Final Results - Year Ended 31 Aug 1999, Part 1

SMITH (WH) GROUP PLC 28 October 1999 Part 1 Results Announcement for the 12 Months ended 31 August 1999 EARNINGS PER SHARE (before exceptional items and goodwill) INCREASED BY TEN PERCENT Highlights: Profit before tax - £134m Sales for continuing retail businesses - £1.2 billion, up 3% (up 2% excluding increased space) Operating profit from continuing retail - £79m, up 18% businesses Operating profit from continuing businesses - £111m, up 10% Earnings per share before exceptional items - 38.9p, up 10% and goodwill Earnings per share before exceptional items 38.4p, up 8% Free cash flow before dividends - £78m Proposed final dividend - 12.45 pence (up 10%) Dividends for year - 18.2 pence (up 10%) Hodder Headline acquisition going well Operating profit for year to 31 August 1999 - £12m (up 17%) Internet business established - Sales - £5m (up 76%) Online target - 30% share of UK e-commerce book market in three years Richard Handover, Chief Executive, said: 'This year we have grown comparable operating profits by 10%. We have also grown earnings per share by 10%. This is the second year in succession we have achieved our financial objectives. 'The trading environment during the year was very tough. Against this background I am very pleased that we have achieved profit growth in continuing retailing businesses of 18%. 'We made it clear a year ago that we would concentrate on our core products of books, magazines and stationery and focus on building the strength of the WHSmith brand. 'We have achieved a 5% increase in book sales and are continuing to grow book market share. Our retail gross margin is up 0.8 percentage points of sales, with improved sales mix of higher margin product. Own brand sales have risen to around 11.5% from 10.0% of UK sales and we have developed a series of own brand book titles which have achieved sales of £6m and are expected to grow strongly over the next few years. 'We are continuing to improve our offer in stores with a better customer proposition in all our ranges and a stronger presentation of the WHSmith brand. 'The position of our international retail activities in both the USA and Asia have been stabilised. They have achieved record profits and provide us with a long-term opportunity for growth. We have recently been awarded the contract to operate WHSmith stores in the International Terminal at Sydney airport. 'As we have previously reported, our News Distribution business suffered a reduction in its profit as a result of the loss of part of a contract with a magazine publisher. Following this loss, the business has now started to recover and we are now investing to make WHSmith News a value-added distributor with a strong market position. 'WH Smith is the leading magazine retailer and distributor in the UK and we are determined to improve our service to our customers and our financial return from this sector. We anticipate that the magazine supply chain will modernise significantly over the next few years and we intend to play a constructive role in the changes, which we expect to strengthen the role of the retailer in meeting customer needs. 'During 1998 we acquired an internet bookselling business in order to establish a position in this currently small but rapidly growing market. During the year we have increased its sales by 76% to £5m and created WHSmith Online with an internet portal site - which has attracted 205,000 users since it was introduced in May and 95,000 active users over the last 40 days. We have also recently launched a site on Open, the interactive television network. 'The electronic commerce sector in the UK will grow rapidly over the next few years. We will build our own distinctive position in these new channels, centred around the strengths of the WHSmith brand, our core product of books, technical capability and by intergrating our Online assets with our established business. 'We are determined to achieve the target we have set ourselves of a 30% share of the UK electronic commerce book market within three years. We are confident that we have taken the necessary steps to achieve this objective and that our e-commerce business will become an important source of additional profit as the market matures. 'The Hodder Headline Publishing business has performed strongly since it was acquired in May. This business grew its sales by 7% and its profits by 17% in the year to the end of August. Hodder Headline is a very good business with strong growth prospects - to which we are committed to add value through support from our mainstream book retailing activities and from electronic content and sales opportunities. 'There have also been disappointments during the year. While the acquisition of the former John Menzies stores was substantially earnings positive, we under-achieved against our aggressive targets for integrating the stores. They are now being converted to WHSmith and 65% of the business has now been rebranded with virtually all of the business rebranded by Christmas. The evidence so far is that we are making good progress. 'We also planned to achieve strong growth in the year from the refurbishment of much of our UK Travel Retail business. This work has produced some excellent stores with far better customer service but the disruption involved in the programme has meant that the financial returns have been deferred, although they are now coming through in the year which has started. 'Finally, as we reported at the half year, our Logistics performance over the 1998 Christmas period was poor with a negative impact on sales. We have taken the necessary steps to ensure that this does not recur. 'When I became Chief Executive of WH Smith two years ago, few predicted that we would have grown earnings per share by twenty-five percent over two years. In fact, we have done this in a retail market which has been unexpectedly difficult. 'We have delivered free cash flow of £78m and have a strong balance sheet. As a result of the satisfactory financial position we are recommending an increase in dividends of 10%. 'The current year has started reasonably well, with sales growth in retailing in line with the 1998/99 performance, satisfactory growth in News Distribution sales and strong growth in Publishing and Internet Trading. 'The whole team at WHSmith has much to be proud of, they have achieved a good result in a tough year. We set out on a course two years ago to change the business by recognising, and then meeting, our customers needs and significantly improving our financial performance. We are all committed, determined and confident we can build on the excellent progress of the last year.' Enquiries WH Smith Group PLC 0171 409 3222 Richard Handover Chief Executive Keith Hamill Finance Director Tim Blythe Director of Corporate Affairs 12 MONTHS TO 31 AUGUST 1999 Page Financial Review and Analysis 4 - 15 Group Profit and Loss Account 16 Group Balance Sheet 17 Group Cash Flow Statement 18 Statement of Total Recognised Gains and Losses 19 Note on Historical Profits 19 Reconciliation of Movements in Shareholders' Funds 19 Segmental Analysis of Results 20 - 24 Exceptional Items 24 Pensions 24 Operating Lease Commitments 25 Interest 25 Taxation 26 Dividends 26 Earnings per Share 27 Fixed Charges Cover 27 Segmental Analysis of Operating Assets Employed 28 Acquisitions and Goodwill 29 Goodwill 30 Fixed Assets 31 Working Capital 31 Provisions 32 Net Cash 32 Share Capital 33 - 34 Reserves 34 Notes to the Cash Flow Statement 35 Post Balance Sheet Events 35 Basis of Preparation 36 FINANCIAL COMMENTARY AND ANALYSIS YEAR ENDED 31 AUGUST 1999 The financial position of the Company is satisfactory. For the third successive year it has achieved good growth in earnings per share - with earnings per share before goodwill and exceptional items up ten per cent (up 100 per cent over 3 years). The Company has also achieved a satisfactory free cash flow of £78m (following free cash flow of £133m in the previous year) and has a strong balance sheet. Changes affecting comparative analysis A large number of changes have been made to the Company over the last two years, including disposals, acquisitions and the return of capital. These make comparison of the results for the financial year difficult to achieve with those for the previous period. The financial statements are also presented in accordance with the required formats under Financial Reporting Standard no.3, which was not developed to aid clarity. The changes involved are as follows: (1) The previous legal accounting period was for the 15 months to 31 August 1998. The figures for that period and for the 12 months to 31 August 1998 are set out in the financial statements. This review makes comparison between the figures for the financial year to 31 August 1999 and the equivalent 12 months to 31 August 1998. (2) The results for the previous period including non recurring exceptional items amounting to £112m, comprising a profit of £122m on the sale of businesses less £10m for reorganisation costs arising from the acquisition of a business. These items distort reported 'headline' profit before tax and earnings per share for the previous period. (3) During the previous period three businesses were sold for proceeds of £465m. These businesses contributed £37m of operating profit in the previous period prior to their date of sale and interest of £10m was earned on the sale proceeds before the end of that period. In comparison interest of only £28m has been earned on the proceeds during the current period. However, the figures for the prior period benefited by £6m because the businesses sold were disposed of after the peak Christmas sales season and would normally have been loss making in the post disposal period. In addition, one of the businesses was only 75% owned and £4m of the profit before tax was attributable to the minority and was included in deduction for minority items. The result of these anomalies was to increase prior year profit before tax by £10m compared with the current year and earnings per share by 4%. The effect of this reverses in the current year. (4) Prior to August 1998 the Company returned £167m of capital to its shareholders by repurchasing its shares. Further repurchases costing £24m have been made during the current year. Share repurchases have reduced the share capital by 11%. The effect of this has been to reduce interest income and profit before tax by £11m in the year (£3m in the previous period) but to increase earnings per share for the remaining shares by 1.5 pence (0.6 pence in the prior period). The effect of these items on earnings per share can be seen by explaining the changes between the figures for the two years as follows: --------------------------------------------------------- pence pence Growth % ------------------------------ EPS for year to 31 August 76.5p 1998 Exclude exceptional items (41.0p) EPS for year to 31 August 35.5p 1998 excluding exceptional items Base business 3.2p 9% Share repurchases 0.9p Acquisitions 2.7p Disposals (3.4p) 0.2p --------------- EPS for the year to 31 38.9p 10% August 1999 before goodwill Goodwill on acquired (0.5p) businesses -------- EPS for the year to 31 38.4p 8% August 1999 ======== --------------------------------------------------------- As can be seen the overall effect on earnings growth from the various non recurring items nets off to an amount which is not significant, leaving underlying earnings growth at around 9%. As explained above, earnings per share growth in the 12 months to 31 August 1998 was increased by 4% to 15% due to the timing of disposals. This reverses in the current year. Had this not occurred, earnings per share growth for the current year excluding goodwill would have been 14% with 9% from base businesses and around 5% from acquisitions and share repurchases. The same reconciliation of changes in the figures between the two years for profit before tax is as follows: --------------------------------------------------------- £m £m Growth % ------------------------------ Profit before tax for the year to 254 31 August 1998 Exclude exceptional items (112) ----- Profit before tax excluding exceptional items for the 142 year to 31 August 1998 Base business 12 12% Share repurchases (8) Acquisitions 9 Disposals * (19) (10) ----- Goodwill on acquired (2) businesses ----- Profit before tax for the year 134 to 31 August 1999 ===== --------------------------------------------------------- * includes £6m arising from timing and £4m relating to minority interests. Trading results of continuing businesses The trading results can be summarised as follows: --------------------------------------------------------- 1999 1998 Growth % ------------------------------- £m £m Sales: Base businesses Retailing 1,198 1,162 3% News Distribution 897 933 (4)% -------------- 2,095 2,095 Acquired in prior year 263 79 Internet Trading 5 1 -------------- 2,363 2,175 9% ============== Operating profit Base businesses Retailing 79 66 18% News Distribution 39 45 (13)% Support costs (12) (13) Internal rents 5 6 Pension costs - (3) -------------- 111 101 10% Acquired in prior year 8 (3) Internet Trading (3) - -------------- 116 98 ===== ===== 18% --------------------------------------------------------- Retailing businesses Excluding the former John Menzies stores acquired in May 1998, the results for retailing businesses comprise: --------------------------------------------------------- 1999 1998 Growth % ------------------------------ £m £m Sales: WHSmith High Street 861 840 2% WHSmith Travel Retail Europe 151 147 3% USA 178 171 3% Asia 8 4 - -------------- 1,198 1,162 3% ============== Operating profit: WHSmith High Street 57 51 12% WHSmith Travel Retail Europe 9 8 6% USA 13 9 54% Asia - (2) --------------- 79 66 18% ================ --------------------------------------------------------- The total retailing activities increased space by 1% to 2.87m square feet (plus 0.74m square feet in former John Menzies stores). The businesses have 934 stores (plus 216 former John Menzies stores). The Company is focusing on growing its sales of books, magazines and stationery. The sales growth was led by progress with book sales, which grew by 5%. Total book sales amounted to £280m (plus £40m in John Menzies stores). Sales of music and video product declined by 6%. This market was generally difficult. Magazine sales grew by 4% and stationery sales by 2.5%. Excluding music and video, sales grew by 4%. Own brand sales of £115m have risen to around 11.5% from 10.0% of UK sales and we have developed a series of own brand book titles which have achieved sales of £6m, up 27%. Gross margin improved by 0.8 percentage points of sales - approximately 0.2 percentage points of which resulted from better mix due from better book sales. Total expenses grew by 2.5%, excluding the cost of additional space. Retailing net margins rose to 6.6% from 5.7%. WHSmith High Street This business operates 401 stores in the UK with 2.3m square feet of selling space (together with 144 former John Menzies stores with 0.7m square feet of selling space). Sales by the base business at £861m were up 2% - with 1% more space. Excluding music and video product, sales were up 3%. Profits have increased to £57m from £51m, an increase of 12% (following an increase of 19% in the previous year). Net margins for the base business grew to 6.6% of sales, compared with 6.1% of sales in the previous year. (Including the former John Menzies stores now part of the division net margin was 5.9%). The additional sales in the period generated an extra £7m of profit (about £3m of which could be attributed to increased space). Gross margins grew by 1 percentage point of sales contributing an extra £9m of profit (£2m of which was due to product mix). Expenses grew in line with cost inflation by £7m - 2.5%. This included an increase of £4m in distribution costs, which partly reflected issues in the logistics area which has now been reorganised. The business has opened stores in developments at Bluewater Park, Newcastle and Trafford Park, has reopened its store at the Manchester Arndale centre and has opened a store in the Monks Cross retail park. Five old stores have been closed. WHSmith Europe Travel Retail The business operates 111 stores with 121,000 square feet (plus 72 former John Menzies stores with 74,000 square feet). The business is mainly focused on UK airports and railway stations. Sales by the base business at £151m were up 3%. During the year the business implemented a substantial refurbishment programme (including major stores at Heathrow Terminal 1 and Terminal 2, Stansted and Manchester airports and Waterloo, Victoria, Paddington and Euston stations). Disruption during and after these refurbishments slowed down the rate of sales growth - although this recovered to 9% in the last quarter. Book sales grew by 9%. The additional sales generated an incremental £2m of profit which was offset by £1m of increased turnover rents. Profits grew to £9m (from £8m) and net margins from 5.4% to 6%. (Including former John Menzies stores net margins were 5.8%). International Travel Retail The business in the USA achieved sales up 3% to £178m (up 1% on a comparable basis). Book sales have grown by 12% and magazine sales by 6%. Profits reached £13m - up from £9m in the previous year which was net of £2m of non recurring provisions against non recovery of debtors on an airport contract. The additional sales contributed an extra £6m to gross margin. Occupancy costs, which are partly variable rose by £2m and expenses rose by £2m (3%). The increase in expenses was after a £2m reduction in administration costs. Net margin grew to 7.3% from 5.3%. The business has 412 stores with 0.46m square feet of selling space. The business has opened new WHSmith prototype brand stores in Atlanta airport and in the Wilshire Grand hotel in Los Angeles and will be rolling these out over the next year. New space has been opened in New Orleans and Las Vegas airports, Los Angeles airport was renewed for a further 2 years and good progress has been made on obtaining new resort hotel contracts. The Asia retail activities in Singapore and Hong Kong airports have achieved sales of £8m. The business has now recovered from a number of problems in the previous year in Hong Kong resulting in losses of £2m and has approximately broken even. The Company has recently been awarded the contract to operate WHSmith stores in the International Terminal at Sydney airport. WHSmith News Distribution The business is the UK's leading wholesaler of magazines and newspapers, operating from 51 depots throughout England and Wales. During 1998 it lost a part of a contract with EMAP (a magazine publisher) which resulted in the loss of sales of £47m and profits of £6m in the current year. Total sales amounted to £995m (up 1% excluding the contract losses). These included £98m (1998 - £92m) of sales to WHSmith retailing businesses. Profits of £39m were in line with the previous year, after excluding the effect of the contract losses. The gross margins were marginally down, reflecting reduced terms to secure certain long term contracts which now represent 75% of turnover. This was offset by cost savings of £3m which reduced total expenses by 5%. Other profit items Centrally controlled support costs at £12m were £1m better than the previous year. Internal rents on the freehold property owned by the Company which are charged to the businesses were down £1m to £5m, reflecting asset sales. No charge to profit was made for the principal pension scheme compared with a charge of £3m in the previous year (see 'Pensions' below). John Menzies Retail - acquisition in prior year In May 1998, 232 John Menzies retail stores were acquired at a cost of £70m. Freehold properties included in the purchase with a cost of £6m have subsequently been sold and leased back. The result of the acquisition included in the accounts are as follows: --------------------------------------------------------- 1999 1998 ----------------- £m £m Sales 263 79 ------------------ Operating profit 8 (3) ================== --------------------------------------------------------- Their performance compared with their results for the 12 months to 31 August 1998 were behind the management's plan and were as follows: --------------------------------------------------------- 1999 1998 ----------------- £m £m Sales - continuing stores 248 251 - stores identified for closure 15 25 ------------------ 263 276 ------------------ Operating profit - continuing stores 9 5 - stores identified for closure (1) - - internal rent 1 1 ------------------ Operating profit before goodwill 9 6 Goodwill amortisation (1) - ------------------ Operating profit after goodwill 8 6 ================== --------------------------------------------------------- The results are after administration savings of £4m in the current year (following savings of £2m in the previous year). Of the stores acquired, 30 are scheduled for closure - of which 22 have been disposed of, or are subject to agreements for disposal. Of the remaining stores, 117 have now been rebranded and refurbished as WHSmith stores and it is planned to refurbish a further 55 stores before the end of the calendar year. After refurbishment these stores are now generally performing well on sales and margin growth. The stores are divided between the UK retail businesses as follows: --------------------------------------------------------- High Travel Total Street Retail --------------------------------- £m £m £m Sales 157 91 248 Operating profit 4 5 9 ================================== No stores 144 72 216 Square feet (m) 668 74 742 --------------------------------------------------------- Internet Trading The results of the newly developed internet trading activities compared with the proforma result for the 12 months to 31 August 1998 are as follows: --------------------------------------------------------- 1999 1998 ------------------ £m £m Sales 5 3 ------------------ Operating loss - Trading loss (2) (1) - Set up costs of portal (1) - ------------------ Operating loss (3) (1) ================== --------------------------------------------------------- Sales grew by 76% - with items ordered up 131%. Book sales amounted to £4m. Publishing acquisitions during the year In May 1999 the Company acquired Hodder Headline for £192m. In February 1999, the Company acquired Helicon, the publisher of Hutchinsons Encyclopedia, for £6m. The results for the businesses included in the accounts are as follows: --------------------------------------------------------- £m ------- Sales 28 ------ Operating profit 4 ====== The funding cost of the acquisitions was £2m. The proforma results of these businesses for the 12 months to 31 August 1999 were as follows: --------------------------------------------------------- 1999 1998 ------------------ £m £m Sales 113 106 ------------------ Operating profit 12 10 ================== --------------------------------------------------------- The funding cost for these acquisitions for a full year at current interest rates will be £10m. Cost synergy benefits of £2m have been delivered and work is in progress to develop increased WHSmith retail sales of Hodder Headline products and significantly grow WH Smith own brand book sales. Content from both businesses has been incorporated on the WH Smith Online portal site. Interest The results include interest income of £14m, compared with £7m in the previous year. The improvement of £7m arises from: --------------------------------------------------------- £m -------- Business disposals 18 Acquisitions (5) Share repurchases (8) Trading cash flow 2 --------- 7 ======== --------------------------------------------------------- On average during the period the Company had net cash deposits of £230m on which it received interest at approximately 6 per cent. Taxation The tax charge for the year is £38m including £2m on international profits. The effective tax rate is 28 per cent - which is in line with the previous year. Operating Leases More to follow FR NFFEXAFLNFAN

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