Value to shareholders

Smith WH PLC 27 July 2004 27 July 2004 WH Smith PLC Plans to deliver value to shareholders The Board of WH Smith PLC is today providing an update on its plans to deliver value to shareholders. These involve refocusing the Group on its core retailing and news distribution activities and implementing plans to improve the profitability of UK High Street Retail. Key Highlights: • Refocused and simplified Group - Exit from US retail business and ASPAC - Proposed sale or demerger of Hodder Headline under way - Strongly performing News Distribution and UK Travel Retail businesses - Opportunity to improve UK High Street Retail performance substantially • Update on plans currently being implemented for UK High Street Retail - Rebuilding position as Britain's most popular stationer, bookseller and newsagent - Increasing product authority in core categories of stationery, cards, books and magazines - Re-engineering ranges to focus on faster growing and more profitable categories - Substantially improving space utilisation by increasing product density - Refocusing business on needs of customers and stores through improved leadership, clarity of direction and a results driven approach - Achieving cost savings, margin enhancement and better stock control • Targeted cost savings of £30m p.a. by the financial year ending August 2007 • Return of value to shareholders from divestment of non-core activities - Value to be returned through sale of Hodder Headline and return of net cash proceeds, or demerger of Hodder Headline • Restructured balance sheet - Proposed new borrowing facilities of up to £120m - Agreement with Trustees to make a payment of £120m and revised annual contributions to the Pension Trust upon the divestment of Hodder Headline • Proposed Management Investment Plan - Executive Directors and senior managers able to invest a substantial amount of their own money - Matching share awards dependent on demanding performance targets - Remuneration Committee consultation with shareholders and representative bodies - Further aligns shareholder and management interests • Confirmation that current trading continues to be in line with its expectations Commenting on the announcement, Kate Swann, Group Chief Executive of WH Smith PLC, said: 'WHSmith is becoming a substantially simplified and refocused Group, concentrating on its core retail and news distribution businesses. 'We aim to return the UK High Street Retail business to its role as Britain's most popular stationer, bookseller and newsagent. The business has unique strengths through its extensive store portfolio, strong market shares and high customer footfall. We intend to reinvigorate the business by focusing on our customers and stores. Our plans encompass improved efficiency through cost savings and margin enhancement, while rebuilding the competitiveness and depth of our product ranges. 'The combination of the strong News Distribution and UK Travel Retail businesses, together with the planned recovery in the UK High Street Retail business, gives the Board full confidence in the prospects for the Group.' -Ends- An interview with Kate Swann, Group Chief Executive of WH Smith PLC, is now available in video, audio and text on www.whsmithplc.com and www.cantos.com Enquiries: WH Smith PLC Mark Boyle Investor Relations +44 (0) 20 7514 9630 Louise Evans Media Relations +44 (0) 20 7514 9624 Brunswick +44 (0) 20 7404 5959 Louise Charlton Tom Buchanan WH Smith PLC Plans to deliver value to shareholders Introduction The Board of WH Smith PLC is today providing an update on its plans to deliver value to shareholders. These involve refocusing the Group on its core retailing and news distribution activities and implementing plans to improve the profitability of UK High Street Retail. The Board is committed to generating shareholder value and is confident in the future of WHSmith. In addition to outlining its plans for UK High Street Retail, the Board: - has announced its intention to sell or demerge Hodder Headline and to return the net cash proceeds to shareholders if Hodder Headline is sold - is announcing its intention to put in place a Management Investment Plan to align management and shareholder interests further The sale or demerger of Hodder Headline, any return of cash to shareholders, and the Management Investment Plan will be subject to approval by shareholders at an extraordinary general meeting. The Board will inform shareholders of the date of the extraordinary meeting in a later announcement. Core businesses Following the divestment of Hodder Headline and the exit from the US retail business and ASPAC, the Group will be significantly simplified and focused on three core businesses: - UK High Street Retail - UK Travel Retail - News Distribution The Board believes that UK Travel Retail and News Distribution are strongly performing businesses with good market positions and excellent cash generation. The Board further believes that there is considerable potential to improve the profitability of UK High Street Retail and has confidence that it has the right management team to implement the recovery plan. Divestment of Hodder Headline On 22 June 2004, the Company announced its intention to sell or demerge Hodder Headline before the end of 2004. WHSmith's publishing business, Hodder Headline Limited, is one of the UK's largest and most diverse book publishers. The acquisitions of John Murray (Publishers) Limited and Robert Gibson & Sons Glasgow, Limited have further strengthened its position in both consumer and education markets. Hodder Headline has performed strongly under WHSmith ownership and this performance continues in the current financial year. However, the Board concluded in 2003 that there was little strategic fit and limited operational benefits between Hodder Headline and the other businesses within the Group. Accordingly, the Board had formed the view that this business would be divested at an appropriate time. Following the approach from Permira, a number of expressions of interest in the business were received. The Board believes that a separation of Hodder Headline from WHSmith will create value for shareholders and will accelerate opportunities for Hodder Headline. The Company is currently in discussions with a number of interested parties. As an alternative to a sale, a demerger would provide existing WHSmith shareholders with a direct interest in an excellent business and the opportunity to participate in any further value gains arising from its growth opportunities. Pension deficit, new borrowing facility and tax rate Following discussions initiated by the Board, the Board has agreed with the Trustees of the Pension Trust the terms of revised funding arrangements once Hodder Headline is divested. The Company will make a single contribution of £120m to the Pension Trust. Annual contributions will be reduced to approximately £21m in the first year of a new nine-year pay down period and will be subject to annual review thereafter. This compares to the £42m contribution in this financial year as part of the previous twelve-year pay down arrangements agreed in the autumn of 2003. The Company has agreed with a consortium of banks to put in place new borrowing facilities of up to £120m on divestment of Hodder Headline. With the planned recovery in the profitability of the UK High Street Retail business, the reduction in on-going contributions to the Pension Trust, the lower on-going dividend payments following the reduction in February 2004, tighter control of working capital and the elimination of recent one-off exceptional cash charges, the Board anticipates that the Group will be strongly cash generative in future years enabling a swift pay down of the new borrowings. In addition, the plans for the recovery of UK High Street Retail do not require material additional capital expenditure. Over the next year it is anticipated that the Company will make progress on settling prior year corporation tax liabilities with the Inland Revenue. As a result, WHSmith expects that its effective tax rate will be lower than the prevailing 30% tax rate in future years. Return of cash If Hodder Headline is sold the Board intends to return the net cash proceeds to shareholders. The return of cash would provide liquidity to shareholders in the short term and shareholders will have the potential for further value generation through continued ownership in full of the remaining businesses of the Group. Proposed Management Investment Plan The Company intends to put in place a Management Investment Plan. This plan will provide the Executive Directors, members of the senior executive group and other senior management (comprising approximately 40 people) with the opportunity to demonstrate their commitment to the future of the Company by investing their own money to buy Ordinary Shares. A matching award of options over Ordinary Shares will be granted which will be exercisable provided that certain demanding corporate performance conditions are met and that the investment is retained over a period of three years. The Remuneration Committee of WH Smith PLC will consult with shareholders and their representative bodies on the details of the proposed Management Investment Plan. Further details of the Plan will be provided in due course and will be proposed to shareholders in a general meeting for their approval. Strategy for News Distribution and UK Travel Retail News Distribution News Distribution is a market leading business with an estimated market share of approximately 35 per cent. in newspapers and magazines. It has provided good cashflow to the Group with an average cash conversion rate of over 100 per cent. over the last four years. It had a strong 2004 first half performance and profitability has been improving; trading profit margins increased from 2.5 per cent. to 3.0 per cent. between 2001 and 2003. The improved performance is being driven by cost control, increased efficiencies and improved service. Investments in systems of approximately £23m since 1998 are providing enhanced customer service and new revenue opportunities. Contract renewal discussions are progressing and the key contract with the major magazine distributor, Frontline, has recently been renewed. Following the Government's announcement that from May 2005 vertical agreements will no longer have the benefit of an exemption from EC competition law, News Distribution is consulting with its business partners and the OFT with a view to ensuring that its distribution contracts with publishers remain effective and in keeping with the relevant legislation. UK Travel Retail WHSmith has a strong position in the UK travel retail market through its portfolio of 129 stores, principally in airports and railway stations. The business has a tailored offering to meet the demands of travelling customers, which are different from those of the customers of UK High Street Retail, and it has a separate operating structure and management team. With an average trading profit margin of 6.8 per cent. between 2001 and 2003 and a strong first half performance in the current financial year, it also has a robust track record and is well positioned for future growth. The business strategy is focused on driving operational efficiency, further developing partnerships with landlords, improving space and range productivity, and improving customer service. Strategy for UK High Street Retail Significant value opportunity The Board believes that the UK High Street Retail business has significant strengths and that there is a substantial opportunity to rebuild its profitability. UK High Street Retail has suffered from a rising cost base, concurrent with sales and margin pressure. In particular, poor retail disciplines and execution, an inconsistent product offer and an inadequate strategic response to competition have, in the Board's view, been largely responsible for the poor performance. These issues, although challenging, are addressable. The management's plan for the revitalisation of UK High Street Retail encompasses a return to retail basics to improve operational performance and efficiency in all areas. The business will be refocused on the needs of customers and stores and cultural change will be driven through improved leadership, clarity of direction and a results-driven approach. Strategically, the business will be re-positioned to rebuild authority and specialist positions in core product categories such as stationery, cards, books and magazines. Ranges will be re-engineered to faster growing and more profitable segments and space utilisation will be substantially improved. UK High Street Retail aims to return to its position as Britain's most popular stationer, bookseller and newsagent. The plan for the UK High Street Retail business builds on its extensive store portfolio, high customer footfall, strong positions in its core markets, and focuses on cost efficiency, margin optimisation and contribution growth. Business strengths: stores and customers UK High Street Retail has some notable strengths. The store portfolio is a significant asset that is currently under-exploited. The business is present in 85% of the top 500 UK retailing locations with 95% of its stores in prime locations. The portfolio does not have a long tail of underperforming stores with 92 per cent. of all stores that have been open for more than twelve months producing a positive cash contribution to UK High Street Retail central overheads. With an average size of 5,500 sq. ft., and an average size of 12,000 sq. ft. for the top 100 stores, WHSmith's store sizes compare favourably with many high street competitors. These attractive locations have significant customer traffic and the Board believes that approximately 70 per cent. of adults have visited a WHSmith store in the last twelve months(1). The Board believes that the difficulty has not been in attracting customers, but in convincing them to make purchases, which it believes is a function of in-store execution and product and value propositions. (1) Source: Based on a survey carried out for the Company by Business Development Research Consultants for the period January to March 2004 Business strengths: products and markets UK High Street Retail's core markets - cards, stationery, books and news & magazines - are large and growing (see table below). Although recently the business has not taken advantage of its strong position to generate margins comparable with those of its competitors, WHSmith remains a major player in all of these categories. The Board believes that greater depth of product range is the key driver of success in many of these segments and UK High Street Retail has the right locations and the space available in its stores to enhance its product offer in key categories. Cost efficiency programme Cost control has been an issue in the business, with costs rising faster than sales in all key areas. Some costs, such as rent and unit labour rates, are expected to continue to rise, but a programme of cost reduction has been initiated in three major areas: - Head office restructuring (as previously announced by the Company on 2 January 2004) is expected to lead to the net reduction of 272 jobs and to reduce costs by £8.5m in the next financial year and £10m per annum by 31 August 2007. This process is underway and to date 170 people have already left the Company - Store staff flexibility and productivity initiatives are expected to save approximately £7m per annum by 31 August 2007 through improved productivity, tighter control and optimised weekly and yearly staff mix. These savings are expected largely to absorb our current expectations for store staff cost inflation over the next three years to 31 August 2007 - An efficiency initiative is expected to generate a total saving of £13m per annum by 31 August 2007 comprising: marketing, administration, and point of sale savings of £1.5m per annum (whilst increasing advertising effectiveness), logistics cost savings of £1.5m per annum, store cost savings of approximately £5m per annum and general and information systems administration savings of approximately £5m per annum There is an on-going drive to improve efficiency further. The target for these initiatives is to produce total store and central overhead cost savings of approximately £30m per annum by 31 August 2007, significantly mitigating inflation in the cost base. Margin optimisation programme UK High Street Retail is implementing a number of initiatives to improve the margins of the business. The Company will seek to leverage its significant buying scale in books and stationery. In addition, benefits are expected from further increased Far East sourcing in stationery at significantly enhanced margins. The promotional stance of the business will be changed with better pricing control, avoidance of unprofitable promotions, such as at Christmas, and improved markdown control. A clear pricing strategy is being developed and promotions on a category-specific basis will be operating from summer 2004. The business is already benefiting from improved stock management processes, improved product file accuracy, 'open-to-buy' procedures as well as aligned incentives and accountability. In addition, a number of initiatives have been introduced that focus on the key areas of 'shrink' (costs relating to theft and stock loss). New measures, new processes and better security are currently being introduced. For the year to 31 August 2003, the worst performing 25% of UK High Street stores were estimated to be responsible for 38% of all shrink across the entire store portfolio. UK High Street Retail's aim is to bring shrink costs of these worst performing stores down to at least the existing average for the entire store portfolio and through this process to achieve estimated cost savings of around £2m per annum. Contribution growth programme The business has in the past driven like-for-like sales growth but often through promotional activity and without consistent growth in contribution. UK High Street Retail aims to drive consistent contribution growth, through both a return to operational retail basics and clear strategic initiatives, designed to deliver a more competitive and compelling product offer. There are three operational initiatives delivering the right ranges to our customers, and three strategic initiatives driving range authority and concentrating more space in more profitable growing categories. The changes necessary to implement these initiatives are currently being made. Contribution growth - operational initiatives (i) On-shelf product availability: In-store availability is to be enhanced through supply chain improvements and improvements in store standards. A new target availability of 95 per cent. has been set for the top selling products (ii) Core products: The top 1,200 book titles are expected to be introduced into stores by August 2004 and the top 200 stationery products are to be in stores by the end of July 2004 (iii)Range: A range review programme is being used to drive product changes, such as the extended filing range currently being rolled out, and to reallocate space to growth sub-categories (e.g. computing accessories) Contribution growth - strategic initiatives There is capacity within the current store portfolio to increase display space and product density substantially in order to improve product range. Furthermore, in approximately 90 of the largest stores, this increase in display space will create more space than needed for the largest increased product range. Before Christmas, we aim to implement initiatives focusing on space expansion, refocusing of our entertainment offer and trials of extended ranges in our largest stores. These programmes are planned for the summer, September and autumn, respectively. In addition, further space initiatives are being planned for next year and beyond as increasing data on consumer response is received. (i) Summer space expansion initiative: This programme involves planned space expansion through increased product density. Eleven trial stores with increased display space are already operating and the successful aspects of these trials are being rolled out to all stores by the end of September 2004. The new space will be used to: - increase substantially the card product range, with the average store moving from approximately 1,400 to 3,500 cards - create permanent 'flexible' space in books and stationery to enable the full year-round range to remain available over Christmas and other seasonal ranges to be displayed during the rest of the year - increase the stationery range, particularly an extended filing range - place new 'front of store' bestseller bays in 385 stores to reinforce the books and entertainment offer (ii) Entertainment initiative: It is difficult for WHSmith to achieve authority across all entertainment categories. Therefore, space is to be shifted towards areas where a competitive position can be achieved. In the short term, there will be a re-focusing of space towards the faster growing DVD category. Before Christmas, 67 stores are expected to have a destination DVD offer of over 2,600 titles and a further 380 stores are expected to have a near doubling of their DVD range to an average of approximately 1,000 titles without any increase in floor space allocation. There will be a simultaneous focus away from lower growth entertainment products with CD singles removed and the number of CD albums and VHS titles reduced (although children's VHS titles will be maintained). (iii)Large stores initiative: In addition to the summer space expansion, there is also the opportunity to increase display space in our largest 90 stores by an estimated 15%. This will enable the building of an even more compelling product range in core categories. The choice in stationery and related services will be broadened (e.g. in frames, computing accessories, arts & crafts etc.) and the product range will be enhanced further in books. The new ranges are expected to be in six trial stores from September/October to assess customer response. The increase in space will also enable us to develop in-store concessions, which enhance the overall proposition. For example, an initial agreement has been reached with a large coffee shop operator for coffee shops in twenty of our largest stores. Business potential In the six months to 29 February 2004, the trading profit margin of UK High Street Retail was 6.3%, 4.7 percentage points lower than during the same period in 2003. It was also significantly lower than the operating profit margins of a number of high street competitors over the Christmas 2003/04 period (see table below). The majority of key competitors generate attractive margins and, in spite of a competitive environment and the perceived threat from supermarkets, the Board is convinced that UK High Street Retail can significantly improve its margins. Product Market size Market growth Competitor Competitor Competitor profit category 2002/03 2002/03 average 5 year margin for 6 month (estimated) (estimated) profit margin reporting period (1) covering Christmas 2003/04(2) ----------- ----------- ------------ ----------- -------- ----------- Cards £1.4bn +4% Clinton Cards 8.0% 13.9% ------- ----------- ------------ -------- ----------- ----------- Stationery £1.9bn +3-4% (3) Rymans 7.0% - ------- ----------- ------------ --------- --------- --------- Books £2.0bn +3-5% Waterstone's 5.6% 9.6% Ottakar's 4.1% 9.9% ------- ----------- ------------ --------- ----------- News and Magazines £1.6bn +1-3% (3) TM Retail 3.1%(4) - -------- ----------- ------------ --------- --------- --------- Notes: (1) Average operating profit margin over the last 5 years, derived from and calculated using public filings of the relevant competitor (2) Average operating profit margin over half year reporting period including Christmas 2003/04, derived from and calculated using public filings of the relevant competitor (3) WHSmith internal estimate of market growth (4) The most recent public filing for TM Retail is for the 2002 fiscal year Source: Market size and growth data sourced from: Cards - TNS; Stationery - GFK, Mintel, Ankar, Filofax, NPD Panel, Suppliers, WHSmith internal estimates; Books - TNS, SWPA, Bookscan; News & Magazines - WHSmith internal estimates Current trading The Board confirms that current trading continues to be in line with its expectations. Enquiries: WH Smith PLC Mark Boyle Investor Relations +44 (0) 20 7514 9630 Louise Evans Media Relations +44 (0) 20 7514 9624 Brunswick +44 (0) 20 7404 5959 Louise Charlton Tom Buchanan Definitions The following definitions apply throughout this document unless the context requires otherwise: 'ASPAC' the Group's former operations in Hong Kong, Australia, New Zealand and Singapore 'Board' the board of directors of WH Smith 'Executive the executive directors of WH Smith Directors' 'Frontline' Frontline Limited 'Group' WH Smith PLC and its subsidiary undertakings 'Hodder Headline' Hodder Headline Limited and its subsidiary undertakings 'Management the proposed incentive arrangements for management Investment Plan' 'News WH Smith Trading Limited and its subsidiary undertakings Distribution' 'Ordinary Share' ordinary shares of 55.55p each in the capital of the Company 'Pension Trust' the WHSmith Pension Trust 'Trustees' the trustees of the Pension Trust 'UK High Street the high street retailing operations of WH Smith Retail Retail' Limited and its subsidiary undertakings 'UK Travel the travel retailing operations of WH Smith Retail Limited Retail' and its subsidiary undertakings 'WHSmith' or the WH Smith PLC and its subsidiary undertakings 'Company' -------------------------- This information is provided by RNS The company news service from the London Stock Exchange

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