Final Results - Year Ended 31 Aug 1999, Part 2

SMITH (WH) GROUP PLC 28 October 1999 Part 2 Results Announcement for the 12 Months ended 31 August 1999 In common with other retailers, the Company's stores are mainly held under operating leases which are not regarded as debt for accounting purposes. The UK High Street leases are on standard 'institutional' lease terms, now typically with 15 year leases subject to five year upwards only rent reviews. The Travel Retail stores are mainly on turnover related leases, usually with minimum rent, and generally varying in length from five to ten years. The business has an annual minimum net rental commitment of £134m (net of £16m of rent receivable). The total future rental commitment at the balance sheet date amounted to £1.1 billion with the leases having an average life of 9 years. The net present value of these commitments is approximately £0.7 billion. Although large, these figures are characteristic of the sector and the risks associated with them depend on the liquidity which is mainly influenced 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 rent, property taxes, other property costs and interest. These were covered 1.8 times by profits before fixed charges, in line with the previous year. This is a generally satisfactory ratio but should not be allowed to deteriorate significantly. Earnings Per Share Earnings per share amounted to 38.4 pence - up 10 per cent excluding goodwill amortisation and exceptional items and 8% excluding exceptional items. Dividends The Company's dividend policy is, over time, for the dividend to be covered by earnings by approximately two times. The Board is proposing a final dividend of 12.45 pence, which is an increase of 10%. This will give a dividend for the full year of 18.2 pence, which is also up 10%. The total cost of the dividend will be £45m. The dividend cover will be 2.1 times. Free Cash Flow and Cash Balances The operating free cash flow available for the payment of dividends (before acquisitions and financing items) amounted to £78m following an exceptional performance of £133m in the previous year. --------------------------------------------------------- 1999 1998 ---------------------------- £m £m Profit before tax 134 142 Depreciation 43 56 ---------------------------- Cash Profit 177 198 Working capital (9) 1 Capital expenditure (60) (56) Asset sales 8 8 Tax paid (29) (5) Provision spend (9) (13) ---------------------------- Free Cash Flow 78 133 ============================ --------------------------------------------------------- This increase in working capital mainly represented an increase in book stocks, which have lower stock turn than other products. Capital expenditure included: --------------------------------------------------------- £m ---------- New stores 8 Refurbished stores 24 News Distribution automation and systems 10 Other systems 6 Own share purchases for employee share scheme 6 Other 6 ----------- 60 ========== --------------------------------------------------------- The tax spend of £5m in the previous year was unusually low as it was net of significant recoveries. The current year tax spend of £29m reflects the introduction of quarterly tax payments. It is net of ACT recoveries of £4m. Outstanding ACT recoverable of £8m at the balance sheet date will be recovered against the cash tax liability for the year ended 31 August 1999. The provision spend relates to surplus properties and the reorganisation costs following the John Menzies store acquisition. It is the Company's general policy not to own the freehold of its stores and during the year the Company sold and then leased back £46m of remaining freehold property. The leases on these properties are on normal commercial terms, with 15 year leases and 5 year rent reviews. The initial rents are £3m. The remaining freeholds comprise the Company's offices and depot in Swindon and certain small stores which are not considered suitable for sale and leaseback. The total movements in net cash positions comprise: --------------------------------------------------------- £m £m ----------------------- Opening net cash 266 Free cash flow 78 Dividends - recurring (45) - special dividend (10) (55) ---------- Acquisition of businesses- proceeds (198) - debt acquired (5) (203) Return of capital to shareholders (32) Sale and leaseback of freehold 46 properties Issue of shares 5 -------- Closing net cash 105 ======== --------------------------------------------------------- Return of Capital to Shareholders During the year the Company returned £24m to shareholders, comprising the purchase of 4m ordinary shares at a cost of £20m and 7m B shares at a cost of £4m. Balance Sheet The net assets comprise: --------------------------------------------------------- £m £m ----------------------- Tangible assets 275 Goodwill 205 -------- 480 Stocks 203 Creditors less debtors (165) --------- - Working Capital 38 Provisions (19) Dividends (30) Tax (32) -------- 437 Net Cash 105 -------- Net Assets 542 ======= --------------------------------------------------------- Tangible assets include £40m for the Company's interest in freehold and long leasehold property. The working capital is subject to significant seasonal fluctuations associated with the peak Christmas trading period. At their peak, stock balances are expected to rise by approximately £60m to around £265m with an outflow of cash of £60m from 31 August figures. If operating property leases were included in the balance sheet at their net present value of £0.7m, balance sheet gearing (net debt as a percentage of capital employed) would be 52%. Return on Capital Employed Total capital employed and returns are as follows: --------------------------------------------------------- ROCE Operating operating Capital ROCE leases employed capitalis ed -------------------------------- £m WHSmith High Street* 207 29% 14% Travel Retail Europe * 20 65% 22% USA 44 28% 21% WH Smith News 5 - - Central items and (48) - - property --------------------------------- Continuing Operations 228 50% 20% ================================= * including former John Menzies stores. --------------------------------------------------------- For the prior year, average returns were 43% (20 per cent after operating leases capitalised). Pensions The financial position of the Company is sensitive to the financial position of its main defined benefit pension fund - which has around £700m of assets. These assets are held by a trustee administered fund to meet long term pension liabilities to past and some present employees. The Company has undertaken to meet any shortfalls against these liabilities should they arise. The variable amount and length of defined benefit pension obligations inevitably give rise to measurement issues in determining the financial position of the pension fund. The surplus is estimated using actuarial assumptions and was last formally valued for accounting purposes as at March 1997 at around 10 per cent of the fund. The effect of the surplus is to reduce the cash and accounting cost of pensions, which would otherwise be around £10m a year. Financing Committed bank facilities amount to £330m from a group of 9 banks. Half of these mature in May 2000 and the other half in May 2002. Currency Approximately 8 per cent of the Company's turnover is earned in foreign currencies. The effect of fluctuations in exchange rates was to increase sales by £4m, with no significant impact on profit. Currency exposures mainly relate to the translation of foreign income. The supply of products from outside the UK is mainly paid for in sterling. Accounting for Goodwill Accounting for goodwill is regulated by Financial Reporting Standard 10, which requires goodwill on acquisitions to be capitalised and effectively permits the non amortisation of goodwill if the value of goodwill is not less than the amount in the accounts, can be calculated and is durable. It has been decided not to amortise the goodwill arising on the acquisition of Hodder Headline, which is expected to generate a strong cashflow and to retain its value. Group Profit and Loss Account For the 12 months to 31 August 1999 12 months to ------------------- Proforma 15 months to Note 31 Aug 31 Aug 31 Aug 1998 1999 1998 Note £m £m £m --------------------------------------------------------------------- Sales - Continuing operations 2,363 2,175 2,649 - Acquisitions 28 - - --------------------------------------------------------------------- 2,391 2,175 2,649 - Discontinued operations - 643 807 ---------------------------------------------------------------------- Total sales 1 2,391 2,818 3,456 ---------------------------------------------------------------------- Operating profit ---------------------------------------------------------------------- - Continuing operations 1,2 116 88 94 - Acquisitions 4 - - ---------------------------------------------------------------------- 120 88 94 - Discontinued operations - 37 35 ---------------------------------------------------------------------- Operating profit 120 125 129 Exceptional profit on sale 2 of operations - 122 122 Interest 5 14 7 6 ----------------------------------------------------------------------- Profit on ordinary activities before taxation 134 254 257 ----------------------------------------------------------------------- Tax on profit on ordinary 6 activities (38) (39) (39) ----------------------------------------------------------------------- Profit on ordinary activities after taxation 96 215 218 Minority interests - (4) (4) ----------------------------------------------------------------------- Profit attributable to shareholders 96 211 214 Dividends 7 (45) (43) (54) ----------------------------------------------------------------------- Retained earnings 51 168 160 ----------------------------------------------------------------------- Earnings per share 8 38.4p 76.5p 77.0p Diluted earnings per share 8 38.1p 76.2p 76.0p Earnings per share before 8 exceptional items and goodwill amortisation 38.9p 35.5p 36.5p Fixed charges cover 9 (continuing operations) - times 1.8x 1.8x 1.7x Dividend per share 7 18.20p 16.60p* 20.75p Dividend cover (before exceptional items) - times 2.1x 2.1x* - Tax charge 6 28.0% 28.0% 28.0% * Total dividend for 15 months apportioned to proforma 12 months. Group Balance Sheet As at 31 August 1999 At At 31 Aug 31 Aug 1999 1998 Note £m £m ---------------------------------------------------------------- Fixed assets Goodwill 12 205 29 Tangible assets 13 275 312 ---------------------------------------------------------------- Total fixed assets 480 341 ---------------------------------------------------------------- Current assets Stock 203 200 Debtors 143 102 Cash at bank and in hand 16 174 366 ------------------------------------------------------------------- ---- 520 668 Creditors due within one year Debt 16 (39) (58) Other (368) (366) ------------------------------------------------------------------- ---- (407) (424) ------------------------------------------------------------------- ---- Net current assets 113 244 ------------------------------------------------------------------- ---- Total assets less current liabilities 593 585 ------------------------------------------------------------------- ---- Creditors due after more than one year Debt 16 (30) (42) Other (2) (3) ------------------------------------------------------------------- ---- (32) (45) Provisions for liabilities 15 (19) (28) and charges ------------------------------------------------------------------- ---- TOTAL NET ASSETS 542 512 ------------------------------------------------------------------- Equity Share capital 17 140 141 Share premium 18 84 80 Capital redemption reserve 18 155 149 Revaluation reserve 18 8 14 Profit and loss account 18 151 121 ----------------------------------------------------------------- Equity Shareholders funds 538 505 Non equity share capital 2 6 ------------------------------------------------------------------- Shareholders funds 540 511 Minority interests 2 1 ------------------------------------------------------------------- TOTAL EQUITY 542 512 Memorandum - Analysis of £m £m net cash ----------------------------------------------------------------- Cash at bank 174 366 Debt less than one year (39) (58) Debt greater than one year (30) (42) ------------------------------------------------------------------- ---- Net cash 105 266 ------------------------------------------------------------------- ---- Group Cash Flow Statement For the 12 Months to 31 August 1999 12 months to ----------------------------- Pro-forma 15 months to 31 Aug 31 Aug 31 Aug 1999 1998 1998 1999 Note £m £m £m ---------------------------------------------------------------- Cash flow from operating 19 145 179 180 activities Returns on investment and 14 7 6 servicing of finance Taxation (37) (5) (15) Purchase of fixed assets 13 (60) (56) (70) Disposal of tangible fixed assets 54 8 14 --------------------------------------------------------------- Cash flow from capital expenditure and financial investment (6) (48) (56) ---------------------------------------------------------------- Proceeds on disposal of - operations 465 465 Acquisitions 11 (171) (80) (80) ---------------------------------------------------------------- Cash flow for acquisitions (171) 385 385 and disposals ---------------------------------------------------------------- Equity dividends paid (55) (44) (44) ---------------------------------------------------------------- Cash flow before use of (110) 474 456 liquid resources and financing ---------------------------------------------------------------- Issue of shares 5 6 7 Repurchase of shares 17 (24) (167) (167) Decrease in debt 16 (63) (20) (70) ---------------------------------------------------------------- Cash flow from financing (82) (181) (230) ---------------------------------------------------------------- (Decrease)/Increase in cash (192) 293 226 ---------------------------------------------------------------- 12 months to ------------------- Proforma 15 months to 31 Aug 1999 31 Aug 31 Aug 1998 1998 Memorandum - Analysis of free cash £m £m £m flow Note --------------------------------------------------------------------- Profit before tax and before 134 142 145 exceptional items Depreciation / amortisation of goodwill - continuing 43 40 49 - discontinued - 16 22 Movement in working capital (9) 25 - - continuing - discontinued - (24) (15) Capital expenditure on fixed (60) (40) (47) assets - continuing - discontinued - (16) (23) Proceeds on disposal of tangible 8 8 14 fixed assets Tax paid (29) (5) (15) Cash spend against provisions 15 (9) (13) (15) --------------------------------------------------------------------- Free cash flow 78 133 115 Dividends 7 (55) (44) (44) Issue of shares 5 6 7 Proceeds on disposal of businesses - 465 465 Acquisitions (171) (80) (80) - cash paid - issue of loan notes (27) - - Sale & leaseback of freehold 46 - - properties Repurchase of shares and ACT on (32) (167) (167) repurchases 17 ---------------------------------------------------------------------- Cash movement in debt (156) 313 296 ---------------------------------------------------------------------- Opening net cash/(debt) 266 (48) (31) Hodder Headline debt acquired (5) - - Exchange movement - 1 1 ---------------------------------------------------------------------- Closing net cash 105 266 266 ---------------------------------------------------------------------- Consolidated Statement of Total Recognised Gains and Losses For the 12 months to 31 August 1999 12 months to --------------------------- Proforma 15 months to 31 Aug 1999 31 Aug 1998 31 Aug 1998 £m £m £m ---------------------------------------------------------------------- Profit attributable to shareholders 96 211 214 Currency translation differences (3) (4) (4) ---------------------------------------------------------------------- Total recognised gains and losses for the financial period 93 207 210 ---------------------------------------------------------------------- Note of Historical Cost Profits For the 12 months to 31 August 1999 12 months to ------------------------ Proforma 15 months to 31 Aug 1999 31 Aug 1998 31 Aug 1998 £m £m £m ------------------------------------------------------------------ Profit on ordinary activities before 134 254 257 taxation Realisation of 6 4 4 property revaluation surplus ------------------------------------------------------------------ Historical cost profit on ordinary activities before 140 258 261 taxation ------------------------------------------------------------------- Historical cost profit retained 57 72 164 earnings ------------------------------------------------------------------- Reconciliation of Movements in Consolidated Shareholders' Funds For the 12 months to 31 August 1999 12 months to ----------------------- Proforma 15 months to 31 Aug 1999 31 Aug 1998 31 Aug 1998 Note £m £m £m ------------------------------------------------------------------- Shareholders funds at beginning of period 511 351 358 ------------------------------------------------------------------- Retained earnings 51 168 160 Share capital issues (net) 5 6 7 Repurchase of shares 17 (24) (167) (167) Currency translation differences (3) (4) (4) Goodwill on disposed businesses previously written off - 157 157 ------------------------------------------------------------------- Net additions to 29 160 153 shareholders funds ------------------------------------------------------------------- Shareholders funds at 540 511 511 end of period ------------------------------------------------------------------- MORE TO FOLLOW FRCNFFEXAAANFAN

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