Final Results

RNS Number : 9609F

Smiths News PLC

16 October 2008

 



Smiths News PLC

Preliminary Results Announcement 

for the year ended 31 August 2008

Smiths News, the UK's leading wholesaler of newspapers and magazines, is pleased to announce preliminary results for the year ended 31 August 2008.

Financial Highlights:

• Underlying profit before tax of £32.5m up 4.8%

• Underlying earnings per share of 14.5p up 3.6%

• Strong free cash flow (1) of £21.4m enabling an increase in dividend and reduction in net debt 

		2008	2007			2008	2007
		Underlying(2)	Underlying(2)	Change Fav / (adv)		Statutory	Statutory	Change Fav / (adv)
Revenue		£1,240.6m	£1,232.4m	0.7%		£1,240.6m	£1,232.4m	0.7%
Operating profit		£36.0m	£36.0m	-		£36.1m	£41.4m	(12.8)%
Profit before tax		£32.5m	£31.0m	4.8%		£32.6m	£36.4m	(10.4)%
Earnings per share		14.5p	14.0p	3.6%		14.8p	16.1p	(8.1)%
Non GAAP measures (3)
Net debt (4)	£44.0m		£52.7m	16.5%
Final dividend	4.5p		4.3p	4.7%
Total dividend	6.7p		6.4p	4.7%

Operating Highlights:

• News International contract secured until 2014; annualised revenue gain of £85m from July 2009

• Contract wins for The Returns Company, Instore, Newsworks and in regional press

• Delivered cost savings (5) of £3.5m helping to offset challenging market conditions 

• Ongoing investment programme securing new sites in East Midlands and South Wales

• Joint venture with Rascal Solutions providing additional services to major retailers

• Service leadership confirmed by independent benchmarking 

Mark Cashmore, Chief Executive commented:  

'The Group has delivered another year of progress culminating in a major contract gain from News International.'

'The general economic climate in the UK has impacted our business resulting in a 2% decline in total revenues for the three months ended 30 September 2008. We expect conditions to remain challenging and as a result revenues for the current year are likely to be modestly short of those achieved in 2008.

The fundamentals of the business remain intact and in these challenging markets our focus and track record of service, efficiency and strong cost management have never been more appropriate.'

The following definitions have been applied consistently throughout this preliminary results announcement:

(1) Free cash flow is the cash flow adjusted for the payment of the dividend, the acquisition of investment in joint venture, the proceeds on the disposal of freehold properties, repayments of obligations under finance leases and the repayment of bank loans.

(2) Underlying 2008 results exclude the profit on disposal of freehold properties of £1.4m, reorganisation costs of £1.3m and the related tax credit of £0.4m. Underlying 2007 results exclude the actuarial curtailment credit on the pension scheme of £5.4m and the related deferred tax charge of £1.6m.

(3) Smiths News PLC has identified certain Non-GAAP measures that it believes provide additional useful information on the performance of the Group.

(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.

(5) Cost savings of £3.5m are stated before inflation increases of £1.8m.

(6) Like for like revenue growth excludes magazine and newspaper publisher contract gains during the year, and the annualisation impact of gains made in the prior year.

Enquiries:

Smiths News
Mark Cashmore, Chief Executive Alan Humphrey, Finance Director	Today: 020 7466 5000 Thereafter: 01793 563641
Buchanan Communications
Mark Edwards	020 7466 5000
Jeremy Garcia

A meeting for analysts will be held at the office of Buchanan Communications, 45 Moorfields, London, EC2Y 9AE on Thursday 16th October commencing at 09.30.

Smiths News PLC's Preliminary Results 2008 are available at www.smithsnews.co.uk. A copy of the Preliminary Results 2008 will shortly be available for inspection at the UK Listing Authority, 25 The North Colonnade, London E14 5HS.

About Smiths News:

Smiths News is the UK's leading wholesaler of newspapers and magazines. The Group was formed on 1 September 2006 following the demerger of WH Smith PLC.

Smiths News distributes newspapers and magazines on behalf of all the major national publishers as well as a large number of regional publishers. The business serves approximately 22,000 customers across England and Wales, supplying large general retailers as well as smaller independent newsagents.

In addition to its distribution activities, Smiths News collects and processes returns, supplies sales information to publishers and provides a range of services for its retail customers.

Smiths News has an approximate 40 per cent share of the magazine wholesaling sector and an approximate 36 per cent share of the newspaper wholesaling sector in the UK.

Smiths News has 44 distribution centres across England and Wales, employing 4,100 staff.

OPERATING REVIEW

We are pleased to report a solid performance in difficult economic conditions. Our key targets have been achieved and we have continued to improve service and efficiency in what has been another year of progress for the business. 

Underlying profit before tax of £32.5m increased by 4.8% on revenues that were up 0.7%. Including the proposed final dividend, the total dividend of 6.7p per share increased by 4.7% and the business generated free cash flow (1) of £21.4m, enabling a reduction in net debt (4) of £8.7m.

Markets

The general economic climate and a reduction in consumer spending suppressed sales this year, particularly in the last quarter. Lower advertising and rising production costs undoubtedly had an impact on publishers leading to higher than expected cover price increases. 

Newspapers, in line with our expectations, continued to show value growth with price increases offsetting the impact of volume declines. Magazines performed less strongly; weekly sales were flat, whilst the monthly and partwork markets remained more difficult.

Looking ahead we believe conditions will remain challenging. On the basis of current trends we would expect to see a small decline in our markets this year. However, our recent contract gains position us to perform ahead of the market trend. 

Service and efficiency

Continual improvement to service and efficiency remains the cornerstone of our strategy. 

The latest independently conducted publisher and retailer surveys confirm Smiths News as market leader with the best and most comprehensive range of services. Our key performance indicators show service at an all time high, whilst operational efficiency has improved across all depots for the third consecutive year.

Delivering efficiency savings is a key strength of the business. Our relentless drive to find more productive ways of working achieved cost savings of £3.5m (5) over the period, offsetting inflation and enabling costs to be £1.7m lower than last year.

Given the tough economic conditions, we have plans in place to continue to manage cost aggressively.

Network

This year we opened a new depot in Nottingham, part of a consolidation in the East Midlands region, creating a hub for newspaper and magazine distribution across the area. The depot will deliver efficiency savings in the coming year and has the capacity to absorb additional business from our recent contract gains. Looking ahead, we have secured a site in South Wales that will enable a similar consolidation of our Cardiff, Bridgend and Newport depots. Operations at the new South Wales depot will commence in December this year.

News International 

In June, following an extensive tender process, News International renewed and extended its contract with us. As well as securing this business until 2014, the new contract will generate an additional £85m of annualised net sales from July 2009. It also increases our market share of News International titles from 24% to 39% extending our operational reach into Bristol, Brighton, Coventry, Harlow, Luton, Swindon and Warrington. 

The contract is an important vote of confidence from the largest UK newspaper publisher. Whilst up front investment will be required in the year ahead, the expanded network will create a platform for new business opportunities.

Business development

We have continued, this year, to make progress beyond our core business.

In March we announced the acquisition of a 50% stake and joint venture agreement with Rascal Solutions Ltd. Rascal provides specialist software and merchandising services, which focus on waste control and improving sales efficiency, for major retailers such as Tesco and Sainsbury's. This investment allows us to offer these services to key customers within the core business as well as into markets beyond news and magazines.

The Returns Company (TRC) has made less progress than we would have wished. The business won a major contract with HarperCollins to process book returns from stores across the UK.  More recently we gave notice on our contract with WH Smith and will cease providing returns services to them at the end of November. The contract was commercially unviable and restricted us from pursuing more profitable growth. TRC's systems and processes provide a platform to build our presence in returns and reverse logistics - sectors that match our competencies well.

Newsworks has developed a new information system for Newspread (a division of Independent News and Media). Instore, our field marketing business, won contracts with Sainsbury's, Martin McColl and The Co-op.

Beyond these initiatives, we continue to look at new markets to which we can bring our expertise and create value for shareholders. 

OFT

The Office of Fair Trading indicated that its findings into the review of the newspaper and magazine supply chain would be published in late summer of 2008. We expect an announcement to be issued in the very near future and look forward to this providing clarity for the industry. Our market leadership means we are well positioned to respond to the challenges and opportunities that may arise.

Outlook

The general economic climate in the UK has impacted our business resulting in a 2% decline in total revenues for the three months ended 30 September 2008. We expect conditions to remain challenging and, as a result, revenues for the current year are likely to be modestly short of those achieved in 2008. 

The fundamentals of the business remain intact and in these challenging markets our focus and track record of service, efficiency and strong cost management have never been more appropriate. 

FINANCIAL REVIEW

Overview

Despite difficult economic conditions, it is pleasing to report another year of growth in underlying profit before tax and earnings per share. Underlying profit before tax of £32.5m is up 4.8% on last year and underlying EPS of 14.5p is up 3.6%. We continue to generate strong free cash flow (1) of £21.4m from the business enabling us to increase our dividend and deliver a further reduction in net debt (4). 

Profit before tax is £3.8m lower than last year due mainly to the inclusion of a non-recurring pension curtailment credit of £5.4m in the prior year arising on the closure of the defined benefit pension scheme to future accrual.

Revenue

	Aug 2008 £m	Aug 2007 £m	Growth %	Like for like growth (6) %
Newspapers	657.6	640.8	2.6	1.0
Magazines	527.7	541.2	(2.5)	(2.5)
Other	55.3	50.4	9.7	9.7
Total revenue	1,240.6	1,232.4	0.7	(0.2)

Total revenues of £1,240.6m are 0.7% above last year with like for like revenues down 0.2% on last year.

Newspaper revenues of £657.6m are up 2.6% on last year. This year has again seen the continuing trend of value growth in newspapers, with price increases outstripping volume declines. In addition, we continue to win new business with publishers. Newspaper revenues include £10.2m of growth from a combination of national and regional contract gains.

Magazine revenues of £527.7m are down 2.5% on last year, of which partwork sales account for over half of the decline. Weekly magazine revenues are flat across the year, whilst monthly magazine revenues were down.

The increase in Other revenues of 9.7% results from contract gains won by Newsworks, Instore and TRC, together with increased revenues from services carried out on behalf of publishers.

Income statement extracts - excluding non-recurring items

	Aug 2008 £m	Aug 2007 £m	Fav/(adv) %
Gross profit	123.5	125.2	(1.4)
Gross margin	10.0%	10.2%
Operating costs	(87.5)	(89.2)	1.9
Underlying operating profit	36.0	36.0	-
Finance costs	(3.5)	(5.0)
Underlying profit before tax	32.5	31.0	4.8
Taxation	(6.5)	(6.1)
Underlying profit after tax	26.0	24.9	4.4

Gross profit of £123.5m is down by 1.4% due to a negative sales mix, with increased sales of lower margin newspapers. This resulted in gross margin reducing from 10.2% last year to 10.0%.

Operating costs of £87.5m are £1.7m lower than last year. This is a strong performance given the reduction in costs of £6.9m in 2007, and the increasing pressure on fuel and energy costs experienced in the second half of the year. The cost savings offset the reduction in gross profit to leave underlying operating profit unchanged at £36.0m.

Finance costs for the year are £3.5m, a reduction of £1.5m on last year due largely to reduced pension finance charges.  

As a result, underlying profit before tax of £32.5m is 4.8% up on last year.

The tax charge for the year of £6.5m represents an effective tax rate of 20%. The effective rate benefits from the release of prior year provisions of £4.5m, offset by a reduction of £1.2m in deferred tax assets relating to share based payments. The effective tax rate would be 29% without these items.

We anticipate that our effective tax rate for 2009 will continue to be lower than the standard rate, but over time we expect it to trend back to the standard rate of corporation tax for the UK.

Underlying profit after tax is £26.0m, which is up 4.4%.  Profit after tax is £26.5m, which is down 7.7% due mainly to the inclusion of a non-recurring pension curtailment credit of £5.4m in the prior year arising on the closure of the defined benefit pension scheme to future accrual.

Non-recurring items

	Aug 2008 £m	Aug 2007 £m
Profit on disposal of freehold properties	1.4	-
Reorganisation costs	(1.3)	-
Pension curtailment	-	5.4
Non-recurring profit before tax	0.1	5.4
Taxation	0.4	(1.6)
Non-recurring profit after tax	0.5	3.8

We entered into sale and leaseback transactions over our five remaining freehold properties for a net consideration of £2.3m. This produced a profit on disposal of £1.4m. 

We are undertaking major reorganisations of our businesses in the East Midlands and South Wales, resulting in one-off costs of £1.3m. These reorganisations will help to deliver both future cost savings and service improvements.  

In 2007, the one-off pension curtailment gain of £5.4m arose on the closure of the defined benefit pension scheme to future accruals in May 2007, together with a related deferred tax impact of £1.6m.

Earnings per share and dividend

	Underlying			Statutory
	Aug 2008	Aug 2007		Aug 2008	Aug 2007
Profit after tax (£m)	26.0	24.9		26.5	28.7
Basic number of shares (millions)	179.3	177.8		179.3	177.8
Basic EPS	14.5p	14.0p		14.8p	16.1p
Dividend per share *	6.7p	6.4p		6.7p	6.4p

Underlying basic earnings per share have increased from 14.0p to 14.5p, an increase of 3.6%, whereas reported earnings per share, which include non-recurring items, of 14.8p decreased from 16.1p in the previous year.

A final dividend of 4.5p has been proposed, which is a 4.7% increase on 2007. This, when added to the interim dividend of 2.2p, gives a total dividend for the year of 6.7p, up 4.7%. The proposed final dividend will be paid on 22 January 2009 to shareholders on the register at close of business on 30 December 2008.

(* including proposed final dividend payable on 22 January 2009)

Free cash flow

	Aug 2008 £m	Aug 2007 £m
Operating profit	36.1	41.4
Depreciation & Amortisation	6.1	5.5
Working capital, share based payments and movement in provisions	(3.0)	6.9
Adjustment for pension curtailment credit	-	(5.4)
Profit on disposal of freehold properties	(1.4)	-
Capital expenditure	(3.8)	(3.2)
Tax	(3.2)	(8.1)
Net Interest paid	(3.5)	(3.8)
Ongoing pension funding	(5.9)	(6.2)
Free cash flow	21.4	27.1

Smiths News continues to generate strong free cash flow (1) of £21.4m in the year and £48.5m in the two years since demerger.

The majority of the working capital cash outflow in 2008 represents the unwinding of positive timing differences from the previous year.

We have continued to manage capital expenditure tightly during the year resulting in capital expenditure of £3.8m, plus new lease commitments of £1.2m, being more than covered by depreciation of £6.1m. 

Cash tax payments in the year of £3.2m are net of refunds of £3.0m from overpayments relating to prior years and £3.0m relief on pension funding. 

The ongoing pension funding includes the second of five annual payments of £5.4m agreed with the Trustees until 2011.

Net debt

	Aug 2008 £m	Aug 2007 £m
Free cash flow	21.4	27.1
Dividends paid	(11.7)	(10.9)
Acquisition of Rascal	(2.1)	-
Proceeds on disposal of freehold properties	2.3	-
New finance leases	(1.2)	(2.2)
Decrease in net debt before one-off pension payment	8.7	14.0
Opening net debt	(52.7)	(41.7)
One-off pension payment	-	(25.0)
	(52.7)	(66.7)
Decrease in net debt (before one-off pension payment in 2007)	8.7	14.0
Closing net debt	(44.0)	(52.7)

Net debt at 31 August 2008 now stands at £44.0m, a reduction of £8.7m on last year.

A £45m term loan is in place, of which £5m is repayable in each of June 2009 and 2010, with the balance repayable in June 2011. We have an interest rate hedge in place until June 2011 at an all in effective rate of 5.78%, which at 31 August 2008 covered 75% of the term loan. In addition we have a £50m revolving credit facility, which is repayable in June 2011.

On 20 March 2008, we acquired a 50% stake in Rascal Solutions Limited, a company that provides store level technology and resources to a number of major retailers in the news and magazine category. The total consideration for the acquisition was £3m (plus fees) of which £1m is deferred until 30 October 2008.

Pension

The pension scheme is closed to further accrual. Given the Liability Driven Investment policy adopted by the Pension Trustees, the present value of the economic benefits of the IAS 19 surplus in the pension scheme of £62.4m (2007: £9.9m) available on a reduction of future contributions is £nil (2007: £nil). As a result the Group has not recognised this IAS 19 surplus on the balance sheet.

There continues to be an actuarial deficit on the scheme of approximately £30m (2007: £40m) that is managed through the Liability Driven Investment policy, which minimises volatility through the hedging of interest and inflation. In addition, we have committed to make annual payments of around £5.4m per annum into the scheme through to August 2011.

Smiths News PLC

Group Income Statement for the year ended 31 August 2008

				2008				2007
£m	Note	Underlying*	Non-recurring items**	Total		Underlying*	Non-recurring items**	Total
Continuing operations
Revenue		1,240.6	-	1,240.6		1,232.4	-	1,232.4
Operating profit	2	36.0	0.1	36.1		36.0	5.4	41.4
Investment revenues	4	0.8	-	0.8		0.7	-	0.7
Finance costs	5	(4.3)	-	(4.3)		(5.7)	-	(5.7)
Profit before tax		32.5	0.1	32.6		31.0	5.4	36.4
Income tax expense	6	(6.5)	0.4	(6.1)		(6.1)	(1.6)	(7.7)
Profit for the year		26.0	0.5	26.5		24.9	3.8	28.7

Earnings per share
Basic	8			14.8p				16.1p
Diluted	8			14.7p				15.8p
Non-GAAP Measures
Underlying earnings per share
Basic	8	14.5p			14.0p
Diluted	8	14.4p			13.7p
Equity dividends per share	7	6.7p			6.4p

*Before non-recurring items described below.

**Non-recurring items in 2008 includes profit on disposal of freehold properties offset by reorganisation costs and in 2007 an actuarial curtailment credit on the defined benefit pension scheme, as set out in note 2 to the financial statements. 

Smiths News PLC

Group Balance Sheet at 31 August 2008

£m	Note	2008	2007
Non-current assets
Intangible assets		4.1	3.4
Property, plant and equipment		15.5	18.2
Deferred tax assets		11.6	6.0
Investments in joint venture and associate		3.3	0.2
Derivative financial instruments		0.2	0.9
		34.7	28.7
Current assets
Inventories		12.2	11.9
Available for sale investments		-	1.1
Trade and other receivables		60.5	53.0
Cash and cash equivalents		3.4	0.4
		76.1	66.4
Total assets		110.8	95.1
Current liabilities
Trade and other payables		(113.1)	(108.0)
Current tax liabilities		(6.8)	(8.8)
Obligations under finance leases		(1.4)	(1.5)
Derivative financial instruments		(0.6)	-
Bank loans and other borrowings		(5.0)	(5.0)
		(126.9)	(123.3)
Non-current liabilities
Bank loans and other borrowings		(39.7)	(44.6)
Retirement benefit obligation	3	-	-
Deferred tax liabilities		(10.1)	(1.6)
Long-term provisions		(0.7)	(0.5)
Obligations under finance leases		(1.3)	(2.0)
Other non-current liabilities		(0.4)	(0.5)
		(52.2)	(49.2)
Total liabilities		(179.1)	(172.5)
Total net liabilities		(68.3)	(77.4)

Equity
Called up share capital	10	9.1	9.1
ESOP reserve	10	(3.9)	(3.7)
Other reserve	10	(280.1)	(280.1)
Hedging reserve	10	0.3	0.9
Retained earnings	10	206.3	196.4
Total equity		(68.3)	(77.4)

The financial statements were approved by the Board of Directors and authorised for issue on 16 October 2008 and were signed on its behalf by:

Mark Cashmore                           Alan Humphrey

Group Chief Executive                Group Finance Director

Smiths News PLC

Group Cash Flow Statement for the year ended 31 August 2008

£m	Note	2008	2007
Net cash inflow from operating activities	9	28.7	9.0
Investing activities
Interest received		0.1	0.7
Loan repaid by associate		-	0.1
Proceeds on disposal of property, plant and equipment		2.3	-
Acquisition of investment in joint venture		(2.1)	-
Purchase of property, plant and equipment		(1.8)	(1.4)
Purchase of intangible assets		(2.0)	(1.8)
Net cash used in investing activities		(3.5)	(2.4)
Financing activities
Interest paid		(3.6)	(4.5)
Dividend paid		(11.7)	(10.9)
Repayments of obligations under finance leases		(1.9)	(1.6)
Repayments of borrowings		(5.0)	-
Net cash used in financing activities		(22.2)	(17.0)
Net increase / (decrease) in cash and cash equivalents		3.0	(10.4)
Opening net cash and cash equivalents		0.4	10.8
Closing net cash and cash equivalents		3.4	0.4

Smiths News PLC

Group Statement of Recognised Income and Expense for the year ended 31 August 2008

£m	Note	2008	2007
(Loss) / gain on cash flow hedges		(0.6)	0.9
Actuarial gains on defined benefit pension scheme	3	45.9	23.5
Effect of asset limit on defined benefit pension scheme	3	(52.5)	(9.9)
UK deferred tax attributable to defined benefit pension scheme		(1.5)	(8.2)
UK current tax attributable to the additional defined benefit pension scheme contributions		3.5	3.9
Net (expense) / income recognised directly in equity		(5.2)	10.2
Profit for the year		26.5	28.7
Total recognised income and expense for the year		21.3	38.9

Total recognised income and expense for the year is fully attributable to the equity holders of the parent company.

Smiths News PLC

Notes to the financial statements

1.    Segmental analysis of results

Revenue and profit before tax are derived from the one principal activity of the group, being the wholesaling of newspapers and magazines. The group operates solely in the UK.  

2.    Operating profit

Non-recurring items included within operating profit amounted to £0.1m (2007: £5.4m). These are:

2008: Profit on disposal of freehold properties of £1.4m. Costs relating to the reorganisation of the East Midlands and South Wales businesses of £1.3m are included within distribution costs.

2007: Actuarial curtailment credit of £5.4m included within administrative expenses arising on the closure of the defined benefit pension scheme, see note 3. There is an associated deferred tax impact of £1.6m, which has been separately disclosed.

£m	2008	2007
Revenue	1,240.6	1,232.4
Cost of sales	(1,117.1)	(1,107.2)
Gross profit	123.5	125.2
Distribution costs	(60.5)	(60.2)
Administrative expenses	(28.3)	(23.6)
Profit on disposal of fixed assets	1.4	-
Operating profit	36.1	41.4

The operating profit is stated after charging:

£m	2008	2007
Cost of inventories recognised as an expense	1,065.8	1,059.4
Research and development costs	-	0.1
Depreciation and amounts written off property, plant & equipment	4.8	4.5
Amortisation of intangible assets	1.3	1.0
Operating lease charges
·          land and buildings	5.3	5.2
·          equipment and vehicles	2.1	2.5
Operating lease rental income – land and buildings	(0.4)	(0.4)
Staff costs	72.3	66.9
Auditors’ remuneration (see below)	0.2	0.5

Fees payable to Deloitte & Touche LLP, the Group's auditors, included in the income statement relate to audit fees for the audit of the company's annual accounts £105k (2007: £95k), audit fees for the audit of subsidiary undertakings £5k (2007: £5k) and consultancy services £62k (2007: £412k).  

3.    Retirement benefit obligation

Pension arrangements for employees are operated through a defined benefit scheme, WHSmith Pension Trust ('Pension Trust'), and a defined contribution scheme, WHSmith Retirement Savings Plan. The most significant is the Pension Trust, which is described in note 3 (a). The scheme is independent of the Company and is administered by a Trustee. The Trustee of the Pension Trust has extensive powers over the pension plan's arrangements, including the ability to determine the levels of contribution.

The amounts recognised in the balance sheet within non-current liabilities in relation to these plans are as follows:

£m	2008	2007
Present value of the obligation	(320.1)	(311.3)
Fair value of plan assets	382.5	321.2
Surplus	62.4	9.9
Amounts not recognised due to asset limit	(62.4)	(9.9)
Retirement benefit obligation recognised in the balance sheet	-	-

The pension scheme is closed to further accrual. Given the Liability Driven Investment policy adopted by the Pension Trustees, the present value of the economic benefits of the IAS 19 surplus in the pension scheme of £62.4m (2007: £9.9m) available on a reduction of future contributions is £nil (2007: £nil). As a result the Group has not recognised this IAS 19 surplus on the balance sheet.

(a)    Defined benefit pension scheme

The Pension Trust

The Group has paid £5.4m to the Pension Trust over the course of the year in relation to the agreed pension deficit funding. As agreed with the Trustees, the Group will make three further payments of this amount over the next three years.

In the prior year the Pension Trust closed to future service accrual. This amendment to the scheme created a £5.4m actuarial curtailment credit included within operating profit for the year ended 31 August 2007.

A full actuarial valuation of the Scheme is carried out every three years with interim reviews in the intervening years. The latest full actuarial valuation of the Pension Trust was carried out as at 31 March 2006 by independent actuaries, Mercer Human Resource Consulting, using the projected unit basis. On an ongoing basis, the actuarial gross defined benefit pension deficit at 31 March 2006 was approximately £63m (approximately £44m net of related deferred taxes) for the Smiths News PLC section of the Pension Trust. The ongoing deficit was greater than the IAS19 deficit primarily due to the different assumptions and calculation methodologies. At the balance sheet date the estimated actuarial gross defined benefit pension deficit was approximately £30m (2007: £40m), approximately £22m net of related deferred taxes.  

The Pension Trust Trustee has adopted a Liability Driven Investment 'LDI' policy in order to substantially reduce the volatility in the underlying investment performance and reduce the risk of a significant increase in the deficit in the fund. The assets are invested such that they are expected to alter in value in line with changes in the pension liability caused by changes in interest and inflation.

The key features of the investment policy are:

• 97% of the Pension Trust's assets were invested in an LDI policy with a leading international institutional fund manager; and 

• 3% of the Pension Trust's assets were used to purchase a portfolio of long-dated equity call options. These represent a notional exposure to underlying equities of some £90m.

The valuation of the defined benefit pension scheme used for the account disclosures are based upon the most recent valuation. Scheme assets are stated at their market value at the relevant reporting date.

The principal long-term assumptions used to calculate scheme liabilities under IAS 19 are: 

%	2008	2007
Rate of increase in salaries	-	4.22
Rate of increase in pension payments and deferred pensions	4.07	3.22
Discount rate	6.34	5.69
Inflation assumptions	4.07	3.22

The amounts recognised in the income statement were as follows:

£m	2008	2007
Current service cost	(0.1)	(2.1)
Interest cost	(17.4)	(16.9)
Expected return on scheme assets	18.1	15.7
Plan curtailment	-	5.4
	0.6	2.1

The charge for the current service cost and the actuarial curtailment credit has been included within administrative expenses.  Interest cost and expected return on scheme assets have been included within investment revenues in 2008 and finance costs in 2007.

Movements in the present value of the defined benefit scheme obligation in the year were as follows:

£m	2008	2007
At 1 September	(311.3)	(334.0)
Current service cost	(0.1)	(2.1)
Interest cost	(17.4)	(16.9)
Actuarial (losses) / gains	(2.7)	21.9
Benefits paid	11.4	14.4
Plan curtailment	-	5.4
At 31 August	(320.1)	(311.3)

Movements in the fair value of defined benefit scheme assets in the year were as follows:

£m	2008	2007
At 1 September	321.2	285.0
Expected return on scheme assets	18.1	15.7
Net actuarial gains	48.6	1.6
Contributions	6.0	33.3
Benefits paid	(11.4)	(14.4)
At 31 August	382.5	321.2

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

£m	2008	2007
Cash	318.6	315.8
Inflation swaps	51.0	(13.8)
Equity call options	12.9	19.2
	382.5	321.2

The actual return on plan assets was £66.7m (2007: £17.3m).

The expected rate of return on these investments, calculated as a weighted average of the expected return on the LDI fund and the equity call options, was 5.55 per cent at 31 August 2008 (5.68 per cent at 31 August 2007).

The mortality assumptions (in years) underlying the value of the accrued liabilities are:

	Male	Female
Life expectancy at age 65
Member currently aged 65	20.1	22.9
Member currently aged 45	21.4	24.1
Life expectancy at age 60
Member currently aged 60	24.9	27.7
Member currently aged 45	25.9	28.7

The mortality assumptions are based on the standard PA92 medium cohort tables (as published by the Institute of Actuaries). The mortality rates underlying the table have been increased by 25% to reflect the Trust's actual experience.

The history of experience adjustments is as follows:

£m	2008	2007	2006	2005	2004
Present value of defined benefit obligation	(320.1)	(311.3)	(334.0)	(967.6)	(883.0)
Fair value of scheme assets	382.5	321.2	285.0	871.5	678.0
Amounts not recognised due to asset limit	(62.4)	(9.9)	-	-	-
Deficit in the scheme	-	-	(49.0)	(96.1)	(205.0)
Experience adjustments on scheme liabilities
Amount (£m)	3.6	21.9	(16.6)	(114.7)
Percentage of scheme liabilities	1%	7%	(5%)	(12%)
Experience adjustments on scheme assets
Amount (£m)	48.6	1.6	(16.2)	70.8
Percentage of scheme assets	13%	1%	(6%)	8%

The cumulative amount of actuarial gains and losses recognised in the statement of recognised income and expense since the adoption of IFRSs is a gain of £36.6m (2007: loss of £9.3m).

(b)    Defined contribution pension scheme

The pension cost charged to income for the defined contribution scheme, WH Smith Retirement Savings Plan, amounted to £1.4m for the year ended 31 August 2008 (2007: £0.7m).

4.    Investment revenues

£m	2008	2007
Interest on bank deposits	0.1	0.1
Net income on pension scheme (Note 3)	0.7	-
Interest received on prior year tax overpayment	-	0.6
	0.8	0.7

5.    Finance costs

£m	2008	2007
Interest on bank overdrafts and loans	3.9	4.3
Net change in fair value of derivative liabilities designated as fair value through profit and loss	0.1	-
Hedge ineffectiveness on the cash flow hedge	0.1	-
Interest payable on finance leases	0.2	0.2
Net charge on pension scheme (Note 3)	-	1.2
	4.3	5.7

6.    Income tax expense

£m	2008	2007
Current tax	9.6	10.6
Current tax - non-recurring items	(0.4)	-
Adjustment in respect of prior year UK corporation tax	(4.5)	(3.9)
Total current tax charge	4.7	6.7
Deferred tax - current year	1.2	(0.6)
Deferred tax - prior year	0.2	-
Deferred tax - non-recurring items	-	1.6
Total tax on profit	6.1	7.7
Effective tax rate	19%	21%

Tax on non-recurring items in 2008 relates to the tax on reorganisation costs incurred in the year at the standard rate of UK corporation tax of 29%. There is no tax charge arising on the profit on the sale of freehold properties as it is offset by capital losses brought forward.

Deferred tax on non-recurring items in 2007 related to the curtailment credit arising on the closure of the defined benefit pension scheme to future accrual.

The effective tax rate of 19% benefits from the adjustment in respect of prior year UK corporation tax. Over time it is expected that the effective tax rate will trend back to the standard rate of UK corporation tax.

Reconciliation of the tax charge

£m	2008	2007
Profit before tax	32.6	36.4
Tax on profit at the standard rate of UK corporation tax 29% (2007: 30%)	9.5	10.9
Permanent differences	0.1	0.7
Share schemes	1.2	-
Capital profits offset by capital losses	(0.4)	-
Adjustment in respect of prior year UK deferred tax	0.2	-
Adjustment in respect of prior year UK corporation tax	(4.5)	(3.9)
Total tax charge	6.1	7.7

In addition to the amount charged to the income statement, deferred tax relating to the defined benefit pension scheme amounting to £1.5m (2007: £8.2m) has been recognised directly in equity.

7.    Dividends

Amounts recognised as distributions to equity shareholders in the year are as follows:

£m	2008	2007
Final dividend for the year ended 31 August 2007 of 4.3p (2006: 4.0p) per share	7.7	7.1
Interim dividend for the year ended 31 August 2008 of 2.2p (2007: 2.1p) per share	4.0	3.8
	11.7	10.9

The proposed final dividend of 4.5p is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements. The proposed dividend will be paid on 22 January 2009 to shareholders on the register at close of business on 30 December 2008.

8.    Earnings per share

	2008	2007
	£m	£m
Profit for the financial year	26.5	28.7
Non-recurring items	(0.5)	(3.8)
Underlying profit for the financial year	26.0	24.9
	Number      m	Number      m
Weighted average number of shares in issue	182.9	182.9
Shares held by ESOP (weighted)	(3.6)	(5.1)
Weighted average number of shares in issue for basic earnings per share	179.3	177.8
Shares issuable (weighted)	1.0	3.7
Weighted average number of shares in issue for diluted earnings per share	180.3	181.5
	Pence	Pence
Earnings per share:
Basic	14.8	16.1
Diluted	14.7	15.8
Underlying earnings per share:
Basic	14.5	14.0
Diluted	14.4	13.7

9.    Net cash inflow from operating activities

£m	2008	2007
Operating profit	36.1	41.4
Adjustment for pension funding	(5.9)	(11.6)
Depreciation of property, plant and equipment	4.8	4.5
(Profit) / loss on sale of property, plant and equipment	(1.4)	0.1
Amortisation of intangible assets	1.3	1.0
Share based payments	0.6	0.5
(Increase) / decrease in inventories	(0.3)	0.3
(Increase) / decrease in receivables	(7.5)	17.0
Increase / (decrease) in payables	4.0	(10.9)
Income tax paid	(3.2)	(8.1)
Increase / (decrease) in provisions	0.2	(0.2)
Net cash inflow from operating activities before non-recurring items	28.7	34.0
One-off pension funding payment	-	(25.0)
Net cash inflow from operating activities	28.7	9.0

10.    Reconciliation of movements in equity

£m	Share Capital	Other Reserve 1	ESOP Reserve	Hedging Reserve	Retained Earnings	Total
Balance at 1 September 2006	9.1	(280.1)	(7.1)	-	170.8	(107.3)
Total recognised income and expense for the year	-	-	-	0.9	38.0	38.9
Dividends paid	-	-	-	-	(10.9)	(10.9)
Employee share schemes	-	-	2.6	-	(2.6)	-
Recognition of share based payments	-	-	-	-	0.8	0.8
Movement in available for sale investments	-	-	0.8	-	0.3	1.1
Balance at 31 August 2007	9.1	(280.1)	(3.7)	0.9	196.4	(77.4)
Total recognised income and expense for the year	-	-	-	(0.6)	21.9	21.3
Dividends paid	-	-	-	-	(11.7)	(11.7)
Employee share schemes	-	-	0.6	-	(0.6)	-
Recognition of share based payments	-	-	-	-	0.6	0.6
Movement in available for sale investments	-	-	(0.8)	-	(0.3)	(1.1)
Balance at 31 August 2008	9.1	(280.1)	(3.9)	0.3	206.3	(68.3)

1 The 'Other' reserve includes reserves created in relation to the proforma restatement and the demerger of WH Smith PLC.

11.    Preparation of the Preliminary Announcement

(a)    Basis of preparation

The preliminary announcement for the 12 months to 31 August 2008 has been prepared on the basis of the accounting policies set out in the accounting policies section of the Smiths News PLC Annual Report and Accounts 2007.

(b)    Preliminary announcement

The financial information set out above does not constitute the group's statutory accounts for the 12 months ended 31 August 2008 or the 12 months ended 31 August 2007, but is derived from those accounts. The statutory accounts for Smith News Plc for the 12 months ended 31 August 2007 have been delivered to the Registrar of Companies and those for the 12 months ended 31 August 2008 will be delivered following the company's annual general meeting. The auditors have reported on those accounts; their reports were unqualified, did not draw attention any matters by way of emphasis without qualifying their report and did not contain statements under s237(2) or (3) Companies Act 1985.

Whilst the financial information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of IFRSs, as adopted by the EU, this announcement does not itself contain sufficient information to comply with IFRSs.

The Company intends to publish full financial statements that comply with IFRSs. The Annual Report and Accounts will be available for shareholders in December 2008.

 

END

 

 

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