Final Results - Part One
Smith WH PLC
14 October 2004
WH SMITH PLC
PRELIMINARY RESULTS ANNOUNCEMENT
FOR THE TWELVE MONTHS ENDED 31 AUGUST 2004
KEY POINTS
Profit before tax, exceptional items and goodwill amortisation in line with
market expectations at £67m (2003: £102m).
Exceptional charge before tax of £200m and goodwill amortisation of £2m.
Loss before tax of £135m (2003: profit of £52m).
Total sales of continuing operations up 2% at £2.5bn:
- UK Retail lfl sales down 1%
- News Distribution lfl sales up 4%
Earnings per share before exceptional items and goodwill amortisation down to
18.0p (2003: 29.1p).
Loss per share of 60.7p (2003: earnings per share of 9.4p).
Final dividend of 8p (2003: 13p) making 12p for the full year (2003: 19p).
Group now simplified and focused on its UK Retail and News Distribution
businesses.
£207m cash will be returned to shareholders on 29 October 2004.
GROUP CHIEF EXECUTIVE'S COMMENTS:
Commenting on the results, Kate Swann, Group Chief Executive said:
'This has been a poor year for the Group. The High Street Retail business
delivered an unacceptable performance following weak Christmas trading, which
highlighted the operational shortcomings and underlying strategic challenges to
the business. We have strengthened management, reduced the cost base and taken
action to reinstate sound retailing disciplines. While we still face
considerable challenges, we have begun to position the High Street Retail
business to meet these more effectively.
'This has also been a year of substantial change. We have sold our USA Travel
Retail, Aspac Retail and Publishing businesses. The Group is now considerably
simplified and focused on its core retail and news distribution businesses in
the UK.
'Travel Retail has had a strong year of profit growth benefiting from sound
retail disciplines and a stable international travel environment.
'News Distribution has delivered another year of steady profit growth through
continued focus on improving customer service and making further cost
efficiencies.
'Current trading is in line with expectations. Although we are making progress
in improving the business, much remains to be done and we expect to face tough
competition in our core markets this Christmas.'
Enquiries:
WH Smith PLC
Mark Boyle - Investor Relations 020 7514 9630
Louise Evans - Media Relations 020 7514 9624
Brunswick
Louise Charlton 020 7404 5959
Tom Buchanan
CURRENT TRADING
In the 6 weeks to 9 October 2004, High Street Retail's lfl sales are down 2% but
gross margin has improved, in line with expectations. Travel Retail's lfl sales
are up 4% and News Distribution's lfl sales are up 3%.
FINANCIAL REVIEW
OVERVIEW
While our News Distribution, Publishing, Travel Retail and Aspac Retail
businesses delivered good performances during the year, the Group's overall
results were poor, driven by underperformance from the High Street Retail
business.
In September 2003, we announced the sale of the airport and hotel divisions of
the USA Travel Retail business. We successfully completed the sale of these
operations in the first half of the year.
In April 2004, we agreed to sell our Aspac Retail business, consisting of
businesses in Australia (Angus & Robertson), New Zealand (Whitcoulls) and Hong
Kong. This sale was completed at the end of May and our Singapore business was
subsequently sold at the end of June 2004.
In August 2004, we reached agreement to dispose of our publishing business,
Hodder Headline, to Hachette Livre S.A. and announced our intention to return to
shareholders up to £207m of cash, equivalent to 85p per ordinary share.
Shareholders approved the disposal and return of cash at an Extraordinary
General Meeting on 23 September 2004 and the disposal completed on 25 September
2004.
The Group also announced that following the disposal of Hodder Headline, it
would make a cash contribution of £120m to the WHSmith Pension Trust, which will
be financed from the Group's own resources and new banking facilities. Annual
cash contributions to the WHSmith Pension Trust will be reduced to approximately
£21m in the coming year (2004: £42m), which will be the first year of a planned
nine-year repayment period.
The Group generated a profit before tax, exceptional items and goodwill
amortisation of £67m (2003: £102m). Loss before tax, after exceptional items and
goodwill amortisation, was £135m (2003: profit of £52m).
The loss per share was 60.7p (2003: earnings per share of 9.4p) whilst adjusted
earnings per share before exceptional items and goodwill amortisation were 18.0p
(2003: 29.1p).
Cash generation of the Group was weaker than in previous years, driven by lower
cash generation in our UK Retail business. Overall, the Group generated free
cash flow(1) of £12m (2003: £61m) and the year-end balance sheet held net cash
of £45m (2003: £68m).
Trading results
NB: All divisional profit and loss figures in this and subsequent sections are
stated before pension service costs, exceptional items and goodwill
amortisation, interest and taxation.
The trading results can be summarised as follows:
£m 2004 2003 Growth LFL Sales
Restated % Growth %
(2)
________________________________________________________________________________
Sales
UK Retail 1,453 1,463 (1%) (1%)(3)
WHSmith News Distribution 1,182 1,115 6% 4%(4)
Less Internal sales (115) (109) 6% 4%(4)
________________________________________________________________________________
Total Continuing sales 2,520 2,469 2% 2%
USA Travel Retail 49 181
Aspac Retail 132 149
Publishing 155 143 8%
Less Internal sales (22) (22) (2%)
________________________________________________________________________________
Total Discontinued sales 314 451 (30%)
_______________________________________________________________________________
Total sales 2,834 2,920 (3%)
________________________________________________________________________________
(1) As defined in 'Free cash flow and cash balances' section below
(2) Restatement arising from adoption of Application Note G 'Revenue
recognition' to Financial Reporting Standard 5 'Substance of Transactions'
(3) UK Retail's sales growth has been adjusted for the impact of new space
(4) News Distribution's sales growth has been adjusted for impact of tabloid
newspaper price discounting in the prior period
2004 2003 Profit
£m Restated Growth %
________________________________________________________________________________
Operating profit
UK Retail 44 90 (51%)
WHSmith News Distribution 35 32 9%
________________________________________________________________________________
Divisional profit - continuing 79 122 (35%)
Support functions (15) (14)
Internal rents 1 3
Pension service costs (14) (12)
________________________________________________________________________________
Operating profit pre exceptional
items and goodwill amortisation -
continuing 51 99 (48%)
USA Travel Retail (5) (16)
Aspac Retail 7 5
Publishing 20 19
Pension service costs - Publishing (1) (1)
________________________________________________________________________________
Operating profit pre exceptional
items and goodwill amortisation 72 106 (32%)
Exceptional items - continuing (92) (18)
Exceptional items - discontinued (9) (35)
Goodwill amortisation - continuing (1) (2)
Goodwill amortisation - (1) (2)
discontinued
________________________________________________________________________________
Total operating (loss)/profit (31) 49 -
________________________________________________________________________________
UK RETAIL
The results for the UK Retail business comprise:
£m 2004 2003 Growth % LfL
Restated Sales
Growth %
________________________________________________________________________________
Sales
High Street Retail 1,145 1,164 (2%) (2%)
Travel Retail 301 291 3% 3%
WHSmith Online 7 8
________________________________________________________________________________
Total sales 1,453 1,463 (1%) (1%)
________________________________________________________________________________
Divisional profit
High Street Retail 25 73 (66%)
Travel Retail 21 19 11%
WHSmith Online (2) (2) -
________________________________________________________________________________
Total divisional profit 44 90 (51%)
________________________________________________________________________________
UK Retail sales fell by 1% to £1,453m (2003: £1,463m). In the High Street Retail
business, sales fell by 2% to £1,145m. Sales in Travel Retail grew by 3% to
£301m. Divisional profit fell 51% to £44m (2003: £90m).
Book sales fell by 2%, with second half sales down 6% after a flat first half.
The key drivers of the sales decline were the release of Harry Potter and the
Order of the Phoenix last year and our decision not to repeat promotions that
had been unprofitable. Stationery sales were up 2% in the year with sales of our
core stationery ranges of 'fashion, lifestyle and essentials' trading well. News
and Express sales were up 2% on last year, driven by new weekly men's magazine
titles, newspaper price discounting in the prior period and improvements in our
snacking offer. Excluding the decline in sales of phonecards, sales grew 4%.
Entertainment sales fell by 7%, with the continued decline in music, VHS and
multimedia sales only partially offset by another strong year for DVDs, up 20%.
Gross profit for the full year decreased by £19m to £554m with the decline in
sales being exacerbated by increased pressure on gross margin. Overall, the
gross margin rate decreased by a full percentage point compared to last year.
Costs grew ahead of inflation, reflecting, for the first time, the £5m
depreciation impact of our investment in the integrated Retek stock management
and merchandising system. In addition, Christmas marketing spend increased by
£3m on the previous year. These cost increases were offset to a small degree by
initial cost savings from the Organisation Review towards the end of the year.
Overall, costs grew as a percentage of sales by 2.1 percentage points.
Consequently, overall net margin for the UK Retail business decreased by 3.1
percentage points to 3.0%.
The UK Retail business now operates from 673 stores, which occupy 3.3 million
square feet. Ten new stores were opened in the year, including seven edge of
town stores, in line with plan. Fourteen stores were also closed in the year,
the majority of which were small loss-makers.
News Distribution
Total sales increased by 6% to £1,182m (2003: £1,115m). Magazine sales increased
by 2%, driven by celebrity titles and a number of new launches, including Star,
Total TV Guide, Nuts and Zoo. Newspapers sales were up 8% buoyed by price
increases and book promotions in the first half of the year. Excluding the
impact of tabloid price discounting in the prior year, like for like newspaper
sales were up 5%.
Partworks were one of the key drivers of growth, with annual sales increasing by
39%. This market strengthened in 2004 as it moved from a seasonal
(post-Christmas) market to a year-round industry. Key titles included Radio
Controlled, Make It Groovy and the Carry On series DVDs. Sales of one-shot
titles were up by 23%, driven by strong Euro 2004 merchandise sales.
Gross profit increased by £5m to £132m, driven by increased sales volumes and
improved product mix. Overall costs grew by 2%, including the closure costs of
the Croydon warehouse, but reduced as a percentage of sales by 0.3 percentage
points as a result of tight cost control in the news warehouses and at head
office. As a result, net margin improved slightly to 3.0% (2003: 2.9%) as
divisional profit grew to £35m (2003: £32m).
Other profit items
Centrally controlled support costs increased to £15m (2003: £14m). Internal
rents on freehold property owned by the Group, which are charged to the
businesses, were £1m, a £2m decrease on last year, due to the sale of freehold
property in the last two years.
USA Travel Retail
USA Travel Retail incurred divisional trading losses of £5m (2003: loss of £16m)
prior to the exit from both the Hotel and Airport Retailing businesses.
Aspac Retail
Prior to the completion of the sale at the end of May, the Aspac Retail business
continued to trade well with like for like sales for the nine-month trading
period up 3%. Divisional profit increased to £7m (2003: £5m).
Publishing
Total Publishing sales increased by 8% to £155m (2003: £143m), driven by a
particularly strong release programme in the first half of the year. Notable
releases included Martin Johnson's and Paul Gascoigne's autobiographies, Pamela
Stephenson's 'Bravemouth' and the latest Martina Cole title, 'The Know'.
Gross profit increased by £4m. Gross margin fell 1.4 percentage points on the
prior year, as the additional contribution generated by the strong sales growth
was offset by an increase in the level of provisioning for unearned authors'
advances. Divisional profit, excluding this charge, grew faster than sales.
Operating costs increased by £3m but reduced by 1.0 percentage point as a
percentage of sales. With this tight cost management significantly offsetting
the fall in gross margin, the overall net margin only fell by 0.4 percentage
points to 12.9% (2003: 13.3%) and divisional profit increased to £20m (2003:
£19m).
Exceptional items
The Group has booked pre-tax exceptional charges in the year of £200m. Of these,
£101m are classified as operating exceptional items, charged against operating
profit, but treated as exceptional due to their size and non-recurring nature.
Operating exceptional items totalling £75m were booked in the first half of the
year, following a full operational and financial review of our UK businesses.
The largest item related to the write down of the carrying value of stock in UK
Retail (£45m). In UK Retail, we also wrote down certain fixed assets by £17m,
booked £1m of reorganisation costs and £3m of other exceptional charges. In
respect of Publishing, we provided £9m to ensure that the balance sheet
reflected an up-to date view on the backlist sales prospects of titles published
in previous years.
In the second half, we incurred further operating exceptional charges of £26m.
We announced at the interim stage the results of an Organisation Review at our
Swindon and London head offices. The total costs related to this review in the
second half amounted to £10m and a further £2m has been provided which relates
to the integration of WHSmith Online's operations into the High Street business.
The net savings from the Organisation Review are anticipated to be £8.5m in the
next financial year (2004/05) and £10m per annum by 31 August 2006. We have also
taken a further impairment charge against fixed assets in the UK Retail business
of £3m. Costs incurred responding to Permira's approach, implementing the
changes to the Group's structure and the return of capital to shareholders
amounted to £11m.
The majority of the operating exceptional charges are non-cash asset write-offs.
The total cash costs will amount to £30m, against which we expect tax relief of
£10m.
In addition to the operating exceptional items, we booked an exceptional charge
of £61m arising from the disposal of our US operations in the first half,
including £39m of goodwill previously written off to reserves. In the second
half, we have increased this charge by £1m.
The disposal of our Aspac Retail businesses generated an exceptional profit on
disposal of £10m.
Although the sale of Hodder Headline completed after the balance sheet date, we
have recorded a provision for loss on disposal of £48m.
In addition, the Group made a £2m profit on the sale and leaseback of freehold
properties in the second half of the year and charged £1m related to other Group
properties.
Interest
The results include interest paid of £5m (2003: £4m), of which £4m is the net
finance cost of the pension fund under FRS 17. This represents the difference
between interest earned on pension scheme assets and interest charged on pension
scheme liabilities.
Taxation
The tax charge for the year is £13m, including £3m of foreign tax. The effective
tax rate on continuing activities, excluding exceptional items and goodwill
amortisation, was 30% (2003: 30%). The effective tax rate on discontinued
activities, excluding exceptional items and goodwill amortisation, was 43%,
reflecting losses in the USA and a higher tax rate in Aspac Retail. As a result,
the Group's effective rate, on this basis, was 34%.
Over the next year it is hoped that the Group will make progress on settling
prior year corporation tax liabilities with the Inland Revenue. As a result, we
expect that our effective tax rate will be lower than the continuing operations'
prevailing 30% tax rate in future years.
Operating leases
The Group's stores are held mainly under operating leases, which are not
regarded as debt for accounting purposes. The UK High Street leases are on
standard 'institutional' lease terms, typically with a 15-year term subject to
5-year upwards-only rent reviews. The Travel Retail stores operate mainly
through turnover related leases, usually with minimum rent guarantees, and
generally varying in length from 5 to 10 years.
The business has an annual minimum net rental commitment of £142m (net of £9m of
external rent receivable). The total future rental commitment at the balance
sheet date amounted to £1.0bn with the leases having an average life of 7 years.
The net present value of these commitments is approximately £0.7bn. Although
large, these commitments are characteristic of the retail sector and the risks
associated with them depend on their liquidity, influenced mainly by the quality
and location of the sites. These are considered to be satisfactory.
Fixed charges cover
A key measure of financial strength for the businesses is fixed charges cover.
The fixed charges comprise operating lease rentals, property taxes, other
property costs and interest. These were covered 1.3 times by profit before fixed
charges (excluding exceptional items and goodwill amortisation) (2003: 1.4
times). For the continuing businesses, fixed charges cover is 1.2 times (2003:
1.5 times).
Loss/Earnings per share
After the substantial exceptional charges in the year, the Group generated a
loss per share of 60.7p (2003: earnings per share of 9.4p) whilst adjusted
earnings per share before exceptional items and goodwill amortisation were 18.0p
(2003: 29.1p).
Dividends
In view of the substantial reduction in the Group's profitability, the Board is
proposing a final dividend of 8 pence (2003: 13 pence). The final dividend will
be paid on 28 January 2005 to shareholders registered at the close of business
on 31 December 2004. This will give a dividend for the full year of 12 pence.
The total cost of the dividend will be £24m. Excluding exceptional items and
goodwill amortisation, the proposed dividend is covered 1.5 times by earnings.
Free cash flow and cash balances
The operating free cash flow (before acquisitions and financing items) amounted
to £12m compared with £61m in the previous year.
£m 2004 2003
________________________________________________________________________________
Profit before tax, exceptional items and
goodwill 67 102
Depreciation 46 49
________________________________________________________________________________
Cash Profit 113 151
Working capital (27) (8)
Capital expenditure (49) (47)
Disposal of assets - 1
Tax paid(5) (21) (32)
Net provision movement (4) (4)
________________________________________________________________________________
Free Cash Flow 12 61
________________________________________________________________________________
(5) Before receipt of tax refund relating to exceptional items.
The movement in working capital is £19m worse than the previous year, largely
due to investment in increasing stock density in the UK Retail business towards
the end of the financial year. The movement in creditors relates predominantly
to discontinued operations:
£m 2004 2003
________________________________________________________________________________
Stock (17) 3
Debtors (1) (17)
Creditors (9) 6
________________________________________________________________________________
Working Capital Movement (27) (8)
________________________________________________________________________________
We have continued to invest in the physical and systems infrastructure of the
business as this analysis of capital expenditure shows:
£m 2004 2003
________________________________________________________________________________
New stores 11 6
Refurbished stores 16 19
Systems 15 20
Other 7 2
________________________________________________________________________________
Total 49 47
________________________________________________________________________________
The movement in the net cash position is as follows:
£m
________________________________________________________________________________
Opening Net Cash 68
Free cash flow 12
Dividends (42)
Pension deficit funding (25)
Proceeds from sale and leaseback 5
Net proceeds on disposal of businesses 42
Cashflow relating to exceptional items (net of
tax) (2)
Cash in subsidiaries disposed (11)
Currency translation differences (2)
________________________________________________________________________________
Closing Net Cash 45
________________________________________________________________________________
The amount shown for pension deficit funding of £25m represents the difference
between the cash contributions to the defined benefit pension schemes of £44m
and the associated profit and loss charge, which comprised £15m for operating
costs and £4m for financing.
With the planned recovery in the profitability of the High Street Retail
business, the reduction in on-going contributions to the Pension Trust, the
lower on-going dividend payments, tighter control of working capital and the
elimination of exceptional one-off cash charges, we anticipate that the Group
will be cash generative in future years.
Balance Sheet
The net assets comprise:
£m £m
________________________________________________________________________________
Tangible assets 237
Goodwill 164
______
401
Stock 184
Creditors less debtors (143)
_______
Working capital 41
Provisions (38)
Dividends (14)
Corporation Tax (30)
________________________________________________________________________________
Operating assets 360
Net Cash 45
________________________________________________________________________________
Net Assets excluding pension liabilities 405
________________________________________________________________________________
Pension liabilities (149)
________________________________________________________________________________
Total Net Assets 256
________________________________________________________________________________
The Group's net assets declined substantially over the year from £409m at the
end of 2003 to £256m this year. The decline is accounted for by the exceptional
charges taken in the year as shown below:
£m £m
________________________________________________________________________________
Opening Net Assets 409
Pre-tax profit before exceptional items and
goodwill 67
Tax on above (23)
________
44
Dividends (24)
Actuarial loss on pension schemes (11)
Currency translation differences (7)
Other movements (2)
________________________________________________________________________________
Net Assets before exceptional items 409
Operating exceptional items (101)
Tax relief on the above 10
________
(91)
Net loss on sale of discontinued operations (101)
Goodwill previously written off 39
________
(62)
________________________________________________________________________________
Closing Net Assets 256
________________________________________________________________________________
The Group's balance sheet structure and net assets will be substantially altered
by the disposal of our publishing operations, the return of cash to shareholders
and the payment to the pension fund. On a pro-forma basis, the impact is as
follows:
As at Sale of Return to Pension Continuing
31 Aug Hodder shareholders contribution Group
2004 Headline £m £m £m
£m Group
£m
________________________________________________________________________________
Tangible assets 237 (7) - - 230
Goodwill 164 (149) - - 15
_______________________________________________________________
401 (156) - 245
Working Capital 41 (65) - - (24)
Provisions (38) - - 15 (23)
Dividends (14) - - - (14)
Corporation Tax (30) - - 21 (9)
_______________________________________________________________
Operating Assets 360 (221) - 36 175
Net cash 45 207 207 (120) (75)
_______________________________________________________________
Net assets 405 (14) (207) (84) 100
excluding pension
liabilities
Pension liabilities (149) 14 - 84 (51)
_______________________________________________________________
Total Net Assets 256 - (207) - 49
_______________________________________________________________
Return on Capital Employed
Total capital employed and returns thereon were as follows:
Operating ROCE % with
Capital operating
Employed £m ROCE % leases
capitalised
________________________________________________________________________________
High Street Retail 189 13% 10%
Travel Retail 25 83% 24%
WHSmith Online (2) - -
________________________________________________________________________________
UK Retail 212 21% 12%
WHSmith News Distribution (18) - -
Central items and property (55) - -
________________________________________________________________________________
Total Continuing Operations 139 37% 14%
______________________________
International Retail 11
Publishing 210
_____________________________________________
Total Discontinued Operations 221
_____________________________________________
Total 360
_____________________________________________
In the prior year, comparable returns for the continuing operations were 55%
(20% with operating leases capitalised).
Pensions
The financial position of the Group is sensitive to the financial position of
its two main defined benefit schemes (WHSmith Pension Trust and Hodder Headline
Staff Retirement Benefits Plan) which, together with retained liabilities under
the USA scheme, had a gross deficit of £205m as at 31 August 2004 and a net
deficit of £144m, after deducting the related deferred tax asset. An additional
net £5m liability relates to retirement medical benefits for certain pensioners.
The pension scheme assets are held in separate trustee-administered funds to
meet long-term pension liabilities to past and some present employees. The Group
has undertaken to meet any shortfalls against the liabilities in the WHSmith
Pension Trust scheme should they arise. The Group closed its main defined
benefit scheme to new members in 1995 but continues to fund the benefits
accruing in respect of the remaining 3,542 active members. Employees who have
joined the Group since 1995 are able to benefit from a defined contribution
pension arrangement.
Following the disposal of Hodder Headline, the Group will make a contribution of
£120m to the WHSmith Pension Trust, which will be financed from the Group's own
resources and new banking facilities.
The Group expects a reduction in pension service costs going forward. This is as
a result of contributions being made by our employees for the first time; a
prospective reduction in some of the scheme benefits such as early retirement
terms; and an overall reduction in pensionable salaries following the
Organisation Review.
Financing
A three year £270m facility agreement was signed on 26 July 2004 between the
Group, Lloyds TSB Bank plc, HSBC Bank plc and The Royal Bank of Scotland plc
under which up to £120m is available by way of a term loan facility, of which
amounts repaid may not be reborrowed, and £150m is available by way of a
multicurrency revolving credit facility. Lloyds TSB Bank plc, HSBC Bank plc and
The Royal Bank of Scotland plc are joint mandated lead arrangers under this
facility agreement. The agreement contains provisions, obligations and certain
financial covenants, which are customary in such an agreement. The Group intends
to draw down £90m of the term loan facility.
Currency
Approximately 7 per cent of the Group's turnover was earned in foreign
currencies. The effect of fluctuations in exchange rates was to decrease total
sales by £1m, with an increase in operating profit before exceptional items and
goodwill amortisation of £2m.
Currency exposures mainly relate to the translation of foreign income and the
supply of products from outside the UK. On a continuing basis, the exposure to
foreign income will be reduced to an immaterial level.
Accounting for goodwill
The goodwill of the publishing operations has been impaired by £45m following
the announcement of the sale of the business to Hachette Livre. Following the
disposal of Publishing, the remaining goodwill will be £15m, which relates to
the acquisitions of the John Menzies Retail chain in 1998 and eight stores from
TM Retail in 2002, both of which are being amortised over 20 years.
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