Final Results

WH Smith PLC 12 October 2006 12 October 2006 WH Smith PLC Preliminary Results Announcement For the twelve months ended 31 August 2006 -STRONG PROFIT PERFORMANCE FOR THE GROUP- KEY POINTS â€¢ Profit before tax and exceptional items on continuing operations, up 31% to Â£51m (2005: Â£39m). Profits from trading operations are: - High Street profit up 14% to Â£42m(1) (2005: Â£37m) - Travel profit up 24% to Â£31m(1) (2005: Â£25m) â€¢ Total Group profit before tax (2) up 42% to Â£44m (2005: Â£31m) â€¢ Strong free cash flow of Â£68m (2005: Â£44m) â€¢ As anticipated, sales of Â£1.3bn, down 4% like-for-like (LFL), reflecting our strategy to focus on profitable sales in our core categories and the continued tough trading environment - High Street LFL sales down 7% - Travel LFL sales up 3% â€¢ Gross margin has improved by 270 basis points year on year â€¢ Cost savings delivered faster than planned; further incremental cost savings of Â£15m over next 3 years identified â€¢ Successful separation of the Retail and Smiths News businesses â€¢ Headline earnings per share (3) up 43% to 25.0p (2005: 17.5p per share) â€¢ Basic earnings per share up 50% to 18.6p (2005: 12.4p per share) â€¢ Pension deficit of Â£41m(4), reduced from Â£152m in 2003 â€¢ Dividend of 6.2p proposed; combined with dividend proposed by Smiths News PLC, giving a full year proforma dividend up 12% to 15.3p (2005: 13.7p) (1) High Street and Travel profit is stated after directly attributable defined benefit pension service costs, share based payment costs and before central costs, exceptional items, interest and taxation (2) Continuing and discontinued operations (3) Profit before tax, exceptional items and IAS 19 pension interest - undiluted (4) On a gross IFRS basis, post the one-off payment of Â£25m on 1 September 2006 (5) Profit before tax and exceptional items on continuing operations Commenting on the results, Kate Swann, Group Chief Executive said: 'The Group has delivered a strong performance, with a 31% improvement in full year profit (5) and strong free cash flow of Â£68m. 'Travel has had another good year with a 24% increase in profitability(1). Despite tough trading conditions on the UK high street, High Street has improved its profitability(1) by 14% and we continue to make progress in improving our customer offer and rebuilding our authority in our core categories. These results reflect the successful implementation of our plan so far. 'Spending in our categories remains subdued and we expect the Christmas season to be competitive; we have planned accordingly.' - Ends - Enquiries: WH Smith PLC Louise Evans/Sarah Heath Media Relations 020 7851 8850 Mark Boyle Investor Relations 020 7851 8820 Brunswick Tom Buchanan 020 7404 5959 Pam Small CURRENT TRADING In the 5 weeks to 7 October 2006, Retail LFL sales were down 3% and gross margin was up on last year. DEMERGER On 31 August 2006, the Retail and News business were separated via a demerger allowing both businesses to benefit from greater focus on their respective strategies as independent businesses. GROUP INCOME STATEMENT Revenue Group revenue decreased from Â£1,423m to Â£1,340m over the year, as we have focused on profitable sales, in a tough trading environment. The LFL sales decline over the period was 4%. ________________________________________________________________________________ Â£m 2006 2005 Growth % LFL Sales Growth % ________________________________________________________________________________ High Street 1,021 1,112 (8%) (7%) Travel 319 311 3% 3% ________________________________________________________________________________ Total 1,340 1,423 (6%) (4%) ________________________________________________________________________________ High Street sales were down 8% and on a LFL basis down 7%. Travel sales growth of 3% (3% on a LFL basis) has been driven by the airports business, up 6% on a LFL basis and 2 percentage points ahead of passenger growth, primarily through product range improvements and more efficient use of space. Books LFL sales were down 5% with gross margin up year on year as we continued to focus on rebuilding our authority as a popular specialist and maximising profitability. Excluding Harry Potter, Books LFL sales were down 3%. At Christmas we created a very competitive offer via promotions and saw some excellent shares on top titles such as Sharon Osbourne's Extreme, Jamie Oliver's Jamie's Italy and John Peel's Margrave of the Marshes. Over the year, we also achieved our third consecutive period of market share stabilisation versus the general high street and we increased our ranges by expanding our space to books in 70 stores. We will increase the space devoted to books in more stores during the course of this financial year. We also implemented significant changes to our books supply chain so we can carry more stock at no additional stock holding cost. With a stronger supply infrastructure in place, we have begun to carry out in-depth analysis at a sub-category level to improve our performance and authority further. In Travel we also increased our range of airport exclusive books from 100 to 200 lines. These books offer great value, a degree of exclusivity and this year we are moving into non-fiction airport exclusives. Stationery LFL sales were down 4% with lower consumer spending in this market impacting sales. As planned, we focused on our core categories and removed unprofitable categories like electronics. This had a negative impact on sales but a positive impact on profit. Gross margin was up strongly driven by intra category mix and sourcing benefits from low cost countries. In the second half of the year we began thorough reviews across all stationery categories. We also tested extended ranges of wrap, art and crafts and core stationery in a small number of large stores as well as testing new ranges such as scrap-booking, card-making and educational toys. We have now added all these ranges into 70 stores and we will be making further changes as a result of these reviews during this financial year. The stationery trial store in Barnet has performed well and provided us again with some useful findings, which we are incorporating into our standard stores. In the second half of the year, we opened three further standalone stationery-only stores in Orpington, Bangor and Tonbridge to gather more data. News and Impulse LFL sales were up 3% year on year with an improvement in gross margin. We held share in news and magazines, supported by strong promotions, despite challenging market conditions with sales declines particularly in monthly magazines and part works. In both High Street and Travel, we continued to grow our confectionery and snacking ranges by making better use of our space, putting in new ranges and equipment. In Travel, we also extended our food range to 20 more stores and increased choice with more desserts, yoghurts and breakfast options as well as extending our ranges of healthy snacks - fruit, nuts, fresh juices including introducing branded healthier options such as Innocent Smoothies and granary bars. In July, drinks in Travel benefited from the hot weather. Entertainment LFL sales were down 19% in an extremely competitive market with a weaker release schedule than in 2004/05 and continuing price deflation. We focused on maximising profit and delivered profitable sales. We anticipated declines in entertainment sales as we rebalanced elements of our entertainment space to other core categories. We tightly controlled stock to reflect sales patterns while maintaining availability levels in line with the previous year. Profit before exceptional items and taxation ________________________________________________________________________________ Â£m 2006 2005 Profit Growth % ________________________________________________________________________________ High Street (1) 42 37 14% Travel (1) 31 25 24% ________________________________________________________________________________ Trading operations profit (1) 73 62 18% Central costs (14) (16) Internal rents 1 1 ________________________________________________________________________________ Operating profit (2) 60 47 28% Net finance charges (9) (8) ________________________________________________________________________________ Profit before taxation (2) 51 39 31% ________________________________________________________________________________ (1) Trading operations profit stated after directly attributable share based payment and pension service charges (2) Stated before exceptional items The Group generated a profit before tax and exceptional items of Â£51m (2005: Â£39m), an increase of 31%. Operating profit2 increased by 28% from Â£47m to Â£60m with the main driver being strong improvements in trading operations. High Street High Street delivered a profit1 increase of 14% to Â£42m (2004: Â£37m) as we focused on rebuilding authority in our core categories, optimising margins, tight cost control and delivering the retail basics. Gross margin improved during the year with the continued benefits of category mix management, lower cost of goods from improving our buying terms further and increasing our Far East sourcing, improved promotion management, reduced shrinkage and better markdown management. High Street delivered Â£22m of cost savings during the year, which is Â£4m ahead of our expectations of Â£18m, set in April this year. Cost savings were delivered from a number of areas of the business including logistics, information systems, stores and marketing communications. We have identified a further Â£15m of cost savings over the next three years from areas including logistics, information systems and stores. As a result of these initiatives and the costs savings delivered in the year, net margin for High Street has increased by 80 basis points to 4.1%. This is before non-allocated central costs. The High Street business now operates from 543 stores, which occupy 3.0m square feet (2005: 3.0m square feet). We opened 7 new stores in the year and closed 6 stores. Travel Travel delivered a strong performance with profit1 increasing by 24% to Â£31m (2005: Â£25m). This was delivered from increased sales, boosted by the hot weather in July 2006, combined with mix and space changes, range improvements and tight cost control. Gross margin has increased during the year through buying improvements and mix changes, resulting in more sales in higher margin categories such as snacking. We have improved average transaction value by focusing on mix changes and improved promotional activity. The Travel business now operates from 129 stores. During the year we made good progress on contracts in airports and rail. In airports we renewed 4 contracts - for the bookstore and CTN* store at Glasgow airport and for CTN stores at Heathrow Terminal 4 and Southampton airports. In airports we also opened 5 new units during the year - a bookstore at Bristol airport and CTN stores at Blackpool, Glasgow, Southampton, and Manchester airports. In rail we renewed successfully 10 contracts, including a key contract with ScotRail that represents 12 sites across Scotland. We also opened 3 new units in rail - a bookstore at London Liverpool Street and two standalone stationery stores at London Charing Cross and London Bridge stations. * CTN - confectionery, tobacconist, newsagent Central costs and internal rents Central support costs were Â£14m, down Â£2m from the prior year. Internal rents on freehold property owned by the Group remained at the prior year level of Â£1m. Net finance charges Net finance charges have increased by Â£1m in the year with lower debt interest from the repayment of the term loan facility during the year being offset by higher IAS 19 pension interest of Â£3m (2005: Â£1m). Pension interest has increased due to the impact of the change in investment policy to a Liability Driven Investment ('LDI') policy. Exceptional Items The Group has taken a Â£12m exceptional charge in relation to costs associated with the demerger. A Â£5m exceptional gain was also recognised in the year as a result of the settlement of post retirement medical benefit liabilities. Taxation The tax charge for the year before tax on exceptional items was Â£10m (2005: Â£9m). The effective tax rate on continuing activities, excluding exceptional items was 20% (2005: 23%). We expect the effective tax rate to remain below the UK standard rate over the medium term. The exact tax rate achieved will depend on the underlying profitability of the Group and continued progress in closing off outstanding tax assessments. Earnings per share The Group generated basic earnings per share of 18.6p (2005: 12.4p) while headline basic earnings per share from continuing operations was 25.0p (2005: 17.5p). The growth has been generated by both improving profitability and a more favourable effective tax rate. Dividends The Board is proposing a dividend of 6.2p per ordinary share. Subject to shareholder approval the dividend will be paid on 6 February 2007 to shareholders registered at the close of business on 5 January 2007. The Board intends to have a progressive dividend policy, which over time would be broadly covered twice by earnings. Fixed charges cover Fixed charges, comprising property operating lease rentals and net finance charges, were covered 1.3 times by profit before fixed charges (2005: 1.3 times cover). CASH FLOW The operating free cash flow amounted to Â£68m compared with Â£44m in the previous year. ________________________________________________________________________________ Â£m 2006 2005 ________________________________________________________________________________ Operating profit(1) 60 47 Non cash items 1 4 Depreciation & amounts written off tangible fixed 37 41 assets ________________________________________________________________________________ Cash profit 98 92 Working capital 9 (8) Capital expenditure (29) (30) Tax (2) (2) Net interest paid (5) (2) Net provisions (3) (6) ________________________________________________________________________________ Free cash flow 68 44 ________________________________________________________________________________ (1) Stated before exceptional items Cash generation has strengthened due to the improved trading performance in the businesses and good working capital control. Non-cash items relate to share based payment charges of Â£6m (2005: Â£4m) and profits on disposal of fixed assets of Â£5m (2005: Â£nil). There have also been impairment charges of Â£3m (2005: Â£nil) in the year. The movement in working capital for continuing businesses was Â£17m favourable to the previous year, principally as a result of the strong focus on stock levels and improved control of receivables. This can be further analysed as follows: ________________________________________________________________________________ Â£m 2006 2005 ________________________________________________________________________________ Inventories 6 5 Receivables 7 (12) Payables (4) (1) ________________________________________________________________________________ Working capital movement 9 (8) ________________________________________________________________________________ Capital expenditure ________________________________________________________________________________ Â£m 2006 2005 ________________________________________________________________________________ New stores and store development 11 11 Refurbished stores 7 7 Systems 7 7 Other 4 5 ________________________________________________________________________________ Total 29 30 ________________________________________________________________________________ We have continued to invest in maintaining our retail properties. Net Funds The movement in the net funds position is as follows: ________________________________________________________________________________ Â£m ________________________________________________________________________________ Opening net debt (58) Free cash flow 68 Equity dividends paid (15) Net purchase of own shares (6) Pension deficit funding (12) Corporate advisory and financing costs (6) Sale & leaseback and fixed asset disposal proceeds 9 Net disposals of subsidiaries 8 Other items (3) Settlement of intercompany account on demerger 57 ________________________________________________________________________________ Closing net funds(1) 42 ________________________________________________________________________________ (1) Stated before Â£25m cash contribution to pension liability on 1 September 2006 The amount shown for pension deficit funding of Â£12m represents Â£10m of additional pension deficit funding in line with our agreement with the Trustees and Â£2m in relation to the post retirement medical benefit liability settlement. The net disposals of subsidiaries of Â£8m includes deferred consideration of Â£11m received in early settlement of loan notes received on the disposal of the USA Travel Airports business to Hudson Group in 2004. Corporate advisory and financing costs of Â£6m includes fees paid in relation to the demerger. After the year end an additional Â£25m cash was contributed to the defined benefit pension scheme as part of the demerger agreement with the WHSmith Pension Trust Trustees. GROUP BALANCE SHEET ________________________________________________________________________________ Â£m Â£m ________________________________________________________________________________ Goodwill and other intangible assets 30 Property plant and equipment 184 _________ 214 Inventories 143 Payables less receivables (149) _________ Working capital (6) Net deferred tax asset 16 Current tax liability (20) Provisions (12) ________________________________________________________________________________ Operating assets employed 192 Net funds (1) 42 ________________________________________________________________________________ Net assets excluding pension liabilities 234 ________________________________________________________________________________ Pension liability (1) (66) ________________________________________________________________________________ Total net assets 168 ________________________________________________________________________________ (1) Stated before Â£25m cash contribution to pension liability on 1 September 2006 The movement of net assets over the year is as follows: ________________________________________________________________________________ Â£m Â£m ________________________________________________________________________________ Opening net assets 105 Profit before tax and exceptional items 51 Tax on above (10) ________ 41 Share based payments and employee share schemes 6 Dividends paid (15) Tax effected movement in pension scheme deficit (16) Movement of intercompany account on demerger 66 Purchase and issue of own shares (6) Other items (4) ________________________________________________________________________________ Net assets before exceptional items 177 Exceptional items (net of associated tax) (9) ________________________________________________________________________________ Closing net assets 168 ________________________________________________________________________________ The Group's net assets have increased from Â£105m at the end of 2005 to Â£168m this year. Return on Capital Employed Total capital employed and ROCE were as follows: ________________________________________________________________________________ ROCE% with Operating operating Capital leases Employed Â£m ROCE % capitalised ________________________________________________________________________________ High Street 180 23% 13% Travel 21 148% 47% ________________________________________________________________________________ Retail 201 36% 18% Central items and property (33) - - ________________________________________________________________________________ Operating assets employed 168 35% 17% ________________________________________________________________________________ For the prior year, comparable average returns were 23 per cent (12 per cent - after capitalised operating leases) Pensions At 31 August 2006, the gross defined benefit pension deficit is Â£66m (2005: Â£60m). The pension deficit has increased mainly due to actuarial adjustments in relation to the lengthening of mortality rates. The results include net finance costs of Â£3m (2005: Â£1m). In September 2005, the Company and the Trustees of the WHSmith Pension Trust (the 'Pension Trust') agreed that they would adopt a new investment policy in order to substantially reduce the volatility in the underlying investment performance and the risk of a significant increase in the deficit in the defined benefit fund. The assets in the investment fund were restructured in order to adopt this policy. This involved the assets being 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 ('a Liability Driven Investment 'LDI' policy'). The key features of this fund restructuring are as follows: - 94% of the fund's assets are invested in an LDI structure with a leading international institutional fund manager - 6% of the fund's assets are invested in a portfolio of long-dated equity call options. These represent a notional exposure to underlying equities of some Â£350m. The impact of this change in investment policy is to substantially reduce the volatility in the fund and the resultant risk of a significant increase in the overall deficit whilst enabling the fund to continue to benefit from any potential higher returns in the equity markets. On the date of demerger, 31 August 2006, the assets and liabilities of the Pension Trust and the WH Smith Retirement Savings Plan (a defined contribution plan) were split between the News business and the Retail business by way of a 'sectionalisation'. Each section only contains the accounts of members who are or were employed by the relevant business. There will be no cross subsidy or cross guarantees between the sections of the Pension Trust. The assets and liabilities of the defined benefit scheme were allocated to the News business section and the WH Smith Retail business section in proportions that reflected the related liabilities of active, deferred, pensioner and orphan members belonging to the respective News and Retail businesses. On 1 September 2006, the Group made a Â£25m one-off cash contribution to the Pension Trust. The Group has agreed with the Pension Trust Trustees to make aggregate ongoing pension deficit funding payments of approximately Â£10m each year for the next five years. Financing and capital structure The Group is financed through a mixture of debt, comprising overdrafts and credit facilities, finance leases, loan notes and equity (ordinary and preference shares). The Group signed a five-year multi-currency Â£90m revolving credit facility agreement on 26 June 2006. The agreement contains provisions, obligations and certain financial covenants, which are customary under such an agreement. In order to facilitate the demerger the Company issued 182,919,970 ordinary shares to the shareholders of Smiths News PLC on a 1:1 basis. On 7 September 2006, a capital reduction was undertaken with the nominal value of ordinary shares reduced from 195p to 20p each, which created Â£320m of distributable reserves. Operating leases The Group's stores are held mainly under operating leases that are not capitalised and therefore are not included as a debt for accounting purposes. The High Street leases are on standard 'institutional' lease terms, typically with a 15 year term subject to five year upwards-only rent reviews. The Travel stores operate mainly through turnover related leases, usually with minimum rent guarantees, and generally varying in length from five to ten years. The business has an annual minimum net rental commitment of Â£124m (net of Â£8m of external rent receivable). The total future rental commitment at the balance sheet date amounted to Â£832m with the leases having an average life of seven years. The net present value of these commitments is approximately Â£558m. This is considered to be a satisfactory situation for, 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. The Group has contingent liabilities relating to reversionary property leases. Pursuant to the terms of the Demerger Agreement, any such contingent liability will be apportioned between the Group and Smiths News PLC in the ratio 65:35 (provided that the Smiths News PLC liability is limited to Â£5m in any 12 month period). We have estimated the Group's 65% share of the future cumulative rental commitment at approximately Â£102m (2005: Â£118m). Basis of preparation and accounting policy changes In accordance with IFRS 3 'Business Combinations' the financial statements of WH Smith PLC have been prepared as if the continuing operations of the Retail business were in existence for the whole of the period from 1 September 2004 through to 31 August 2006. Central costs of the pre demerger group have been mainly allocated to WH Smith PLC. The Group adopted IAS 32 'Financial Instruments: Presentation and Disclosure' and IAS 39 'Financial Instruments: Recognition and Measurement' at 1 September 2005. Group Income Statement for the year ended 31 August 2006 ______________________________________________________________________________________________________________ 2006 2005 ______________________________________________________________________________________________________________ Before Before exceptional Exceptional exceptional Exceptional Â£m Note items items Total items items Total ______________________________________________________________________________________________________________ Continuing operations Revenue 2 1,340 - 1,340 1,423 - 1,423 ______________________________________________________________________________________________________________ Operating profit 2, 3, 4 60 (7) 53 47 - 47 Investment income 2 - 2 3 - 3 Finance costs (11) - (11) (11) - (11) ______________________________________________________________________________________________________________ Profit before tax 51 (7) 44 39 - 39 Income tax expense 7 (10) (2) (12) (9) - (9) ______________________________________________________________________________________________________________ Profit after tax from continuing operations 41 (9) 32 30 - 30 Loss for the year from discontinued operations 5 - - - - (8) (8) ______________________________________________________________________________________________________________ Profit for the year 41 (9) 32 30 (8) 22 ______________________________________________________________________________________________________________ _______________________________________________________________________________________________________ 2006 2005 _______________________________________________________________________________________________________ Note _______________________________________________________________________________________________________ Earnings per share (1) Basic - continuing operations 9 18.6p 16.9p Diluted - continuing operations 9 18.2p 16.8p Basic 9 18.6p 12.4p Diluted 9 18.2p 12.3p _______________________________________________________________________________________________________ Non GAAP measures Headline earnings per share(2) Basic - continuing operations 9 25.0p 17.5p Diluted - continuing operations 9 24.4p 17.3p Basic 9 25.0p 17.5p Diluted 9 24.4p 17.3p Equity dividends per share(3) 6.2p Fixed charges cover 1.3x 1.3x _______________________________________________________________________________________________________ (1) Earnings per share is calculated in accordance with IAS 33 'Earnings per share' (2) Headline earnings per share excludes exceptional items and IAS 19 pension interest (3) Dividend per share is the final proposed dividend Group Balance Sheet at 31 August 2006 ________________________________________________________________________________ Â£m Note 2006 2005 ________________________________________________________________________________ Non-current assets Goodwill 15 15 Other intangible assets 15 14 Property, plant and equipment 184 197 Deferred tax assets 29 38 Trade and other receivables 5 16 ________________________________________________________________________________ 248 280 ________________________________________________________________________________ Current assets Inventories 143 148 Trade and other receivables 69 75 Cash and cash equivalents 10 66 39 ________________________________________________________________________________ 278 262 ________________________________________________________________________________ Total assets 526 542 ________________________________________________________________________________ Current liabilities Trade and other payables (215) (216) Current tax liabilities (20) (26) Obligations under finance leases 10 (3) (4) Bank overdrafts and other 10 (13) (45) borrowings Short-term provisions (4) (5) ________________________________________________________________________________ (255) (296) ________________________________________________________________________________ Non-current liabilities Bank loans and other borrowings 10 - (37) Retirement benefit obligation 6 (66) (60) Deferred tax liabilities (13) (14) Long-term provisions (8) (11) Obligations under finance leases 10 (8) (11) Other non-current liabilities (8) (8) ________________________________________________________________________________ (103) (141) ________________________________________________________________________________ Total liabilities (358) (437) ________________________________________________________________________________ ________________________________________________________________________________ Total net assets 168 105 ________________________________________________________________________________ Total equity 168 105 ________________________________________________________________________________ Group Balance Sheet at 31 August 2006 (continued) ________________________________________________________________________________ Â£m Note 2006 Proforma 2005 ________________________________________________________________________________ Total equity Called up share capital 13 357 353 'B' share reserves - 2 'C' share reserves - 8 ESOP reserves (22) (26) Revaluation reserve 3 3 Hedging reserve (2) - Translation reserve (2) - Other reserve (166) (234) Retained earnings - (1) ________________________________________________________________________________ 168 105 ________________________________________________________________________________ Group Cash Flow Statement for the year ended 31 August 2006 ________________________________________________________________________________ Â£m Note 2006 2005 ________________________________________________________________________________ Net cash inflows / (outflows) from operating 12 82 (23) activities ________________________________________________________________________________ Investing activities Interest received 2 4 Proceeds on disposal of property, plant and 9 2 equipment Proceeds on disposal of subsidiary - 222 Proceeds on settlement of loan notes 11 - Non-operating disposal costs (3) (10) Purchase of property, plant and equipment (24) (29) Purchase of intangible assets (5) (1) ________________________________________________________________________________ Net cash (outflows) / inflows from investing (10) 188 ________________________________________________________________________________ Financing activities Interest paid (7) (6) Dividend paid (15) (11) 'C' share dividend paid on capital - (143) reorganisation Purchase of shares for employee share schemes - (12) Money returned to ESOP Trust after share capital reorganisation - 5 Issue of shares to satisfy employee share 4 2 schemes Repurchase of 'C' shares equity portion (3) (62) Repayments of borrowings (76) - Repayments of obligations under finance leases (4) (3) New bank loans raised (net of financing costs) - 61 Derivative cash movements (1) - Movement in funding balances with the News 57 (8) business ________________________________________________________________________________ Net cash used in financing activities (45) (177) ________________________________________________________________________________ Net increase / (decrease) in cash and cash equivalents - continuing operations 19 (2) Net increase / (decrease) in cash and cash equivalents - discontinued operations 8 (10) ________________________________________________________________________________ Net increase / (decrease) in cash and cash equivalents in year 27 (12) ________________________________________________________________________________ Opening net cash and cash equivalents 39 51 ________________________________________________________________________________ Closing net cash and cash equivalents 66 39 ________________________________________________________________________________ Reconciliation of net cash flow to movement in net (debt) / funds ________________________________________________________________________________ Net (debt) / funds at beginning of the year (58) 26 IAS 39 - 'B' shares and 'C' shares classified as financial liabilities (7) - Increase / (decrease) in cash and cash 27 (12) equivalents Decrease / (increase) in debt 76 (63) Net movement in finance leases 4 (9) ________________________________________________________________________________ Net funds / (debt) at end of the year 10 42 (58) ________________________________________________________________________________ Group Statement of Recognised Income and Expense for the year ended 31 August 2006 Â£m 2006 2005 ________________________________________________________________________________ Exchange differences arising on translation of foreign operations (2) - Loss on cash flow hedges (2) - Actuarial losses on defined pension schemes (Note 6) (24) (27) UK deferred tax attributable to pension scheme 5 (10) liabilities UK current tax attributable to the additional pension scheme contributions 3 13 ________________________________________________________________________________ Net expense recognised directly in equity (20) (24) Profit for the year 32 22 ________________________________________________________________________________ Total recognised income and expense for the year 12 (2) ________________________________________________________________________________ Total recognised income and expense for the year is fully attributable to the equity holders of the parent company. Reconciliation of movements in equity _______________________________________________________________________________________________________________ 'B' and 'C' Hedging and Share share Translation Revaluation ESOP Other Retained Â£m Capital reserves Reserves Reserve Reserve Reserve Earnings Total _______________________________________________________________________________________________________________ _______________________________________________________________________________________________________________ Balance at 1 September 2004 - 2 - - - - - 2 Capital reorganisation and pro forma restatement 352 70 - 3 (20) (238) 151 318 _______________________________________________________________________________________________________________ Restated at 1 September 2004 352 72 - 3 (20) (238) 151 320 Total recognised income and expense for the year - - - - - - (2) (2) Recognition of share based payments - - - - - - 4 4 Dividends paid - - - - - - (154) (154) Repurchase of shares - - - - (11) - - (11) Employee share schemes 1 - - - - 1 - 2 Cancellation of shares - (62) - - - - - (62) Money returned to ESOP Trust after share capital reorganisation - - - - 5 - - 5 Movement in funding balances with the News business - - - - - 3 - 3 _______________________________________________________________________________________________________________ Balance at 1 September 2005 353 10 - 3 (26) (234) (1) 105 Cumulative adjustment for implementation of IAS 39 - (7) - - - - - (7) _______________________________________________________________________________________________________________ Balance restated at 1 September 2005 for adoption of IAS 39 353 3 - 3 (26) (234) (1) 98 Total recognised income and expense for the period - - (4) - - - 16 12 Recognition of share-based payments - - - - - - 4 4 Dividends paid - - - - - - (15) (15) Employee share schemes 4 - - - 4 2 (4) 6 Repurchase of shares - (3) - - - - - (3) Movement in funding balances with the News business - - - - - 66 - 66 _______________________________________________________________________________________________________________ Balance at 31 August 2006 357 - (4) 3 (22) (166) - 168 _______________________________________________________________________________________________________________ Notes 1. Basis of preparation WH Smith PLC (formerly New WH Smith PLC; formerly Pollquote Limited) was incorporated on 10 August 2004. On 23 June 2006, the company re-registered as a public limited company. On 31 August 2006, the WH Smith Retail Business was demerged from Smiths News PLC, effected by a dividend in specie. The shareholders of Smiths News PLC received a dividend in specie in respect of the entire shareholding of New WH Smith PLC. The payment of the dividend was effected as follows: - Existing shares in WH Smith Retail Holdings Limited (formerly WH Smith PLC), which owned the Retail Business were transferred by Smiths News PLC to New WH Smith PLC (now renamed WH Smith PLC) so that New WH Smith PLC became the holding company of the WH Smith Retail Business; and - In exchange for such transfer, New WH Smith PLC allotted and issued to Smiths News PLC Shareholders one New WH Smith PLC Share, credited as fully paid, for each Smiths News PLC Share held. On 30 August 2006 New WH Smith PLC changed its name to WH Smith PLC. The shares of WH Smith PLC were admitted to listing on The London Stock Exchange on 1 September 2006. In accordance with the principles of reverse acquisition accounting in IFRS 3 - Business Combinations, the accounts of WH Smith PLC have been prepared as if it had been in existence in its current group form since 1 September 2004. The following summarises the accounting principles that have been applied in preparing the accounts on a reverse acquisition accounting basis: - The income statement for WH Smith PLC has been prepared as if the continuing operations of the WH Smith PLC Group were in existence for the whole of the period from 1 September 2004 through to 31 August 2006. - Share capital and reserves for the prior year consolidated balance sheet have been restated on a pro forma basis including the 2005 capital reorganisation. Differences between these amounts and the previously reported share capital and reserves have been reflected in the other reserve, as set out in the Reconciliation of movements in equity. The proforma restated share capital for the prior year represents the nominal value of shares in issue as if WH Smith PLC had been in existence in its group form since 1 September 2004. - As well as costs borne directly by the Retail Business, the results for the year ended 31 August 2006 and 31 August 2005 include Â£0.8 million of corporate head office costs of the former ultimate parent company which have historically not been recharged by WH Smith PLC to its business divisions. Services provided by WH Smith PLC included, but were not limited to, treasury, cash management, human resources, accounting, legal and professional services and IT services. These charges may not be representative of the costs that would have been incurred had the business been a standalone entity. International Financial Reporting Standards The consolidated Group financial statements have been prepared in accordance with International Financial Reporting Standards ('IFRS') as adopted by the European Union and with those parts of the Companies Act 1985 applicable to companies reporting under IFRS. These are those standards, subsequent amendments and related interpretations issued and adopted by the International Accounting Standards Board ('IASB') that have been endorsed by the European Union at the year end. The Group previously reported under UK Generally Accepted Accounting Principles ('UK GAAP'). The consolidated Group financial statements have also been prepared in accordance with IFRS adopted for use in the European Union and therefore comply with Article 4 of the EU IAS Regulation. 1. Basis of Preparation (continued) International Financial Reporting Standards (continued) At the date of authorisation of these consolidated Group financial statements, the following Standards and Interpretations which have not been applied in these financial statements were in issue but not yet effective: IFRIC 4 Determining whether an Arrangement Contains a Lease IFRIC 8 Scope of IFRS 2 IFRIC 9 Reassessment of Embedded Derivatives Amendment to IAS 39 Cash Flow Hedge Accounting of Forecast Intragroup Transactions The directors anticipate that the adoption of these Standards and Interpretations in future years will have no material impact on the Group financial statements except for the additional disclosures on capital and financial instruments when the relevant standards come into effect for the financial year commencing on or after 1 September 2006. Adoption of IAS 32 and IAS 39 The Group implemented IAS 32 'Financial Instruments: Disclosure and Presentation' and IAS 39 'Financial Instruments: Recognition and Measurement' in the year commencing 1 September 2005. The effect of the adoption of IAS 39 is to reduce net assets by Â£7 million resulting from the reclassification of non-equity share capital to financial liabilities. The Group has designated the majority of its foreign exchange derivatives as cash flow hedges as at 1 September 2005 and there was no effect on the balance sheet in respect of this. Accounting convention The financial statements are drawn up on the historical cost basis of accounting. The financial information is rounded to the nearest million, except where otherwise indicated. Basis of consolidation The consolidated Group financial statements incorporate the financial statements of WH Smith PLC and all its subsidiaries up to the year end date. Subsidiary undertakings are all entities over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights so to obtain benefits from its activities. Goodwill arising on acquisition is recognised as an asset and initially measured at cost, being the excess of the cost of the business combination over the Group's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised. If, after reassessment, the Group's interest in the net fair value of the acquiree's identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, after taking into account recognised goodwill, the excess is immediately recognised in the income statement. The separable net assets, both tangible and intangible of the newly acquired subsidiary undertakings are incorporated into the financial statements on the basis of the fair value as at the effective date of control, if appropriate. Results of subsidiary undertakings disposed of during the financial year are included in the financial statements up to the effective date of disposal. Where a business component representing a separate major line of business is disposed of, or classified as held for sale, it is classified as a discontinued operation. The post-tax profit or loss of the discontinued operations is shown as a single amount on the face of the income statement, separate from the other results of the Group. All intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. 2. Segmental analysis of results For management purposes, the Group is currently organised into two operating divisions - High Street and Travel. These divisions are the basis on which the Group currently reports its primary business segment information. Prior to their disposal, the Publishing business, USA Travel Retail and ASPAC Retail were separate business segments. The information for these businesses, which are presented as discontinued operations, can be found in Note 5. (i) Segmental analysis by business segments a) Group revenue ________________________________________________________________________________ Â£m 2006 2005 ________________________________________________________________________________ Continuing operations: High Street 1,021 1,112 Travel 319 311 ________________________________________________________________________________ Group revenue 1,340 1,423 ________________________________________________________________________________ b) Group results ________________________________________________________________________________ Â£m 2006 2005 ________________________________________________________________________________ Continuing operations: High Street 42 37 Travel 31 25 ________________________________________________________________________________ Trading profit 73 62 Unallocated costs (13) (15) ________________________________________________________________________________ Group operating profit before exceptional 60 47 items Exceptional items (note 4) (7) - ________________________________________________________________________________ Group operating profit 53 47 Investment income 2 3 Finance costs (11) (11) Income tax expense (12) (9) Loss for the year from discontinued - (8) operations ________________________________________________________________________________ Profit for the year 32 22 ________________________________________________________________________________ 2. Segmental analysis of results (continued) (i) Segmental analysis by business segments (continued) (c) Balance Sheet ________________________________________________________________________________________________________________________ 2006 2005 ___________________________________________________________________ __________________________________________________ High Continuing Discontinued High Continuing Discontinued Â£m Street Travel operations operations Group Street Travel operations operations Group ___________________________________________________________________ __________________________________________________ Assets Segment assets 442 74 516 4 520 458 53 511 3 514 Unallocated assets - - 6 - 6 - - 28 - 28 ___________________________________________________________________ __________________________________________________ Consolidated total assets 442 74 522 4 526 458 53 539 3 542 ___________________________________________________________________ __________________________________________________ Liabilities Segment liabilities (213) (38) (251) (4) (255) (224) (31) (255) (6) (261) Unallocated liabilities - - (103) - (103) - - (176) - (176) ___________________________________________________________________ __________________________________________________ Consolidated total liabilities (213) (38) (354) (4) (358) (224) (31) (431) (6) (437) ___________________________________________________________________ __________________________________________________ Net Assets 168 - 168 108 (3) 105 ________________________________________________________________________________________________________________________ (d) Other Segmental Items ___________________________________________________________________ __________________________________________________ High Continuing Discontinued High Continuing Discontinued Â£m Street Travel operations operations Group Street Travel operations operations Group ___________________________________________________________________ __________________________________________________ Capital additions 24 5 29 - 29 26 4 30 - 30 Depreciation and amortisation (29) (5) (34) - (34) (36) (5) (41) - (41) of non-current assets Impairment losses (3) - (3) - (3) - - - - - ________________________________________________________________________________________________________________________ Segment assets include intangible assets, property, plant and equipment, inventories, receivables and operating cash. Segment liabilities comprise of operating liabilities. Information on discontinued operations is shown in Note 5. 2. Segmental analysis of results (continued) (ii) Segmental analysis by geographical area The total Group revenue and operating profits for these periods originate from the UK/Europe region. The Directors consider this to be one segment. 3. Group operating profit ________________________________________________________________________________ Â£m 2006 2005 ________________________________________________________________________________ Turnover 1,340 1,423 Cost of sales (761) (847) ________________________________________________________________________________ Gross profit 579 576 Distribution costs (434) (437) Administrative expenses (97) (92) ________________________________________________________________________________ Pre-exceptional operating items (90) (92) Exceptional operating items (1) (7) - ________________________________________________________________________________ Other income (2) 5 - ________________________________________________________________________________ Group operating profit 53 47 ________________________________________________________________________________ (1) The exceptional operating items are detailed in Note 4. (2) Other income is attributable to profit on sale of freehold property, plant and equipment. During the period there was a Â£3 million impairment charge for property, plant and equipment included in Distribution costs (2005:Â£nil). 3. Group operating profit (continued) ________________________________________________________________________________ Â£m 2006 2005 ________________________________________________________________________________ Cost of inventories recognised as an expense 786 854 Writedown of inventories in the period 12 17 Depreciation and amounts written off property, 33 37 plant & equipment Amortisation of intangible assets 4 4 Net operating lease charges - land and buildings 147 140 - equipment and vehicles 1 2 Other occupancy costs 50 45 Staff costs 192 199 Auditors' remuneration (see below) 2 1 Fees payable to Deloitte & Touche LLP, the Group's auditors, included in the income statement related to: Audit fees 0.2 0.2 Non-audit fees 1.9 0.2 ________________________________________________________________________________ 2.1 0.4 ________________________________________________________________________________ Fees payable to Deloitte & Touche LLP, the Group's auditors, included in the income statement relating to audit fees amount to Â£0.2m (2005: Â£0.2m), and non-audit fees of Â£1.9m (2005: Â£0.2m) which comprise further assurance services in respect of the demerger of the business of Â£1.9m (2005: Â£nil), tax compliance services Â£nil (2005: Â£0.1m), and IFRS preparation work Â£nil (2005: Â£0.lm). 4. Continuing operations exceptional items Exceptional items are material items of income or expense that are disclosed separately due to their nature or amount. They are disclosed and described separately in the financial statements where it is necessary to do so to provide further understanding of the financial performance of the group. ________________________________________________________________________________ Â£m 2006 2005 ________________________________________________________________________________ Settlement of Post Retirement Medical Benefit 5 - Scheme Costs of demerger from Smiths News PLC (12) - ________________________________________________________________________________ (7) - ________________________________________________________________________________ In September 2005, members of the post retirement medical benefits scheme were offered the option to be bought out of the scheme, which was accepted by the majority of members. A gain of Â£5 million (before tax) arose from the settlement of this scheme, which has been recognised in the Income Statement for the period. Further details are included in Note 6. The Group has a Â£12 million exceptional charge in relation to costs associated with the demerger from Smiths News PLC. 5. Discontinued operations Results from discontinued operations The results from discontinued operations were as follows: ________________________________________________________________________________ Â£m 2006 2005 ________________________________________________________________________________ Revenue Publishing business Total revenue - 14 Internal revenue - (3) ________________________________________________________________________________ Total revenue - 11 ________________________________________________________________________________ ________________________________________________________________________________ USA Travel Retail - - ________________________________________________________________________________ ________________________________________________________________________________ Total revenue - discontinued operations - 11 ________________________________________________________________________________ ____________________________________________________________________________________ 2006 2005 ____________________________________________________________________________________ USA USA Publishing Travel Publishing Travel Â£m business Retail Total business Retail Total ____________________________________________________________________________________ Profit before tax - - - - - - and before exceptional items Income Tax - - - - - - Expense ____________________________________________________________________________________ Profit after tax - - - - - - and before exceptional items and loss on sale ____________________________________________________________________________________ Exceptional - - - - - - trading items Impairment on sale of - - - - (8) (8) discontinued operations Income Tax - - - - - - Expense ____________________________________________________________________________________ Exceptional items after tax - - - - (8) (8) ____________________________________________________________________________________ ____________________________________________________________________________________ Loss for the period from - - - - (8) (8) discontinued operations ____________________________________________________________________________________ The cash flows of discontinued operations comprise: ________________________________________________________________________________ Â£m 2006 2005 ________________________________________________________________________________ From operating activities - - From investing activities 8 (10) From financing activities - - ________________________________________________________________________________ Net increase / (decrease) in cash and cash 8 (10) equivalents ________________________________________________________________________________ 5. Discontinued operations (continued) Publishing business disposal On 25 September 2004, the Group completed the disposal of its Publishing business, Hodder Headline Limited. A financial summary of the disposal is shown below: ________________________________________________________________________________ Â£m ________________________________________________________________________________ Fixed assets 156 Inventories 17 Debtors 80 Creditors (30) Net pension liabilities (14) ________________________________________________________________________________ Net assets disposed 209 ________________________________________________________________________________ Cash consideration 210 Cash received in respect of working capital adjustments 5 Net assets disposed (209) Transaction costs and other charges (6) ________________________________________________________________________________ Net result on sale of the Publishing business recognised in the - financial year ________________________________________________________________________________ The Group incurred a Â£5 million cash outflow in respect of transaction costs and other charges relating to the Publishing business disposal. USA Travel Retail Â£8 million was charged to the Income Statement in the prior year relating to the disposal of discontinued businesses. Of this amount, Â£7 million related to an impairment review of the loan notes received as deferred consideration on the previous disposal of the Groups USA business, and the balance related to closure and exit provisions. Aspac Retail During the year ended 31 August 2005, Â£7 million was received for the Aspac Retail disposal, which related to deferred consideration and working capital adjustments. 6. Retirement benefit obligation The WH Smith Group has operated a number of defined benefit and defined contribution pension plans. The main pension arrangements for employees are operated through a defined benefit scheme, WHSmith Pension Trust, and a defined contribution scheme, WHSmith Retirement Savings Plan. The most significant is the defined benefit WHSmith Pension Trust for the Group's UK employees which is described in note 6 a) (i). 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 plans' arrangements, including the ability to determine the levels of contribution. Segregation of assets and liabilities of each pension scheme into two sections On the date of the Demerger, the assets and liabilities of the defined benefit scheme have been split between the WH Smith Retail business (owned by WH Smith PLC) and the News business (owned by Smiths News PLC) by way of a 'sectionalisation' of the defined benefit scheme into two different sections (i.e. the WH Smith Retail business section and the News business section). The two sections will remain within the defined benefit scheme. Similarly, the assets and liabilities of the defined contribution scheme will be separated (or 'sectionalised') into two different sections, a WH Smith Retail business section and a News business section, with each section only containing the accounts of members who are or were employed by the relevant business. The two sections will remain within the WH Smith Retirement Savings Plan. Upon sectionalisation of the defined benefit scheme, the assets and liabilities of the defined benefit scheme have been allocated to the WH Smith Retail business section and the News business section in proportions that reflect the number of active, deferred, pensioner and orphan members belonging to the respective businesses. Orphan members are members (or spouses of members) whose employer had left the group prior to the split but were classified as either News or Retail for the purpose of the sectionalisation. These proportions are currently estimated to be 65 per cent, for the WH Smith Retail business and 35 per cent, for the News business. The participating employers of the WH Smith Retail business will contribute to the WH Smith Retail business section, and the participating employers of the News business will contribute to the News business section. Assets apportioned to one section of the Pension Trust will not be able to be used for the purposes of the other section. There will be no cross-subsidy or cross-guarantee between the sections of the Pension Trust. However, for administration and investment purposes the Pension Trust will operate generally on a unified basis, except that the principal employers will be replaced with a sponsor for each section. On 1 September 2006, a one-off contribution of Â£25 million was made to the Pension Trust by the Company. The amounts recognised in the balance sheet within non-current liabilities in relation to these plans are as follows: ________________________________________________________________________________ Â£m 2006 2005 ________________________________________________________________________________ Continuing operations Present value of the obligations (674) (651) Fair value of plan assets 608 598 ________________________________________________________________________________ Deficit (66) (53) ________________________________________________________________________________ Retirement medical benefit liability - (7) ________________________________________________________________________________ Retirement benefit obligation recognised in the (66) (60) balance sheet ________________________________________________________________________________ Deferred taxation 20 18 ________________________________________________________________________________ Net retirement obligation (46) (42) ________________________________________________________________________________ 6. Retirement benefit obligation (continued) a) Defined benefit pension scheme (i) The WHSmith Pension Trust 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, and as with each such triennial valuation, the valuation currently remains subject to the formal approval of the Pension Trust Trustee. The scheme was closed in September 1995 and under the projected unit method the current service cost would be projected to increase as members approach retirement and the age profile of members increases. On an ongoing basis the gross actuarial defined benefit pension deficit for WH Smith PLC was approximately Â£96 million (approximately Â£67 million net of related deferred taxes) for the Pension Trust. The ongoing deficit is greater than the IAS 19 deficit primarily due to the different assumptions and calculation methodologies. In September 2005, the Pension Trust Trustee adopted a new investment 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 in the investment fund were restructured in order to adopt this policy. This involved the assets being 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 ('a Liability Driven Investment 'LDI' policy'). The key features of this new investment policy were that: - 94% of the Pension Trust's assets was invested in an LDI policy with a leading international institutional fund manager; and - 6% of the Pension Trust's assets was used to purchase a portfolio of long-dated equity call options. These represented a notional exposure to underlying equities of some Â£350 million. The impact of this change in investment policy is to substantially reduce the volatility in the fund and the resultant risk of a significant increase in the overall deficit whilst enabling the fund to continue to benefit from any potential higher returns in the equity markets. The valuation of the defined benefit pension scheme used for the IAS 19 disclosures is 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 in the actuarial valuation were: ________________________________________________________________________________ % 2006 2005 ________________________________________________________________________________ Rate of increase in salaries 4.00% 3.70% Rate of increase in pension payments and 3.00% 2.70% deferred pensions Discount rate 5.10% 4.90% Inflation assumptions 3.00% 2.70% ________________________________________________________________________________ 6. Retirement benefit obligation (continued) (a) Defined benefit pension scheme (continued) (i) The WH Smith Pension Trust (continued) The amounts recognised in the income statement were as follows: ________________________________________________________________________________ Â£m 2006 2005 ________________________________________________________________________________ Current service cost (6) (6) Interest cost (32) (31) Expected return on scheme assets 29 30 ________________________________________________________________________________ (9) (7) ________________________________________________________________________________ The charge for the current service cost has been included in administrative costs. Movements in the present value of the defined benefit scheme obligations in the current year were as follows: ________________________________________________________________________________ Â£m 2006 2005 ________________________________________________________________________________ At 1 September (651) (559) Current service cost (6) (6) Interest cost (32) (31) Actuarial gains and losses (7) (75) Benefits paid 22 20 ________________________________________________________________________________ As at 31 August (674) (651) ________________________________________________________________________________ Movements in the fair value of defined benefit scheme assets in the year were as follows: ________________________________________________________________________________ Â£m 2006 2005 ________________________________________________________________________________ At 1 September 598 443 Expected return on scheme assets 29 30 Actuarial gains and losses (17) 48 Contributions from the sponsoring companies 20 97 Benefits paid (22) (20) ________________________________________________________________________________ As at 31 August 608 598 ________________________________________________________________________________ 6. Retirement benefit obligation (continued) (a) Defined benefit pension scheme (continued) (i) The WHSmith Pension Trust (continued) An analysis of the defined benefit scheme assets at the balance sheet date is detailed below. ________________________________________________________________________________ Â£m 2006 2005 ________________________________________________________________________________ Equities - 265 Bonds - 333 Cash 584 - Inflation swaps (14) - Equity call options 38 - ________________________________________________________________________________ 608 598 ________________________________________________________________________________ An analysis of the expected rate of return on the defined benefit scheme assets at the balance sheet date is detailed below. ________________________________________________________________________________ 2006 2005 ________________________________________________________________________________ Equities - 7.00% Bonds - 4.00% Cash (1) - 3.75% Inflation swaps (1) - - Equity call options (1) - - ________________________________________________________________________________ (1) The expected rate of return on these investments is calculated as a weighted average of the expected return on the LDI fund and the equity call options and at 31 August 2006 was 5.01 per cent. Prior to 22 September 2005, the overall expected rate of return on the Trust's assets was calculated as a weighted average return based on the distribution of the assets (between equities, bonds and cash, at the accounting date). On 22 September 2005, the investment strategy was altered to invest in a Liability Driven Investment (LDI) fund and a number of equity call options. 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 per cent to reflect the Trust's actual experience. 6. Retirement benefit obligation (continued) (a) Defined benefit pension scheme (continued) (i) The WH Smith Pension Trust (continued) The four year history of experience adjustments is as follows: ________________________________________________________________________________ 2006 2005 2004 2003 Â£m ________________________________________________________________________________ Present value of defined benefit (674) (651) (612) (585) obligations Fair value of scheme assets 608 598 473 441 ________________________________________________________________________________ Surplus / (deficit) in the scheme (66) (53) (139) (144) ________________________________________________________________________________ Experience adjustments on scheme liabilities Amount (Â£m) (7) (75) Percentage of scheme liabilities (%) 1 11 _____________________________________________________________ Experience adjustments on scheme assets Amounts (Â£m) (17) 48 Percentage of scheme assets (%) (3) 8 _____________________________________________________________ (ii) Post retirement medical benefits The WH Smith Group provides retirement medical benefits to certain pensioners. Total premiums paid by the Group during the period in respect of these benefits were Â£0.1 million (31 August 2005: Â£0.4 million). The present value of the future liabilities under this arrangement at each reporting date has been assessed by independent actuaries (Mellon Human Resources & Investor Solutions (Actuaries & Consultants Limited)) and this amount was included on the balance sheet within retirement benefit obligations. In September 2005, the members were offered the option to be bought out of this scheme, which was accepted by the majority of the members. The impact of the settlement was a Â£5 million reduction in the net deficit. A small number of members opted to remain in the scheme and the present value of the remaining future liabilities is valued at Â£0.1 million net of deferred taxation. b) Defined contribution pension scheme The pension cost charged to income for the Group's defined contribution scheme, WH Smith Retirement Savings Plan, amounted to Â£2 million for the year ended 31 August 2006 (31 August 2005: Â£2 million). c) Discontinued pension schemes Year ended 31 August 2005 Publishing Business On 25 September 2004, the Group completed the disposal of the Publishing business, including the disposal of that business' pension fund. The gross deficit at the date of disposal was Â£20 million. USA Travel Retail Business The Group made a settlement of Â£3 million in respect of the pension liabilities of this business. 7. Income tax expense ________________________________________________________________________________ Â£m 2006 2005 ________________________________________________________________________________ Tax on profit before exceptional items 4 14 Standard rate of UK corporation tax 30% Adjustment in respect of prior year UK (7) (3) corporation tax ________________________________________________________________________________ Total current tax charge before exceptional items (3) 11 ________________________________________________________________________________ Deferred tax - current year 13 (2) ________________________________________________________________________________ Tax on profit before exceptional items 10 9 Tax on exceptional items 2 - ________________________________________________________________________________ Tax on profit after exceptional items 12 9 ________________________________________________________________________________ Effective tax rate on continuing activities before exceptional items 20% 23% ________________________________________________________________________________ Reconciliation of the taxation charge ________________________________________________________________________________ Â£m 2006 2005 ________________________________________________________________________________ Tax on profit before exceptional items at standard rate of UK corporation tax 30% 15 12 Tax effect of items that are not deductible or not taxable in determining taxable profit 2 1 Depreciation for which no tax relief is available - 1 Utilisation of tax losses (13) - Adjustment in respect of prior years (7) (3) ________________________________________________________________________________ Current tax charge (3) 11 ________________________________________________________________________________ 8. Dividends Amounts recognised as distributions to shareholders in the period are as follows: ________________________________________________________________________________ Â£m 2006 2005 ________________________________________________________________________________ Dividends Interim - paid 5 4 Final - paid 10 7 ________________________________________________________________________________ 15 11 ________________________________________________________________________________ 'C' share dividends 'C' share dividend paid on capital reorganisation - 143 ________________________________________________________________________________ 15 154 ________________________________________________________________________________ The proposed dividend of 6.2p per share is not included as a liability in these financial statements and, subject to shareholder approval, will be paid on 6 February 2007 to shareholders on the register at the close of business on 5 January 2007. 8. Dividends (continued) In the prior year, the Group paid a 'C' share dividend of Â£142,533,945 to the holders of 167,686,994 'C' shares in accordance with the terms of a capital reorganisation, and upon payment of this dividend, these 'C' shares were converted to deferred shares, which have now been cancelled in the year ended 31 August 2006. The Group also paid a dividend of Â£282,688 during the year to 31 August 2006 (31 August 2005: Â£156,647) in respect of 'C' shares, and paid dividends on the 'B' shares of Â£81,555 during the year to 31 August 2006 (31 August 2005: Â£45,192). 9. Earnings /(loss) per share a) Earnings ______________________________________________________________________________________ 2006 2005 __________________________________________________ _________________________________ Â£m Continuing Discontinued Total Continuing Discontinued Total __________________________________________________ _________________________________ Headline earnings attributable to shareholders 43 - 43 31 - 31 Pension interest net of related taxation (2) - (2) (1) - (1) Exceptional items net of related taxation (9) - (9) - (8) (8) __________________________________________________ _________________________________ Profit / (loss) attributable to shareholders 32 - 32 30 (8) 22 ______________________________________________________________________________________ b) Basic earnings / (loss) per share ______________________________________________________________________________________ 2006 2005 __________________________________________________ _________________________________ Pence Continuing Discontinued Total Continuing Discontinued Total __________________________________________________ _________________________________ Headline earnings per share (note a) 25.0 - 25.0 17.5 - 17.5 Pension interest net of related taxation (1.2) - (1.2) (0.6) - (0.6) Exceptional items net of related taxation (5.2) - (5.2) - (4.5) (4.5) __________________________________________________ _________________________________ Earnings / (loss) per share (note b) 18.6 - 18.6 16.9 (4.5) 12.4 ______________________________________________________________________________________ a) Headline earnings per share has been calculated using profit after tax but before exceptional items and IAS 19 net interest charges on the defined benefit pension scheme. b) Basic earnings per share has been calculated using profit after tax and exceptional items. 9. Earnings /(loss) per share (continued) c) Diluted earnings / (loss) per share ______________________________________________________________________________________ 2006 2005 __________________________________________________ _________________________________ Pence Continuing Discontinued Total Continuing Discontinued Total __________________________________________________ _________________________________ Headline earnings per share 24.4 - 24.4 17.3 - 17.3 Pension interest net of related taxation (1.1) - (1.1) (0.5) - (0.5) Exceptional items net of related taxation (5.1) - (5.1) - (4.5) (4.5) __________________________________________________ _________________________________ Earnings / (loss) per share 18.2 - 18.2 16.8 (4.5) 12.3 ______________________________________________________________________________________ Diluted earnings per share takes into account various share awards and share options including SAYE schemes, which are expected to vest, and for which a sum below fair value will be paid. d) Weighted average share capital ________________________________________________________________________________ Â£m 2006 2005 ________________________________________________________________________________ Weighted average shares in issue for earnings per 172 177 share Add weighted average number of ordinary shares 4 2 under option ________________________________________________________________________________ Weighted average ordinary shares for diluted 176 179 earnings per share ________________________________________________________________________________ 10. Analysis of net funds / (debt) Movements in net funds / (debt) can be analysed as follows: ________________________________________________________________________________ IAS32 and 39 Â£m 2005 reclassifications Cash flow Non-cash 2006 ________________________________________________________________________________ Cash and cash equivalents 39 - 27 - 66 Debt - Sterling floating rate (50) (7) 44 - (13) - Sterling fixed rate (32) - 32 - - Obligations under finance leases (15) - 4 - (11) ________________________________________________________________________________ Net (debt) / funds (58) (7) 107 - 42 ________________________________________________________________________________ ________________________________________________________________________________ Â£m 2004 Cash flow Non-cash 2005 ________________________________________________________________________________ Cash and cash equivalents 51 (12) - 39 Debt - Sterling floating rate (17) (33) - (50) - Sterling fixed rate (2) (30) - (32) Obligations under finance leases (6) (3) (6) (15) ________________________________________________________________________________ Net funds / (debt) 26 (78) (6) (58) ________________________________________________________________________________ 11. Contingent liabilities and Capital commitments Â£m 2006 2005 ________________________________________________________________________________ Bank and other loans guaranteed 6 11 ________________________________________________________________________________ No amount has been included above for taxation that would arise in the event of certain international subsidiaries distributing the balance of their reserves. Other potential liabilities that could crystallise are in respect of previous assignments of leases where the liability could revert to the Group if the lessee defaulted. Pursuant to the terms of the Demerger Agreement, any such contingent liability which becomes an actual liability will be apportioned between the Group and Smiths News PLC in the ratio 65:35 (provided that the actual liability of Smiths News PLC in any 12 month period does not exceed Â£5 million). The Group's 65% share of these leases has an estimated future gross rental commitment at 31 August 2006 of Â£102 million (31 August 2005: Â£118 million). Contracts placed for future capital expenditure approved by the directors but not provided for in this combined financial information amount to Â£5 million (31 August 2005: Â£4 million). 12. Net cash inflow / (outflow) from operating activities ________________________________________________________________________________ Â£m 2006 2005 ________________________________________________________________________________ Operating Profit from continuing operations 53 47 Operating exceptional items 7 - Adjustment for pension funding (12) (90) Depreciation of property, plant and equipment 30 37 Profit on sale of property, plant and equipment (5) - Impairment of property, plant and equipment 3 - Amortisation of intangible assets 4 4 Share based payments 6 4 Decrease in inventories 6 5 Decrease / (increase) in receivables 7 (12) Decrease in payables (4) (1) Income taxes paid (2) (2) Cash spend against provisions (3) (6) ________________________________________________________________________________ Net cash inflow / (outflow) from operating activities before exceptional items 90 (14) Cash outflow relating to exceptional operating items (8) (9) ________________________________________________________________________________ Net cash inflow / (outflow) from operating activities 82 (23) ________________________________________________________________________________ 13. Share capital a) Authorised ___________________________________________________________________________________ 2006 2005 ___________________________________________________________________________________ Number of Nominal Number of Nominal value shares value shares (millions) Â£m (millions) Â£m ___________________________________________________________________________________ Equity: Ordinary shares of - - - - Â£1.00 each Ordinary shares of Â£1.95 each 300 585 - - ___________________________________________________________________________________ Redeemable preference - - - - share of Â£50,000 each ___________________________________________________________________________________ Total 300 585 - - ___________________________________________________________________________________ b) Allotted and fully paid ___________________________________________________________________________________ 2006 2005 ___________________________________________________________________________________ Number of Nominal Number of Nominal value shares value shares (millions) Â£m (millions) Â£m ___________________________________________________________________________________ Equity: Ordinary shares of - - - - Â£1.00 each Ordinary shares of Â£1.95 each 183 357 - - ___________________________________________________________________________________ Redeemable preference - - - - share of Â£50,000 each ___________________________________________________________________________________ Total 183 357 - - ___________________________________________________________________________________ At 31 August 2005, the authorised share capital of the company was Â£1,000 divided into one thousand ordinary shares of Â£1.00 each with one share allotted and fully paid up. On 23 June 2006, the authorised share capital was increased by the creation of one redeemable preference share of Â£50,000 which was issued as fully paid up. In accordance with IAS 32 'Financial instruments: disclosure and presentation', this amount is presented within liabilities. On the same day the company issued a second ordinary share which was fully paid. On 6 July 2006, the authorised share capital was increased by Â£584,999,000 through the creation of a further 584,999,000 ordinary shares of Â£1.00 each. 76 ordinary shares were then issued fully-paid to the existing shareholders. The issued and unissued ordinary shares were then consolidated on a 39:1 basis into ordinary shares of Â£39 each which were then subdivided on a 1:20 basis into ordinary shares of Â£1.95 each. Following this consolidation and subdivision, the authorised share capital was Â£585,050,000 divided into 300,000,000 ordinary shares of Â£1.95 each and 1 redeemable preference share of Â£50,000, of which 40 ordinary shares and the redeemable preference share were issued and full paid- up. On 31 August 2006, the Company issued 182,919,970 ordinary shares to the shareholders of Smiths News PLC in exchange for acquiring WH Smith Retail Holdings Limited (formerly WH Smith PLC) and its subsidiary entities. On 7 September 2006, the company reduced its authorised share capital through the reduction of the nominal value of each ordinary share from Â£1.95 each to Â£0.20 each, creating Â£320 million of distributable reserves. 14. Related party transactions Transactions between businesses within this Group which are related parties have been eliminated on consolidation and are not disclosed in this note. Smiths News PLC During the periods, Group companies entered into the following transactions with Smiths News PLC. On 31 August 2006, the Group was demerged from Smiths News PLC. Purchases were made on an arm's length basis. 14. Related party transactions (continued) The amounts outstanding are unsecured and will be settled in cash. No guarantees have been given or received. No provisions have been made for doubtful debts in respect of the amounts owed by related parties. ________________________________________________________________________________ Â£m 2006 2005 ________________________________________________________________________________ Purchase of goods from Smiths News PLC 115 113 Trading amounts owed to Smiths News PLC at end of 6 10 year Amounts owed by Smiths News PLC in respect of prior years' corporation tax 15 15 ________________________________________________________________________________ Prior to demerger on 31 August 2006, trading between the Retail and News businesses was not classified as a related party transaction as they were both part of the WH Smith Group. Transitional services agreement on demerger On 7 July 2006, WH Smith PLC and Smiths News PLC entered into a transitional services agreement whereby WH Smith PLC has agreed, with effect from the demerger, to supply certain transitional services to Smiths News PLC. These services include, amongst other things, payroll, tax, and property administration. It is expected that the services will be provided for a transitional period of up to 12 months plus such time as is required to complete the 2005/2006 year end tax computation, following which Smiths News PLC will make its own arrangements for the provision of these services. The consideration payable by Smiths News PLC to WH Smith PLC under this agreement from the 12 month period is likely to be approximately Â£800,000 although this could increase depending on the length of time that the services are provided to Smiths News PLC. USA Travel Retail - Hotels The CEO of Travel Traders LLC is Sean Anderson who was Chairman of WH Smith Airports Inc., WH Smith PLC's US subsidiary until September 2003 and he holds a 30 per cent stake in Travel Traders LLC. The total consideration of Â£7 million for the USA Travel Retail hotel business was satisfied by way of an interest bearing loan note with a 5 per cent coupon, conditional on the trading cash flows of Travel Traders LLC. Additionally, WH Smith Group Holdings (USA) Inc. holds a 15 per cent equity interest in Travel Traders LLC is also providing a loan facility of up to Â£4 million to the new company, of which Â£3 million is drawn down as at 31 August 2006, (31 August 2005: Â£3 million). Remuneration of key management personnel The remuneration of the executive directors, who are the key management personnel of the Group, is set out below in aggregate for each of the categories specified in IAS 24 Related Party Disclosures. ________________________________________________________________________________ Â£000 2006 2005 ________________________________________________________________________________ Short-term employee benefits 2,407 3,048 Post-employment benefits 39 38 ________________________________________________________________________________ 2,446 3,086 ________________________________________________________________________________ Directors' transactions There are no other transactions with directors. 15. Post Balance Sheet Events WH Smith Pension Trust On 1 September 2006, the Group made a Â£25 million one -off contribution to the WH Smith Pension Trust. On 7 September 2006, the company reduced its authorised share capital through the reduction of the nominal value of each ordinary share from Â£1.95 each to Â£0.20 each, creating Â£320 million of distributable reserves. 16. Analysis of Retail Stores and Selling Space Number of stores 1 September Opened Closed 31 August 2005 2006 ________________________________________________________________________________________ High Street 542 7 (6) 543 Travel 127 2 - 129 ________________________________________________________________________________________ Total 669 9 (6) 672 ________________________________________________________________________________________ Retail selling square feet (000's) ________________________________________________________________________________________ 1 September Opened Closed Redeveloped 31 August 2005 2006 ________________________________________________________________________________________ High Street 3,035 21 (38) (19) 2,999 Travel 216 1 - 3 220 ________________________________________________________________________________________ Total 3,251 22 (38) (16) 3,219 ________________________________________________________________________________________ 17. Preparation of the Preliminary Announcement a) Basis of preparation The preliminary announcement for the 12 months to 31 August 2006 has been prepared on the basis of the accounting policies set out in the New WH Smith PLC prospectus issued on 7 July 2006. While the financial information included in this preliminary announcement has been computed in accordance with International Financial Reporting Standards (IFRS), this announcement does not itself contain sufficient information to comply with IFRS. The Company expects to publish full financial statements that comply with IFRSs in November 2006. b) Preliminary announcement The financial information for the 12 months to 31 August 2006 and 12 months to 31 August 2005 do not comprise statutory accounts for the purpose of Section 240 of the Companies Act 1985 and have been extracted from the Company's consolidated accounts for the year to 31 August 2006. The statutory accounts for WH Smith PLC (formerly New WH Smith PLC; formerly Pollquote Limited) for the period from incorporation on 10 August 2004 to 31 August 2005 have been filed with the Registrar of Companies and those for the 12 months to 31 August 2006 will be filed following the Company's annual general meeting. The accounts for the period ending 31 August 2005 did not require to be audited. The auditors' reports on the accounts for the 12 months to 31 August 2006 were unqualified and did not include a statement under Section 237 (2) or (3) of the Companies Act 1985. The Annual Report and Accounts will be posted to shareholders in November 2006. This information is provided by RNS The company news service from the London Stock Exchange

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