwill of Tuffnells, Statutory continuing loss before tax is £35.5m (FY2017: profit of £34.2m) and Statutory continuing earnings per share is a loss of 15.5p (FY2017: earnings of 11.0p). The Statutory continuing and discontinued loss after tax is £47.0m (FY2017: profit £36.6m), and Statutory continuing and discontinued earnings per share is a loss of 19.1p (FY2017: earnings 14.9p). The Statutory continuing and discontinued results are also impacted by the closure of Pass My Parcel and the sale of the Books business for an enterprise value of £18.7m.

Free cash flow of £20.2m from continuing operations (FY2017: £28.7m), demonstrates the Group's underlying cash generative business model even in a difficult year. In the light of challenges in the year and mindful of the benefits of strengthening the balance sheet as we position the business for recovery, the Group has resolved not to recommend a final dividend, making the full year dividend 3.1p, down 68.4%.

GROUP INTEGRATION AND ORGANISATION RESTRUCTURE

In July 2017, following recent disposals, the Group restructured its leadership and operations in pursuit of a more integrated business model. Good progress was made in centralising support services, but it is now clear that there are not the same efficiencies to be achieved in sales & marketing and at an operating level. Indeed, the move to integrate into a single structure weakened operational performance and impacted internal accountability and controls. A detailed review of the Group's networks also concluded that opportunities for combining physical operations of Tuffnells with Smiths News are limited, giving further impetus to a return to more focused management.

In response, we have taken decisive action to address the lessons learned. The closure of Pass My Parcel, the appointment of new leadership and the return to focused business units were critical first steps in restoring stability to core operations. In order to address a weakening of controls and accountability which followed our integration programme, we have made improvements to business information and the control and accountability framework. This has helped to identify the root causes of underperformance and clarified our immediate priorities for FY2019.

On 1 September 2018 Jos Opdeweegh was appointed as Chief Executive Officer and we have subsequently further refreshed the senior management team strengthening the relevant experience and capabilities to lead our recovery. The appointment of Michael Holt as a non-executive director also enhances the Board's experience and knowledge of the parcels and freight markets.

Operationally, the integration activity across our two networks has ceased. We have re-established dedicated management teams and leadership for Smiths News and Tuffnells, returning accountability for revenue and costs to the individual businesses, while supporting them with the newly integrated central services. Both businesses remain leaders in their fields with strong market positions, giving confidence that by refocusing on core service and efficient operations, stability can be restored.

Strengthening the efficiency, operational excellence and network quality of Smiths News and Tuffnells will underpin the Group's recovery plan, driven also by improved capability in business analytics and an energised culture of continual improvement. We have actions underway to address the immediate priorities and aim to share details of the fully developed turnaround strategy in January 2019, including confirmation of our capital allocation plans.

SMITHS NEWS

Adjusted operating profit in Smiths News was £35.9m (FY2017: £40.4m) with revenue of £1,335.1m (FY2017: £1,383.4m). This performance includes the sales and costs of Pass My Parcel, amounting to a loss of £5.4m (FY2017: loss £6.3m). Sales and profit this year were boosted by sticker sales associated with the FIFA World Cup, albeit these were down on expectations and the levels achieved in previous tournaments.

While newspaper and magazine sales declined at the higher end of our strategic forecast, they continue to demonstrate an overall resilience and relative predictability that gives confidence to future revenue planning. Newspaper sales of £841.8m were down 3.9%, with price mitigating volume declines; magazine categories, including one-shots and partworks, were down by 3.8%.

Planned headcount reduction from network integration did not materialise and costs in the first half of the year were further impacted by service issues at the Hemel Hempstead depot that required an additional £0.6m of necessary service related costs to rectify. In hindsight, it is clear that the Group's integration strategy impacted operational focus and controls; in addition, planned savings were not fully achieved, resulting in a £3.3m shortfall to the target of £5m efficiencies in the year.

Distribution contracts were successfully renewed with two of our largest publisher clients: News UK (July 2018), and Frontline (October 2018). In total, these contracts account for circa 30% of Smiths News' current sales and the new agreements secure our territories with these publishers for a further five years. Discussions with a number of the other publishers are ongoing, and we are confident of renewing the long term agreements with all our key partners.

On 1 October 2018 Jonathan Bunting, formerly Chief Operating Officer, was appointed as Chief Executive of Smiths News. Jonathan has deep experience of the business and news industry, having embedded knowledge and strong relationships with our key publishers and retailers.

In what was a challenging year the capabilities of Smiths News were severely tested; its resilience in the face of these difficulties demonstrates its underlying value to the Group. Looking ahead, with the combination of renewed contracts, the closure of Pass My Parcel and a return to dedicated operational management, Smiths News is well positioned to continue delivering a relatively predictable flow of revenue and cash that will help to underpin the Group's recovery plans.

CLOSURE OF PASS MY PARCEL

Pass My Parcel made an Adjusted operating loss of £5.4m in the period up to 23 May 2018. Following a detailed review of its prospects, the Board resolved to close the operation and its associated network of local retailers. Consequently, a further £6.7m attributable to closure and ongoing onerous contracts has been charged to Adjusted Items.

Discussions with key clients to exit ongoing contracts have progressed more quickly than first anticipated, impacting costs in FY2018 but reducing the quantum and potential for ongoing impact. Deliveries and collections representing over 95% of volumes ceased during August 2018 and distribution services for the remaining clients will end by January 2019. The contractual arrangements for the provision of IT services to one client are, however, expected to continue throughout FY2019 at minimal cost.

The parcel-shop network is expected to transfer to a leading UK parcel carrier, and a migration plan is underway, completing June 2019. A wider costs removal plan is on track, ensuring other direct and indirectly associated expenses are removed as swiftly as possible.

DAWSON MEDIA DIRECT (DMD)

DMD, our specialist distributor of printed and digital media to airlines and travel points delivered a good result with Adjusted Operating profit of £3.0m up by 30.4% (FY2017: £2.3m) from revenue of £26.5m, (FY2017: £28.8m). Profit growth was driven by a combination of positive net contract changes, and cost efficiencies from internal restructure in the prior year. The business was not impacted by the Group's wider integration activity.

TUFFNELLS

Tuffnells made an Adjusted operating loss of £5.0m compared to an Adjusted operating profit of £12.0m in FY2017. External revenue of £175.2m was down by 4.4% (FY2017: £183.2m) with sales and volumes performance in the second half of the year materially behind expectations.

The market for IDW freight was increasingly competitive, putting pressure on both price and consignment volumes as the year progressed. In this more challenging environment, Tuffnells' performance was materially impacted by the execution of our integration plans leading to service shortfalls that culminated at the seasonal peak. The Group also discovered and rectified an historical misapplication of national minimum wage legislation, impacting Adjusted operating costs by £0.8m this financial year.

In May 2018 the Group reported that the level of change across the business had disrupted service and had given rise to a number of challenges, including increased driver vacancies and a high turnover of depot managers, limiting our ability to respond with sufficient experience and agility. Operational performance had been further undermined by the delivery and collection of Pass My Parcel volumes that also put pressure on core service.

With hindsight, the integration of the Group's operations and sales & marketing functions led to suboptimal service and a weakening of controls at a time when our competitors were more aggressively targeting our customers. The actions we have taken to strengthen management, improving service and accountability were implemented too late in the year to make a meaningful impact on peak trading. Volumes during the third quarter were down by 12.3% with a disproportionate impact on full year operating profits as the seasonal uplift would usually generate an important premium for the business.

In the light of the lessons learned, we have reintroduced dedicated operational and commercial management to Tuffnells. This supports a structured approach to recovery that will continue to address historical under investment in order to introduce a standard operating model, attracting and on-boarding high quality revenue and achieving a more flexible cost to serve. A sustainable recovery will take time to achieve in full but we expect to see a gradual improvement to performance as the actions are implemented over the course of FY2019.

On 1 October 2018 Peter Birks was appointed to role of Chief Executive Officer of Tuffnells. Peter brings a wealth of experience in logistics, having held senior executive roles across a number of successful and innovative UK-based distribution businesses.

DISCONTINUED OPERATIONS

On 14 February 2018, the Group completed the sale of the Books business at a loss of £10.5m, full details are provided in note 12. In the prior year, on 30 June 2017, the Group completed the sale of the Education & Care business at a profit of £19.0m full details are included in the Annual Report.

EXIT OF PASS MY PARCEL

In the light of continued losses the carrying value of Pass My Parcel was written down to £nil in February 2018. A detailed review of the proposition followed, concluding in May 2018 that the business model was unviable with no reasonable prospect of recovery. Trading from 23 May 2018, together with impairment of assets, the expenses of closure and the exiting of remaining agreements, resulted in costs of £6.7m included within Adjusted items.

The Adjusted discontinued profit before tax amounted to £1.7m over the full year compared to £2.0m in FY2017.

CAPITAL MANAGEMENT

In May 2018 the Company announced it would conduct a review of its capital allocation strategy, determining the most appropriate distribution of its surplus free cash flow. The Board's decision not to recommend a final dividend for FY2018 is a reflection of performance in the year, but it was also mindful of the interim dividend paid in July 2018, and our near term priority of strengthening the balance sheet while meeting the investment requirements of business recovery. Looking ahead, the Board is conscious of the importance of a dividend to shareholders and anticipates a dividend in FY2019, based on the earnings and free cash flow achieved in the year. A more detailed capital management policy will accompany our planned strategy announcement in January 2019.

PRIORITIES FOR 2019

The Group's immediate focus is on returning its operations to stability, arresting the decline in profit and establishing a platform for turnaround. The decision to return to two operating units, supported by a suite of central services, is indicative of our plan to recover performance by strengthening the individual businesses. We remain committed to finding efficiencies across the Group and believe that greater standardisation of processes, particularly in Tuffnells, can also deliver material improvements.

Our priorities for FY2019 include:

1. Returning Tuffnells to profitability through a reduction of the cost base, a more granular pricing methodology and net new customer wins;

2. Renegotiating the remaining Smiths News contracts with key publishers;

3. Implementing a standardised operating model in Tuffnells to enhance safety, productivity and customer experience;

4. Streamlining head office functions to improve financial reporting, robust business analytics, increased productivity and continuous improvement;

5. Maximising the amount of cost savings at Smiths News to diminish the impact of the price adjusted volume decline in the business; and

6. Embedding a new, entrepreneurial culture with a passion for excellence and customer centricity.

These priorities will establish the foundations for a sustainable improvement in profitability. Our strategy for long-term growth, including its relationship to capital allocation, is currently being finalised. We aim to update stakeholders with a detailed strategic plan, including the implications for capital allocation, in January 2019.

FINANCIAL REVIEW

A challenging year for the Group has been reflected in weaker results for Smiths News and a disappointing performance from Tuffnells, however we have continued to deliver a positive free cash flow.

CONTINUING ADJUSTED RESULTS ⁽¹⁾ ⁽⁵⁾

GROUP

Continuing Adjusted results £m	2018	2017	Change
Revenue	1,534.3	1,594.3	(3.8%)
Operating profit	33.9	54.7	(38.0%)
Net finance costs	(5.5)	(6.7)	(17.9%)
Profit before tax	28.4	48.0	(40.8%)
Taxation	(5.5)	(9.9)	44.4%
Effective tax rate	19.4%	20.6%
Profit after tax	22.9	38.1	(39.9%)

Continuing adjusted operating profit was £33.9m, down £20.8m (38.0%) on the prior year, and driven by poor performances in both Tuffnells and Smiths News. Smiths News Adjusted operating profit was down by £4.5m to £35.9m, including £5.4m of losses in Pass My Parcel (FY2017: £6.3m loss) for the period up to 23 May 2018, when the Board made the decision to exit the click & collect market. Smiths News benefited from World Cup trading and network savings, but both fell short of expectations. DMD had a good trading year; although revenue was down, operating profit increased by £0.7m to £3.0m, following actions taken to reduce operational expenditure. Tuffnells reported an operating loss of £5.0m, down £17m on the prior year (FY2017: £12m profit). Tuffnells performance suffered from a more competitive trading environment and inconsistent service standards, resulting in lower parcel volumes, and a sub-optimal trunking and distribution network which drove a higher unit cost per consignment. Other factors included incremental wage and cost pressure, changes in depot management, and a one-off charge for a historical misapplication of National Minimum Wage legislation.

Net finance charges of £5.5m (FY2017: £6.7m) were down on prior year. Included within net finance charges are: interest costs on borrowing incurred in the period of £4.1m (FY2017: £4.4m), lower year-on-year as the drawn borrowing facility requirement was favourable from cash flow generation and cash proceeds from the disposal of the Books business; finance lease interest of £0.6m (FY2017: £1.0m); amortisation of bank arrangement fees £0.5m (FY2017: £1.0m); and pension interest costs £0.2m (FY2017: £0.3m).

Adjusted profit before tax was £28.4m, down 40.8% on last year.

Taxation of £5.5m resulted in an effective tax rate of 19.4%, effective tax rate was lower than last year due to the reduction in UK corporation tax rate.

STATUTORY CONTINUING & DISCONTINUED RESULTS

GROUP

Statutory continuing results £m	2018	2018	2017	2017	Change
Revenue		1,534.3		1,594.3	(3.8%)
Operating (loss)/profit:
Smiths News	25.0		36.1		(30.7%)
DMD	2.7		1.3		107.7%
Tuffnells	(57.7)		4.3		(1,441%)
Operating (loss)/profit		(30.0)		41.7	(171.9%)
Net finance costs		(5.5)		(7.5)	26.7%
(Loss)/Profit before tax		(35.5)		34.2	(203.8%)
Taxation		(2.6)		(7.2)	63.9%
Effective tax rate		(7.3%)		21.1%
Profit after tax		(38.1)		27.0	(241.1%)

Statutory continuing loss before tax of £35.5m is lower to prior year by £69.7m (FY2017: £34.2m profit), primarily driven by: impairment charge relating to goodwill at Tuffnells £46.1m (FY2017: £nil); amortisation of acquired intangibles £7.1m (FY2017: £7.3m); Pass My Parcel exit costs of £6.7m (FY2017 £nil); and network and reorganisation costs of £3.1m (FY2017: £8.0m).

At the divisional level Smiths News statutory operating profit was £25.0m, down 30.7% on prior year after £10.9m of adjusted items which included Pass My Parcel exit costs of £6.7m, Tuffnells Statutory operating loss was £57.7m down £62.0m after impairment of goodwill of £46.1m and amortisation of acquired intangibles of £7.1m.

The effective statutory income tax rate for continuing operations was (7.3%) (FY2017: 21.1%), as the tax impact of Adjusted items was £2.9m (FY2017: £2.7m).

Statutory continuing & discontinued loss after tax of £47.0m is down by £83.6m (FY2017: £36.6m profit), and Statutory continuing & discontinued loss per share of 19.1p is down 34.0p (FY2017:14.9p profit). The Statutory continuing & discontinued results are impacted by the sale of the Books business in February 2018 for an enterprise value of £18.7m and a loss of £10.5m on disposal.

As a consequence of the Tuffnells impairment, the disposal of the Books business and the distribution of dividends in the year the net assets on the balance sheet have reduced £71.0m to a reported net liability at 31 August 2018 of £45.9m.

EARNINGS PER SHARE

	Continuing Adjusted ⁽¹⁾		Continuing Statutory
	2018	2017	2018	2017
Earnings/(loss) attributable to ordinary shareholders (£m)	22.9	38.1	(38.1)	27.0
Basic weighted average number of shares (millions)	246.0	245.4	246.0	245.4
Basic Earnings/(loss) per share	9.3p	15.5p	(15.5p)	11.0p
Diluted weighted number of shares (millions)	246.7	247.0	246.7	247.0
Diluted Earning/(loss) per share	9.3p	15.4p	(15.5p)	10.9p

Earnings attributable to shareholders on a continuing adjusted basis of £22.9m resulted in an adjusted EPS of 9.3p, a decrease of 6.2p on last year, driven by the more challenging trading conditions in Tuffnells, Smiths News network efficiencies savings not being achieved, and continuing losses at Pass My Parcel prior to the decision to exit.

The fully diluted weighted number of shares was 246.7m (FY2017: 247.0m). Fully diluted shares includes a 0.7m diluted share adjustment for employee incentive schemes (FY2017: 1.6m).

Including Adjusted items, statutory continuing earnings per share is down 26.5p to 15.5p (loss per share) (FY2017: 11.0p).

Statutory continuing and discontinued loss attributable to shareholders of £47.0m (FY2017: £36.6m profit) resulted in a loss per share of 19.1p, down 34p on FY17, driven by the loss on disposal of the Books business.

DIVIDEND

	2018	2017
Dividend per share (paid & proposed)	3.1p	9.8p
Dividend per share (recognised)	9.8p	9.6p

After careful consideration of performance in the year and immediate priorities of the business, the Board has resolved not to recommend a final dividend, leaving the full year dividend as 3.1p paid as an interim dividend in July 2018, a reduction of 6.7p or 68.4% (FY2017: 9.8p).

SMITHS NEWS (including Pass My Parcel)

Adjusted figures ⁽¹⁾ - £m	2018	2017	Change
Revenue	1,335.1	1,383.4	(3.5%)
Operating profit	35.9	40.4	(11.1%)
Operating margin	2.7%	2.9%	(20bps)

Revenue in the news distribution business was £1,335.1m (FY2017: £1,383.4m) down 3.5%. Newspaper and magazine sales have continued to perform in line with long term trends, with a relatively stronger performance than expected from newspapers helping to offset weaker magazine sales. Newspaper sales of £841.8m were down 3.9%, with price increases helping to offset volume declines. Combined sales of all magazine categories were down by 3.8%, which includes the benefit of the FIFA World Cup album and sticker sales.

Adjusted operating profit was £35.9m (FY2017: £40.4m) down £4.5m (11.1%). Operating profit was favourably impacted by the World Cup sales, although the profit from these at £2.8m was materially lower than in previous tournaments. As a consequence of the integration strategy and the consequent impact on focus and accountability, targeted annual savings of £5m were not achieved, Inflationary pressure in contractor rates costs also adversely eroded operating margins. In addition, operating challenges at the new Hemel Hempstead depot resulted in incremental operating costs throughout the year of £1.0m. Pass My Parcel incurred a net loss of £5.4m in the period up to 23 May 2018 (FY2017: £6.3m), when the decision to exit the business was made by the Board. An additional Pass My Parcel exit charge of £6.7m is reported within Adjusted items.

TUFFNELLS

Adjusted figures ⁽¹⁾ - £m	2018	2017	Change
Revenue	175.2	183.2	(4.4%)
Operating (loss)/profit	(5.0)	12.0	(141.7%)
Operating margin	(2.9%)	6.6%	(950bps)

Tuffnells had a particularly challenging year, achieving total revenue of £175.2m down 4.4%, (FY17: £183.2m), and driving an Adjusted operating loss of £5.0m, down £17m (FY2017: £12.0m profit).

In what became an increasingly competitive market, variability in service standards and disruptive price competition for larger customers, led to lower volumes, particularly in the second half of the year. Tuffnells did not therefore benefit from its usual seasonal peak, which in previous years has contributed a substantial proportion of annual profit. The decline in parcel volumes combined with the semi-fixed operating cost base at a depot level resulted in incremental operational inefficiencies within our trunking network. Separately, operational costs rose from increases in national living wage, higher sub-contractor rates and continuing challenges in the recruitment of drivers.

As part of the integration strategy, Tuffnells handled Pass My Parcel deliveries in those areas outside of Smiths News' territories. The combination of delivering large consignments of irregular dimension and weight (IDW) and handling, much smaller packets for Pass My Parcel, resulted in further operating inefficiencies. The exit of the Pass My Parcel proposition will allow Tuffnells to give greater focus efficiency in its core trunking and delivery routes.

DMD

Adjusted figures ⁽¹⁾ - £m	2018	2017	Change
Revenue	26.5	28.8	(8.0%)
Operating profit	3.0	2.3	30.4%
Operating margin	11.3%	8.0%	330bp

DMD is our specialist distributor of printed and digital media to airlines and travel points. Revenue of £26.5m (FY2017: £28.8m) is down 8.0% due to reduction in newspaper distribution arrangements with two publishers and one established airline customer ceasing to provide newspapers. Adjusted operating profit of £3.0m (FY2017: £2.3m) is up 30.4% due to cost efficiencies from prior year restructuring activities resulted in a combination of recurring savings £0.5m and a one-off benefit of £0.2m.

ADJUSTED ITEMS ⁽¹⁾

Continuing Operations ⁽⁵⁾

£m		2018	2017

Network and re-organisation costs	a	(3.1)	(8.0)
Property	b	0.7	(0.6)
Acquisition and disposal costs/income	c	-	2.2
Amortisation of acquired intangibles	d	(7.1)	(7.3)
Pension	e	-	0.7
Settlement of interest rate swap	f	-	(0.8)
Impairment of Tuffnells goodwill	g	(46.1)	-
Pass my Parcel exit costs	h	(6.7)	-
Impairment of tangible assets	i	(1.1)	-
NMW regulatory compliance	j	(0.5)	-
Total before taxation		(63.9)	(13.8)
Taxation		2.9	2.7
Total after taxation		(61.0)	(11.1)

The Group incurred a total of £61.0m of adjusted items on a continuing basis, after tax (FY2017: £11.1m).

This comprises:

(a) Network and re-organisation costs

There are £3.1m (FY2017: £8.0m) network and reorganisation costs. In the current year this includes abortive integration costs of £1.6m (FY2017: £nil) with regard to the integration programme announced at the end of the previous financial year. There are further costs of £1.8m (FY2017: £nil) relating to redundancies announced in August 2018 arising from the decision to streamline head-office functions, which is separate to the network restructuring in the previous financial year. There is a credit of £0.3m relating to the release of the remaining redundancy provision related to network restructuring.

The total of £8.0m in the prior year comprised: a £4.0m charge for the FY2017 redundancy provision relating to network restructuring; £2.0m related to network rationalisation costs incurred in the Smiths News network; £0.6m related to the restructuring of the Smiths News joint venture FMD Limited; £0.5m in rationalising overseas operations in DMD and the remaining £0.9m related to redundancy costs within Smiths News and Tuffnells.

Costs associated with network and reorganisation are considered adjusted items given they are part of a strategic programme to drive future cost savings and are significant in value to the results of the Group.

(b) Property

There is a £0.7m credit (FY2017: £0.6m charge) relating to property costs. During the year the Group made the strategic decision to transfer the previously vacant Slough depot to the Tuffnells business, resulting in a credit from the release of its onerous lease provision of £0.7m (FY2017: £0.9m charge relating to three properties). In the prior year £0.3m of reversionary lease provisions were released as they were no longer required. Onerous charges on property are charged through adjusted items as they form part of the Group's strategic restructuring programme. The reversal of charges has also been made in adjusted items for consistency.

There are £nil (FY2017: £2.2m) costs in the current year relating to acquisition and disposal costs. Prior year acquisition costs included the release of deferred contingent consideration which was payable conditional on the financial performance of Tuffnells and the continued employment of its former owners. This amounted to £2.7m comprising equity based amounts and amounts provided for cash rewards (see note 27) which were offset by £0.5m fees relating to disposal activity in the prior year that did not meet the criteria to be included within discontinued. Deferred contingent consideration charges and credits in respect of previous acquisitions and costs relating to disposal activity are considered to be adjusted items as they do not form part of normal operating costs/ credits of the business.

(d) Amortisation of acquired intangibles

A charge of £7.1m (2017: £7.3m) has been recognised relating to amortisation of acquired intangibles. This is considered an adjusting item as it allows comparison between segments as shown in note 2.

(e) Pension

There is £nil (2017: £0.7m) of pension credits in the current year. The prior year £0.7m pension credit relates to a trivial commutation of benefits to members in the Group's section of the WH Smith Pension Trust. The prior year pension credit is not considered to be part of normal operations and is therefore considered to be an adjusted item.

(f) Settlement of interest rate swap

There is £nil (2017: £0.8m) relating to settlement of interest costs. The costs related to the settlement of swap instruments after the Group took a strategic decision to no longer enter into hedging arrangements. The settlement followed a change in Treasury policy (see note 20). The cost is classified as an adjusted item because it is of significant value and is not expected to be recurrent in nature.

(g) Impairment of Tuffnells goodwill

During the year management reviewed the carrying value of Tuffnells goodwill and concluded that an impairment charge of £46.1 million (2017: £nil) was required. The recoverable amount of goodwill (in both the current and prior year) is calculated with reference to its value in use based on future cash flow projections. The key assumptions used in the calculation are disclosed in note 13. It is considered adjusting due to its one off nature and significant value.

(h) Pass My Parcel (PMP) exit costs

Following a review of the PMP proposition on 23 May 2018, the Board decided to terminate the contracts in relation to PMP and close the division, as a result of this decision a charge of £6.7m (2017: £nil) was booked.

Management concluded that losses on winding down the division represented an onerous contract with a cost of £4.7m recognised which comprises the forecast excess of costs over income from the date the Group took the decision to close the division. It is considered adjusting due to its one off nature and significant value. Of this balance, £2.5m remains in provisions to cover the costs to close all contracts (see note 24). In the period from 1 September 2017 to the date of the decision to close, PMP incurred losses of £5.4m (these losses were included in our adjusted operating results).

A further £2.0m of impairment charges split £1.0m tangible and £1.0m intangible were recognised to write off the non-current assets relating to the division (note 13 and 14).

(i) Impairment of tangible assets

The Group took the decision to consider the sale of the Jacks Beans division to focus on its core businesses, bids received indicated an excess of net book value of £1.1m therefore the Group has impaired the assets and moved them into non-current assets held for sale. Given the magnitude, the one-off nature and the Group's strategy to focus on its core businesses it is considered to be an adjusting item.

(j) NMW regulatory compliance

The Group has been in discussion with HMRC regarding an historical underpayment in relation to a misapplication of national minimum wage legislation in Tuffnells. Although dialogue continues, a provision amounting to £1.3m has been made in the Financial Statements in respect of any potential liabilities, of which £0.5m relating specifically to the estimated fine is classified as adjusting due to its one off nature. £0.8m has been included within adjusted operating results as it did not meet the definition of an adjusting item.

Discontinued Adjusted items

(Loss)/Profit on disposal of subsidiary

Re-organisation costs

Re-organisation costs of £0.1m (2017 £0.3m) were incurred by the Books business during the year. Reorganisation costs are considered to be adjusted items as they are part of the Group's wider restructuring programme to deliver cost savings and were incurred prior to the disposal these are disclosed separately from other reorganisation costs on the basis the Books business was discontinued.

Amortisation and impairment of discontinued intangibles

Included within discontinued operations results are items of £nil (2017 £11.2m) relating to amortisation and impairment of discontinued intangibles. The prior year includes impairments of £9.9m relating to the Books business and £1.3m of amortisation of acquired intangibles. The impairment is considered to be adjusting due to magnitude, the one-off nature and as it does not relate to underlying trade. Amortisation of acquired intangibles is considered adjusting as it skews the results of the non-acquired businesses.

CONTINUING FREE CASH FLOW ⁽²⁾

Free cash flow generation remains one of the Group's key strengths. Free cash flow ⁽²⁾ includes finance leases, Adjusted items, interest and tax; it excludes pension deficit recovery payments.

£m	2018	2017
Operating (loss)/ profit continuing (including Adjusted items)	(30.0)	41.7
Adjusted items	63.9	13.0
Depreciation & amortisation	11.9	11.7
Adjusted EBITDA	45.8	66.4
Working capital movements	7.7	0.4
Capital expenditure	(8.5)	(13.8)
Finance lease payments	(3.8)	(4.2)
Net interest and fees	(5.8)	(4.4)
Taxation	(6.5)	(9.1)
Other	(0.4)	0.3
Free cash flow (excluding adjusted items)	28.5	35.6
Adjusted items - cash effect	(8.3)	(6.9)
Free cash flow	20.2	28.7

We have focused on cash performance in the period, with the Group generating £20.2m in free cash flow, a decrease of £8.5m (29.6%) on the prior year.

Adjusted EBITDA of £45.8m compared to FY2017 of £66.4m, is down by 31.0% driven by trading performance, although the increase in capital expenditure since acquiring Tuffnells in December 2014 is now resulting in marginally higher depreciation and amortisation charges of £11.9m (FY2017: £11.7m).

The decrease in working capital in the period was £7.7m (FY2017: decrease £0.4m) driven largely by favourable timing of weekly receipt and monthly payment cycles relative to the year end date.

Capital expenditure in the year was £8.5m (FY2017: £13.8m) a decrease of £5.3m. New and existing depot and network investments were £2.1m (FY2017: £5.9m) a decrease in the year as no new depots were opened. Technology and equipment investment was £4.7m (FY2017: £5.2m).

Cash tax costs of £6.5m (FY2017: £9.1m) have decreased in the year reflecting the decline in trading performance.

Net interest and fees of £5.8m (FY2017: £4.4m) has increased by £1.4m following bank arrangement fees of £1.6m which were paid on the agreement of a new £175m bank facility concluded in October 2017. Bank interest paid was £4.2m, down £0.2m on prior year, as the average net debt requirement is lower compared to last year following the disposal of the Education & Care business in June 2017 and the Books business in February 2018.

The total net cash impact of Adjusted items was £8.3m (FY2017: £6.9m). This comprised £6.8m (FY2017: £5.4m) of network reorganisation and restructuring costs.

NET DEBT

£m	2018	2017
Opening net debt	(82.1)	(141.7)
Free cash flow	20.2	28.7
Finance lease creditor movement	3.2	2.2
Pension deficit recovery	(4.7)	(4.8)
Dividend paid	(24.1)	(23.6)
Disposal proceeds	12.9	58.2
Discontinued disposal proceeds to repay overdraft	(12.7)	-
Discontinued operations cash flow	3.9	(1.1)
Closing net debt	(83.4)	(82.1)

Net debt closed the period at £83.4m, of which £5.3m (FY17: £8.5m) relates to finance leases.

Net debt increased on the prior year and our Net debt/EBITDA ratio rose to 1.8x, (FY2017: 1.2x) The cash impact of the deterioration in EBITDA from trading challenges was partially offset by the disposal proceeds from the sale of the Books business. The intra-month working capital cash flow cycle at Smiths News generates a routine and predictable cash swing of around £40m which utilises the Revolving Credit Facility (RCF) of £125m. This results in a predictable fluctuation of net debt during the course of the month compared to the closing net debt position. However, the free cash flow generation (after Adjusted items) in year was not sufficient to cover the announced dividend payments of £24.1m (FY2017: £23.6m).

Pension funding remained consistent at £4.7m (FY2017: £4.8m). Pension deficit repair payments are considered as a non-free cash flow item.

We were comfortably within our bank facilities of £175m and our covenant ratios at year end. In October 2017 we entered a new bank facility commitment of £175m with six relationship banks which runs from October 2017 to January 2021. The new facility comprises of a term loan of £50m with no amortisation and an RCF for £125m on a higher interest margin, but similar covenant terms to the previous facility.

PENSION

The Group operates two defined benefit schemes, both closed to new entrants and WH Smith Pension Trust closed to future accrual.

The Smiths News section of the WH Smith Pension Trust has assets of £583.1m and had an actuarial deficit of £17.5m as at 31 March 2015. As at 31 August 2018 the IAS19 surplus of £154.5m (FY2017: £149.3m) was not recognised in the accounts as the amount available on a reduction of future contributions is £nil.

The Group recognises the present value of the agreed schedule of future contributions as a pension liability of £5.1m on the balance sheet (FY2017: £8.7m).

The Tuffnells defined benefit scheme has assets of £9.6m and an actuarial deficit of £4.3m as at 1 April 2016. As at 31 August 2018 the IAS19 deficit was £2.2m.

The total cash contribution of defined benefit schemes, which include pension administration fees and disclosed within the cash flow statement, amounted to £4.7m for FY2018 (FY2017: £4.8m).

DISCONTINUED OPERATIONS

On 14 February 2018, the Group completed the sale of the Books business at a loss of £10.5m. The sales price was lower than anticipated, but allows the Group to focus on its core operations. Full details are provided in note 12. In the prior year, on 30 June 2017, the Group completed the sale of the Education & Care business at a profit of £19.0m full details are included in note 12.

Discontinued operations contributed Adjusted operating profit of £1.8m for the period they remained part of the Group (HY2017: £3.3m - of which the Books business contributed £1.6m and the Education & Care business £1.7m).

The discontinued operations contributed £1.7m profit before tax during the year for the period they remained part of the Group (FY2017: £2.0m).

GOING CONCERN

The Group meets its day-to-day working capital requirements through its new bank facilities of £175m, agreed in October 2017, with a term to January 2021. The Group's forecasts, taking into account the Board's future expectations of the Group's performance, indicate that there is sufficient headroom within these bank facilities and the Group will continue to operate well within the covenants attaching to those facilities.

Considering the principal risks discussed in this report, the directors have a reasonable expectation that the Group has adequate resources to continue in operation and meet its liabilities as they fall due for both the foreseeable future and for the period of the three year viability assessment. Thus, the Group continues to adopt the going concern basis in preparing its consolidated financial statements and includes disclosure regarding its three year viability assessment based the principal risks.

PRINCIPAL RISKS

The Group has a clear framework in place to continuously identify and review the principal risks. The Audit Committee report describes how we manage risk from Board level and throughout the organisation. Further details can be found in the Annual Report. Key risks are plotted on risk maps with descriptions, owners, and mitigating actions, reporting against a level of materiality consistent with its size. These risk maps are reviewed and challenged by the Executive Team and Audit Committee. Additional risk management support is provided by external experts in areas of technical complexity to complete our bottom-up and top-down exercises.

As part of the Board's ongoing assessment of the principal risks, the Board has considered the performance of the Group, its markets, the changing regulatory landscape and future strategic plans. Principal risks previously reported have been reviewed in detail and they have been refined and made more specific. Compared to the principal risks reported in the Annual Report 2017:

· the risks relating to failure to deliver robust financial performance, failing to attract, engage and retain talent and inadequate processes in place to support people initiatives are new;

· the risk relating to constraints on capacity and/or failure to execute restructuring and other change management programmes has been removed and incorporated into the existing risk relating to the failure to define the Group's strategy and direction and a new risk relating to the loss of key people, lack of engagement and loss of depth knowledge and specialist skills; and

· the risk relating to a non-adherence to transport operator licence condition has been removed as the mitigating actions undertaken by management have reduced the materiality and foreseeability of the principal risk and it remains well managed.

These risks are still subject to ongoing monitoring and appropriate mitigation.

The table below details each principal business risk, those aspects that would be impacted were the risk to materialise, our assessment of the current status of the risk and how it is mitigated.

	Principal risks	Change during the year	Potential impact	Mitigating actions and assurance
1.	Failure to refine and execute the Group's strategy and direction - The risk of not establishing business plans and a clear vision for the Group impacts employee engagement, financial returns, external confidence and shareholder perception.	No change	Sales and/or profit expected may not be met and/or the Company's reputation and support for a recovery plan are challenged. The change management culture required in the short term for restructuring may result in reduced performance and financial returns.	Performance to the business plan is reviewed regularly using a balanced scorecard KPI framework. This ensures effective and timely monitoring of performance with actions taken in the event of shortfalls to expectations. Financial and operational metrics are considered along with risk assessments and impact on management before remedial action is taken. Accountability at leadership level is redefined.
2.	Tuffnells - Failing to achieve desired customer experience and service levels, and/or not adapting to the competitive environment - The risk of not maintaining customer service standards and/or not understanding and adapting to new technologies, competitors and demographics which drive change in customer behaviour and/or that result in deep and speedy structural market changes.	Increasing	Impact on growth and profitability within Tuffnells if consistent service standards are not understood and addressed, and/or if organisational efficiency goals are not met.	The team is being strengthened with industry skills and there are various change programmes to improve business efficiency. More work is planned to understand the changes in customer expectations and to improve customer service, in particular around the operating model, management information, supporting technology, IT infrastructure and safe workplace environment.
3.	Failure to adequately monitor financial performance and/or delays in the Group's financial performance recovery - The risk that the Group does not achieve or monitor financial performance or meet forecast commitments, as well as the associated risk that the current financial position does not allow for planned investment programmes and business improvements to be undertaken.	New	Impact on ability to meet financial commitments and ability to invest in the programmes and improvements that are essential to sustainable performance in the medium to long term.	Annual budgets and forecasts, supported by regular financial management reporting, take into account the current financial position of the Group, allowing for or changing objectives to meet short and medium-term financial targets, as well as longer term aspirations.
4.	Failing to optimise profitability within Smiths News - The risk of failing to retain major contracts in Smiths News at acceptable rates and manage costs in a declining market impacts current and projected business performance.	No Change	Impact on supply of product or route to market may erode margin and/or increase cost to serve.	In the newspaper and magazine distribution industry, publishers typically award five year contracts - as the market leader Smiths News is well placed during the next round of contract negotiations with publishers. Strong relationships across the supply chain help the business to understand and demonstrate its strengths for the benefit of its suppliers and customers and in particular to build on the service proposition as central to achieving excellence.
5.	Failing to attract, engage and retain talent within a high performance and values-based culture - The risk that we do not attract the people and skills we need to take the Group forward and that employees are not motivated towards or are disengaged from the task in hand.	New	Impact on the ability to address the strategic priorities and deliver the forecast performance for the Group.	We seek to offer market competitive terms to ensure talent remains engaged. We undertake workforce planning; performance, talent and succession initiatives; learning and development programmes; and promote the Group's culture and core values. Regular surveys are undertaken to monitor the engagement of employees.
6.	Inadequate processes in place to support People initiatives - The risk that the People processes and systems do not support the changes in culture and expertise that is required, or do not support compliance to legislation.	New	Impact on the ability to address the control and efficiency improvements and change programmes necessary to changes in culture and to support compliance.	A Group-wide People system has been procured and will be introduced in 2019. Management information (eg compliance with labour-related regulation, staff turnover etc) has been introduced.
7.	Failing to meet high health and safety standards - The risk of inadequate health and safety framework and insufficiently enforcing a health and safety culture results in serious injury to employees and/or the public or a breach of relevant health and safety legislation.	No Change	In addition to the danger to staff or the public, the impact of a health and safety failure negatively impacts operations, profitability and/or corporate reputation, together with the risk of possible enforcement action	Safety is a key priority of the Group. Health & safety performance is reviewed at Board meetings, Audit Committee, and Executive Team meetings. A dedicated Health and Safety Team executes improvement programmes and promotes a safety culture. The Group continues to invest in improvements, including recruitment of a new H&S Director and better management reporting. The aim continues to be towards consistency in standards and culture across the Group.
8.	Increased labour market constraints and costs - The risk of legislative changes or interpretation, coupled with the EU Exit and political uncertainty drives demographic or legislative changes or interpretation impacting the ability to recruit and retain warehouse and delivery contractors resulting in higher attrition risk in warehousing and distribution and/or increasing liabilities and costs.	No Change	In the event of any legal claim as to worker status by consultants, subcontractors or agency workers the business could be liable for increased costs (National Insurance contributions) and liabilities (such as employee rights). The inability to pass on such statutory increases to our customers could impact profitability, and affect the cost of future efficiency programmes. The implications of EU Exit include a decreasing pool of available, suitably qualified employees and subcontractors.	The Group regularly reviews its legal terms of engagement with contractors and has appropriate contractual and operational arrangements in place. Self-employed delivery contractors have clearly articulated agreements defining tasks they are contracted to provide whether personally or by a substitute. Increasing employment cost associated with National Living Wage/Apprentices Levy/Auto Enrolment has been factored into latest budgets. Future impact of EU Exit on employment risks are unknown at the date of this report but are being tracked. Legal developments are monitored to ensure that the business maintains compliance with legislation and best practice. Workforce planning initiatives including apprenticeship and training programmes, such as Warehouse to Wheels, are supporting the longer-term mitigation of driver shortage.
9.	Deterioration of the Macroeconomic environment - The risk of volatility and/or prolonged economic downturn causes a decline in demand for our services including the uncertainty associated with EU Exit, impacts current and/or projected business performance above that included in the business planning and review process.	No change	Reductions in discretionary spending may impact sales of newspapers or magazines and/or see a reduction in parcel volumes. Uncertainty from EU Exit may affect the business in both the short and medium term on trade arrangements, future capital investment strategies and resourcing costs.	Annual budgets and forecasts take into account the current macroeconomic environment to set expectations internally and externally, allowing for, or changing objectives to meet, short and medium-term financial targets.

Statement of viability

1 How Connect Group assesses its prospects

Connect Group's business activities and strategy are central to assessing its future prospects. These, together with factors likely to affect its future development, performance and position, are set out in the Annual Report. The financial position of the Group, its cash flows and liquidity are highlighted in the Financial Review. The Group manages its financing by structuring core borrowings and the availability of facilities for draw down. The Group's prospects are assessed primarily through its business planning process. This includes an annual review which considers profitability, the Group's cash flows, committed funding and liquidity positions and forecast future funding requirements over the assessment period of three years. The most recent was signed off in October 2018, and it is part of the Board's role to consider the appropriateness of any key assumptions, taking into account the external environment and business strategy.

2 The assessment period

The directors have determined that the three years to August 2021 is an appropriate assessment period over which to provide its viability statement. This period is consistent with that used for the Group's corporate planning process as detailed above, and reflects the directors' best estimate of the future prospects of the business including the nature and potential impact of the principal risks that face the business. The Board noted in considering the appropriate assessment period that the Group's current banking facilities are due to expire in January 2021. The Board also considered whether there are specific foreseeable events relating to the principal risks that could occur beyond the three year period that should be taken into account when setting the assessment period and concluded there were none. In the Board's assessment of viability, the scenarios have assumed that external debt is repaid as it becomes due, or will be refinanced as and when required (see note 20).

3 Assessment of viability

In generating its plan the Board has considered the overall strategy of the Group, the principal risks and uncertainties inherent within the business, as well as making a number of key strategic planning assumptions which are noted below:

1. No significant impact on trading as a result of the EU Exit or other political change;

2. Modest revenue growth in Tuffnells in the assessment period;

3. Delivery of margin improvement in Tuffnells driven by efficiencies both in operating and overhead costs in the assessment period;

4. Continued decline in sales of printed media during the assessment period offset by overhead efficiencies in the assessment period;

5. Retention of major contracts in Smiths News at rates which maintain acceptable margins;

6. No major changes in working capital profile;

7. Successful renewal of banking facilities in January 2021; and

8. No significant acquisitions or disposals in the assessment period.

In making this statement, the directors have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity. This included the availability and effectiveness of mitigating actions that could realistically be taken to avoid or reduce the impact or occurrence of the underlying risks. In assessing the likely effectiveness of such actions, the Board considered the conclusions from their regular review of risk management and internal control systems.

To make the assessment of viability, stress scenarios have been tested over and above those in the business plan, based upon a number of the Group's principal risks and uncertainties. The scenarios were overlaid into the business plan to quantify the potential impact of one or more of these crystallising over the assessment period. Whilst each of the principal risks has a potential impact and has been considered as part of the assessment, only those that represent severe but plausible scenarios were selected for modelling through the business plan. These were:

Scenario Modelled	Link to Principal Risks
Scenario 1 Customer attrition as a result of poor customer service levels and not adapting to the competitive environment.
We have assumed customer attrition in Tuffnells exceeds new customers resulting in revenue not exceeding £175m.	Risk 2: Failure to achieve desired customer experience and service levels.
Scenario 2 Major publisher business failure.
The group plan assumes all major publishers will continue to operate over the forecast business. We have modelled a scenario that reflects one of the major publishers going out of business or moving to a digital only market.	Risk 4: Failing to optimise profitability in the news business.
Scenario 3 Forecast savings targets are not met.
The business plan assumes both operational and overhead efficiencies in Tuffnells as part of delivering its turnaround as well as overhead savings in Smiths News throughout the period. We have assumed only 50% of these improvements are achieved.	Risk 3: Failing to monitor financial performance and/or delays in the Group's financial performance recovery.
Scenario 4 Changes to the Gig economy.
The Group operates a business model that uses a mix of employed operatives, subcontractors and agency staff. If employment law is changed which renders the mix unworkable in future, then this would potentially lead to increased cost. We have modelled scenarios that change this mix and lead to increased cost.	Risk 8: Increased labour market constraints and costs.
Scenario 5 Major Health & Safety Incidents.
We considered the financial and reputational impact of a series of Health & Safety incidents, modelling an increased cost and regulatory fines such as from the Health & Safety Executive.	Risk 7: Failing to meet high health & safety standards.
Scenario 6 Reverse stress test - revenue loss, margin erosion and working capital outflow in combination to covenant breach.
This combines an extreme series of factors in unison to illustrate what would result in a covenant breach.	Multiple risks in combination.

As noted above, the scenarios have assumed that external debt is repaid as it becomes due, or will be refinanced as and when required.

The scenarios above are hypothetical and severe for the purpose of creating outcomes that have the ability to threaten the viability of the Group; however, multiple measures are in place to prevent and mitigate any such occurrences from taking place.

In each of the stress scenarios 1-5, the Group would be able to continue operating within existing debt covenants and liquidity headroom. Scenario 6 required such an extreme set of factors in unison that it is considered to be a very remote likelihood and therefore does not represent a realistic threat to the viability of the Group but rather illustrates the factors that would result in a banking covenant breach. The directors considered mitigating factors that could be deployed to counter the negative effects of the crystallisation of each of these risks. The main actions included reducing any non-essential capital expenditure and operating expenditure on projects, as well as not paying dividends.

The Board also considered the impact of the EU Exit on the business and does not foresee any significant negative impact which will impact on the viability assessment.

4 Viability statement

Taking into account the Group's current position and principal risks and uncertainties, the directors confirm that they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the three years to August 2021.

5 Going concern

The directors also considered it appropriate to adopt the going concern basis in preparing the Group Financial Statements.

DIRECTORS' RESPONSIBILITIES STATEMENT

The responsibility statement has been prepared in connection to the Company's full Annual Report for the year ended 31 August 2018. Certain parts of the Annual Report are not included in this announcement, as described in note 1.

Responsibility statement

We confirm that to the best of our knowledge:

· the financial statements, prepared in accordance with the relevant financial reporting framework, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole; and

· the Operating Review and Financial Review includes a fair review of the development and performance of the business and the position of the company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

This responsibility statement was approved by the board of directors on 6 November 2018 and is signed on its behalf by:

Jos Opdeweegh	Tony Grace
Chief Executive Officer	Chief Financial Officer

Connect Group PLC

Group Income Statement for the year ended 31 August 2018

£m		2018			2017
	Note	Adjusted*	Adjusted items	Total	Adjusted*	Adjusted items	Total

Revenue	2	1,534.3	-	1,534.3	1,594.3	-	1,594.3
Operating (loss)/profit	2,3	33.9	(63.9)	(30.0)	54.7	(13.0)	41.7
Finance costs	7	(5.5)	-	(5.5)	(6.7)	(0.8)	(7.5)
(Loss)/profit before tax		28.4	(63.9)	(35.5)	48.0	(13.8)	34.2
Income tax expense	8	(5.5)	2.9	(2.6)	(9.9)	2.7	(7.2)
(Loss)/profit for the year from continuing operations		22.9	(61.0)	(38.1)	38.1	(11.1)	27.0
Discontinued operations
(Loss)/Profit for the year from discontinued operations		1.3	(10.2)	(8.9)	1.0	8.6	9.6
(Loss)/Profit attributable to equity shareholders continuing and discontinued operations		24.2	(71.2)	(47.0)	39.1	(2.5)	36.6

(Loss)/earnings per share from continuing operations
Basic	10	9.3p	(15.5p)	15.5p	11.0p
Diluted	10	9.3p	(15.5p)	15.4p	10.9p

Equity dividends per share (paid and proposed)	9		3.1p		9.8p

* This measure is described in Note 1(c) of the accounting policies. Adjusted items are set out in note 4 to the Group financial statements.

Group Statement of Comprehensive Income for the year ended 31 August 2018

£m Continuing	Note	2018	2017
Items that will not be reclassified to the Group Income Statement
Actuarial (loss) on defined benefit pension scheme	6	(2.1)	(9.9)
Impact of IFRIC 14 on defined benefit pension scheme	6	2.1	6.8
Tax relating to components of other comprehensive income that will not be reclassified	8	-	0.3
		-	(2.8)
Items that may be subsequently reclassified to the Group Income Statement
Gain on cash flow hedges	29	-	0.6
Termination of interest rate swap	29	-	0.8
Currency translation differences		(0.3)	-
Tax relating to components of other comprehensive income that may be reclassified	8	-	(0.2)
		(0.3)	1.2
Other comprehensive result/(loss) for the year - continuing		(0.3)	(1.6)
(Loss)/profit for the year - continuing		(38.1)	27.0
Total comprehensive (expense)/income for the year - continuing		(38.4)	25.4

Other comprehensive loss for the year - discontinued		-	1.7
(Loss)/profit for the year - discontinued		(8.9)	9.6
Total comprehensive (expense)/income for the year - discontinued		(8.9)	11.3
Total comprehensive (expense)/income for the year		(47.3)	36.7

Group Balance Sheet at 31 August 2018

£m	Note	2018	2017
Non-current assets
Intangible assets	13	50.8	106.5
Property, plant and equipment	14	38.8	41.3
Interest in joint ventures	15	5.1	4.6
Retirement benefit assets	6	-	-
Deferred tax assets	23	-	5.4
		94.7	157.8
Current assets
Inventories	16	13.3	13.8
Trade and other receivables	17	81.7	98.3
Cash and bank deposits	19	18.0	5.5
Current tax asset		0.3	-
Assets classified as held for sale	11	0.5	64.5
		113.8	182.1
Total assets		208.5	339.9
Current liabilities
Trade and other payables	18	(127.6)	(136.2)
Current tax liabilities		(0.8)	(5.3)
Bank loans and other borrowings	19	(47.2)	(20.0)
Obligations under finance leases	21	(2.8)	(3.1)
Retirement benefit obligations	6	(3.7)	(4.1)
Provisions	24	(9.5)	(9.0)
Liabilities classified as held for sale	11	-	(49.5)
		(191.6)	(227.2)
Non-current liabilities
Retirement benefit obligations	6	(3.6)	(7.4)
Bank loans and other borrowings	19	(48.8)	(60.0)
Obligations under finance leases	21	(2.5)	(5.4)
Other non-current liabilities	22	(0.6)	(1.0)
Deferred tax liabilities	23	(2.5)	(7.2)
Non-current provisions	24	(4.8)	(6.6)
		(62.8)	(87.6)
Total liabilities		(254.4)	(314.8)
Total net (liabilities)/assets		(45.9)	25.1

Group Balance Sheet at 31 August 2018 (continued)

£m	Note	2018	2017
Equity
Called up share capital	28(a)	12.4	12.4
Share premium account	28(c)	60.5	60.5
Demerger reserve	29(a)	(280.1)	(280.1)
Own shares reserve	29(b)	(2.1)	(3.1)
Hedging & translation reserve	29(c)	0.2	0.5
Retained earnings	30	163.2	234.9
Total shareholders' equity		(45.9)	25.1

The accounts were approved by the Board of Directors and authorised for issue on 6 November 2018 and were signed on its behalf by:

Registered number - 05195191

Jos Opdeweegh Tony Grace

Chief Executive Officer Chief Financial Officer

Group Statement of Changes in Equity for the year ended 31 August 2018

£m	Note	Share capital	Share premium account	Demerger reserve	Own shares reserve	Hedging & translation reserve	Retained earnings	Total
Balance at 31 August 2016		12.3	59.2	(280.1)	(3.5)	(1.1)	226.2	13.0
Profit for the year		-	-	-	-	-	36.6	36.6
Termination of cash flow hedge		-	-	-	-	0.8	-	0.8
Gain on cash flow hedges		-	-	-	-	0.6	-	0.6
Actuarial loss on defined benefit pension scheme		-	-	-	-	-	(8.1)	(8.1)
Impact of IFRIC 14 on defined benefit pension scheme		-	-	-	-	-	6.8	6.8
Currency translation differences		-	-	-	-	0.2	-	0.2
Tax relating to components of other comprehensive income		-	-	-	-	-	(0.2)	(0.2)
Total comprehensive income for the year		-	-	-	-	1.6	35.1	36.7
Issue of share capital	28	0.1	1.3	-	-	-	-	1.4
Purchase of own shares		-	-	-	(0.5)	-	-	(0.5)
Dividends paid	9	-	-	-	-	-	(23.6)	(23.6)
Employee share schemes		-	-	-	0.9	-	(0.9)	-
Recognition of share based payments net of tax		-	-	-	-	-	(1.9)	(1.9)
Balance at 31 August 2017		12.4	60.5	(280.1)	(3.1)	0.5	234.9	25.1
Loss for the year		-	-	-	-	-	(47.0)	(47.0)
Actuarial loss on defined benefit pension scheme		-	-	-	-	-	(2.1)	(2.1)
Impact of IFRIC 14 on defined benefit pension scheme		-	-	-	-	-	2.1	2.1
Currency translation differences		-	-	-	-	(0.3)	-	(0.3)
Tax relating to components of other comprehensive income		-	-	-	-	-	-	-
Total comprehensive expense for the year		-	-	-	-	(0.3)	(47.0)	(47.3)
Issue of share capital	28	-	-	-	-	-	-	-
Purchase of own shares		-	-	-	-	-	-	-
Dividends paid	9	-	-	-	-	-	(24.1)	(24.1)
Employee share schemes		-	-	-	1.0	-	(1.0)	-
Recognition of share based payments net of tax		-	-	-	-	-	0.4	0.4
Balance at 31 August 2018		12.4	60.5	(280.1)	(2.1)	0.2	163.2	(45.9)

Group Cash Flow Statement for the year ended 31 August 2018

£m	Note	2018	2017
Net cash inflow from operating activities	27	37.5	51.2
Investing activities
Dividends received from associates		0.2	0.2
Purchase of property, plant and equipment		(6.1)	(13.7)
Purchase of intangible assets		(2.4)	(5.1)
Proceeds on sale of property, plant and equipment		-	1.3
Proceeds on sale of subsidiary (net of disposal costs)		12.9	56.8
Net cash used in investing activities		4.6	39.5
Financing activities
Interest paid		(5.8)	(5.2)
Dividend paid	9	(24.1)	(23.6)
Repayments of obligations under finance leases		(3.8)	(4.2)
Proceeds on issue of shares	28	-	0.7
Net outflow on purchase of shares for Employee Benefit Trust	29	-	(0.5)
Net increase/(decrease) in revolving credit facility		25.3	(61.0)
New bank loans raised		48.8	-
Repayment of borrowings		(80.0)	-
Net cash used in financing activities		(39.6)	(93.8)

Net increase/(decrease) in cash and cash equivalents		2.5	(3.1)
Effect of foreign exchange rate changes		(0.2)	0.4
		2.3	(2.7)
Opening net cash and cash equivalents		6.4	9.1
Closing net cash and cash equivalents	19	8.7	6.4

During the year cash outflow from operating activities attributed to discontinued operations amounted to £8.8m (2017: £3.8m inflow) and paid £4.3m (2017: £3.7m) in respect of investing activities. There were no cash flows associated with financing activities attributable to discontinued operations.

Analysis of net debt

£m	Note	2018	2017
Cash and cash equivalents	19	8.7	6.4
Current borrowings	19	(38.0)	(20.0)
Non-current borrowings	19	(48.8)	(60.0)
Net borrowings		(78.1)	(73.6)
Finance lease liabilities	21	(5.3)	(8.5)
Net debt		(83.4)	(82.1)

Cash and cash equivalents includes cash of £18.0m (2017: £6.4m) offset by £9.2m (2017: £nil) of overdrafts.

Notes to the accounts

1. Accounting policies

(a) Basis of preparation

The financial information contained within this preliminary announcement for the 12 months to 31 August 2018 and 12 months to 31 August 2017 does not comprise statutory financial statements for the purpose of the Companies Act 2006, but is derived from those statements. The statutory accounts for Connect Group Plc for the 12 months to 31 August 2017 have been filed with the Registrar of Companies and those for the 12 months to 31 August 2018 will be filed following the Company's annual general meeting. The auditor's reports on the accounts for both the 12 months to 31 August 2018 and 12 months to 31 August 2017 were unqualified and did not include a statement under Section 498 (2) or (3) of the Companies Act 2006. The Annual Report and Accounts will be available for shareholders in December 2018.

(b) Going concern

The Group agreed a new bank facility commitment of £175m with associated covenants which is in place until January 2021. The Group's forecasts and projections, taking account of reasonable potential variations in trading performance, show that the Group should be able to operate within the level of its current financing covenants for the foreseeable future defined as a period not less than 12 months from the balance sheet date.

Despite the uncertain economic environment the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Thus the Group continues to adopt the going concern basis in preparing its consolidated financial statements.

The directors believe that the alternate performance measures provide additional information for users of the accounts on the performance of the business. These measures are consistent with how business performance is measured internally by the Board and Operating Committee.

The Group uses certain performance measures for internal reporting purposes and employee incentive arrangements. The terms 'net debt', 'Free cash flow (excluding adjusted items)', 'Free cash flow', 'adjusted profit', 'adjusted and adjusted diluted earnings per share', 'adjusted EBITDA' are not defined terms under IFRS and may not be comparable with similar measures disclosed by other companies.

The following are the key non-IFRS measures identified by the Group in the consolidated financial statements as adjusted results:

Adjusted EBITDA is calculated as Adjusted operating profit (as defined above) before depreciation and amortisation. This metric is reconciled on page 16.

Free cash flow; is defined as cash flow excluding the following: payment of dividends, dividends from associates, acquisitions and disposals, the repayment of bank loans, EBT share purchase, proceeds of share issues and cash flows relating to pension deficit repair. This measures shows the cash retained by the Group in the year and is considered by the Directors to provide additional information on the cash available for shareholders returns. A reconciliation of free cash flow to the net movement in cash and cash equivalents is shown in note 35.

Net debt; is calculated as total debt less cash and cash equivalents. Total debt includes loans and borrowings, overdrafts and obligations under finance leases. A reconciliation of net debt is presented in the Group Cash Flow Statement.

Operating profit; is stated after charging Adjusted items relating to operating activities and after the share of results of associates but before investment income and finance costs.

Gross Profit; is stated after charging the direct cost of sales. Gross profit has been restated after reclassifying costs between distribution and cost of inventories expensed see note 3 for details.

Contribution; is stated after charging the distribution costs to gross profit. Contribution is considered to be a key performance measure as it is considered to represent the direct cost of running each business within the Group as distribution is primary operation of the Group. Contribution is reconciled in note 3.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

(d) Estimates and judgements

The preparation of accounts requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.

Sources of estimation uncertainty

The key assumption concerning the future, and other key sources of estimation uncertainty at the end of the reporting period that may have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year.

Estimated impairment of goodwill

The group tests annually whether goodwill has suffered any impairment, in accordance with the accounting policy. The carrying amounts of cash-generating units (CGU's) have been determined based on value in use calculations. These calculations require the use of estimates (note 13).

An impairment charge of £46.1m arose on the Tuffnells CGU during the course of the 2018 year, resulting in the CGU being written down to its recoverable amount. Note 13 include details of management's assumptions and impact of changing these estimates.

Key accounting judgements

The significant judgements made in the accounts for the year ended 31 August 2018 are:

Onerous contracts

Present obligations arising under onerous contracts are recognised and measured as provisions. An onerous contract is considered to exist where the Group has a contract under which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received from the contract. The calculation of onerous contract provisions includes estimates of all future costs and income to occur. Significant judgement is applied in the determination of when contracts become onerous. With reference to Pass My Parcel, management have determined the date at which the contracts became onerous, is the date on which the Board approved to wind down the operations and cease further investment. See note 24 for further details.

(e) Non-current assets held for sale and disposal groups

Non-current assets held for sale and disposal groups are classified as assets held for sale when their carrying amount is to be recovered principally through a sale transaction and a sale is considered highly probable. They are stated at the lower of carrying amount and fair value less costs to sell.

(f) Discontinued operations

In accordance with IFRS 5 'Non-current assets held for sale and Discontinued operations', the net results of discontinued operations are presented separately in the Group Income statement (and the comparatives restated) and the assets and liabilities of these operations are presented separately in the Group balance sheet.

(g) Revenue

Smiths News and DMD

Revenue is recognised on the despatched value of goods sold. Revenue represents the amounts receivable for goods and services provided in the normal course of business, net of discounts, returns (including expected returns), VAT and other sales related taxes. Goods are sold to retailers on a sale or return basis. Revenue for goods supplied with a right of return is stated net of the value of any returns.

Tuffnells

Revenue is recognised on delivery of the service to which it relates, based on agreed rates net of discounts, VAT and other sales related taxes.

(h) Taxation

Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the income statement, except to the extent it relates to items recognised in other comprehensive income or directly in equity. Current tax is the expected tax payable based on the taxable profit for the year, using tax rates enacted, or substantively enacted at the balance sheet date and any adjustment to tax payable in respect of previous years.

Deferred tax is provided on the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is calculated using tax rates enacted or substantively enacted at the balance sheet date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled. Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which these temporary differences can be utilised.

(i) Dividends

Interim and final dividends are recorded in the financial statements in the period in which they are paid.

(j) Capitalisation of internally generated development costs

Expenditure on developed software is capitalised when the Group is able to demonstrate all of the following: the technical feasibility of the resulting asset; the ability (and intention) to complete the development and use it; how the asset will generate probable future economic benefits; and the ability to measure reliably the expenditure attributable to the asset during its development. Subsequent to initial recognition, internally generated intangible assets are reported at cost less accumulated amortisation and accumulated impairment losses, on the same basis as intangible assets that are acquired separately.

(k) Joint ventures

The Group Accounts include the Group's share of the total recognised gains and losses in its joint ventures on an equity accounted basis.

Investments in joint ventures are carried in the balance sheet at cost adjusted by post-acquisition changes in the Group's share of the net assets of the joint ventures, less any impairment losses. The carrying values of investments in joint ventures include acquired goodwill. Losses in joint ventures that are in excess of the Group's interest in the joint venture are recognised only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the joint venture.

(l) Business combinations and goodwill

The Group uses the acquisition method of accounting to account for business combinations. The cost of an acquisition is measured at the fair value of the assets given, equity instruments issued, liabilities incurred or assumed at the date of exchange. Acquisition related costs are recognised in profit or loss as incurred. Any deferred or contingent purchase consideration is recognised at fair value over the period of entitlement. If the contingent purchase consideration is classified as equity, it is not remeasured and settlement is accounted for in equity. Any deferred or contingent payment deemed to be remuneration as opposed to purchase consideration in nature is recognised in profit or loss as incurred, and excluded from the acquisition method of accounting for business combinations. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured, initially, at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The non-controlling interest is measured, initially, at the non-controlling interest's proportion of the net fair value of the assets, liabilities and contingent liabilities recognised. Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer's previously held equity interest in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed.

Goodwill arising on all acquisitions is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses.

The carrying value is reviewed annually for impairment or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Intangible assets arising under a business combination (acquired intangibles) are capitalised at fair value as determined at the date of exchange and are stated at fair value less accumulated amortisation and impairment losses. Amortisation of acquired intangibles is charged to the income statement on a straight-line basis over the estimated useful lives as follows:

Customer relationships - 2.5 to 7.5 years

Trade name - 5 to 10 years

Software and development costs - 3 to 7 years

Computer software and internally generated development costs which are not integral to the related hardware are capitalised separately as an intangible asset and stated at cost less accumulated amortisation and impairment losses.

Assets held under finance leases are amortised over their expected useful lives on the same basis as owned assets or, where shorter, over the term of the relevant lease. All intangible assets are reviewed for impairment in accordance with IAS 36 'Impairment of Assets' when there are indications that the carrying value may not be recoverable.

(m) Property, plant and equipment

Property, plant and equipment assets are stated at cost less accumulated depreciation and any recognised impairment losses. No depreciation has been charged on freehold land. Other assets are depreciated, to a residual value, on a straight-line over their estimated useful lives, as follows:

Freehold and long term leasehold properties - over 20 years

Short term leasehold properties - shorter of the lease period and the estimated remaining economic life

Fixtures and fittings - 3 to 15 years

Equipment - 5 to 12 years

Computer equipment - up to 5 years

Vehicles - up to 5 years

Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, over the term of the relevant lease. All property, plant and equipment is reviewed for impairment in accordance with IAS 36 'Impairment of Assets' when there are indications that the carrying value may not be recoverable.

(n) Leasing

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Property, plant and equipment held under finance leases is capitalised in the balance sheet at the lower of the fair value or the present value of the minimum lease payments and is depreciated over its useful life. The capital elements of future obligations under leases are included as liabilities in the balance sheet. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of return on the remaining balance of the liability.

Property and equipment and vehicle rentals paid under operating leases are charged to income on a straight line basis over the lease term. The benefits of rent free periods and similar incentives are credited to the income statement on a straight-line basis to the first break clause.

(o) Inventories

Inventories comprise goods held for resale and are stated at the lower of cost or net realisable value. Inventories are valued using a weighted average cost method. Cost comprises direct materials and, where applicable, direct labour costs and those overheads that have been incurred in bringing the inventories to their present location and condition.

(p) Trade receivables

Trade receivables do not carry any interest and are initially recognised at their fair value. They are subsequently remeasured at amortised cost using the effective interest rate method. Appropriate allowances for estimated irrecoverable amounts are recognised in the income statement when there is evidence that the asset is impaired.

(q) Trade payables

Trade payables are initially measured at fair value, and are subsequently remeasured at amortised cost, using the effective interest rate method.

(r) Treasury

Cash and bank deposits

Cash and cash equivalents in the balance sheet comprise cash at bank and in hand and short term deposits with an original maturity of three months or less. In the consolidated balance sheet, bank overdrafts are shown within borrowings in current liabilities. Cash and cash equivalents in the cash flow statement comprise cash at bank and in hand and bank overdrafts held for trading purposes.

Financial liabilities and equity

Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. Equity instruments issued are recorded at the proceeds received, net of direct issue costs.

Bank borrowings

Interest bearing bank loans and overdrafts are initially measured at fair value (being proceeds received, net of direct issue costs), and are subsequently measured at amortised cost, using the effective interest rate method. Finance charges, including premiums payable on settlement or redemptions and direct issue costs are accounted for on an accruals basis and taken to the income statement using the effective interest rate method and are added to the carrying value of the instrument to the extent that they are not settled in the period in which they arise.

Foreign currencies

Financial statements of foreign operations

The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and are translated at foreign exchange rates ruling at the balance sheet date. The revenues and expenses of foreign operations are translated at an average rate for the period where this rate approximates to the foreign exchange rates ruling at the dates of the transactions.

Net investment in foreign operations

Exchange differences arising from this translation of foreign operations, and of related qualifying hedges are taken directly to equity. They are recycled into the income statement upon disposal.

Foreign currency transactions

Transactions in foreign currencies are recorded using the rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated at foreign exchange rates ruling at the dates the fair value was determined.

(s) Provisions

Provisions are recognised when the Group has a present legal or constructive obligation as a result of a past event and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are measured at the directors' best estimate of the expenditure required to settle the obligation at the balance sheet date and if this amount is capable of being reliably estimated. If such an obligation is not capable of being reliably estimated, no provision is recognised and the item is disclosed as a contingent liability where material. Where the effect is material, the provision is determined by discounting the expected future cash flows.

(t) Retirement benefit costs

The Group operates a number of defined contribution schemes for the benefit of its employees. Payments to the Group's schemes are recognised as an expense in the income statement as incurred. The Group operates two defined benefit pension schemes. The largest scheme The WH Smith Pension Trust is closed to further accrual. The charge to the Group of providing benefits for these two schemes is determined by the Projected Unit Credit Method, with actuarial calculations being carried out at the balance sheet date. Actuarial gains and losses are recognised in full in the period in which they occur in the group statement of comprehensive income. The retirement benefit obligation recognised in the balance sheet represents the present value of the defined benefit, reduced by the fair value of scheme assets. An asset ceiling cap is applied in accordance with IFRIC 14 with an additional liability recognised where there is a contractual obligation to make further payments into the scheme.

(u) Employee Benefit Trust

Smiths News Employee Benefit Trust

The shares held by the Smiths News Employee Benefit Trust are valued at the historical cost of the shares acquired. This value is deducted in arriving at shareholders' funds and presented as the own share reserve in line with IAS 32 'Financial Instruments: Disclosure and Presentation'.

(v) Share schemes

Share based payments

The Group operates several share-based payment schemes, being the Sharesave Scheme, the Executive Share Option Scheme, the LTIP and the Deferred Bonus Plan. Details of these are provided in the Directors' Remuneration report and in note 31.

Equity-settled share-based schemes are measured at fair value at the date of grant. The fair value is expensed with a corresponding increase in equity on a straight-line basis over the period during which employees become unconditionally entitled to the options. The fair values are calculated using an appropriate option pricing model. The income statement charge is then adjusted to reflect expected and actual levels of vesting based on non-market performance related criteria.

Administrative expenses and distribution and marketing expenses include the cost of the share-based payment schemes.

(w) Changes in accounting policies

New Standards and Interpretations applied for the first time:

The following Standards have been adopted without any significant impact on the amounts reported in these financial statements:

Recognition of Deferred Tax Assets for Unrealised Losses (Amendments to IAS 12).

Disclosure initiative (amendments to IAS 7) - The amendment to IAS 7 requires a disclosure of changes in liabilities arising from financing activities. This has been presented in note 19.

Annual improvements 2014 - 2016 cycle effective 1 January 2017.

New Standards and Interpretations not yet applied

At the date of authorisation of these financial statements, the following Standards and Interpretations that are potentially relevant to the Group and which have not been applied in these financial statements were in issue but not yet effective (and in some cases had not yet been adopted by the EU):

IFRS 9 'Financial Instruments' - effective for accounting periods beginning on or after 1 January 2018 therefore effective on the Group financial statements for the year ending 31 August 2019.

The standard introduces changes to three key areas:

· new requirements for the classification and measurement of financial instruments;

· a new impairment model based on expected credit losses for recognising provisions; and

· simplified hedge accounting through closer alignment with an entity's risk management methodology.

The Group has completed an assessment of the impact of IFRS 9 and has concluded that adoption will not have a material impact on either the Consolidated Income Statement or the Consolidated Balance Sheet. The Group will apply all aspects of the new standard at the transition date of 1 September 2018 by adjusting opening retained earnings in the balance sheet and no restatement of comparative periods.

IFRS 15 'Revenue from Contracts with Customers'- effective for accounting periods beginning on or after 1 January 2018 therefore effective for the Group financial statements for the year ending 31 August 2019.

IFRS 15 establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. IFRS 15 will supersede the current revenue recognition guidance including IAS 18 Revenue, IAS 11 Construction Contracts and the related Interpretations when it becomes effective.

The core principle of IFRS 15 is that an entity should recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Specifically, the Standard introduces a 5-step approach to revenue recognition:

· Step 1: Identify the contract(s) with a customer

· Step 2: Identify the performance obligations in the contract

· Step 3: Determine the transaction price

· Step 4: Allocate the transaction price to the performance obligations in the contract

· Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation

Under IFRS 15, an entity recognises revenue when (or as) a performance obligation is satisfied, i.e. when 'control' of the goods or services underlying the particular performance obligation is transferred to the customer.

Far more prescriptive guidance has been added in IFRS 15 to deal with specific scenarios.

Furthermore, extensive disclosures are required by IFRS 15.

In April 2016, the IASB issued Clarifications to IFRS 15 in relation to the identification of performance obligations, principal versus agent considerations, as well as licensing application guidance.

Substantially all revenue earned by the Group is recognised at the point of service or on delivery of goods, and revenue recognised does not vary materially from the consideration to which the Group is entitled therefore no material adjustment is predicted. Were any adjustment to be required, the modified retrospective approach would be adopted with the cumulative impact of any adjustment recognised in retained earnings on transition date.

IFRS 16 'Leases' - effective for accounting periods beginning on or after 1 January 2019 therefore effective in the Group financial statements for the year ending 31 August 2020.

Transition to IFRS 16 will take place for the Group on 1 September 2019. The standard introduces a comprehensive model for the identification of lease arrangements and accounting treatments for both lessors and lessees and will replace the current lease accounting requirements including IAS 17 Leases and the related interpretations.

For lessees, IFRS 16 removes distinctions between operating leases and finance leases. These are replaced by a model where a right of use asset and a corresponding liability are recognised for all leases except for short-term leases and low value assets. In contrast to lessee accounting, IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17, and continues to require a lessor to classify a lease either as an operating lease or a finance lease.

From the work performed to date and based on the undiscounted lease commitments presented in note 25, it is anticipated that implementation of the new standard will have a significant impact on the reported assets and liabilities of the Group. In addition, the implementation of the standard will impact the income statement and classification of cash flows. A reliable estimate of the financial impact on the Group's consolidated results is dependent on a number of unresolved areas, including; choice of transition option, refinement of approach to discount rates, estimates of lease-term for leases with options to break and renew and conclusion of data collection.

In addition, the financial impact is dependent on the facts and circumstances at the time of transition. For these reasons, it is not yet practicable to determine a reliable estimate of the financial impact on the Group.

The directors anticipate that the adoption of the following Standards and Interpretations in future periods will have no material impact on the financial statements of the Group:

Amendments to IFRS 2 Classification and Measurement of Share-based Payment Transactions - effective for accounting periods beginning on or after 1 January 2018.

Annual Improvements 2014-2016 Cycle - effective 1 January 2018.

IFRIC 22 Foreign Currency Transactions and Advance Consideration - effective date 1 January 2018.

IFRIC 23 Uncertainty over Income Tax Treatments - effective date 1 January 2019.

Annual Improvements to IFRS 2015-2017 cycle - effective date 1 January 2019.

Amendments to IAS 19 Plan Amendment, Curtailment or Settlement - effective date 1 January 2019.

2. Segmental analysis

In accordance with IFRS 8 'Operating Segments', management has identified its operating segments. The performance of these operating segments is reviewed, on a monthly basis, by the Board. The Board monitors the tangible, intangible and financial assets attributable to each segment to determine the allocation of resources and the performance of each segment.

The continuing operating segments are:

Smiths News (formerly News & Media: News Distribution also referred to as Early Distribution)

The UK market leading distributor of newspapers and magazines to 27,000 retailers across England and Wales from 39 distribution centres.

DMD

(formerly News & Media: Media)

A supplier of newspaper and magazines to airlines and a provider of inflight services.

Tuffnells

(formerly Mixed Freight)

A leading provider of next day B2B delivery of Irregular weight and dimensions consignments.

As explained in note 11, the Books business, a leading UK distributor of physical and digital books was disposed of on 14 February 2018. The business has been presented as a discontinued operation and has been included below where necessary for the purpose of reconciliation. As detailed in note 12, the Education & Care business was sold on 30 June 2017 and the results for the period to this date are also presented within Discontinued operations.

The following is an analysis of the Group's revenue and results by reportable segment:

	Revenue
£m	2018	2017
Smiths News	1,335.1	1,383.4
DMD	26.5	28.8
Tuffnells	175.2	183.2
Elimination of Intra group revenue	(2.5)	(1.1)
Continuing operations	1,534.3	1,594.3
Discontinued operations	114.3	270.3
Total continuing and discontinued operations	1,648.6	1,864.6

The accounting policies of the reportable segments are the same as the Group's accounting policies described in note 1.

Intra group revenue relates to services provided by Tuffnells to Smiths News in respect of Pass My Parcel.

	2018			2017
£m	Adjusted operating profit	Adjusted items	Statutory operating profit	Adjusted operating profit	Adjusted items	Statutory operating profit
Smiths News	35.9	(10.9)	25.0	40.4	(4.3)	36.1
DMD	3.0	(0.3)	2.7	2.3	(1.0)	1.3
Tuffnells	(5.0)	(52.7)	(57.7)	12.0	(7.7)	4.3
Continuing operations	33.9	(63.9)	(30.0)	54.7	(13.0)	41.7
Discontinued operations*	1.8	(10.6)	(8.8)	2.0	7.5	9.5
Total continuing and discontinued operations	35.7	(74.5)	(38.8)	56.7	(5.5)	51.2
Net finance expense	(5.5)	-	(5.5)	(6.7)	(0.8)	(7.5)
Profit before taxation	30.2	(74.5)	(44.3)	50.0	(6.3)	43.7

*Discontinued operations in the table above are pre-tax measures. Presentation in the Group income statement for discontinued operations are post tax measures.

Information about major customers

Included in revenues arising from Smiths News are revenues of approximately £141.3m (2017: £147.5m) which arose from sales to the Group's largest customer. No other single customer contributed 6% or more of the Group's revenue in 2018 (2017: 5%).

Segment assets and liabilities

	Assets		Liabilities		Net assets/(liabilities)
£m	2018	2017	2018	2017	2018	2017
Smiths News	76.9	85.4	(212.2)	(220.8)	(135.3)	(135.4)
DMD	22.7	23.0	(7.3)	(8.2)	15.4	14.8
Tuffnells	108.9	167.0	(34.9)	(36.3)	74.0	130.7
Discontinued operations	-	64.5	-	(49.5)	-	15.0
Consolidated assets/(liabilities)	208.5	339.9	(254.4)	(314.8)	(45.9)	25.1

Segment depreciation, amortisation and non-current asset additions

		Depreciation		Amortisation and impairment		Additions to non-current assets
£m		2018	2017	2018	2017	2018	2017
	Smiths News	(3.8)	(4.2)	(4.1)	(3.0)	3.8	6.8
	DMD	(0.2)	(0.2)	(0.3)	(0.3)	0.1	0.2
	Tuffnells	(4.6)	(4.1)	(53.1)	(7.1)	4.4	6.7
	Continuing operations	(8.6)	(8.5)	(57.5)	(10.4)	8.3	13.7
	Discontinued operations	-	(0.8)	-	(12.7)	0.6	3.4
	Consolidated total	(8.6)	(9.3)	(57.5)	(23.1)	8.9	17.1

Additions to non-current assets include intangible assets and property, plant and equipment.

Geographical analysis

£m	Revenue by destination		Non-current assets by location of operation
	2018	2017	2018	2017
United Kingdom	1,521.2	1,579.6	94.6	152.4
Europe	8.6	9.6	-	-
Rest of World	4.5	5.1	-	-
Continuing operations	1,534.3	1,594.3	94.6	152.4
Discontinued operations	114.3	270.3	-	-
Total Continuing and discontinued operations	1,648.6	1,864.6	94.6	152.4

3. Operating profit

The Group's results are analysed as follows:

£m		2018			Restated* 2017
Continuing operations	Note	Adjusted	Adjusted items	Total	Adjusted	Adjusted items	Total
Revenue		1,534.3	-	1,534.3	1,594.3	-	1,594.3
Cost of inventories recognised as an expense		(1,154.5)	-	(1,154.5)	(1,203.9)	-	(1,203.9)
Other cost of sales		(137.3)	(0.5)	(137.8)	(125.3)	-	(125.3)
Cost of sales		(1,291.8)	(0.5)	(1,292.3)	(1,329.2)	-	(1,329.2)
Gross profit		242.5	(0.5)	242.0	265.1	-	265.1
Distribution costs		(137.8)	(3.1)	(140.9)	(156.3)	-	(156.3)
Contribution		104.7	(3.6)	101.1	108.8	-	108.8
Other administrative expenses		(68.3)	(7.1)	(75.4)	(50.5)	(8.2)	(58.7)
Share-based payment expense	31	-	-	-	(0.9)	2.5	1.6
Impairment of intangibles	13	-	(46.1)	(46.1)	-	-	-
Amortisation of intangibles	13	(3.0)	(7.1)	(10.1)	(3.1)	(7.3)	(10.4)
Administrative expenses		(71.3)	(60.3)	(131.6)	(54.5)	(13.0)	(67.5)
Share of profits from joint ventures	15	0.5	-	0.5	0.4	-	0.4
Operating profit		33.9	(63.9)	(30.0)	54.7	(13.0)	41.7

*The above note has been restated to move £79.2m out of cost of inventory recognised as an expense in to distribution costs as this is considered the most appropriate allocation. A subtotal of contribution has been added as this is considered a key performance metric for the Group.

The operating profit is stated after charging/ (crediting):

£m	Note	2018			2017
		Continuing	Discontinued	Total	Continuing	Discontinued	Total
Depreciation on property, plant & equipment	14	8.6	-	8.6	8.5	0.8	9.3
Amortisation of intangible assets	13	10.3	-	10.3	10.4	12.7	23.1
Operating lease charges
· occupied land and buildings		10.2	0.5	10.7	9.6	1.4	11.0
· equipment and vehicles		16.7	0.1	16.8	16.9	0.6	17.5
Operating lease rental income - land and buildings		(0.2)	-	(0.2)	(0.1)	(0.2)	(0.3)
Write down of inventories recognised as an expense		-	-	-	-	(1.6)	(1.6)
(loss)/gain on disposal of non-current assets		(0.4)	-	(0.4)	0.4	(0.8)	(0.4)
(loss)/gain on disposal of non-current assets held for sale	12	-	(10.5)	(10.5)	-	-	-
Staff costs (excluding share based payments)	5	125.5	6.7	132.2	128.4	23.5	151.9

Included in administrative expenses are amounts payable to Deloitte LLP and their associates by the Company and its subsidiary undertakings in respect of audit and non-audit services which are as follows:

£m	2018	2017
Fees payable to the Company's auditor for the audit of the Company's annual accounts	0.5	0.2
Fees payable to the Company's auditor for the audit of the Company's subsidiaries	0.2	0.2
Total audit fees	0.7	0.4
Other services	-	-
Total non-audit fees	-	-
Total fees (continuing and discontinued)	0.7	0.4

Details of the Company's policy on the use of auditors for non-audit services and how the auditor's independence and objectivity was safeguarded are set out in the Audit Committee Report in the Annual Report.

4. Adjusted items

£m		2018	2017
Continuing operations
Network and re-organisation costs	(a)	(3.1)	(8.0)
Property	(b)	0.7	(0.6)
Acquisition and disposal costs/income	(c)	-	2.2
Amortisation of acquired intangibles	(d)	(7.1)	(7.3)
Pension	(e)	-	0.7
Settlement of interest rate swap	(f)	-	(0.8)
Impairment of Tuffnells goodwill	(g)	(46.1)	-
Pass My Parcel exit costs	(h)	(6.7)	-
Impairment of tangible assets	(i)	(1.1)	-
NMW regulatory compliance	(j)	(0.5)
Total before tax		(63.9)	(13.8)
Taxation		2.9	2.7
Total after taxation		(61.0)	(11.1)

Discontinued operations
(Loss)/Profit on disposal of subsidiary	(k)	(10.5)	19.0
Re-organisation costs	(l)	(0.1)	(0.3)
Amortisation and impairment of discontinued intangibles	(m)	-	(11.2)
Total before tax		(10.6)	7.5
Taxation		-	1.1
Total after taxation		(10.6)	8.6
Continuing and discontinued operations
Total before tax		(71.6)	(6.3)
Taxation		2.9	3.8
Total after taxation		(68.7)	(2.5)

The Group incurred a total of £48.3m of adjusted items on a continuing basis, after tax (2017: £11.1m).

This comprises:

(a) Network and re-organisation costs

There are £3.1m (2017: £8.0m) network and reorganisation costs. In the current year this includes abortive integration costs of £1.6m (2017: £nil) with regard to the integration programme announced at the end of the previous financial year. There are further costs of £1.8m (2017: £nil) relating to redundancies announced in August 2018 arising from the decision to streamline head-office functions which is separate to the network restructuring in the previous financial year. There is a credit of £0.3m relating to the release of the remaining redundancy provision related to network restructuring.

The total of £8.0m in the prior year comprised: a £4.0m charge for the 2017 redundancy provision relating to network restructuring; £2.0m related to network rationalisation costs incurred in the Smiths News network; £0.6m related to the restructuring of the Smiths News joint venture FMD Limited; £0.5m in rationalising overseas operations in DMD and the remaining £0.9m related to redundancy costs within Smiths News and Tuffnells.

(b) Property

There is a £0.7m credit (2017: £0.6m charge) relating to property costs. During the year the Group made the strategic decision to transfer the previously vacant Slough depot to the Tuffnells business, resulting in a credit from the release of its onerous lease provision of £0.7m (2017: £0.9m charge relating to three properties). In the prior year £0.3m of reversionary lease provisions were released as they were no longer required. Onerous charges on property are charged through adjusted items as they form part of the Group's strategic restructuring programme. The reversal of charges has also been made in adjusted items for consistency.

There are £nil (2017: £2.2m) costs in the current year relating to acquisition and disposal costs. Prior year acquisition costs included the release of deferred contingent consideration which was payable conditional on the financial performance of Tuffnells and the continued employment of its former owners. This amounted to £2.7m comprising equity based amounts and amounts provided for cash rewards (see note 27) which were offset by £0.5m fees relating to disposal activity in the prior year that did not meet the criteria to be included within discontinued. Deferred contingent consideration charges and credits in respect of previous acquisitions and costs relating to disposal activity are considered to be adjusted items as they do not form part of normal operating costs/ credits of the business.

(d) Amortisation of acquired intangibles

(e) Pension

(f) Settlement of interest rate swap

(g) Impairment of Tuffnells goodwill

During the year management reviewed the carrying value of Tuffnells goodwill and concluded that an impairment charge of £46.1 million (2017: £nil) was required. The recoverable amount of goodwill (in both the current and prior year) is calculated with reference to its value in use based on future cash flow projections. The key assumptions used in the calculation are disclosed in note 14. It is considered adjusting due to its one-off nature and significant value.

(h) Pass My Parcel (PMP) exit costs

Following a review of the PMP proposition on 23 May 2018, the Board decided to close the division and as a result a charge of £6.7m (2017: £nil) was booked.

A further £2.0m of impairment charges split £1.0m tangible and £1.0m intangible were recognised to write off the non-current assets relating to the division (note 13 and 14).

(i) Impairment of tangible assets

The Group took the decision to consider the sale of the Jack's Beans division to focus on its core businesses, bids received indicated an excess of net book value of £1.1m therefore the Group has impaired the assets and moved them into non-current assets held for sale. Given the magnitude, the one-off nature and the Group's strategy to focus on its core businesses it is considered to be an adjusting item.

(j) NMW regulatory compliance

(k) (Loss)/Profit on disposal of subsidiary

On 14 February 2018, the Group completed the sale of the Books business at a loss of £10.5m full details are provided in note 12. In the prior year, on 30 June 2017, the Group completed the sale of the Education & Care business at a profit of £19.0m full details are included in note 12.

(l) Re-organisation costs

Re-organisation costs of £0.1m (2017 £0.3m) were incurred by the Books business during the year. Reorganisation costs are considered to be adjusted items as they are part of the Group's wider restructuring programme to deliver cost savings and were incurred prior to the disposal. These are disclosed separately from other reorganisation costs on the basis the Books business was discontinued.

(m) Amortisation and impairment of discontinued intangibles

5. Staff costs and employees

(a) Staff costs

The aggregate remuneration of employees (including executive directors) was:

£m Continuing	Note	2018	2017
Wages and salaries		112.6	116.5
Social security		11.0	10.1
Pension costs	6	1.9	1.8
Total		125.5	128.4

Pension costs shown above exclude charges and credits for pension scheme financing and actuarial gains and losses arising on the pension schemes. Wages and salaries shown above exclude amounts related to share based payment charges. On a continuing basis there was a credit of £nil in 2018 (2017: credit £1.6m) relating to share based payments (refer to note 3). There was £6.7m (2017: £23.7m) of staff costs relating to discontinued operations these are not included in the above table.

(b) Employee numbers

The average total monthly number of employees relating to continuing operations (including executive directors) was:

Number	2018	Restated 2017
Operations	3,707	3,859
Support functions	1,137	1,152
Total	4,844	5,011

The note has been restated to only to include continuing operations. The average amount of discontinued operations staff in the prior year was 940 (521 operations and 419 support functions).

6. Retirement benefit obligation

Defined benefit pension schemes

The Group operates two defined benefit schemes, the WH Smith Pension Trust (the 'Pension Trust) and the Tuffnells Parcels Express Pension Scheme. The assets and liabilities of the 'Consortium CARE' and 'Platinum' defined benefit schemes were disposed as part of the sale of the Education & Care business (see note 12).

The Group's defined benefit pension plans are final salary pension plans, which provide benefits to members in the form of a guaranteed level of pension payable for life. The level of benefits provided depends on members' length of service and their salary in the final years leading up to retirement. Benefits are paid to members from trustee-administered funds. The trustees are responsible for ensuring that the plan is sufficiently funded to meet current and future benefit payments. If investment experience is worse than expected, the Group's obligations are increased.

The trustees must agree a funding plan with the sponsoring company such that any funding shortfall is expected to be met by additional contributions and investment performance. In order to assess the level of contributions required, triennial valuations are carried out with plan's obligations measured using prudent assumptions (relative to those used to measure accounting liabilities). The trustees' other duties include managing the investment of plan assets, administration of plan benefits and exercising of discretionary powers.

The amounts recognised in the balance sheet are as follows:

£m	WH Smith Pension Trust	Tuffnells Parcels Express	2018	WH Smith Pension Trust	Tuffnells Parcels Express	2017
Present value of defined benefit obligation	(428.6)	(11.8)	(440.4)	(460.6)	(13.0)	(473.6)
Fair value of assets	583.1	9.6	592.7	609.9	10.2	620.1
Net surplus/ (loss)	154.5	(2.2)	152.3	149.3	(2.8)	146.5
Amounts not recognised due to asset limit	(154.5)	-	(154.5)	(149.3)	-	(149.3)
	-	(2.2)	(2.2)	-	(2.8)	(2.8)
Additional liability recognised due to minimum funding requirements	(5.1)	-	(5.1)	(8.7)	-	(8.7)
Pension liability	(5.1)	(2.2)	(7.3)	(8.7)	(2.8)	(11.5)

The primary defined benefit pension scheme (the Smiths News Section of the WH Smith Pension Trust) has an IAS 19 surplus of £154.5m at 31 August 2018 (2017: £149.3m surplus) which the Group does not recognise in the accounts as the Group do not have an unconditional right to either a reduction of future contributions or right to a refund on closure of the scheme. The valuation of the defined benefit schemes for the IAS 19 disclosures have been carried out by independent qualified actuaries based on updating the most recent funding valuations of the respective schemes, adjusted as appropriate for membership experience and changes in the actuarial assumptions.

The actuarial valuation for funding purposes produces a scheme deficit due to different assumptions and calculation methodologies used compared to those under IAS 19, most notably the use of a discount rate that reflects the actual investment strategy, rather than corporate bond yields as required under IAS 19.

WH Smith Pension Trust

The actuarial valuation of the Smiths News section of the WH Smith Pension Trust, at 31 March 2015 was a deficit of £17.5m.

Future cash contributions by the Group to the pension trustees total £3.3m per annum through to March 2020. The Group recognises the present value of these agreed contributions as a pension liability of £5.1m (2017: £8.7m).

Other defined benefit schemes

The triennial actuarial valuation of the Tuffnells Parcels Express scheme as at 1 April 2016 was an agreed liability of £4.3m. Guaranteed Minimum Pension ("GMP") equalisation is expected to lead to an increase in scheme liabilities at some future date on the Tuffnells Parcels Express scheme. Deficit recovery contributions to the scheme have been agreed at £0.3m per annum.

The weighted average duration of the schemes is 17 years for the Pension Trust and 25 years for the Tuffnells Parcels Express scheme.

The principal long-term assumptions used to calculate scheme liabilities on all Group schemes are:

% p.a.	2018		2017
Discount rate	2.6		2.3
Inflation assumptions - CPI	2.2		2.3
Inflation assumptions - RPI	3.2		3.3
Demographic assumptions for WH Smith Pension Trust:	2018		2017
Life expectancy at age 65	Male	Female	Male	Female
Member currently aged 65	21.4	23.3	21.5	23.3
Member currently aged 45	22.5	24.5	22.5	24.5
Demographic assumptions for Tuffnells Parcels Express scheme:	2018		2017
Life expectancy at age 65	Male	Female	Male	Female
Member currently aged 65	22.2	24.1	22.3	24.1
Member currently aged 45	23.3	25.4	23.3	25.3

Inflation assumptions

Pension increases in deferment in the both Schemes are granted in line with CPI for all deferred members. RPI inflation is used to determine the increases for pensions currently in payment, subject to any annual caps and floors.

A summary of the movements in the net balance sheet asset/ (liability) and amounts recognised in the Group Income Statement and Other Comprehensive Income are as follows:

£m	Fair value of scheme assets	Defined benefit obligation	Impact of IFRIC 14 on defined benefit pension schemes	Total
At 31 August 2016	671.9	(531.5)	(161.6)	(21.2)
Current service cost	-	(0.3)	-	(0.3)
Net interest cost	13.2	(10.3)	(3.2)	(0.3)
Administration expenses	(0.2)	-	-	(0.2)
Past service credits	(3.4)	4.1	-	0.7
Total amount recognised in income statement	9.6	(6.5)	(3.2)	(0.1)
Actual return on scheme assets (excluding amounts included in net interest expense)	(21.8)	-	-	(21.8)
Actuarial gains arising from experience	-	4.5	-	4.5
Actuarial gains arising from changes in financial assumptions	-	4.7	-	4.7
Actuarial gains arising from changes in demographic assumptions	-	4.5	-	4.5
Change in surplus not recognised	-	-	6.8	6.8
Amount recognised in other comprehensive income	(21.8)	13.7	6.8	(1.3)
Employer contributions	5.2	-	-	5.2
Employee contributions	-	-	-	-
Benefit payments	(27.2)	27.2	-	-
Amounts included in cash flow statement	(22.0)	27.2	-	5.2
Disposal	(17.6)	23.5	-	5.9
At 31 August 2017	620.1	(473.6)	(158.0)	(11.5)
Current service cost	-	(0.1)		(0.1)
Net interest cost	14.4	(10.9)	(3.7)	(0.2)
Administration expenses	(0.2)	-		(0.2)
Total amount recognised in income statement	14.2	(11.0)	(3.7)	(0.5)
Actual return on scheme assets (excluding amounts included in net interest expense)	(23.4)	-	(1.7)	(25.1)
Actuarial gains/(loss) arising from experience	-	(3.1)	-	(3.1)
Actuarial gains arising from changes in financial assumptions	-	21.9	-	21.9
Actuarial gains arising from changes in demographic assumptions	-	2.5	-	2.5
Change in surplus not recognised	-	-	3.8	3.8
Amount recognised in other comprehensive income	(23.4)	21.3	2.1	-
Employer contributions	4.7	-	-	4.7
Employee contributions	-	-	-	-
Benefit payments	(22.9)	22.9	-	-
Amounts included in cash flow statement	(18.2)	22.9	-	4.7
At 31 August 2018	592.7	(440.4)	(159.6)	(7.3)

Included within Current liabilities				(3.7)
Included within Non-current liabilities				(3.6)

The charge for the current service cost is included within administrative expenses. 'Net interest costs' are calculated by applying a discount rate to the net defined benefit asset or liability scheme assets and are included within finance income and expense.

An analysis of the assets at the balance sheet date is detailed below:

£m		2018	2017
Gilts and swaps portfolio	Quoted and Unquoted	362.9	401.9
Corporate bonds	Quoted and Unquoted	216.0	202.4
Loan fund	Unquoted	-	-
Equity funds	Unquoted	9.6	10.2
Bonds	Unquoted	-	-
Cash and other	Unquoted	4.2	5.6
		592.7	620.1

The return on scheme assets during 2018 was a loss of £23.4m (2017: a loss of £21.8m) due to a decrease in the value of bonds held to match pension scheme liabilities.

The value of the assets held by the trust in Connect Group PLC issued financial instruments is £nil (2017: £nil).

Sensitivity of results to changes in the main assumptions:

Assumption	Change in assumption	Impact on IAS 19 liabilities
Discount rate	+/- 0.5%	(£35.5m)/ +£37.5m
Rate of inflation	+/- 0.5%	£36m/ +(£33m)
Life expectancy	+/- 1 year	£15.5m/ +(£15.5m)

The sensitivity analysis for each significant actuarial assumption has been determined based on reasonably possible changes to the assumptions at the end of the reporting period. It is based on a change in the key assumption while holding all other assumptions constant. The effect of a change in more than one assumption will be different to the sum of the individual changes. When calculating the sensitivities, the same methodology used to calculate the liability recognised in the balance sheet has been applied. The methodology and types of assumptions used in preparing the sensitivity analysis is consistent with the previous period.

The history of experience adjustments is as follows:

£m	2018	2017	2016	2015	2014
Present value of defined benefit obligation	(440.4)	(473.6)	(531.5)	(432.0)	(450.7)
Fair value of assets	592.7	620.1	671.9	563.3	522.7
Impact of IFRIC 14 on defined benefit pension schemes	(159.6)	(158.0)	(161.6)	(149.4)	(93.0)
Net deficit in the schemes	(7.3)	(11.5)	(21.2)	(18.1)	(21.0)
Experience adjustments on scheme liabilities	21.3	13.7	(117.4)	25.1	0.8
Experience adjustments on scheme assets	(23.4)	(21.8)	115.4	28.7	44.6

The cumulative amount of actuarial gains and losses recognised in the statement of comprehensive income since the adoption of IFRS is a loss of £30.5m (2017: a loss of £30.5m).

The Group's defined benefit pension plans have a number of areas of risk, the most significant of which are set out below:

· Life expectancy

The majority of the plans' obligations are to provide a pension for the life of the member, so increases in life expectancy will result in an increase in the plans' liabilities.

· Inflation risk

The plans' benefit obligations are linked to inflation and higher inflation will lead to higher liabilities.

· Changes in bond yields

Falling bond yields tend to increase the funding and accounting liabilities. The schemes both hold investments in corporate and government bonds which offer a degree of matching, i.e. the movement in assets arising from changes in bond yields partially matches the movement in the funding or accounting liabilities. In this way, the exposure to movements in bond yields is reduced.

However, as the WH Smith Pension Trust entered into an insurance backed annuity 'buy-in' of the Scheme assets, within the section of the Trust sponsored by Smiths News, which minimises the Group's exposure to future pension obligations (note 32).

Defined contribution schemes

The Group operates a number of defined contribution schemes. For the year ended 31 August 2018, contributions from the respective employing company for continuing operations totalled £1.9m (2017: £1.8m) which is included in the Income Statement.

A defined contribution plan is a pension plan under which the group pays contributions to an independently administered fund - such contributions are based upon a fixed percentage of employees' pay. The group has no legal or constructive obligations to pay further contributions to the fund once the contributions have been paid. Members' benefits are determined by the amount of contributions paid by the Company and the member, together with investment returns earned on the contributions arising from the performance of each individual's chosen investments and the type of pension the member chooses to buy at retirement. As a result, actuarial risk (that benefits will be lower than expected) and investment risk (that assets invested in will not perform in line with expectations) fall on the employee.

7. Finance costs

£m	Note	2018	2017
Continuing operations
Interest on bank overdrafts and loans		(4.1)	(4.4)
Amortisation of loan arrangement fees		(0.5)	(1.0)
Net interest expense on defined benefit obligation	6	(0.2)	(0.3)
Interest payable on finance leases		(0.6)	(1.0)
Foreign exchange gains		-	0.2
Unwinding of discount on provisions - trading	24	(0.1)	(0.2)
Adjusted items:
Settlement of interest rate swap	4	-	(0.8)
Finance costs - continuing operations		(5.5)	(7.5)
Finance costs - continuing and discontinued operations		(5.5)	(7.5)

8. Income tax expense

£m			2018			2017
Continuing operations	Adjusted	Adjusted items	Total	Adjusted	Adjusted items	Total
Current tax	5.6	(1.9)	3.7	10.0	(0.6)	9.4
Adjustment in respect of prior year	(1.0)	-	(1.0)	(0.8)	0.1	(0.7)
Total current tax charge	4.6	(1.9)	2.7	9.2	(0.5)	8.7
Deferred tax - current year	0.6	(1.0)	(0.4)	0.1	(2.0)	(1.9)
Deferred tax - prior year	0.3	-	0.3	0.5	-	0.5
Deferred tax - impact of rate change	-	-	-	0.1	(0.2)	(0.1)
Total tax charge - continuing operations	5.5	(2.9)	2.6	9.9	(2.7)	7.2
Effective tax rate	19.4%		(7.3%)	20.6%		21.1%
Tax charge - discontinued operations	0.4	(0.4)	-	1.0	(1.1)	(0.1)
Tax charge - continuing and discontinued operations	5.9	(3.3)	2.6	10.9	(3.8)	7.1

The effective adjusted income tax rate for continuing operations in the year was 19.4% (2017: 20.6%). After the impact of Adjusted items of £2.9m (2017: £2.7m), the effective statutory income tax rate for continuing operations was (7.3)% (2017: 21.1%).

Corporation tax is calculated at the main rates of UK corporation tax, those being 19.0% (2017: 19.6%). Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions.

Of the charge to current tax, approximately £nil (2017: £1.0m) related to tax on profits arising in the Books business, which was disposed of during the year. No tax charge or credit arose on the disposal of the relevant subsidiary.

The tax charge for the year can be reconciled to the profit in the income statement as follows:

£m	2018	2017
Profit before tax - continuing operations	(35.5)	34.2
Tax on profit at the standard rate of UK corporation tax 19.0% (2017: 19.6%)	(6.7)	6.7
Expenses not deductible for tax purposes	9.8	0.8
Non-taxable income	(0.5)	(0.6)
Share based payments	0.6	0.5
Adjustment in respect of prior years	(0.6)	(0.2)
Impact of change in UK tax rate	-	(0.1)
Impact of higher overseas tax rates	-	0.1
Tax charge - continuing operations	2.6	7.2

Expenses not deductible for tax purposes are comprised mainly of the tax effect of the impairment of Goodwill in Tuffnells. See note 4.

Tax charges to other comprehensive income and directly in equity

£m Continuing operations	2018	2017
Current tax relating to the defined benefit pension scheme	(0.7)	(0.8)
Current tax relating to share based payments	-	-
Deferred tax relating to derivative financial instruments	-	0.2
Deferred tax relating to share based payments	-	0.2
Deferred tax relating to retirement benefit obligations	0.7	0.3
Tax (credit) to other comprehensive income and directly in equity - continuing operations	-	(0.1)
Tax charge to other comprehensive income and directly in equity - discontinued operations	-	0.3
Tax charge to other comprehensive income and directly in equity - continuing and discontinued operations	-	0.2

9. Dividends

Amounts paid & proposed as distributions to equity shareholders in the years:

	2018	2017	2018	2017
Paid & proposed dividends for the year	Per share	Per share	£m	£m
Interim dividend - paid	3.1p	3.1p	7.6	7.6
Final dividend - proposed	nil	6.7p	-	16.4
	3.1p	9.8p	7.6	24.0
Recognised dividends for the year
Final dividend - prior year	6.7p	6.5p	16.5	16.0
Interim dividend - current year	3.1p	3.1p	7.6	7.6
	9.8p	9.6p	24.1	23.6

There is no proposed final dividend for the year ended 31 August 2018.

The final dividend payment of £16.5m is £0.1m higher than that proposed, which is a result of movements in treasury shares between the declaration date and the ex-div date.

10. Earnings per share

	2018			2017
	£m		Pence	£m		Pence
	Earnings	Weighted average number of shares million	per share	Earnings	Weighted average number of shares million	per share

Weighted average number of shares in issue		247.7			247.5
Shares held by the ESOP (weighted)		(1.7)			(2.1)

Basic earnings per share (EPS)
Continuing operations
Adjusted earnings attributable to ordinary shareholders	22.9	246.0	9.3p	38.1	245.4	15.5p

Adjusted items	(61.0)			(11.1)

Earnings attributable to ordinary shareholders	(38.1)	246.0	(15.5p)	27.0	245.4	11.0p

Discontinued operations
Earnings attributable to ordinary shareholder	1.3	246.0	0.5p	9.6	245.4	3.9p

Total - Continuing and discontinued operations
Adjusted earnings attributable to ordinary shareholders	24.2	246.0	9.8p	39.1	245.4	15.9p

Adjusted items	(71.2)			(2.5)

Earnings attributable to ordinary shareholders	(47.0)	246.0	(19.1p)	36.6	245.4	14.9p

Diluted earnings per share (EPS)
Effect of dilutive share options		-			1.6
Effect of dilutive share options adjusting		0.7			1.6
Continuing operations
Diluted adjusted EPS	22.9	246.7	9.3p	38.1	247.0	15.4p
Diluted EPS	(38.1)	246.0	(15.5p)	27.0	247.0	10.9p

Discontinued operations - Diluted EPS	(8.9)	246.0	(3.6p)	9.6	247.0	3.9p

Total - Continuing and discontinued operations
Diluted adjusted EPS	24.2	246.7	9.8p	39.1	247.0	15.8p
Diluted EPS	(47.0)	246.0	(19.1p)	36.6	247.0	14.8p

Dilutive shares increase the basic number of shares at 31 August 2018 by 0.7m to 246.7m (31 August 2017: 247.0m).

The calculation of diluted EPS reflects the potential dilutive effect of employee incentive schemes of 0.7m dilutive shares (31 August 2017: 1.6m). In 2017 there was a dilutive impact of a weighted 1.6m shares being the time apportioned share capital relating to the deferred consideration for the acquisition of The Big Green Parcel Holding Company Limited (whose principal trading subsidiary is Tuffnells Parcels Express Limited).

Dilutive shares are only dilutive for the purposes of the Group's adjusted measure, where a profit is recognised. The application of the dilutive shares to the adjusted profits measure reduces the profit per share. For the Group's statutory measures, the potential dilutive effect of employee incentive schemes is antidilutive, in that they would reduce the loss per share. Accordingly, they are not applied to the statutory calculation with basic and dilutive EPS being the same.

11 Discontinued Operations and assets held for sale

The Group took the decision to consider the sale of the Jack's Beans division to focus on its core businesses, bids received indicated an excess of net book value of £1.1m, therefore, the Group have impaired the assets down to £0.5m and moved them into non-current assets held for sale.

On 30 June 2017 the Education & Care business was sold (refer to note 12 for detail). The results of this business are therefore disclosed as discontinued. The Books business was classified as held for sale on 31 August 2017 as the Group was actively marketing the business, it subsequently disposed of the business on the 14 February 2018. As such, the results of the Books business are also classified as discontinued.

The results of discontinued operations, which have been included within the consolidated income statement, are as follows:

£m	12 months to Aug 2018			12 months to Aug 2017
	Adjusted	Adjusted items	Total	Adjusted	Adjusted items	Total

Revenue	114.3	-	114.3	270.3	-	270.3
Expenses	(112.5)	(10.6)	(123.1)	(268.3)	7.5	(260.8)
Operating profit	1.8	(10.6)	(8.8)	2.0	7.5	9.5
Finance costs	(0.1)	-	(0.1)	-	-	-
Profit before tax	1.7	(10.6)	(8.9)	2.0	7.5	9.5
Income tax expense	(0.4)	0.4	-	(1.0)	1.1	0.1
Profit from discontinued operations	1.3	(10.2)	(8.9)	1.0	8.6	9.6

The major classes of assets and liabilities comprising the operations classified as held for sale are as follows:

£m	2018	2017
Goodwill	-	9.7
Intangible assets	-	3.0
Property, plant and equipment	0.5	4.0
Inventories	-	20.3
Trade and other receivables	-	26.1
Current tax asset	-	0.5
Cash and bank balances	-	0.9
Total assets classified as held for sale	0.5	64.5
Trade and other payables	-	(48.5)
Deferred tax liabilities	-	(0.4)
Provisions	-	(0.6)
Total liabilities classified as held for sale	-	(49.5)
Net assets of assets held for sale/disposal group	0.5	15.0

Impairment of £nil (2017: £7.9m) was charged in respect of goodwill bringing the carrying value of the business to fair value less cost to sell.

During the year cash outflow from operating activities attributed to discontinued operations amounted to £8.8m (2017: inflow £3.8m) and paid £4.3m (2017: £3.7m) in respect of investing activities. There were no cash flows associated with financing activities attributable to discontinued operations.

12 Disposal of subsidiaries

The Group disposed of the Books business on 14 February 2018.

The net assets of the business at the date of disposal were:

	£m
Goodwill	9.7
Intangible assets	3.6
Property, plant and equipment	4.1
Inventories	20.7
Trade and other receivables	32.7
Cash and bank balances	4.6
Trade and other payables	(45.9)
Corporation tax liability	(0.1)
Deferred tax liabilities	(0.3)
Provisions	(0.5)
Net assets disposed	28.6

Gross proceeds received	18.7
Disposal costs	(1.5)
Release of deferred consideration liability	0.9
Net assets disposed	(28.6)
Loss on disposal	(10.5)

Total consideration
Satisfied by:
Cash	18.7

Net cash inflow arising on disposal
Equity consideration	6.0
Disposal proceeds to repay overdraft*	12.7
Consideration received in cash and cash equivalents	18.7
Less: cash and cash deposits disposed	(4.6)
Less: cash disposal costs	(1.5)
	12.6

*As part of the sale and purchase agreement a Group overdraft balance was settled which was intrinsically linked to the Books business.

The loss on disposal is included in the profit for the year from discontinued operations.

The Group disposed of the Education & Care business on 30 June 2017.

The net assets of the business at the date of disposal were:

	£m
Goodwill	20.9
Intangible assets	6.3
Property, plant and equipment	6.0
Pension asset	0.2
Inventories	8.6
Trade and other receivables	11.0
Cash and bank balances	0.5
Deferred tax asset	1.1
Trade and other payables	(9.6)
Deferred tax liabilities	(0.7)
Pension liability	(6.1)
	38.2
Disposal costs	1.8
Gain on disposal	19.0

Total consideration	59.0
Satisfied by:
Cash	58.7
Cash received after 31 August 2017	0.3

Net cash inflow arising on disposal:
Consideration received in cash and cash equivalents	58.7
Less: cash and cash equivalents disposed	(0.5)
	58.2

The gain on disposal is included in the profit for the year from discontinued operations.

Net cash inflow arising from disposal of Books business	12.6
Cash consideration received in the period to 28 February 2018 arising from disposal of Education & Care	0.3
Net cash inflow arising from disposals	12.9

13. Intangible assets

		Acquired Intangibles			Internally generated development costs	Computer software costs
£m	Goodwill	Customer relationships	Trade name	Software	Internally generated development costs	Computer software costs	Total
Cost:
At 1 September 2017	57.8	29.3	30.7	0.8	6.4	11.5	136.5
Additions	-	-	-	-	0.7	1.1	1.8
Disposals	-	-	-	-	-	(0.1)	(0.1)
At 31 August 2018	57.8	29.3	30.7	0.8	7.1	12.5	138.2
Accumulated amortisation:
At 1 September 2017	-	(11.3)	(8.3)	(0.7)	(3.9)	(5.8)	(30.0)
Amortisation charge	-	(4.0)	(3.1)	(0.1)	(0.4)	(2.7)	(10.3)
Disposals	-	-	-	-	-	-	-
Impairment	(46.1)	-	-	-	(1.0)	-	(47.1)
At 31 August 2018	(46.1)	(15.3)	(11.4)	(0.8)	(5.4)	(8.5)	(87.4)
Net book value at 31 August 2018	11.7	14.0	19.3	-	1.8	4.0	50.8
Cost:
At 1 September 2016	96.3	48.8	33.5	1.5	11.2	16.2	207.5
Additions	-	-	-	-	2.1	3.0	5.1
Disposals	-	-	-	-	(2.8)	(0.6)	(3.4)
Disposal of business	(20.9)	(9.3)	(0.9)	(0.2)	(0.9)	(4.3)	(36.5)
Classified as held for sale	(17.6)	(10.2)	(1.9)	(0.5)	(3.2)	(2.8)	(36.2)
At 31 August 2017	57.8	29.3	30.7	0.8	6.4	11.5	136.5
Accumulated amortisation:
At 1 September 2016	-	(20.0)	(7.5)	(1.1)	(7.2)	(6.9)	(42.7)
Amortisation charge	-	(5.1)	(3.2)	(0.3)	(1.4)	(3.2)	(13.2)
Disposals		-	-	-	2.6	0.4	3.0
Disposal of business		5.6	0.5	0.2	0.4	2.6	9.3
Impairment	(7.9)	(2.0)	-	-	-	-	(9.9)
Classified as held for sale	7.9	10.2	1.9	0.5	1.7	1.3	23.5
At 31 August 2017	-	(11.3)	(8.3)	(0.7)	(3.9)	(5.8)	(30.0)
Net book value at 31 August 2017	57.8	18.0	22.4	0.1	2.5	5.7	106.5

The Group leases software under various finance lease arrangements. The net book value of finance leases contained within the software balance above is £0.2m (2017: £0.6m).

The net book value of the Groups acquired intangibles split by CGU is included in the table below.

	Goodwill			Acquired Intangibles			Total
£m	2018	2017	On acquisition	2018	2017	On acquisition	2018	2017	On acquisition
DMD	5.7	5.7	5.7	0.2	0.5	2.6	5.9	6.2	8.3
Smiths News	-	-	-	-	0.1	0.3	-	0.1	0.3
Tuffnells	6.0	52.1	52.1	33.1	39.9	58.1	39.1	92.0	110.2

	11.7	57.8	57.8	33.3	40.5	61.0	45.0	98.3	118.8

Impairment tests goodwill

The carrying amount of the Tuffnells business has been reduced to its recoverable amount through recognition of an impairment loss against goodwill, no class of asset other than goodwill was impaired. This loss has been included in adjusting items against operating expenses in the income statement.

Goodwill is not amortised, but tested annually for impairment or more frequently if there are indications that goodwill might be impaired with the recoverable amount being determined from value in use calculations. The recoverable amounts of the combined cash generating units are determined from the value in use calculations. The Group prepares cash flow forecasts derived from the most recent plan for the following as approved by the Board and extrapolates these cash flows on an estimated growth rate into perpetuity.

The rate used to discount the forecast cash flows is 9.5% (2017 10.0%), being the Group's weighted average cost of capital adjusted for industry and market risk.

The table below includes the key assumptions used to calculate the Group's cash generating unit value in use:

	Tuffnells	Smiths News	DMD
Average plan revenue growth	1.4%	(6.1%)	0.0%
Average plan contribution margin^*1	8.1%	4.8%	10.0%
Discount Rate	9.5%	9.5%	9.5%
Long term growth rate	2%	0.0%	0.0%

^*1Average contribution margin is considered gross profit less distribution costs

In generating these budgets the Board has considered the overall strategy of the Group, the principal risks and uncertainties inherent within the business, as well as making a number of key strategic planning assumptions which are noted below:

1. No significant impact on trading as a result of the EU Exit or other political change;

2. Modest revenue growth in Tuffnells in the assessment period;

3. Delivery of margin improvement in Tuffnells, driven by efficiencies both in operating and overhead costs in the assessment period;

4. Continued decline in sales of printed media during the assessment period offset by overhead efficiencies in the assessment period; and

5. Retention of major contracts in the news distribution business at rates which maintain acceptable margins.

Consistent with IAS 36 revenues in relation to enhancement of assets has not been included.

Sensitivity to changes in key assumptions

Impairment testing is dependent on management's estimates and judgements, particularly as they relate to the forecasting of future cash flows, the discount rates selected and expected long-term growth rates.

The Group has conducted sensitivity analysis on the impairment test of each of the CGU's classified within continuing operations. There is significant headroom on the carrying value of each CGU except for the Tuffnells CGU. Given the headroom in the other CGU's it would require a significant change in assumptions to require an impairment charge and this level of change is considered unlikely. The Tuffnells CGU has a carrying value of £67.5m based on the following assumptions; the effect of a reasonably possible change in the assumptions is disclosed in the table below.

	Plan scenario	Change	Effect on impairment £m
Long term growth rate (%)	2%	-/+ 1%	13.8/(10.5)
Post tax discount rate (%)	9.5%	-/+ 1%	(7.7)/10.1
Contribution (£m)*¹	£74.3m	- 10%	(19.5)
Average contribution margin *² (% of revenue)	10.0%	-/+ 1%	(2.1)/1.3

^*1Contribution is gross profit less distribution costs

^*2Average contribution margin is considered gross profit less distribution costs

Other Intangibles

The individual material intangible assets relate to the customer relationships and brand acquired on the acquisition of Tuffnells. The carrying value of these assets at 31 August 2018 is £13.8m and £19.3m (2017: £17.5m and £22.4m) respectively with a remaining amortisation period of 4 and 6.5 years respectively. Given the trading performance in the year these assets were reviewed for impairment, no impairment was indicated.

Included within distribution costs is £1.0m (2017: £nil) in relation to the impairment of intangible assets in the PMP division, this is included with the Smiths News CGU further details are included within note 4.

As detailed in note 12, goodwill and intangibles attributable to the Education & Care CGU were disposed during the previous financial year.

An impairment against goodwill and intangibles attributable to the Books business was charged during the previous financial year bringing the carrying value to the fair value less costs to sell. The resulting goodwill and intangibles values were transferred to assets held for sale in the prior year.

14. Property, plant and equipment

£m	Land & Buildings
	Freehold properties	Long term leasehold	Short term leasehold	Fixtures & fittings	Equipment & vehicles	Total
Cost:
At 1 September 2017	14.1	1.5	12.6	4.9	42.7	75.8
Additions	-	-	1.3	0.9	6.9	9.1
Transfer between asset classes	-	-	-	-	-	-
Disposals	(0.1)	(0.2)	(0.3)	(0.4)	(4.0)	(5.0)
Classified as held for sale	-	-	-	-	(3.4)	(3.4)
At 31 August 2018	14.0	1.3	13.6	5.4	42.2	76.5
Accumulated depreciation:
At 1 September 2017	-	(0.4)	(7.7)	(3.5)	(22.9)	(34.5)
Depreciation charge	(0.2)	-	(1.0)	(1.3)	(6.1)	(8.6)
Transfer between asset classes	-	-	-	0.6	(0.6)	-
Disposals	-	0.1	-	0.6	3.8	4.5
Impairments	-	-	-	-	(2.0)	(2.0)
Classified as held for sale	-	-	-	-	2.9	2.9
At 31 August 2018	(0.2)	(0.3)	(8.7)	(3.6)	(24.9)	(37.7)
Net book value at 31 August 2018	13.8	1.0	4.9	1.8	17.3	38.8
Cost:
At 1 September 2016	15.8	1.4	14.6	12.3	47.5	91.6
Additions	3.5	0.1	1.0	2.2	5.2	12.0
Transfer between asset classes	0.7	-	-	-	(0.7)	-
Disposals	(1.1)	-	(2.7)	(2.0)	(5.2)	(11.0)
Disposal of business	(4.8)	-	-	(1.4)	(3.7)	(9.9)
Classified as held for sale	-	-	(0.3)	(6.2)	(0.4)	(6.9)
At 31 August 2017	14.1	1.5	12.6	4.9	42.7	75.8
Accumulated depreciation:
At 1 September 2016	(0.9)	(0.4)	(9.3)	(7.1)	(23.6)	(41.3)
Depreciation charge	(0.2)	-	(1.0)	(1.2)	(6.9)	(9.3)
Disposals	0.6	-	2.4	1.5	4.8	9.3
Disposal of business	0.5	-	-	0.9	2.5	3.9
Classified as held for sale	-	-	0.2	2.4	0.3	2.9
At 31 August 2017	-	(0.4)	(7.7)	(3.5)	(22.9)	(34.5)
Net book value at 31 August 2017	14.1	1.1	4.9	1.4	19.8	41.3

The Group leases plant and equipment under a number of finance lease arrangements and has the option to purchase the equipment at the end of each lease. The net book value of finance leases contained within these balances is £3.7m at 31 August 2018 (2017: £6.8m). See note 4 for details of impairment and assets held for sale.

Impairments of £1.1m and £1.0m have been recognised in the current year relating to the write down of Jack's Beans assets to their NBV and write off PMP assets respectively, further detail is included within note 4.

15. Interests in joint ventures

The Group's share of the results, assets and liabilities of joint ventures is as follows:

£m	2018	2017

Revenue	5.1	4.9
Profit after tax	0.5	0.4

Non-current assets	1.5	1.4
Current assets	2.5	2.4
Total assets	4.0	3.8
Current liabilities	(1.8)	(2.0)
Non-current liabilities	-	(0.1)
Total liabilities	(1.8)	(2.1)
Goodwill	2.9	2.9
Share of net assets	5.1	4.6

Dividends of £0.2m (£0.2m FY17) were received in the year to 31 August 2018 from joint ventures.

The Group has a 50% interest in the ordinary shares of Rascal Solutions Limited, a company incorporated in England (2017: 50%), which in turn owns 100% of the ordinary shares of Open-Projects Limited. The latest statutory accounts of Rascal Solutions Limited were drawn up to 31 August 2017. The Group has a 50% investment in FMD Limited, the holding company of Worldwide Magazine Distribution Limited, a company incorporated in England (2017: 50%). The latest statutory accounts of FMD Limited were drawn up to 31 July 2017. Both of these companies are currently in the process of liquidation.

During the prior year, the Group's shares in Bluebox Avionics Limited were exchanged for shares in Bluebox Systems Group Limited (previously named Bluebox Aviation Systems Limited); an entity in which the Group has a 36.1% interest. A loan balance of £ nil (FY17: £0.3m) owed by Bluebox Avionics Limited was converted to an investment in Bluebox Aviation Systems Limited, a subsidiary of Bluebox Systems Group Limited.

16. Inventories

£m	2018	2017
Goods held for resale	12.4	12.8
Raw materials and consumables	0.9	1.0
Inventories	13.3	13.8

17. Trade and other receivables

£m	2018	2017
Trade receivables	61.3	76.8
Allowance for doubtful debts	(0.5)	(0.5)
	60.8	76.3
Other debtors	14.3	13.5
Prepayments and accrued income	6.6	8.5
Trade and other receivables	81.7	98.3

Trade receivables

The average credit period taken on sale of goods is 20 days (2017: 24 days). Trade receivables are generally non-interest bearing. The Group provides for receivables on an individual customer basis based on circumstances known at that time and the likelihood of recovery.

Included in the outstanding trade receivables balance are debtors with overdue amounts of £1.4m (2017: £5.4m) that the Group has not provided for as these amounts are still considered recoverable and fall outside our pre-determined provisioning policy.

Ageing of past due but not impaired receivables:

£m	2018	2017
30-60 days	2.0	1.5
61-90 days	0.4	0.8
91-120 days	0.5	0.8
Over 120 days	0.2	2.3
	3.1	5.4

Of the trade receivables balance at the end of the year:

· One customer (2017: one) had an individual balance that represented more than 10% of the total trade receivables balance. The total of this was £13.2m (2017: £13.8m); and

· A further seven customers (2017: seven) had individual balances that represented more than 5% of the total trade receivables balance. The total of these was £32.8m (2017: £49.1m).

Movement in the allowance for doubtful debts:

£m	2018	2017
At 1 September	0.5	0.8
Impairment losses recognised	0.5	0.6
Amounts written off as uncollectible	(0.4)	-
Amounts recovered during the year	(0.1)	-
Amounts released during the year	-	-
Disposal during year	-	-
Transferred as held for sale	-	(0.9)
At 31 August	0.5	0.5

Ageing of past due and impaired trade receivables:

£m	2018	2017
30-60 days	-	0.1
61-90 days	-	-
91-120 days	0.2	0.1
Over 120 days	0.3	0.3
Continuing	0.5	0.5
Discontinued	-	0.9
Total continuing and discontinued	0.5	1.4

The directors consider that the carrying amount of trade and other receivables approximates their fair value which is considered to be a level 2 methodology of valuing them.

Other debtors and prepayments

The largest items included within this balance are £6.8m (2017: £6.7m) of publisher debtors and £2.6m (2017: £3.8m) of accrued revenue.

18. Trade and other payables

	£m	2018	2017
Trade payables		94.0	102.9
Other creditors		17.5	18.2
Accruals and deferred income		16.1	15.1
		127.6	136.2

Trade and other payables principally comprise amounts outstanding for trade purchases and on-going costs. The average credit period taken for trade purchases is 31 days (2017: 32 days). No interest is charged on trade payables. The directors consider that the carrying amount of trade and other payables approximates to their fair value using a level 2 valuation.

19. Cash and borrowings

Cash and borrowings by currency (Sterling equivalent) are as follows:

£m	Sterling	Euro	US Dollar	Other	Total 2018	2017
Cash and bank deposits - continuing	14.8	1.8	1.2	0.2	18.0	5.5
Cash and bank deposits - classified as held for sale	-	-	-	-	-	0.9
Cash and bank deposits - total	14.8	1.8	1.2	0.2	18.0	6.4
Term loan - disclosed within current liabilities	-	-	-	-	-	(20.0)
Overdrafts - disclosed within current liabilities	(9.2)	-	-	-	(9.2)	-
Revolving credit facility - disclosed within current liabilities	(38.0)	-	-	-	(38.0)	-
Term loan - disclosed within non-current liabilities	(48.8)	-	-	-	(48.8)	(60.0)
Total borrowings	(96.0)	-	-	-	(96.0)	(80.0)
Net borrowings	(81.2)	1.8	1.2	0.2	(78.0)	(73.6)

Total borrowings
Amount due for settlement within 12 months	(47.2)	-	-	-	(47.2)	(20.0)
Amount due for settlement after 12 months	(48.8)	-	-	-	(48.8)	(60.0)
	(96.0)	-	-	-	(96.0)	(80.0)

Cash and bank deposits comprise cash held by the Group and short-term bank deposits with an original maturity of three months or less. The carrying amount of these assets approximates their fair value.

In October 2017, the Group concluded new bank facilities of £175m with six relationship banks with a term which runs until January 2021. The new facility comprises of a term loan of £50m with no amortisation and a revolving credit facility (RCF) for £125m on a higher interest margin than the previous facility but with similar covenant terms to the previous facility (see note 20). The £47.2m due for settlement within 12 months relates to the RCF and overdraft.

Available Group bank facilities are outlined in note 20. Interest payable under the facility in place at 31 August 2018 is calculated as the cost of one month LIBOR plus an interest margin of between 1.35% and 2.35% dependent on the net debt/ adjusted EBITDA covenant ratio. The weighted average interest rate for the year was 4.9%.

Reconciliation of liabilities arising from financing activities

The table below details changes in the Group's liabilities arising from financing activities, including both cash and non-cash changes. Liabilities arising from financing activities are those for which cash flows were, or future cash flows will be, classified in the Group's consolidated statement of cash flows as cash flows from financing activities.

£m	Note	01/09/2017	Financing cash flows	New finance leases	Other changes	31/08/2018
Term Loan	19	80.0	(30.0)	-	(1.2)	48.8
Revolving credit facility	19	-	24.1	-	13.9	38.0
Finance leases		8.5	(3.8)	-	0.6	5.3
Total		88.5	(9.7)	-	13.3	92.1

Other changes include interest accruals, payments and settlement of a Group overdraft balance intrinsically linked to the Books business (see note 12).

20. Financial Instruments

Treasury policy

The Group operates a centralised treasury function to manage the Group's funding requirements and financial risks in line with the Board approved treasury policies and procedures and their delegated authorities. Treasury's role is to ensure that appropriate financing is available for running the businesses of the Group on a day to day basis, whilst minimising interest cost. No transactions of a speculative nature are undertaken. Dealings are restricted to those banks with suitable credit ratings and counterparty risk and credit exposure is monitored frequently.

Capital risk management

The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising the return to stakeholders through the optimisation of the debt and equity balance. The capital structure of the Group consists of debt, which includes the borrowings, cash and cash equivalents as disclosed in Note 19 and equity attributable to equity holders of the parent, comprising issued capital, reserves and retained earnings as disclosed in the Group Statement of Changes in Equity.

The only externally imposed capital requirements for the Group are debt to EBITDA, fixed charge cover and interest cover under the terms of the bank facilities, with which the Group has fully complied during both the current year and the prior year. To maintain or adjust its capital structure, the Group may adjust the dividend payment to shareholders and/or issue new shares. The Group's capital is only restricted by distributable reserves.

The Board regularly reviews the capital structure. As part of this review, the Board considers the cost of capital and the risks associated with each class of capital, given the recent changes in the Group, a target capital structure is under consideration.

Liquidity risk

The Group manages liquidity risk by maintaining adequate reserves and banking facilities and by monitoring forecast and actual cash flows. The facilities that the Group has at its disposal to further reduced liquidity risk are described below.

As at 31 August 2018, the Group had £175m committed bank facilities in place (2017: £230m). Bank facilities comprised:

· a £50m syndicated term loan

· a £125m syndicated revolving credit facility which expires in January 2021;

The facility described above is subject to the following covenants:

· Leverage cover - the net debt: adjusted EBITDA ratio which must remain below 2.75x. At 31 August 2018 the ratio was 1.8x (2017: 1.2x);

· Interest cover - the consolidated net interest: adjusted EBITDA ratio which must remain above 4.0x. As at 31 August 2018 the ratio was 9.6x (2017: 12.0x);

· Fixed charge cover - the ratio of adjusted EBITDA to consolidated fixed charges is not less than 1.75x to 1. As at 31 August 2018 the ratio was 2.3x (2017: 3.0x); and

· Guarantor cover - The annual turnover, gross assets and pre-tax profits of the Guarantors contribute at any time 80 per cent or more of the annual consolidated turnover, gross assets and pre-tax profits of the Group for each of its financial years. The guarantors, which are all 100% owned or wholly owned subsidiaries of the Connect Group PLC, are Connect Group PLC, Smiths News Holdings Limited and Tuffnells Parcels Express Limited.

At 31 August 2018, the Group had available £87.0m (2017: £150.0m) of undrawn committed borrowing facilities. There were no breaches of loan agreements during either the current or prior years.

As the Group is cash generative its liquidity risk is considered low. The Group's cash generation allows it to meet all loan commitments as they fall due as well as sustain a negative working capital position.

The Group invests significant resources in the forecasting and management of its cash flows. This is critical given a routine cash cycle at Smiths News that results in significant predictable swings within each month of around £40.0m, which utilises the Revolving Credit Facility of £125.0m.

The following is an analysis of the undiscounted contractual cash flows payable under financial liabilities and derivatives. The undiscounted cash flows will differ from both the carrying value and fair value. Floating rate interest is estimated using the prevailing rate at the balance sheet date.

£m	Due within 1 Year	Due between 1 and 2 years	Due between 2 and 3 years	Greater than 3 years
At 31 August 2018
Non derivative financial liabilities
Bank and other borrowings	(47.2)	-	(50.0)	-
Finance leases	(2.8)	(1.7)	(0.4)	(0.6)
Total	(50.0)	(1.7)	(50.4)	(0.6)
At 31 August 2017
Non derivative financial liabilities
Bank and other borrowings	(22.5)	(60.6)	-	-
Finance leases	(3.8)	(2.8)	(2.2)	(1.0)
Total	(26.3)	(63.4)	(2.2)	(1.0)

Counterparty risk

Dealings are restricted to those banks with suitable credit ratings and counterparty risk and credit exposure is monitored.

Foreign currency risk

· The majority of the Group's transactions are carried out in the functional currencies of its operations, and so transactional exposure is limited.

· The majority of the Group's net liabilities are held in Sterling, with only £1.0m (2017: £4.4m) of net assets held in overseas currencies. Translation exposure arises on the re-translation of overseas subsidiaries profits and net assets into sterling for financial reporting purposes and is not seen as significant.

· Note 19 denotes borrowings by currency.

· There are no material currency exposures to disclose.

Interest rate risk

The Group monitors its exposure to interest rate risk and has used interest rate swaps to manage its exposure to interest rate movements on its bank borrowings. In light of the Group's reduced debt exposure, consideration of the macroeconomic environment and sensitivity to potential interest rate rises.

The Group avoids the use of derivatives or other financial instruments in circumstances when the outcome would effectively be largely dependent upon speculation on future rate movements.

Hedge accounting

It is, and has been throughout the period of review, the Group's policy that no trading in derivative financial instruments shall be undertaken.

All financial assets are classified under loans and receivables and other financial liabilities are held at amortised cost.

Interest rate sensitivity analysis

Based on the assumption that the liabilities outstanding at the balance sheet date were outstanding for the whole year, if interest rates had been 0.5% higher/lower and all other variables were held constant, the Group's profit and equity for the year ended 31 August 2018 would decrease/increase by £0.4m (2017: £0.4m).

Credit risk

The Group considers its exposure to credit risk at 31 August 2018 to be as follows:

£m	2018	2017
Bank deposits	17.9	6.4
Trade and other receivables	78.7	103.4
	96.6	109.8

Further detail on the Group's policy relating to trade receivables can be found in note 17.

21. Obligations under finance leases

£m	2018		2017
	Minimum lease payments	Present value of minimum lease payments	Minimum lease payments	Present value of minimum lease payments
Amount payable under finance leases:
Within one year	2.8	2.8	3.8	3.1
In the second to fifth years inclusive	2.7	2.5	6.0	5.4
Total	5.5	5.3	9.8	8.5
Less: future finance charges	(0.2)	-	(1.3)
Present value of lease obligations	5.3	5.3	8.5	8.5
Less: amount due for settlement within 12 months (shown under current liabilities)		(2.8)		(3.1)
Amount due for settlement after 12 months		2.5		5.4

Group policy is to acquire certain items of its fixtures, equipment and software under finance leases. The average lease term is 3 years. Interest rates are fixed at the contract date. All leases are on a fixed repayment basis and no arrangements have been entered into for contingent rental payments.

The fair value of the Group's lease obligations approximates to their carrying amount.

22. Other non-current liabilities

£m	2018	2017
Other creditors	0.6	1.0

The balance disclosed as other creditors within non-current liabilities relates to operating lease incentives which are being recognised over the lease term.

23. Deferred tax

Deferred tax assets and liabilities are attributable to the following:

£m	Accelerated tax depreciation	Other	Share based payments	Intangible assets	Retirement benefits	Total
At 1 September 2017	1.8	0.9	0.7	(7.2)	2.0	(1.8)
Charge to income	0.1	(0.7)	(0.7)	1.3	-	-
Charge to other comprehensive income and directly in equity	-	-	-	-	(0.7)	(0.7)
Classified as held for sale	-	-	-	-	-	-
Disposal of subsidiary	-	-	-	-	-	-
At 31 August 2018	1.9	0.2	-	(5.9)	1.3	(2.5)

Deferred tax assets	1.9	0.2	-	-	1.3	3.4
Deferred tax liabilities	-	-	-	(5.9)	-	(5.9)

At 1 September 2016	2.1	0.5	1.2	(10.8)	3.8	(3.2)
Charge to income	(0.2)	0.6	(0.3)	2.5	(0.2)	2.4
Charge to other comprehensive income and directly in equity	-	(0.2)	(0.2)	-	(0.6)	(1.0)
Classified as held for sale	-	-	-	0.4	-	0.4
Disposal of subsidiary	(0.1)	-	-	0.7	(1.0)	(0.4)
At 31 August 2017	1.8	0.9	0.7	(7.2)	2.0	(1.8)

Deferred tax assets	1.8	0.9	0.7	-	2.0	5.4
Deferred tax liabilities	-	-	-	(7.2)	-	(7.2)

The Group has recognised the net balance of deferred tax as the liability and asset are with the same tax authority and unwind over the same time period. The deferred tax assets have been deemed recoverable as they are offset by a liability and the Group forecasts that it will continue to make profits against which the assets can be utilised.

The Group has capital losses carried forward of £28.2m (2017: £28.2m). Deferred tax assets have not been recognised in respect of the capital losses carried forward due to the uncertainty of their utilisation.

On 15 September 2016, the Finance Bill received Royal Assent to enact the previously announced reductions in the rate of corporation tax to 19% from 1 April 2017 and 17% from 1 April 2020. The Group has continued to remeasure its UK deferred tax assets and liabilities at the end of the reporting period at the rates of 19% and 17% based on an updated expectation of when those balances are expected to unwind.

24. Provisions

£m	Regulatory	Reorganisation provisions	Insurance and legal provision	Deferred contingent consideration	Property provisions	Total
At 1 September 2017	-	(4.5)	(3.6)	(0.8)	(6.7)	(15.6)
Additions	(1.3)	(5.3)	(2.4)	-	(0.4)	(9.4)
Release	-	-	0.7	0.8	0.7	2.2
Utilised in period	-	5.8	1.9	-	0.9	8.6
Unwinding of discount utilisation	-	-	-	-	(0.1)	(0.1)
Transfer	(1.5)	-	1.5	-	-	-
At 31 August 2018	(2.8)	(4.0)	(1.9)	-	(5.6)	(14.3)

£m					2018	2017
Included within current liabilities					(9.5)	(9.0)
Included within non-current liabilities					(4.8)	(6.6)
Total					(14.3)	(15.6)

Included within non-current liabilities is £nil (2017: £1.5m) relating to insurance and legal provisions and £4.8m (2017: £5.1m) relating to Property provisions.

Regulatory provisions relate to a £1.5m fine and legal costs from the Health & Safety Executive ("HSE") in relation to a fatality at its Brierley Hill depot that occurred in January 2016. This was settled in full on 3 October 2018 following Tuffnells prosecution on 11 September 2018 for an offence under S2(1) of the Health and Safety at Work Act. A further £1.3m is in relation to legal costs and estimated historical underpayment of national minimum wage (see note 4 for further information).

Reorganisation provisions include £2.2m relating to the closure of Pass My Parcel and £1.8m of redundancy costs, that have been announced prior to the year end and are all expected to be utilised during the following financial year (see note 4 for further information).

Insurance & legal provisions represent the expected future costs of employer's liability, public liability, motor accident claims and legal claims.

Deferred contingent consideration related to amounts provided in relation to the acquisition of the remaining 49% share of the former Books business' subsidiary Wordery on 27 August 2015, which has been released through discontinued operations on disposal of the Books business in February 2018.

The property provision represents the estimated future cost of the Group's onerous leases on non-trading properties and for potential dilapidation costs across the Group. These provisions have been discounted at a risk adjusted rate and this discount will be unwound over the life of the leases. The provisions cover the period to 2036, however, a significant portion of the potential liability falls within five years. Included within the provision are amounts of £0.3m in relation to estimated PMP related dilapidation costs (see note 4 for further information).

25. Contingent liabilities and capital commitments

£m	2018	2017
Bank and other loans guaranteed	6.8	6.0

Other potential liabilities that could crystallise are in respect of previous assignments of leases where the liability could revert to the Group if the lessee defaulted. Pursuant to the terms of the Demerger Agreement from WH Smith PLC, any such contingent liability in respect of assignment prior to demerger, which becomes an actual liability, will be apportioned between Connect Group PLC and WH Smith PLC in the ratio 35:65 (provided that the actual liability of Connect Group PLC in any 12 month period does not exceed £5m). The Company's share of these leases has an estimated future cumulative gross rental commitment at 31 August 2018 of £1.3m (2017: £2.0m).

Contracts placed for future capital expenditure approved by the directors but not provided for amount to: £nil (2017: £nil).

On 12 September 2018, the Group approved a letter of credit of £4.4m to our main insurer for the motor insurance and employer liability insurance policy. The letter of credit covers the employer deductible element of the insurance policy for insurance claims.

26. Operating lease commitments

The group as lessee:

Minimum lease payments under non-cancellable operating leases are as follows:

Continuing		2018			2017
£m		Land & buildings	Equipment & vehicles	Total	Land & buildings	Equipment & vehicles	Total
Within one year	12.1		13.3	25.5	9.4	12.5	21.9
In the second to fifth years inclusive	30.4		18.6	49.0	25.2	23.3	48.5
In more than five years	22.3		2.3	24.5	18.8	0.5	19.3
	64.8		34.2	99.0	53.4	36.3	89.7

The Group leases various distribution properties and plant and equipment under non-cancellable operating lease agreements. The leases have varying terms, escalation clauses and renewal rights.

The group as lessor:

At the balance sheet date, the Group had contracted with tenants for the following future minimum lease payments:

£m	2018	2017
Within one year	0.1	0.2
In the second to fifth years inclusive	-	0.3
	0.1	0.5

Property rental income earned during the year was £0.2m (2017: £0.3m).

27. Net cash inflow from operating activities

£m	Note	2018	2017
Operating (loss)/profit - continuing	3	(30.0)	41.7
Operating (loss)/profit - discontinued	3	(8.8)	9.5
Operating (loss)/profit - total		(38.8)	51.2
Losses on disposal of assets		0.5	0.4
Impairment of assets held for sale	4	1.1	-
Impairment of tangible assets	4	1.0	-
Share of profits of joint ventures		(0.5)	(0.4)
Loss/ (gain) on disposal of subsidiary	12	10.5	(19.0)
Adjustment for pension funding		(4.2)	(5.2)
Depreciation of property, plant and equipment		8.6	9.3
Amortisation and impairment of intangible assets		57.5	23.1
Impairment of loan to joint venture	4	-	0.6
Share based payments		(0.3)	(1.2)
(Increase) in inventories		0.5	(2.0)
Decrease in receivables		17.7	3.9
(Decrease) in payables		(10.2)	(3.0)
(Decrease)/ Increase in provisions		(0.3)	4.7
Non cash pension costs		0.3	(0.3)
Amortisation of loan arrangement fees	7	0.6	-
Income tax paid		(6.5)	(10.9)

Net cash inflow from operating activities		37.5	51.2

Net cash flow from operating activities is stated after the following adjusted items:
Payment of deferred consideration		-	(1.1)
Re-organisation & restructuring costs		(4.7)	(4.7)
PMP exit costs		(2.1)
Fees relating to disposal activity		(1.5)	(0.5)
		(8.3)	(6.3)

28. Share Capital

(a) Share capital

£m	2018	2017
Issued and fully paid:
At 1 September	12.4	12.3
Shares issued during the year	-	0.1
247.7m ordinary shares of 5p each (2017: 247.7m)	12.4	12.4

(b) Movement in share capital

Number (m)		Ordinary shares of 5p each
31 August 2017		247.7
Shares issued during the year		-
At 31 August 2018		247.7

The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at the general meetings of the Company. The Company has one class of ordinary shares, which carry no right to fixed income.

During the year to 31 August 2018,125 ordinary 5p shares were issued to satisfy share scheme exercises.

During the year to 31 August 2017, 946,334 ordinary 5p shares were issued. 394,007 ordinary shares were issued in relation to the satisfaction of deferred consideration to the former owners of The Big Green Parcel Holding Company Limited (Tuffnells). The remainder were issued to satisfy share scheme exercises.

£m	2018	2017

Balance at 1 September	60.5	59.2
Premium arising on issue of equity shares	-	1.3
Balance at 31 August	60.5	60.5

29. Reserves

(a) Demerger reserve

£m	2018	2017
At 1 September	(280.1)	(280.1)
At 31 August	(280.1)	(280.1)

This relates to reserves created following the capital re-organisation undertaken as part of the demerger of WH Smith PLC in 2006. The balance represented the difference between the share capital and reserves of the Group restated on a pro-forma basis as at 31 August 2004 and the previously reported share capital.

(b) Own shares reserve

£m	2018	2017
Balance at 1 September	(3.1)	(3.5)
Acquired in the period	-	(0.5)
Disposed of on exercise of options	1.0	0.9
Balance at 31 August	(2.1)	(3.1)

The reserve represents the cost of shares in Connect Group PLC purchased in the market and held by the Smiths News Employee Benefit Trust to satisfy awards and options granted under the Group's Executive Share Schemes (see Note 31). The number of ordinary shares held by the Trust as at 31 August 2018 was 1,506,850 (2017: 2,241,459). In accordance with IAS 32, these shares are deducted from shareholders' funds. Under the terms of the Trust, the Trustee has waived all dividends on the shares it holds.

£m	2018	2017
Balance at 1 September	0.5	(1.1)
Settlement on termination	-	0.8
Net movement in cash flow hedges	-	0.6
Exchange differences on translating net assets of foreign operations	(0.3)	0.2
Balance at 31 August	0.2	0.5

The hedging reserve represents the cumulative amount of gains and losses on hedging instruments deemed effective in cash flow hedges. The cumulative deferred gain or loss on the hedging instrument is recognised in the profit or loss only when the hedged transaction ceases to be effective.

30. Retained Earnings

		£m
Balance at 31 August 2016		226.2
Amounts recognised in Total comprehensive income		35.1
Dividends paid		(23.6)
Employee share schemes		(0.9)
Equity-settled share based payments, net of tax		(1.9)
Balance at 31 August 2017		234.9
Amounts recognised in Total comprehensive expense		(47.0)
Dividends paid		(24.1)
Employee share schemes		(1.0)
Equity-settled share based payments, net of tax		0.4
Balance at 31 August 2018		163.2

31. Share-based payments

In 2018, the Group recognised a total credit of £0.4m related to equity-settled share-based payment transactions. In 2017 there was a total credit of £1.2m. The average share price throughout the year was 72.0p (2017: 134.0p).

The Group operates the following share incentive schemes:

Sharesave Scheme		Under the terms of the Connect Group Sharesave Scheme, the Board may grant options to purchase ordinary shares in the Company to eligible employees who enter into an HM Revenue & Customs approved Save-As-You-Earn ('SAYE') savings contract for a term of three years. Options are granted at a 20% discount to the market price of the shares on the day preceding the date of offer and are normally exercisable for a period of six months after completion of the SAYE contract.
Executive Share Option Scheme (ESOS)		Under the terms of the Connect Group Executive Share Option Scheme, the Board may grant options to purchase ordinary shares in the Company to executives up to an annual limit of 200% of base salary. The exercise of options is conditional on the achievement of adjusted profit after a three year period, which is determined by the Remuneration Committee at the time of grant. Provided that the target is met, options are normally exercisable until the day preceding the 10^th anniversary of the date of grant.
LTIP		Under the terms of the Connect Group LTIP, executive directors and key senior executives may be awarded each year conditional entitlements to ordinary shares in the Company (which may be in the form of nil cost options or conditional awards) or, in order to retain flexibility and at the Company's discretion, a cash sum linked to the value of a notional award of shares up to a value of 200% of base salary. The vesting of awards is subject to the satisfaction of a three year performance condition, which is determined by the Remuneration Committee at the time of grant. Subject to the satisfaction of the performance condition, awards are normally exercisable until the 10^th anniversary of the date of grant.
Deferred Bonus Plan (DBP)		Under the terms of the Connect Group Deferred Bonus Plan, executive directors and key senior executives may be granted each year share awards (in the form of nil cost options) dependent on the achievement of the Annual Bonus Plan performance targets. Awards are normally exercisable after two years subject to continued employment.

Details of the options/awards are as follows:

	Sharesave		ESOS		LTIP		DBP
Number of options/ awards	No of shares	Weighted average exercise price (p)	No of shares	Weighted average exercise price (p)	No of shares	Weighted average exercise price (p)	No of shares	Weighted average exercise price
At 31 Aug 2016	3,333,127	129.9	4,984,971	145.9	2,279,310	-	1,149,805	-
Granted	1,701,823	100.8	1,544,115	139.1	1,910,445	-	417,556	-
Exercised	(552,327)	121.6	(164,298)	113.5	-	-	(501,096)	-
Expired /Forfeited	(917,432)	126.7	(267,519)	150.6	(1,183,726)	-	(155,741)	-
At 31 Aug 2017	3,565,191	118.1	6,097,269	144.8	3,006,029	-	910,524	-
Granted	3,154,226	43.6	1,353,061	108.8	2,137,786	-	338,976	-
Exercised	(9,846)	101.3	(114,935)	86.3	-	-	(676,941)	-
Expired /Forfeited	(2,787,326)	115.1	(705,876)	165.0	(2,039,058)	-	(92,705)	-
At 31 Aug 2018	3,922,245	60.4	6,629,519	136.3	3,104,757	-	479,854	-

Exercisable at 31 Aug 2018	253,052	128.4	2,753,725	134.3	-	-	-	-
Exercisable at 31 Aug 2017	439,369	142.2	2,256,150	131.7	-	-	-	-

The weighted average remaining contractual life in years of options/awards is as follows:

	Sharesave	ESOS	LTIP	DBP
Outstanding at 31 August 2018	2.6	6.6	8.6	1.2
Outstanding at 31 August 2017	2.5	7.1	8.8	1.6

Details of the options/awards granted or commencing during the current and comparative year are as follows:

	Sharesave	ESOS	LTIP	DBP
During 2018:
Effective date of grant or commencement date	Jun 2018	Dec 17	Dec 17	Dec 17
Average fair value at date of grant or scheme commencement - pence	13.9	11.6	109	109
During 2017:
Effective date of grant or commencement date	Jun 2017	Nov 2016 and Feb 2017	Feb 2017	Feb 2017
Average fair value at date of grant or scheme commencement - pence	21.8	18.0	138.0	138.0

The options outstanding at 31 August 2018 had exercise prices ranging from nil to 189.5p (2017: nil to 189.5p).

The weighted average share price on the date of exercise was 108p (2017: 150p).

The Sharesave and ESOS options granted during each period have been valued using the Black-Scholes model, the LTIP and DBP schemes are valued by reference to the share price at the date of grant.

The inputs to the Black-Scholes model are as follows:

	Sharesave	ESOS	ESOS	LTIP	DBP
2018 options/awards:		Dec 2017
Share price at grant date - pence	52.3	109	-	109	109
Exercise price - pence	42.0	109	-	-	-
Expected volatility - per cent	50%	33%	-	-	-
Expected life - years	3.0	3.0	-	-	-
Risk free rate - per cent	0.94%	0.78%	-	-	-
Expected dividend yield - per cent	1.9%	9.1%	-	-	-
Weighted average fair value - pence	13.9	11.6	-	-	-

2017 options/awards:		Nov 2016	Feb 2017
Share price at grant date - pence	126.0	139.5	138.0	138.0	138.0
Exercise price - pence	100.8	139.5	138.0	-	-
Expected volatility - per cent	32%	33%	33%	-	-
Expected life - years	3.0	3.0	3.0	-	-
Risk free rate - per cent	0.63%	0.72%	0.60%	-	-
Expected dividend yield - per cent	7.8%	7.0%	7.1%	-	-
Weighted average fair value - pence	21.8	18.1	17.7	-	-

32. Post balance sheet events

On 22 October 2018 the WH Smith Pension Trust entered into an insurance backed annuity 'buy-in' of the Scheme assets within the section of the Trust sponsored by Smiths News, which minimises the Group's exposure to future pension obligations.

The High Court ruled on 26 October 2018 on the equalisation of Guaranteed Minimum Payments (GMP) on pensions. There will be potential additional liabilities arising for some pension schemes and the High Court approved two different methods for calculation. This judgement is likely to increase the liabilities within the Tuffnells pension scheme. Given the very recent nature of the judgement and the complexities involved in calculating any required liability, the extent to which the judgement will increase the liabilities is under consideration and therefore no provision has been made as at 31 August 2018. The Smiths News section of the WH Smith Pension Trust is not subject to GMP as the Scheme is not contracted out.

33. Related party transactions

Transactions between businesses within this Group, which are related parties, have been eliminated on consolidation and are not disclosed in this note.

Transactions with the Group's pension schemes are disclosed in Note 6.

Trading transactions

	Sales to related parties		Amounts owed by related parties
£m	2018	2017	2018	2017
Joint ventures	3.5	3.1	0.8	0.7

Sales to related parties are for management fees, payment is due on the last day of the month following the date of invoice.

Non-trading transactions

	Loans to related parties
£m	2018	2017
Joint ventures	-	-

Aggregate remuneration of key management personnel

The remuneration of the directors and the executive leadership team, who are the key management personnel of the continuing Group, is set out below in aggregate for each of the categories specified in IAS 24 'Related Party Disclosures.'

£m	2018	2017
Short-term employee benefits	2.1	4.4
Post employment benefits	0.4	0.3
Termination benefits	-	0.2
Share based payments	(0.1)	0.6
	2.4	5.5

Information concerning directors' remuneration, interest in shares and share options are included in the Directors' remuneration report in the Annual Report.

34. Subsidiary and associated undertakings

Company name/ (number)	Share Class	Group %	Company name/ (number)	Share Class	Group %
United Kingdom
Rowan House, Cherry Orchard North, Kembrey Park, Swindon SN2 8UH
Connect Limited 02008952	Ordinary Shares	100%	Martin-Lavell Limited 02654521 (*)	Ordinary Shares	100%
Connect Logistics Limited 09172965	Ordinary Shares	100%	Pass My Parcel Limited 09172022	Ordinary Shares	100%
Connect News & Media Limited 08572634	Ordinary Shares	100%	Phantom Media Limited 03805661 (*)	Ordinary Shares	100%
Connect Parcel Freight Limited 09295023	Ordinary Shares	100%	Smiths News Holdings Limited 04236079	Ordinary Shares	100%
Connect Parcels Limited 09172850	Ordinary Shares	100%	Smiths News Instore Limited 03364589 (*)	Ordinary Shares	100%
Connect Services Limited 08522170	Ordinary Shares	100%	Smiths News Investments Limited (*) 06831284	Ordinary Shares	100%
Connect Specialist Distribution Group Limited 08458801	Ordinary Shares	100%	Smiths News Limited 08506961	Ordinary Shares	100%
Connect2U Limited 03920619 (*)	Ordinary Shares	100%	Smiths News Trading Limited 00237811	Ordinary Shares	100%
Dawson Media Services Limited (*) 06882722	Ordinary Shares	100%	The Big Green Euro Machine Limited 02496549	Ordinary Shares	100%
Dawson Guarantee Company Limited 06882393	Ordinary Shares	100%	The Big Green Parcel Group Limited 05356630 (*)	Ordinary Shares	100%
Dawson Holdings Ltd 00034273 (*)	Ordinary Shares	100%	The Big Green Parcel Holding Company Ltd 06459283 (*)	Ordinary Shares	100%
Dawson Limited 03433262	Ordinary Shares	100%	The Big Green Parcel Machine Limited 03125293 (*)	Ordinary Shares	100%
Dawson Media Direct Limited 06882366	Ordinary Shares	100%	Tuffnells Parcels Express Limited 00319964	Ordinary Shares	100%
Jack's Beans Limited 09646507	Ordinary Shares	100%
Two Snowhill, Snow Hill, Birmingham, B4 6GA
Worldwide Magazine Distribution Limited 01206287	Ordinary Shares	50%	FMD Limited 03729720	Ordinary A shares	50%
Estantia House, Pitreavie Drive, Pitreavie Business Park, Dunfermline, Fife KY11 8US
Bluebox Aviation Systems Ltd SC267388	Ordinary Shares	36.1%	Bluebox Systems Group Limited SC544863	Ordinary A Shares	36.1%
Inflight House, Hurricane Way, Langley, SL3 8AG
Bluebox Avionics Limited 05684001	Ordinary Shares	36.1%
Silbury Court, 420 Silbury Boulevard, Milton Keynes MK9 2AF
Open-Projects Limited 02422753	Ordinary Shares	50%	Rascal Solutions Limited 05191277	Ordinary A Shares	50%
France
Dawson Media Direct SAS 450 101 340 RCS Bobigny	Ordinary Shares	100%	11 rue Léopold Bellan, 75000 Paris, France
Spain
Dawson Media Direct Iberica SL CIF-B84692904	Ordinary Shares	100%	Avendida de la Industria 38, Nave C-17, 28223 Coslada, Spain
Germany
Dawson Media Direct GmbH HRB 99445	Ordinary Shares	100%	Auf der Roos 6-12, 65795 Hattersheim am Main, Germany
Belgium
Dawson Media Direct NV 474.114323	Ordinary Shares	100%	Brixtonlaan 1E, 1930 Nossengem, Belgium
Turkey
Dawson Media Direct Anonim Sirketi 14449-5	Ordinary Shares	100%	Parima Plaza Maltepe Mahallesi Eski Cirpici Yolu Sok No:8 K:14-176 Merter-Zeytinburnu Istanbul Turkey
Australia
Dawson Media Direct Australia Pty Limited 615545545	Ordinary Shares	100%	C/O Grant Thornton Australia Level 17, 383 Kent Street, Sydney NSW 2000, Australia
Hong Kong
Dawson Media Direct China Limited 1167911	Ordinary Shares	100%	Flat/Rm 5008 50/F, Central Plaza, 18 Harbour Road, Wanchai, Hong Kong
Thailand
Dawson Media Direct Co. Ltd 105558138385	Ordinary Shares	100%	87 M Thai Tower, All Seasons Place, 23rd Floor, Wittayu Road, Lumpini Sub-District, Pathumwan District, Bangkok, Thailand
United Arab Emirates
DMD Holdings Limited (JAFZA) OF3596	Ordinary Shares	100%	PO Box 7992, Dubai, United Arab Emirates
United States
Dawson Media Direct Holdings Inc 4056281	Common Stock	100%	Corporation Trust Centre, 1209 Orange Street, Wilmington IL DE19801, United States
Dawson Media Direct Inc 4056283	Common Stock	100%	40 Wall Street, 28^th Floor, New York, NY 10005, USA

* Audit exemption statement

For the year ended 31 August 2018, the companies as indicated in the table by '(*)' above were entitled to exemption from audit under section 479A of the Companies Act 2006 relating to subsidiary companies. The members of these companies have not required them to obtain an audit of their financial statements for the year ended 31 August 2018.

Bluebox Systems Group Limited, Bluebox Aviation Systems Limited and Bluebox Avionics Limited are associated undertakings. Rascal Solutions Limited, Open-Projects Limited, FMD Limited and Worldwide Magazine Distribution Limited are joint ventures (see note 15).

35. Reconciliation of Free cash flow to net movement in cash and cash equivalents

A reconciliation between free cash flow and the net increase/ (decrease) in cash and cash equivalents is shown below:

£m	2018	2017
Net increase/(decrease) in cash & cash equivalents	2.5	(3.1)
Dividend paid	24.1	23.6
Proceeds on sale of subsidiary (net of disposal costs)	(12.9)	(56.8)
Increase/Decrease in borrowings	5.9	61.0
Adjustment for pension funding	4.7	5.2
Net outflow on purchase of shares for EBT	-	0.5
Proceeds on issue of shares	-	(0.7)
Dividends received from associates	(0.2)	(0.2)
Total Free cash flow	24.1	29.5
Discontinued free cash flow	(3.9)	(0.8)
Continuing free cash flow	20.2	28.7

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.

END

FR DMMGMZKMGRZZ

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