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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Connect Group Plc | LSE:CNCT | London | Ordinary Share | GB00B17WCR61 | ORD 5P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 25.60 | 25.70 | 25.80 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
From Apr 2019 to Apr 2024
TIDMCNCT
RNS Number : 4153G
Connect Group PLC
06 November 2018
6 November 2018
Connect Group PLC
('Connect Group' or 'the Group')
Audited Preliminary Results Announcement for the year ended 31 August 2018
A year of significant challenge and changes
Connect Group, a leading UK specialist distributor, today announces its audited preliminary results for the year ended 31 August 2018.
Adjusted continuing results FY18 FY17 % Change Revenue GBP1,534.3m GBP1,594.3m (3.8%) Profit before tax GBP28.4m GBP48.0m (40.8%) Earnings per share 9.3p 15.5p (40.0%) Statutory continuing results Revenue GBP1,534.3m GBP1,594.3m (3.8%) (Loss)/profit before tax (GBP35.5m) GBP34.2m (203.8%) (Loss)/earnings per share (15.5p) 11.0p (240.9%) Dividend per share 3.1p 9.8p (68.4%) Free cash flow GBP20.2m GBP28.7m (29.6%) Net debt GBP83.4m GBP82.1m (1.6%) ------------------------------ ------------ ------------ ---------
Headlines:
-- Adjusted continuing profit before tax GBP28.4m, down GBP19.6m
-- Performance driven by losses in Tuffnells and Pass My Parcel and weaker trading in Smiths News
-- Free cash flow of GBP20.2m, down GBP8.5m -- No final dividend - making a full year dividend of 3.1p, down 68.4% (FY 2017: 9.8p)
-- Smiths News - impacted by shortfalls to cost reduction targets and disappointing World Cup sales
-- Pass My Parcel closed in light of continued losses
-- Tuffnells materially impacted by operational integration, leading to service and efficiency shortfalls, and coinciding with more competitive trading conditions
-- Statutory continuing loss before tax of GBP35.5m, includes a goodwill impairment for Tuffnells of GBP46.1m
-- Appointment of Jos Opdeweegh as Chief Executive Officer from 1 September 2018 -- Turnaround actions underway, spearheaded by Tuffnells recovery plan
-- Full strategy for recovery and growth, including capital allocation, to be confirmed in January 2019
Gary Kennedy, Chairman, commented:
"A year of significant challenge exposed weaknesses in our strategy and its execution, with a consequent impact on results.
While it is disappointing not to succeed, we have taken decisive action to address underperformance and respond to the lessons learned. I am confident that under the new leadership of Jos Opdeweegh, and a return to more focused operations, we can reenergise the business, restoring stability and confidence."
Enquiries:
Connect Group PLC Jos Opdeweegh, Chief Executive Officer 01793 563641 Tony Grace, Chief Financial Officer 01793 563721 www.connectgroupplc.com Buchanan Richard Oldworth/ Jamie Hooper / Maddie Seacombe connect@buchanan.uk.com www.buchanan.uk.com 020 7466 5000
A meeting for analysts will be held at the office of Buchanan, 107 Cheapside, London, EC2V 6DN on 6 November 2018 commencing at 9.30am. Connect Group PLC's Preliminary Results 2018 are available at www.connectgroupplc.com
An audio webcast of the analyst meeting will be available from 12 noon today via the following link:
http://webcasting.buchanan.uk.com/broadcast/5bb4ae6ec6ec681d9e06bbf5
About Connect Group
Connect Group PLC is a UK based specialist distributor and a leading provider of distribution solutions in complex and fragmented markets. The Group's networks are focused on serving high drop density early morning deliveries, and the demands of mixed and irregular sized freight.
The Group's core businesses are each leading players in their markets:
Smiths News is the UK's largest newspaper and magazine wholesaling business with an approximate 55 per cent market share. It distributes newspapers and magazines on behalf of the major national and regional publishers, delivering to approximately 27,000 customers across England and Wales on a daily basis. The speed of turnaround and density of Smiths News' coverage is critical to one of the UK's fastest physical supply chains.
Dawson Media Direct (DMD) supplies newspapers, magazines and inflight entertainment technology, serving 115 airports in 47 countries globally. Delivering to strict time windows with security accreditation, DMD serves the specialist needs of airlines and travel points in the UK and worldwide with printed and digital media.
Tuffnells is a leading distributor of mixed and irregular freight, serving approximately 5,000 small and medium sized enterprises across the UK. Its network of 37 depots collects and delivers mixed parcel freight consignments, specialising in items of irregular dimension and weight ("IDW"), examples of which include bulky furnishings, building materials and automotive parts. With a mix of local and national clients, Tuffnells completes up to 70,000 daily deliveries, offering a range of timed services that are responsive to customer demand.
Notes to Editors
This document contains certain forward-looking statements with respect to Connect Group PLC's financial condition, its results of operations and businesses, strategy, plans, objectives and performance. Words such as 'anticipates', 'expects', 'intends', 'plans', 'believes', 'seeks', 'estimates', 'targets', 'may', 'will', 'continue', 'project' and similar expressions, as well as statements in the future tense, identify forward-looking statements. These forward-looking statements are not guarantees of Connect Group PLC's future performance and relate to events and depend on circumstances that may occur in the future and are therefore subject to risks, uncertainties and assumptions. There are a number of factors which could cause actual results and developments to differ materially from those expressed or implied by such forward looking statements, including, among others the enactment of legislation or regulation that may impose costs or restrict activities; the re-negotiation of contracts or licences; fluctuations in demand and pricing in the industry; fluctuations in exchange controls; changes in government policy and taxation; industrial disputes; war and terrorism. For a more detailed description of these risks, uncertainties and other factors, please see the section titled "Principal Risks" in the preliminary announcement for the full year ended 31 August 2018. These forward-looking statements speak only as at the date of this document. Unless otherwise required by applicable law, regulation or accounting standard, Connect Group PLC undertakes no responsibility to publicly update any of its forward-looking statements whether as a result of new information, future developments or otherwise. Nothing in this document should be construed as a profit forecast or profit estimate. This document may contain earnings enhancement statements which are not intended to be profit forecasts and so should not be interpreted to mean that earnings per share will necessarily be greater than those for the relevant preceding financial period. The financial information referenced in this document does not contain sufficient detail to allow a full understanding of the results of Connect Group PLC. For more detailed information, please see the preliminary announcement for the full-year ended 31 August 2018 which can be found on the Investor Relations section of the Connect Group PLC website - www.connectgroupplc.com. However, the contents of Connect Group PLC's website are not incorporated into and do not form part of this document.
The Group uses certain performance measures for internal reporting purposes and employee incentive arrangements. The terms 'net debt', 'free cash flow', 'adjusted operating profit', 'adjusted profit before tax', 'adjusted earnings per share' 'adjusted EBITDA' and 'Adjusted' are not defined terms under IFRS and may not be comparable with similar measures disclosed by other companies.
(1) The following are the key non-IFRS measures identified by the Group in the consolidated financial statements as Adjusted results:
Adjusted operating profit is defined as statutory operating profit from continuing operations, excluding the impact adjusting items (defined above). This metric is reconciled on the face of the income statement, with detail of each adjusted item disclosed within note 4.
Adjusted profit before tax is defined as statutory profit before tax, excluding the impact of adjusting items (defined above). This metric is reconciled on the face of the income statement, with detail of each adjusted item disclosed within note 4.
Adjusted earnings per share; is defined as adjusted PBT, less taxation attributable to adjusted PBT and including any adjustment for minority interest to result in adjusted profit after tax attributable to shareholders; divided by the basic weighted average number of shares in issue. This metric is reconciled in note 10.
Adjusted items; are items of income or expense that are considered significant, in nature or value, and are excluded in arriving at Adjusted operating profit. The purpose of excluding these items from adjusted measures is to provide additional performance metrics to users of the financial statements that exclude the impact of the items the directors consider to have a significant impact on reported results and do not relate to the underlying trading activity of the Group. The specific items vary between financial years, and for the current year include certain disposal related costs, legal and regulatory provisions, amortisation and impairment of intangibles, impairment of property, plant and equipment, integration costs, business restructuring costs and network re-organisation costs including those relating to strategy changes which are not normal operating costs of the underlying business. They are disclosed and described separately in note 4 of the financial statements to provide further understanding of the financial performance of the Group. A reconciliation of adjusted profit to statutory profit is presented on the income statement.
(2) Free cash flow; is defined as cash flow excluding the following: payment of dividends, dividends from associates, acquisitions and disposals, the repayment of bank loans, EBT share purchase, proceeds of share issues and cash flows relating to pension deficit repair. This measures shows the cash retained by the Group in the year and is considered by the Directors to provide additional information on the cash available for shareholders returns. A reconciliation of free cash flow to the net movement in cash and cash equivalents is shown in note 35.
(3) Adjusted EBITDA is calculated as Adjusted operating profit (as defined above) before depreciation and amortisation. This metric is reconciled on page 16.
(4) Net debt; is calculated as total debt less cash and cash equivalents. Total debt includes loans and borrowings, overdrafts and obligations under finance leases. A reconciliation of net debt is presented in the Group Cash Flow Statement.
(5) Continuing operations excludes the sale of Education and Care sold on 30 June 2017 and Books division which was classified as held for sale as at 31 August 2017 and sold on 14 February 2018. Discontinued profit for the year is the Books division for the period after tax.
(6) FY2018 refers to the full year ended 31 August 2018, FY2017 refers to the full year ended 31 August 2017.
(7) All movements are calculated to round thousands.
OPERATING REVIEW
INTRODUCTION
In what has been a significantly challenging year, weaker trading in Tuffnells and Smiths News (including losses in Pass My Parcel) was compounded by operational inconsistency and shortfalls against efficiency targets. In the light of the underperformance, we have halted our integration and business transformation plans, appointed energetic and experienced new leadership, and taken decisive action to stabilise operations and improve accountability in our core businesses.
In January 2018 the Group announced that as a result of weaker trading it expected full year adjusted profit before tax for its continuing operations to be in the range of GBP42m to GBP45m. Following further poor trading, in June 2018 the Group announced that this forecast would not be achieved and the Board had materially reduced its expectations for full year Adjusted profit before tax. In September 2018 the Group further confirmed to the market that following a continuation of the challenging trends it expected the full year trading performance to be below our revised expectations.
Group Adjusted profit before tax for continuing operations of GBP28.4m is down by 40.8% (FY2017: GBP48.0m) and Adjusted Earnings per Share is down 40.0% to 9.3p.
Following an impairment of GBP46.1m in the goodwill of Tuffnells, Statutory continuing loss before tax is GBP35.5m (FY2017: profit of GBP34.2m) and Statutory continuing earnings per share is a loss of 15.5p (FY2017: earnings of 11.0p). The Statutory continuing and discontinued loss after tax is GBP47.0m (FY2017: profit GBP36.6m), and Statutory continuing and discontinued earnings per share is a loss of 19.1p (FY2017: earnings 14.9p). The Statutory continuing and discontinued results are also impacted by the closure of Pass My Parcel and the sale of the Books business for an enterprise value of GBP18.7m.
Free cash flow of GBP20.2m from continuing operations (FY2017: GBP28.7m), demonstrates the Group's underlying cash generative business model even in a difficult year. In the light of challenges in the year and mindful of the benefits of strengthening the balance sheet as we position the business for recovery, the Group has resolved not to recommend a final dividend, making the full year dividend 3.1p, down 68.4%.
GROUP INTEGRATION AND ORGANISATION RESTRUCTURE
In July 2017, following recent disposals, the Group restructured its leadership and operations in pursuit of a more integrated business model. Good progress was made in centralising support services, but it is now clear that there are not the same efficiencies to be achieved in sales & marketing and at an operating level. Indeed, the move to integrate into a single structure weakened operational performance and impacted internal accountability and controls. A detailed review of the Group's networks also concluded that opportunities for combining physical operations of Tuffnells with Smiths News are limited, giving further impetus to a return to more focused management.
In response, we have taken decisive action to address the lessons learned. The closure of Pass My Parcel, the appointment of new leadership and the return to focused business units were critical first steps in restoring stability to core operations. In order to address a weakening of controls and accountability which followed our integration programme, we have made improvements to business information and the control and accountability framework. This has helped to identify the root causes of underperformance and clarified our immediate priorities for FY2019.
On 1 September 2018 Jos Opdeweegh was appointed as Chief Executive Officer and we have subsequently further refreshed the senior management team strengthening the relevant experience and capabilities to lead our recovery. The appointment of Michael Holt as a non-executive director also enhances the Board's experience and knowledge of the parcels and freight markets.
Operationally, the integration activity across our two networks has ceased. We have re-established dedicated management teams and leadership for Smiths News and Tuffnells, returning accountability for revenue and costs to the individual businesses, while supporting them with the newly integrated central services. Both businesses remain leaders in their fields with strong market positions, giving confidence that by refocusing on core service and efficient operations, stability can be restored.
Strengthening the efficiency, operational excellence and network quality of Smiths News and Tuffnells will underpin the Group's recovery plan, driven also by improved capability in business analytics and an energised culture of continual improvement. We have actions underway to address the immediate priorities and aim to share details of the fully developed turnaround strategy in January 2019, including confirmation of our capital allocation plans.
SMITHS NEWS
Adjusted operating profit in Smiths News was GBP35.9m (FY2017: GBP40.4m) with revenue of GBP1,335.1m (FY2017: GBP1,383.4m). This performance includes the sales and costs of Pass My Parcel, amounting to a loss of GBP5.4m (FY2017: loss GBP6.3m). Sales and profit this year were boosted by sticker sales associated with the FIFA World Cup, albeit these were down on expectations and the levels achieved in previous tournaments.
While newspaper and magazine sales declined at the higher end of our strategic forecast, they continue to demonstrate an overall resilience and relative predictability that gives confidence to future revenue planning. Newspaper sales of GBP841.8m were down 3.9%, with price mitigating volume declines; magazine categories, including one-shots and partworks, were down by 3.8%.
Planned headcount reduction from network integration did not materialise and costs in the first half of the year were further impacted by service issues at the Hemel Hempstead depot that required an additional GBP0.6m of necessary service related costs to rectify. In hindsight, it is clear that the Group's integration strategy impacted operational focus and controls; in addition, planned savings were not fully achieved, resulting in a GBP3.3m shortfall to the target of GBP5m efficiencies in the year.
Distribution contracts were successfully renewed with two of our largest publisher clients: News UK (July 2018), and Frontline (October 2018). In total, these contracts account for circa 30% of Smiths News' current sales and the new agreements secure our territories with these publishers for a further five years. Discussions with a number of the other publishers are ongoing, and we are confident of renewing the long term agreements with all our key partners.
On 1 October 2018 Jonathan Bunting, formerly Chief Operating Officer, was appointed as Chief Executive of Smiths News. Jonathan has deep experience of the business and news industry, having embedded knowledge and strong relationships with our key publishers and retailers.
In what was a challenging year the capabilities of Smiths News were severely tested; its resilience in the face of these difficulties demonstrates its underlying value to the Group. Looking ahead, with the combination of renewed contracts, the closure of Pass My Parcel and a return to dedicated operational management, Smiths News is well positioned to continue delivering a relatively predictable flow of revenue and cash that will help to underpin the Group's recovery plans.
CLOSURE OF PASS MY PARCEL
Pass My Parcel made an Adjusted operating loss of GBP5.4m in the period up to 23 May 2018. Following a detailed review of its prospects, the Board resolved to close the operation and its associated network of local retailers. Consequently, a further GBP6.7m attributable to closure and ongoing onerous contracts has been charged to Adjusted Items.
Discussions with key clients to exit ongoing contracts have progressed more quickly than first anticipated, impacting costs in FY2018 but reducing the quantum and potential for ongoing impact. Deliveries and collections representing over 95% of volumes ceased during August 2018 and distribution services for the remaining clients will end by January 2019. The contractual arrangements for the provision of IT services to one client are, however, expected to continue throughout FY2019 at minimal cost.
The parcel-shop network is expected to transfer to a leading UK parcel carrier, and a migration plan is underway, completing June 2019. A wider costs removal plan is on track, ensuring other direct and indirectly associated expenses are removed as swiftly as possible.
DAWSON MEDIA DIRECT (DMD)
DMD, our specialist distributor of printed and digital media to airlines and travel points delivered a good result with Adjusted Operating profit of GBP3.0m up by 30.4% (FY2017: GBP2.3m) from revenue of GBP26.5m, (FY2017: GBP28.8m). Profit growth was driven by a combination of positive net contract changes, and cost efficiencies from internal restructure in the prior year. The business was not impacted by the Group's wider integration activity.
TUFFNELLS
Tuffnells made an Adjusted operating loss of GBP5.0m compared to an Adjusted operating profit of GBP12.0m in FY2017. External revenue of GBP175.2m was down by 4.4% (FY2017: GBP183.2m) with sales and volumes performance in the second half of the year materially behind expectations.
The market for IDW freight was increasingly competitive, putting pressure on both price and consignment volumes as the year progressed. In this more challenging environment, Tuffnells' performance was materially impacted by the execution of our integration plans leading to service shortfalls that culminated at the seasonal peak. The Group also discovered and rectified an historical misapplication of national minimum wage legislation, impacting Adjusted operating costs by GBP0.8m this financial year.
In May 2018 the Group reported that the level of change across the business had disrupted service and had given rise to a number of challenges, including increased driver vacancies and a high turnover of depot managers, limiting our ability to respond with sufficient experience and agility. Operational performance had been further undermined by the delivery and collection of Pass My Parcel volumes that also put pressure on core service.
With hindsight, the integration of the Group's operations and sales & marketing functions led to suboptimal service and a weakening of controls at a time when our competitors were more aggressively targeting our customers. The actions we have taken to strengthen management, improving service and accountability were implemented too late in the year to make a meaningful impact on peak trading. Volumes during the third quarter were down by 12.3% with a disproportionate impact on full year operating profits as the seasonal uplift would usually generate an important premium for the business.
In the light of the lessons learned, we have reintroduced dedicated operational and commercial management to Tuffnells. This supports a structured approach to recovery that will continue to address historical under investment in order to introduce a standard operating model, attracting and on-boarding high quality revenue and achieving a more flexible cost to serve. A sustainable recovery will take time to achieve in full but we expect to see a gradual improvement to performance as the actions are implemented over the course of FY2019.
On 1 October 2018 Peter Birks was appointed to role of Chief Executive Officer of Tuffnells. Peter brings a wealth of experience in logistics, having held senior executive roles across a number of successful and innovative UK-based distribution businesses.
DISCONTINUED OPERATIONS
On 14 February 2018, the Group completed the sale of the Books business at a loss of GBP10.5m, full details are provided in note 12. In the prior year, on 30 June 2017, the Group completed the sale of the Education & Care business at a profit of GBP19.0m full details are included in the Annual Report.
EXIT OF PASS MY PARCEL
In the light of continued losses the carrying value of Pass My Parcel was written down to GBPnil in February 2018. A detailed review of the proposition followed, concluding in May 2018 that the business model was unviable with no reasonable prospect of recovery. Trading from 23 May 2018, together with impairment of assets, the expenses of closure and the exiting of remaining agreements, resulted in costs of GBP6.7m included within Adjusted items.
The Adjusted discontinued profit before tax amounted to GBP1.7m over the full year compared to GBP2.0m in FY2017.
CAPITAL MANAGEMENT
In May 2018 the Company announced it would conduct a review of its capital allocation strategy, determining the most appropriate distribution of its surplus free cash flow. The Board's decision not to recommend a final dividend for FY2018 is a reflection of performance in the year, but it was also mindful of the interim dividend paid in July 2018, and our near term priority of strengthening the balance sheet while meeting the investment requirements of business recovery. Looking ahead, the Board is conscious of the importance of a dividend to shareholders and anticipates a dividend in FY2019, based on the earnings and free cash flow achieved in the year. A more detailed capital management policy will accompany our planned strategy announcement in January 2019.
PRIORITIES FOR 2019
The Group's immediate focus is on returning its operations to stability, arresting the decline in profit and establishing a platform for turnaround. The decision to return to two operating units, supported by a suite of central services, is indicative of our plan to recover performance by strengthening the individual businesses. We remain committed to finding efficiencies across the Group and believe that greater standardisation of processes, particularly in Tuffnells, can also deliver material improvements.
Our priorities for FY2019 include:
1. Returning Tuffnells to profitability through a reduction of the cost base, a more granular pricing methodology and net new customer wins;
2. Renegotiating the remaining Smiths News contracts with key publishers;
3. Implementing a standardised operating model in Tuffnells to enhance safety, productivity and customer experience;
4. Streamlining head office functions to improve financial reporting, robust business analytics, increased productivity and continuous improvement;
5. Maximising the amount of cost savings at Smiths News to diminish the impact of the price adjusted volume decline in the business; and
6. Embedding a new, entrepreneurial culture with a passion for excellence and customer centricity.
These priorities will establish the foundations for a sustainable improvement in profitability. Our strategy for long-term growth, including its relationship to capital allocation, is currently being finalised. We aim to update stakeholders with a detailed strategic plan, including the implications for capital allocation, in January 2019.
FINANCIAL REVIEW
A challenging year for the Group has been reflected in weaker results for Smiths News and a disappointing performance from Tuffnells, however we have continued to deliver a positive free cash flow.
CONTINUING ADJUSTED RESULTS (1) (5)
GROUP
Continuing Adjusted results GBPm 2018 2017 Change ---------------------------------- -------- -------- -------- Revenue 1,534.3 1,594.3 (3.8%) Operating profit 33.9 54.7 (38.0%) Net finance costs (5.5) (6.7) (17.9%) ---------------------------------- -------- -------- -------- Profit before tax 28.4 48.0 (40.8%) Taxation (5.5) (9.9) 44.4% ---------------------------------- -------- -------- -------- Effective tax rate 19.4% 20.6% ---------------------------------- -------- -------- -------- Profit after tax 22.9 38.1 (39.9%) ---------------------------------- -------- -------- --------
Continuing adjusted operating profit was GBP33.9m, down GBP20.8m (38.0%) on the prior year, and driven by poor performances in both Tuffnells and Smiths News. Smiths News Adjusted operating profit was down by GBP4.5m to GBP35.9m, including GBP5.4m of losses in Pass My Parcel (FY2017: GBP6.3m loss) for the period up to 23 May 2018, when the Board made the decision to exit the click & collect market. Smiths News benefited from World Cup trading and network savings, but both fell short of expectations. DMD had a good trading year; although revenue was down, operating profit increased by GBP0.7m to GBP3.0m, following actions taken to reduce operational expenditure. Tuffnells reported an operating loss of GBP5.0m, down GBP17m on the prior year (FY2017: GBP12m profit). Tuffnells performance suffered from a more competitive trading environment and inconsistent service standards, resulting in lower parcel volumes, and a sub-optimal trunking and distribution network which drove a higher unit cost per consignment. Other factors included incremental wage and cost pressure, changes in depot management, and a one-off charge for a historical misapplication of National Minimum Wage legislation.
Net finance charges of GBP5.5m (FY2017: GBP6.7m) were down on prior year. Included within net finance charges are: interest costs on borrowing incurred in the period of GBP4.1m (FY2017: GBP4.4m), lower year-on-year as the drawn borrowing facility requirement was favourable from cash flow generation and cash proceeds from the disposal of the Books business; finance lease interest of GBP0.6m (FY2017: GBP1.0m); amortisation of bank arrangement fees GBP0.5m (FY2017: GBP1.0m); and pension interest costs GBP0.2m (FY2017: GBP0.3m).
Adjusted profit before tax was GBP28.4m, down 40.8% on last year.
Taxation of GBP5.5m resulted in an effective tax rate of 19.4%, effective tax rate was lower than last year due to the reduction in UK corporation tax rate.
STATUTORY CONTINUING & DISCONTINUED RESULTS
GROUP
Hot Features
Premium
Statutory continuing 2018 2018 2017 2017 Change
results GBPm
----------------------------- ------- -------- ----- -------- ---------
Revenue 1,534.3 1,594.3 (3.8%)
Operating (loss)/profit:
----------------------------- ------- -------- ----- -------- ---------
Smiths News 25.0 36.1 (30.7%)
DMD 2.7 1.3 107.7%
Tuffnells (57.7) 4.3 (1,441%)
----------------------------- ------- -------- ----- -------- ---------
Operating (loss)/profit (30.0) 41.7 (171.9%)
Net finance costs (5.5) (7.5) 26.7%
----------------------------- ------- -------- ----- -------- ---------
(Loss)/Profit before
tax (35.5) 34.2 (203.8%)
Taxation (2.6) (7.2) 63.9%
----------------------------- ------- -------- ----- -------- ---------
Effective tax rate (7.3%) 21.1%
----------------------------- ------- -------- ----- -------- ---------
Profit after tax (38.1) 27.0 (241.1%)
----------------------------- ------- -------- ----- -------- ---------
Statutory continuing loss before tax of GBP35.5m is lower to prior year by GBP69.7m (FY2017: GBP34.2m profit), primarily driven by: impairment charge relating to goodwill at Tuffnells GBP46.1m (FY2017: GBPnil); amortisation of acquired intangibles GBP7.1m (FY2017: GBP7.3m); Pass My Parcel exit costs of GBP6.7m (FY2017 GBPnil); and network and reorganisation costs of GBP3.1m (FY2017: GBP8.0m).
At the divisional level Smiths News statutory operating profit was GBP25.0m, down 30.7% on prior year after GBP10.9m of adjusted items which included Pass My Parcel exit costs of GBP6.7m, Tuffnells Statutory operating loss was GBP57.7m down GBP62.0m after impairment of goodwill of GBP46.1m and amortisation of acquired intangibles of GBP7.1m.
The effective statutory income tax rate for continuing operations was (7.3%) (FY2017: 21.1%), as the tax impact of Adjusted items was GBP2.9m (FY2017: GBP2.7m).
Statutory continuing & discontinued loss after tax of GBP47.0m is down by GBP83.6m (FY2017: GBP36.6m profit), and Statutory continuing & discontinued loss per share of 19.1p is down 34.0p (FY2017:14.9p profit). The Statutory continuing & discontinued results are impacted by the sale of the Books business in February 2018 for an enterprise value of GBP18.7m and a loss of GBP10.5m on disposal.
As a consequence of the Tuffnells impairment, the disposal of the Books business and the distribution of dividends in the year the net assets on the balance sheet have reduced GBP71.0m to a reported net liability at 31 August 2018 of GBP45.9m.
EARNINGS PER SHARE
Continuing Adjusted Continuing Statutory
(1)
------------------------------------------ ---------------------- -----------------------
2018 2017 2018 2017
------------------------------------------ ---------- ---------- ------------ ---------
Earnings/(loss) attributable to ordinary
shareholders (GBPm) 22.9 38.1 (38.1) 27.0
Basic weighted average number of shares
(millions) 246.0 245.4 246.0 245.4
Basic Earnings/(loss) per share 9.3p 15.5p (15.5p) 11.0p
Diluted weighted number of shares
(millions) 246.7 247.0 246.7 247.0
Diluted Earning/(loss) per share 9.3p 15.4p (15.5p) 10.9p
------------------------------------------ ---------- ---------- ------------ ---------
Earnings attributable to shareholders on a continuing adjusted basis of GBP22.9m resulted in an adjusted EPS of 9.3p, a decrease of 6.2p on last year, driven by the more challenging trading conditions in Tuffnells, Smiths News network efficiencies savings not being achieved, and continuing losses at Pass My Parcel prior to the decision to exit.
The fully diluted weighted number of shares was 246.7m (FY2017: 247.0m). Fully diluted shares includes a 0.7m diluted share adjustment for employee incentive schemes (FY2017: 1.6m).
Including Adjusted items, statutory continuing earnings per share is down 26.5p to 15.5p (loss per share) (FY2017: 11.0p).
Statutory continuing and discontinued loss attributable to shareholders of GBP47.0m (FY2017: GBP36.6m profit) resulted in a loss per share of 19.1p, down 34p on FY17, driven by the loss on disposal of the Books business.
DIVID
2018 2017
-------------------------------------- ----- -----
Dividend per share (paid & proposed) 3.1p 9.8p
Dividend per share (recognised) 9.8p 9.6p
-------------------------------------- ----- -----
After careful consideration of performance in the year and immediate priorities of the business, the Board has resolved not to recommend a final dividend, leaving the full year dividend as 3.1p paid as an interim dividend in July 2018, a reduction of 6.7p or 68.4% (FY2017: 9.8p).
SMITHS NEWS (including Pass My Parcel)
Adjusted figures (1) - GBPm 2018 2017 Change ----------------------------- -------- -------- -------- Revenue 1,335.1 1,383.4 (3.5%) Operating profit 35.9 40.4 (11.1%) ----------------------------- -------- -------- -------- Operating margin 2.7% 2.9% (20bps) ----------------------------- -------- -------- --------
Revenue in the news distribution business was GBP1,335.1m (FY2017: GBP1,383.4m) down 3.5%. Newspaper and magazine sales have continued to perform in line with long term trends, with a relatively stronger performance than expected from newspapers helping to offset weaker magazine sales. Newspaper sales of GBP841.8m were down 3.9%, with price increases helping to offset volume declines. Combined sales of all magazine categories were down by 3.8%, which includes the benefit of the FIFA World Cup album and sticker sales.
Adjusted operating profit was GBP35.9m (FY2017: GBP40.4m) down GBP4.5m (11.1%). Operating profit was favourably impacted by the World Cup sales, although the profit from these at GBP2.8m was materially lower than in previous tournaments. As a consequence of the integration strategy and the consequent impact on focus and accountability, targeted annual savings of GBP5m were not achieved, Inflationary pressure in contractor rates costs also adversely eroded operating margins. In addition, operating challenges at the new Hemel Hempstead depot resulted in incremental operating costs throughout the year of GBP1.0m. Pass My Parcel incurred a net loss of GBP5.4m in the period up to 23 May 2018 (FY2017: GBP6.3m), when the decision to exit the business was made by the Board. An additional Pass My Parcel exit charge of GBP6.7m is reported within Adjusted items.
TUFFNELLS
Adjusted figures (1) - GBPm 2018 2017 Change ----------------------------- ------- ------ --------- Revenue 175.2 183.2 (4.4%) Operating (loss)/profit (5.0) 12.0 (141.7%) ----------------------------- ------- ------ --------- Operating margin (2.9%) 6.6% (950bps) ----------------------------- ------- ------ ---------
Tuffnells had a particularly challenging year, achieving total revenue of GBP175.2m down 4.4%, (FY17: GBP183.2m), and driving an Adjusted operating loss of GBP5.0m, down GBP17m (FY2017: GBP12.0m profit).
In what became an increasingly competitive market, variability in service standards and disruptive price competition for larger customers, led to lower volumes, particularly in the second half of the year. Tuffnells did not therefore benefit from its usual seasonal peak, which in previous years has contributed a substantial proportion of annual profit. The decline in parcel volumes combined with the semi-fixed operating cost base at a depot level resulted in incremental operational inefficiencies within our trunking network. Separately, operational costs rose from increases in national living wage, higher sub-contractor rates and continuing challenges in the recruitment of drivers.
As part of the integration strategy, Tuffnells handled Pass My Parcel deliveries in those areas outside of Smiths News' territories. The combination of delivering large consignments of irregular dimension and weight (IDW) and handling, much smaller packets for Pass My Parcel, resulted in further operating inefficiencies. The exit of the Pass My Parcel proposition will allow Tuffnells to give greater focus efficiency in its core trunking and delivery routes.
DMD
Adjusted figures (1) - GBPm 2018 2017 Change ----------------------------- ------ ----- ------- Revenue 26.5 28.8 (8.0%) Operating profit 3.0 2.3 30.4% ----------------------------- ------ ----- ------- Operating margin 11.3% 8.0% 330bp ----------------------------- ------ ----- -------
DMD is our specialist distributor of printed and digital media to airlines and travel points. Revenue of GBP26.5m (FY2017: GBP28.8m) is down 8.0% due to reduction in newspaper distribution arrangements with two publishers and one established airline customer ceasing to provide newspapers. Adjusted operating profit of GBP3.0m (FY2017: GBP2.3m) is up 30.4% due to cost efficiencies from prior year restructuring activities resulted in a combination of recurring savings GBP0.5m and a one-off benefit of GBP0.2m.
ADJUSTED ITEMS (1)
Continuing Operations (5)
GBPm 2018 2017 --------------------------------------- --- ------- ------- Network and re-organisation costs a (3.1) (8.0) Property b 0.7 (0.6) Acquisition and disposal costs/income c - 2.2 Amortisation of acquired intangibles d (7.1) (7.3) Pension e - 0.7 Settlement of interest rate swap f - (0.8) Impairment of Tuffnells goodwill g (46.1) - Pass my Parcel exit costs h (6.7) - Impairment of tangible assets i (1.1) - NMW regulatory compliance j (0.5) - Total before taxation (63.9) (13.8) -------------------------------------------- ------- ------- Taxation 2.9 2.7 -------------------------------------------- ------- ------- Total after taxation (61.0) (11.1) -------------------------------------------- ------- -------
The Group incurred a total of GBP61.0m of adjusted items on a continuing basis, after tax (FY2017: GBP11.1m).
This comprises:
(a) Network and re-organisation costs
There are GBP3.1m (FY2017: GBP8.0m) network and reorganisation costs. In the current year this includes abortive integration costs of GBP1.6m (FY2017: GBPnil) with regard to the integration programme announced at the end of the previous financial year. There are further costs of GBP1.8m (FY2017: GBPnil) relating to redundancies announced in August 2018 arising from the decision to streamline head-office functions, which is separate to the network restructuring in the previous financial year. There is a credit of GBP0.3m relating to the release of the remaining redundancy provision related to network restructuring.
The total of GBP8.0m in the prior year comprised: a GBP4.0m charge for the FY2017 redundancy provision relating to network restructuring; GBP2.0m related to network rationalisation costs incurred in the Smiths News network; GBP0.6m related to the restructuring of the Smiths News joint venture FMD Limited; GBP0.5m in rationalising overseas operations in DMD and the remaining GBP0.9m related to redundancy costs within Smiths News and Tuffnells.
Costs associated with network and reorganisation are considered adjusted items given they are part of a strategic programme to drive future cost savings and are significant in value to the results of the Group.
(b) Property
There is a GBP0.7m credit (FY2017: GBP0.6m charge) relating to property costs. During the year the Group made the strategic decision to transfer the previously vacant Slough depot to the Tuffnells business, resulting in a credit from the release of its onerous lease provision of GBP0.7m (FY2017: GBP0.9m charge relating to three properties). In the prior year GBP0.3m of reversionary lease provisions were released as they were no longer required. Onerous charges on property are charged through adjusted items as they form part of the Group's strategic restructuring programme. The reversal of charges has also been made in adjusted items for consistency.
(c) Acquisition and disposal costs
There are GBPnil (FY2017: GBP2.2m) costs in the current year relating to acquisition and disposal costs. Prior year acquisition costs included the release of deferred contingent consideration which was payable conditional on the financial performance of Tuffnells and the continued employment of its former owners. This amounted to GBP2.7m comprising equity based amounts and amounts provided for cash rewards (see note 27) which were offset by GBP0.5m fees relating to disposal activity in the prior year that did not meet the criteria to be included within discontinued. Deferred contingent consideration charges and credits in respect of previous acquisitions and costs relating to disposal activity are considered to be adjusted items as they do not form part of normal operating costs/ credits of the business.
(d) Amortisation of acquired intangibles
A charge of GBP7.1m (2017: GBP7.3m) has been recognised relating to amortisation of acquired intangibles. This is considered an adjusting item as it allows comparison between segments as shown in note 2.
(e) Pension
There is GBPnil (2017: GBP0.7m) of pension credits in the current year. The prior year GBP0.7m pension credit relates to a trivial commutation of benefits to members in the Group's section of the WH Smith Pension Trust. The prior year pension credit is not considered to be part of normal operations and is therefore considered to be an adjusted item.
(f) Settlement of interest rate swap
There is GBPnil (2017: GBP0.8m) relating to settlement of interest costs. The costs related to the settlement of swap instruments after the Group took a strategic decision to no longer enter into hedging arrangements. The settlement followed a change in Treasury policy (see note 20). The cost is classified as an adjusted item because it is of significant value and is not expected to be recurrent in nature.
(g) Impairment of Tuffnells goodwill
During the year management reviewed the carrying value of Tuffnells goodwill and concluded that an impairment charge of GBP46.1 million (2017: GBPnil) was required. The recoverable amount of goodwill (in both the current and prior year) is calculated with reference to its value in use based on future cash flow projections. The key assumptions used in the calculation are disclosed in note 13. It is considered adjusting due to its one off nature and significant value.
(h) Pass My Parcel (PMP) exit costs
Following a review of the PMP proposition on 23 May 2018, the Board decided to terminate the contracts in relation to PMP and close the division, as a result of this decision a charge of GBP6.7m (2017: GBPnil) was booked.
Management concluded that losses on winding down the division represented an onerous contract with a cost of GBP4.7m recognised which comprises the forecast excess of costs over income from the date the Group took the decision to close the division. It is considered adjusting due to its one off nature and significant value. Of this balance, GBP2.5m remains in provisions to cover the costs to close all contracts (see note 24). In the period from 1 September 2017 to the date of the decision to close, PMP incurred losses of GBP5.4m (these losses were included in our adjusted operating results).
A further GBP2.0m of impairment charges split GBP1.0m tangible and GBP1.0m intangible were recognised to write off the non-current assets relating to the division (note 13 and 14).
(i) Impairment of tangible assets
The Group took the decision to consider the sale of the Jacks Beans division to focus on its core businesses, bids received indicated an excess of net book value of GBP1.1m therefore the Group has impaired the assets and moved them into non-current assets held for sale. Given the magnitude, the one-off nature and the Group's strategy to focus on its core businesses it is considered to be an adjusting item.
(j) NMW regulatory compliance
The Group has been in discussion with HMRC regarding an historical underpayment in relation to a misapplication of national minimum wage legislation in Tuffnells. Although dialogue continues, a provision amounting to GBP1.3m has been made in the Financial Statements in respect of any potential liabilities, of which GBP0.5m relating specifically to the estimated fine is classified as adjusting due to its one off nature. GBP0.8m has been included within adjusted operating results as it did not meet the definition of an adjusting item.
Discontinued Adjusted items
(Loss)/Profit on disposal of subsidiary
On 14 February 2018, the Group completed the sale of the Books business at a loss of GBP10.5m, full details are provided in note 12. In the prior year, on 30 June 2017, the Group completed the sale of the Education & Care business at a profit of GBP19.0m full details are included in the Annual Report.
Re-organisation costs
Re-organisation costs of GBP0.1m (2017 GBP0.3m) were incurred by the Books business during the year. Reorganisation costs are considered to be adjusted items as they are part of the Group's wider restructuring programme to deliver cost savings and were incurred prior to the disposal these are disclosed separately from other reorganisation costs on the basis the Books business was discontinued.
Amortisation and impairment of discontinued intangibles
Included within discontinued operations results are items of GBPnil (2017 GBP11.2m) relating to amortisation and impairment of discontinued intangibles. The prior year includes impairments of GBP9.9m relating to the Books business and GBP1.3m of amortisation of acquired intangibles. The impairment is considered to be adjusting due to magnitude, the one-off nature and as it does not relate to underlying trade. Amortisation of acquired intangibles is considered adjusting as it skews the results of the non-acquired businesses.
CONTINUING FREE CASH FLOW (2)
Free cash flow generation remains one of the Group's key strengths. Free cash flow (2) includes finance leases, Adjusted items, interest and tax; it excludes pension deficit recovery payments.
GBPm 2018 2017 --------------------------------------------------------- ------- ------- Operating (loss)/ profit continuing (including Adjusted items) (30.0) 41.7 Adjusted items 63.9 13.0 Depreciation & amortisation 11.9 11.7 --------------------------------------------------------- ------- ------- Adjusted EBITDA 45.8 66.4 Working capital movements 7.7 0.4 Capital expenditure (8.5) (13.8) Finance lease payments (3.8) (4.2) Net interest and fees (5.8) (4.4) Taxation (6.5) (9.1) Other (0.4) 0.3 --------------------------------------------------------- ------- ------- Free cash flow (excluding adjusted items) 28.5 35.6 --------------------------------------------------------- ------- ------- Adjusted items - cash effect (8.3) (6.9) Free cash flow 20.2 28.7 --------------------------------------------------------- ------- -------
We have focused on cash performance in the period, with the Group generating GBP20.2m in free cash flow, a decrease of GBP8.5m (29.6%) on the prior year.
Adjusted EBITDA of GBP45.8m compared to FY2017 of GBP66.4m, is down by 31.0% driven by trading performance, although the increase in capital expenditure since acquiring Tuffnells in December 2014 is now resulting in marginally higher depreciation and amortisation charges of GBP11.9m (FY2017: GBP11.7m).
The decrease in working capital in the period was GBP7.7m (FY2017: decrease GBP0.4m) driven largely by favourable timing of weekly receipt and monthly payment cycles relative to the year end date.
Capital expenditure in the year was GBP8.5m (FY2017: GBP13.8m) a decrease of GBP5.3m. New and existing depot and network investments were GBP2.1m (FY2017: GBP5.9m) a decrease in the year as no new depots were opened. Technology and equipment investment was GBP4.7m (FY2017: GBP5.2m).
Cash tax costs of GBP6.5m (FY2017: GBP9.1m) have decreased in the year reflecting the decline in trading performance.
Net interest and fees of GBP5.8m (FY2017: GBP4.4m) has increased by GBP1.4m following bank arrangement fees of GBP1.6m which were paid on the agreement of a new GBP175m bank facility concluded in October 2017. Bank interest paid was GBP4.2m, down GBP0.2m on prior year, as the average net debt requirement is lower compared to last year following the disposal of the Education & Care business in June 2017 and the Books business in February 2018.
The total net cash impact of Adjusted items was GBP8.3m (FY2017: GBP6.9m). This comprised GBP6.8m (FY2017: GBP5.4m) of network reorganisation and restructuring costs.
NET DEBT
GBPm 2018 2017 --------------------------------------------------- ------- -------- Opening net debt (82.1) (141.7) Free cash flow 20.2 28.7 Finance lease creditor movement 3.2 2.2 Pension deficit recovery (4.7) (4.8) Dividend paid (24.1) (23.6) Disposal proceeds 12.9 58.2 Discontinued disposal proceeds to repay overdraft (12.7) - Discontinued operations cash flow 3.9 (1.1) Closing net debt (83.4) (82.1) --------------------------------------------------- ------- --------
Net debt closed the period at GBP83.4m, of which GBP5.3m (FY17: GBP8.5m) relates to finance leases.
Net debt increased on the prior year and our Net debt/EBITDA ratio rose to 1.8x, (FY2017: 1.2x) The cash impact of the deterioration in EBITDA from trading challenges was partially offset by the disposal proceeds from the sale of the Books business. The intra-month working capital cash flow cycle at Smiths News generates a routine and predictable cash swing of around GBP40m which utilises the Revolving Credit Facility (RCF) of GBP125m. This results in a predictable fluctuation of net debt during the course of the month compared to the closing net debt position. However, the free cash flow generation (after Adjusted items) in year was not sufficient to cover the announced dividend payments of GBP24.1m (FY2017: GBP23.6m).
Pension funding remained consistent at GBP4.7m (FY2017: GBP4.8m). Pension deficit repair payments are considered as a non-free cash flow item.
We were comfortably within our bank facilities of GBP175m and our covenant ratios at year end. In October 2017 we entered a new bank facility commitment of GBP175m with six relationship banks which runs from October 2017 to January 2021. The new facility comprises of a term loan of GBP50m with no amortisation and an RCF for GBP125m on a higher interest margin, but similar covenant terms to the previous facility.
PENSION
The Group operates two defined benefit schemes, both closed to new entrants and WH Smith Pension Trust closed to future accrual.
The Smiths News section of the WH Smith Pension Trust has assets of GBP583.1m and had an actuarial deficit of GBP17.5m as at 31 March 2015. As at 31 August 2018 the IAS19 surplus of GBP154.5m (FY2017: GBP149.3m) was not recognised in the accounts as the amount available on a reduction of future contributions is GBPnil.
The Group recognises the present value of the agreed schedule of future contributions as a pension liability of GBP5.1m on the balance sheet (FY2017: GBP8.7m).
The Tuffnells defined benefit scheme has assets of GBP9.6m and an actuarial deficit of GBP4.3m as at 1 April 2016. As at 31 August 2018 the IAS19 deficit was GBP2.2m.
The total cash contribution of defined benefit schemes, which include pension administration fees and disclosed within the cash flow statement, amounted to GBP4.7m for FY2018 (FY2017: GBP4.8m).
DISCONTINUED OPERATIONS
On 14 February 2018, the Group completed the sale of the Books business at a loss of GBP10.5m. The sales price was lower than anticipated, but allows the Group to focus on its core operations. Full details are provided in note 12. In the prior year, on 30 June 2017, the Group completed the sale of the Education & Care business at a profit of GBP19.0m full details are included in note 12.
Discontinued operations contributed Adjusted operating profit of GBP1.8m for the period they remained part of the Group (HY2017: GBP3.3m - of which the Books business contributed GBP1.6m and the Education & Care business GBP1.7m).
The discontinued operations contributed GBP1.7m profit before tax during the year for the period they remained part of the Group (FY2017: GBP2.0m).
GOING CONCERN
The Group meets its day-to-day working capital requirements through its new bank facilities of GBP175m, agreed in October 2017, with a term to January 2021. The Group's forecasts, taking into account the Board's future expectations of the Group's performance, indicate that there is sufficient headroom within these bank facilities and the Group will continue to operate well within the covenants attaching to those facilities.
Considering the principal risks discussed in this report, the directors have a reasonable expectation that the Group has adequate resources to continue in operation and meet its liabilities as they fall due for both the foreseeable future and for the period of the three year viability assessment. Thus, the Group continues to adopt the going concern basis in preparing its consolidated financial statements and includes disclosure regarding its three year viability assessment based the principal risks.
PRINCIPAL RISKS
The Group has a clear framework in place to continuously identify and review the principal risks. The Audit Committee report describes how we manage risk from Board level and throughout the organisation. Further details can be found in the Annual Report. Key risks are plotted on risk maps with descriptions, owners, and mitigating actions, reporting against a level of materiality consistent with its size. These risk maps are reviewed and challenged by the Executive Team and Audit Committee. Additional risk management support is provided by external experts in areas of technical complexity to complete our bottom-up and top-down exercises.
As part of the Board's ongoing assessment of the principal risks, the Board has considered the performance of the Group, its markets, the changing regulatory landscape and future strategic plans. Principal risks previously reported have been reviewed in detail and they have been refined and made more specific. Compared to the principal risks reported in the Annual Report 2017:
-- the risks relating to failure to deliver robust financial performance, failing to attract, engage and retain talent and inadequate processes in place to support people initiatives are new;
-- the risk relating to constraints on capacity and/or failure to execute restructuring and other change management programmes has been removed and incorporated into the existing risk relating to the failure to define the Group's strategy and direction and a new risk relating to the loss of key people, lack of engagement and loss of depth knowledge and specialist skills; and
-- the risk relating to a non-adherence to transport operator licence condition has been removed as the mitigating actions undertaken by management have reduced the materiality and foreseeability of the principal risk and it remains well managed.
These risks are still subject to ongoing monitoring and appropriate mitigation.
The table below details each principal business risk, those aspects that would be impacted were the risk to materialise, our assessment of the current status of the risk and how it is mitigated.
Principal risks Change during the year Potential impact Mitigating actions and
assurance
1. Failure to refine and No change Sales and/or profit Performance to the business
execute the Group's expected may not be met plan is reviewed regularly
strategy and direction - and/or the Company's using a balanced scorecard
The risk of not reputation and support for KPI framework.
establishing a recovery plan are This ensures effective and
business plans and a clear challenged. timely monitoring of
vision for the Group performance with actions
impacts employee The change management taken in the event
engagement, financial culture required in the of shortfalls to
returns, short term for expectations.
external confidence and restructuring may result in
shareholder perception. reduced Financial and operational
performance and financial metrics are considered
returns. along with risk assessments
and impact on
management before remedial
action is taken.
Accountability at
leadership level is
redefined.
---------------------------- ----------------------- ---------------------------- ----------------------------
2. Tuffnells - Failing to Increasing Impact on growth and The team is being
achieve desired customer profitability within strengthened with industry
experience and service Tuffnells if consistent skills and there are
levels, and/or not service standards are not various change programmes
adapting to the competitive understood and addressed, to improve business
environment - The risk of and/or if organisational efficiency.
not maintaining customer efficiency goals are not
service standards met. More work is planned to
and/or not understanding understand the changes in
and adapting to new customer expectations and
technologies, competitors to improve customer
and demographics which service, in particular
drive change in customer around the operating model,
behaviour and/or that management information,
result in deep and speedy supporting technology,
structural market IT infrastructure and safe
changes. workplace environment.
---------------------------- ----------------------- ---------------------------- ----------------------------
3. Failure to adequately New Impact on ability to meet Annual budgets and
monitor financial financial commitments and forecasts, supported by
performance and/or delays ability to invest in the regular financial
in the Group's financial programmes and management reporting, take
performance recovery - The improvements that are into
risk that the Group does essential to sustainable account the current
not achieve or monitor performance in the medium financial position of the
financial performance to long term. Group, allowing for or
or meet forecast changing objectives to
commitments, as well as the meet short and medium-term
associated risk that the financial targets, as well
current financial position as longer term aspirations.
does not allow for planned
investment programmes and
business improvements to be
undertaken.
---------------------------- ----------------------- ---------------------------- ----------------------------
4. Failing to optimise No Change Impact on supply of product In the newspaper and
profitability within Smiths or route to market may magazine distribution
News - The risk of failing erode margin and/or industry, publishers
to retain major increase cost to serve. typically award five year
contracts in Smiths News at contracts - as the market
acceptable rates and manage leader Smiths News is well
costs in a declining market placed during the next
impacts round of contract
current and projected negotiations with
business performance. publishers.
Strong relationships across
the supply chain help the
business to understand and
demonstrate
its strengths for the
benefit of its suppliers
and customers and in
particular to build on
the service proposition as
central to achieving
excellence.
---------------------------- ----------------------- ---------------------------- ----------------------------
5. Failing to attract, engage New Impact on the ability to We seek to offer market
and retain talent within a address the strategic competitive terms to ensure
high performance and priorities and deliver the talent remains engaged.
values-based culture forecast performance
- The risk that we do not for the Group. We undertake workforce
attract the people and planning; performance,
skills we need to take the talent and succession
Group forward initiatives; learning
and that employees are not and development programmes;
motivated towards or are and promote the Group's
disengaged from the task in culture and core values.
hand.
Regular surveys are
undertaken to monitor the
engagement of employees.
---------------------------- ----------------------- ---------------------------- ----------------------------
6. Inadequate processes in New Impact on the ability to A Group-wide People system
place to support People address the control and has been procured and will
initiatives - The risk that efficiency improvements and be introduced in 2019.
the People processes change programmes
and systems do not support necessary to changes in Management information (eg
the changes in culture and culture and to support compliance with
expertise that is required, compliance. labour-related regulation,
or do not staff turnover etc)
support compliance to has been introduced.
legislation.
---------------------------- ----------------------- ---------------------------- ----------------------------
7. Failing to meet high health No Change In addition to the danger Safety is a key priority of
and safety standards - The to staff or the public, the the Group. Health & safety
risk of inadequate health impact of a health and performance is reviewed at
and safety safety failure Board meetings,
framework and negatively impacts Audit Committee, and
insufficiently enforcing a operations, profitability Executive Team meetings.
health and safety culture and/or corporate
results in serious injury reputation, together with A dedicated Health and
to employees and/or the the Safety Team executes
public or a breach of risk of possible improvement programmes and
relevant health and safety enforcement action promotes a safety culture.
legislation. The Group continues to
invest in improvements,
including recruitment of a
new H&S Director
and better management
reporting. The aim
continues to be towards
consistency in standards
and culture across the
Group.
---------------------------- ----------------------- ---------------------------- ----------------------------
8. Increased labour market No Change In the event of any legal The Group regularly reviews
constraints and costs - The claim as to worker status its legal terms of
risk of legislative changes by consultants, engagement with contractors
or interpretation, subcontractors or agency and has appropriate
coupled with the EU Exit workers the business could contractual and operational
and political uncertainty be liable for increased arrangements in place.
drives demographic or costs (National Insurance Self-employed delivery
legislative changes contributions) contractors have
or interpretation impacting and liabilities (such as clearly articulated
the ability to recruit and employee rights). The agreements defining tasks
retain warehouse and inability to pass on such they are contracted to
delivery contractors statutory increases provide whether personally
resulting in higher to our customers could or by a substitute.
attrition risk in impact profitability, and
warehousing and affect the cost of future Increasing employment cost
distribution and/or efficiency programmes. associated with National
increasing liabilities The implications of EU Exit Living Wage/Apprentices
and costs. include a decreasing pool Levy/Auto Enrolment
of available, suitably has been factored into
qualified employees latest budgets. Future
and subcontractors. impact of EU Exit on
employment risks are
unknown
at the date of this report
but are being tracked.
Legal developments are
monitored to ensure that
the business maintains
compliance with legislation
and best practice.
Workforce planning
initiatives including
apprenticeship and training
programmes, such as
Warehouse
to Wheels, are supporting
the longer-term mitigation
of driver shortage.
---------------------------- ----------------------- ---------------------------- ----------------------------
9. Deterioration of the No change Reductions in discretionary Annual budgets and
Macroeconomic environment - spending may impact sales forecasts take into account
The risk of volatility of newspapers or magazines the current macroeconomic
and/or prolonged economic and/or see environment to set
downturn causes a decline a reduction in parcel expectations internally and
in demand for our services volumes. Uncertainty from externally, allowing for,
including the uncertainty EU Exit may affect the or changing objectives to
associated business in both the meet, short
with EU Exit, impacts short and medium term on and medium-term financial
current and/or projected trade arrangements, future targets.
business performance above capital investment
that included in strategies and resourcing
the business planning and costs.
review process.
---------------------------- ----------------------- ---------------------------- ----------------------------
Statement of viability
1 How Connect Group assesses its prospects
Connect Group's business activities and strategy are central to assessing its future prospects. These, together with factors likely to affect its future development, performance and position, are set out in the Annual Report. The financial position of the Group, its cash flows and liquidity are highlighted in the Financial Review. The Group manages its financing by structuring core borrowings and the availability of facilities for draw down. The Group's prospects are assessed primarily through its business planning process. This includes an annual review which considers profitability, the Group's cash flows, committed funding and liquidity positions and forecast future funding requirements over the assessment period of three years. The most recent was signed off in October 2018, and it is part of the Board's role to consider the appropriateness of any key assumptions, taking into account the external environment and business strategy.
2 The assessment period
The directors have determined that the three years to August 2021 is an appropriate assessment period over which to provide its viability statement. This period is consistent with that used for the Group's corporate planning process as detailed above, and reflects the directors' best estimate of the future prospects of the business including the nature and potential impact of the principal risks that face the business. The Board noted in considering the appropriate assessment period that the Group's current banking facilities are due to expire in January 2021. The Board also considered whether there are specific foreseeable events relating to the principal risks that could occur beyond the three year period that should be taken into account when setting the assessment period and concluded there were none. In the Board's assessment of viability, the scenarios have assumed that external debt is repaid as it becomes due, or will be refinanced as and when required (see note 20).
3 Assessment of viability
In generating its plan the Board has considered the overall strategy of the Group, the principal risks and uncertainties inherent within the business, as well as making a number of key strategic planning assumptions which are noted below:
1. No significant impact on trading as a result of the EU Exit or other political change; 2. Modest revenue growth in Tuffnells in the assessment period;
3. Delivery of margin improvement in Tuffnells driven by efficiencies both in operating and overhead costs in the assessment period;
4. Continued decline in sales of printed media during the assessment period offset by overhead efficiencies in the assessment period;
5. Retention of major contracts in Smiths News at rates which maintain acceptable margins; 6. No major changes in working capital profile; 7. Successful renewal of banking facilities in January 2021; and 8. No significant acquisitions or disposals in the assessment period.
In making this statement, the directors have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity. This included the availability and effectiveness of mitigating actions that could realistically be taken to avoid or reduce the impact or occurrence of the underlying risks. In assessing the likely effectiveness of such actions, the Board considered the conclusions from their regular review of risk management and internal control systems.
To make the assessment of viability, stress scenarios have been tested over and above those in the business plan, based upon a number of the Group's principal risks and uncertainties. The scenarios were overlaid into the business plan to quantify the potential impact of one or more of these crystallising over the assessment period. Whilst each of the principal risks has a potential impact and has been considered as part of the assessment, only those that represent severe but plausible scenarios were selected for modelling through the business plan. These were:
Scenario Modelled Link to Principal Risks ---------------------------------------------------- ------------------------------- Scenario 1 Customer attrition as a result of poor customer service levels and not adapting to the competitive environment. We have assumed customer attrition in Tuffnells Risk 2: Failure to achieve exceeds new customers resulting in revenue desired customer experience not exceeding GBP175m. and service levels. Scenario 2 Major publisher business failure. The group plan assumes all major publishers Risk 4: Failing to optimise will continue to operate over the forecast profitability in the business. We have modelled a scenario that news business. reflects one of the major publishers going out of business or moving to a digital only market. Scenario 3 Forecast savings targets are not met. The business plan assumes both operational Risk 3: Failing to monitor and overhead efficiencies in Tuffnells as financial performance part of delivering its turnaround as well and/or delays in the as overhead savings in Smiths News throughout Group's financial performance the period. We have assumed only 50% of these recovery. improvements are achieved. Scenario 4 Changes to the Gig economy. The Group operates a business model that uses Risk 8: Increased labour a mix of employed operatives, subcontractors market constraints and and agency staff. If employment law is changed costs. which renders the mix unworkable in future, then this would potentially lead to increased cost. We have modelled scenarios that change this mix and lead to increased cost. Scenario 5 Major Health & Safety Incidents. We considered the financial and reputational Risk 7: Failing to meet impact of a series of Health & Safety incidents, high health & safety modelling an increased cost and regulatory standards. fines such as from the Health & Safety Executive. Scenario 6 Reverse stress test - revenue loss, margin erosion and working capital outflow in combination to covenant breach. This combines an extreme series of factors Multiple risks in combination. in unison to illustrate what would result in a covenant breach. ---------------------------------------------------- -------------------------------
As noted above, the scenarios have assumed that external debt is repaid as it becomes due, or will be refinanced as and when required.
The scenarios above are hypothetical and severe for the purpose of creating outcomes that have the ability to threaten the viability of the Group; however, multiple measures are in place to prevent and mitigate any such occurrences from taking place.
In each of the stress scenarios 1-5, the Group would be able to continue operating within existing debt covenants and liquidity headroom. Scenario 6 required such an extreme set of factors in unison that it is considered to be a very remote likelihood and therefore does not represent a realistic threat to the viability of the Group but rather illustrates the factors that would result in a banking covenant breach. The directors considered mitigating factors that could be deployed to counter the negative effects of the crystallisation of each of these risks. The main actions included reducing any non-essential capital expenditure and operating expenditure on projects, as well as not paying dividends.
The Board also considered the impact of the EU Exit on the business and does not foresee any significant negative impact which will impact on the viability assessment.
4 Viability statement
Taking into account the Group's current position and principal risks and uncertainties, the directors confirm that they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the three years to August 2021.
5 Going concern
The directors also considered it appropriate to adopt the going concern basis in preparing the Group Financial Statements.
DIRECTORS' RESPONSIBILITIES STATEMENT
The responsibility statement has been prepared in connection to the Company's full Annual Report for the year ended 31 August 2018. Certain parts of the Annual Report are not included in this announcement, as described in note 1.
Responsibility statement
We confirm that to the best of our knowledge:
-- the financial statements, prepared in accordance with the relevant financial reporting framework, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole; and
-- the Operating Review and Financial Review includes a fair review of the development and performance of the business and the position of the company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
This responsibility statement was approved by the board of directors on 6 November 2018 and is signed on its behalf by:
Jos Opdeweegh Tony Grace Chief Executive Officer Chief Financial Officer
Connect Group PLC
Group Income Statement for the year ended 31 August 2018
GBPm 2018 2017
----------------------------- ---- ---------------------------- ----------------------------
Note Adjusted* Adjusted Total Adjusted* Adjusted Total
items items
----------------------------- ---- --------- -------- ------- --------- -------- -------
Revenue 2 1,534.3 - 1,534.3 1,594.3 - 1,594.3
----------------------------- ---- --------- -------- ------- --------- -------- -------
Operating (loss)/profit 2,3 33.9 (63.9) (30.0) 54.7 (13.0) 41.7
Finance costs 7 (5.5) - (5.5) (6.7) (0.8) (7.5)
----------------------------- ---- --------- -------- ------- --------- -------- -------
(Loss)/profit before
tax 28.4 (63.9) (35.5) 48.0 (13.8) 34.2
Income tax expense 8 (5.5) 2.9 (2.6) (9.9) 2.7 (7.2)
----------------------------- ---- --------- -------- ------- --------- -------- -------
(Loss)/profit for
the year from continuing
operations 22.9 (61.0) (38.1) 38.1 (11.1) 27.0
----------------------------- ---- --------- -------- ------- --------- -------- -------
Discontinued operations
----------------------------- ---- --------- -------- ------- --------- -------- -------
(Loss)/Profit for
the year from discontinued
operations 1.3 (10.2) (8.9) 1.0 8.6 9.6
----------------------------- ---- --------- -------- ------- --------- -------- -------
(Loss)/Profit attributable
to equity shareholders
continuing and discontinued
operations 24.2 (71.2) (47.0) 39.1 (2.5) 36.6
----------------------------- ---- --------- -------- ------- --------- -------- -------
(Loss)/earnings per
share from continuing
operations
Basic 10 9.3p (15.5p) 15.5p 11.0p
Diluted 10 9.3p (15.5p) 15.4p 10.9p
Equity dividends
per share (paid
and proposed) 9 3.1p 9.8p
--------------------- ---- ------- ----- -----
* This measure is described in Note 1(c) of the accounting policies. Adjusted items are set out in note 4 to the Group financial statements.
Group Statement of Comprehensive Income for the year ended 31 August 2018
GBPm Note 2018 2017
Continuing
-------------------------------------------------- ---- ------ -----
Items that will not be reclassified to
the Group Income Statement
Actuarial (loss) on defined benefit pension
scheme 6 (2.1) (9.9)
Impact of IFRIC 14 on defined benefit
pension scheme 6 2.1 6.8
Tax relating to components of other comprehensive
income that will not be reclassified 8 - 0.3
-------------------------------------------------- ---- ------ -----
- (2.8)
Items that may be subsequently reclassified
to the Group Income Statement
Gain on cash flow hedges 29 - 0.6
Termination of interest rate swap 29 - 0.8
Currency translation differences (0.3) -
Tax relating to components of other comprehensive
income that may be reclassified 8 - (0.2)
-------------------------------------------------- ---- ------ -----
(0.3) 1.2
Other comprehensive result/(loss) for
the year - continuing (0.3) (1.6)
(Loss)/profit for the year - continuing (38.1) 27.0
-------------------------------------------------- ---- ------ -----
Total comprehensive (expense)/income for
the year - continuing (38.4) 25.4
Other comprehensive loss for the year
- discontinued - 1.7
(Loss)/profit for the year - discontinued (8.9) 9.6
-------------------------------------------------- ---- ------ -----
Total comprehensive (expense)/income for
the year - discontinued (8.9) 11.3
-------------------------------------------------- ---- ------ -----
Total comprehensive (expense)/income for
the year (47.3) 36.7
-------------------------------------------------- ---- ------ -----
Group Balance Sheet at 31 August 2018
GBPm Note 2018 2017
---------------------------------------- ---- ------- -------
Non-current assets
Intangible assets 13 50.8 106.5
Property, plant and equipment 14 38.8 41.3
Interest in joint ventures 15 5.1 4.6
Retirement benefit assets 6 - -
Deferred tax assets 23 - 5.4
94.7 157.8
---------------------------------------- ---- ------- -------
Current assets
Inventories 16 13.3 13.8
Trade and other receivables 17 81.7 98.3
Cash and bank deposits 19 18.0 5.5
Current tax asset 0.3 -
Assets classified as held for sale 11 0.5 64.5
---------------------------------------- ---- ------- -------
113.8 182.1
---------------------------------------- ---- ------- -------
Total assets 208.5 339.9
---------------------------------------- ---- ------- -------
Current liabilities
Trade and other payables 18 (127.6) (136.2)
Current tax liabilities (0.8) (5.3)
Bank loans and other borrowings 19 (47.2) (20.0)
Obligations under finance leases 21 (2.8) (3.1)
Retirement benefit obligations 6 (3.7) (4.1)
Provisions 24 (9.5) (9.0)
Liabilities classified as held for sale 11 - (49.5)
---------------------------------------- ---- ------- -------
(191.6) (227.2)
---------------------------------------- ---- ------- -------
Non-current liabilities
Retirement benefit obligations 6 (3.6) (7.4)
Bank loans and other borrowings 19 (48.8) (60.0)
Obligations under finance leases 21 (2.5) (5.4)
Other non-current liabilities 22 (0.6) (1.0)
Deferred tax liabilities 23 (2.5) (7.2)
Non-current provisions 24 (4.8) (6.6)
---------------------------------------- ---- ------- -------
(62.8) (87.6)
---------------------------------------- ---- ------- -------
Total liabilities (254.4) (314.8)
---------------------------------------- ---- ------- -------
Total net (liabilities)/assets (45.9) 25.1
---------------------------------------- ---- ------- -------
Group Balance Sheet at 31 August 2018 (continued)
GBPm Note 2018 2017 ------------------------------ ----- ------- ------- Equity Called up share capital 28(a) 12.4 12.4 Share premium account 28(c) 60.5 60.5 Demerger reserve 29(a) (280.1) (280.1) Own shares reserve 29(b) (2.1) (3.1) Hedging & translation reserve 29(c) 0.2 0.5 Retained earnings 30 163.2 234.9 ------------------------------ ----- ------- ------- Total shareholders' equity (45.9) 25.1 ------------------------------ ----- ------- -------
The accounts were approved by the Board of Directors and authorised for issue on 6 November 2018 and were signed on its behalf by:
Registered number - 05195191
Jos Opdeweegh Tony Grace
Chief Executive Officer Chief Financial Officer
Group Statement of Changes in Equity for the year ended 31 August 2018
GBPm Note Share Share Demerger Own shares Hedging Retained Total
capital premium reserve reserve & translation earnings
account reserve
------------------------- ----- --------- --------- --------- ----------- --------------- ---------- -------
Balance at 31
August 2016 12.3 59.2 (280.1) (3.5) (1.1) 226.2 13.0
Profit for the
year - - - - - 36.6 36.6
Termination
of cash flow
hedge - - - - 0.8 - 0.8
Gain on cash
flow hedges - - - - 0.6 - 0.6
Actuarial loss
on defined benefit
pension scheme - - - - - (8.1) (8.1) Impact of IFRIC 14 on defined benefit pension scheme - - - - - 6.8 6.8 Currency translation differences - - - - 0.2 - 0.2 Tax relating to components of other comprehensive income - - - - - (0.2) (0.2) ------------------------- ----- --------- --------- --------- ----------- --------------- ---------- ------- Total comprehensive income for the year - - - - 1.6 35.1 36.7 Issue of share capital 28 0.1 1.3 - - - - 1.4 Purchase of own shares - - - (0.5) - - (0.5) Dividends paid 9 - - - - - (23.6) (23.6) Employee share schemes - - - 0.9 - (0.9) - Recognition of share based payments net of tax - - - - - (1.9) (1.9) Balance at 31 August 2017 12.4 60.5 (280.1) (3.1) 0.5 234.9 25.1 ------------------------- ----- --------- --------- --------- ----------- --------------- ---------- ------- Loss for the year - - - - - (47.0) (47.0) Actuarial loss on defined benefit pension scheme - - - - - (2.1) (2.1) Impact of IFRIC 14 on defined benefit pension scheme - - - - - 2.1 2.1 Currency translation differences - - - - (0.3) - (0.3) Tax relating - - - - - - - to components of other comprehensive income ------------------------- ----- --------- --------- --------- ----------- --------------- ---------- ------- Total comprehensive expense for the year - - - - (0.3) (47.0) (47.3) Issue of share 28 - - - - - - - capital Purchase of - - - - - - - own shares Dividends paid 9 - - - - - (24.1) (24.1) Employee share schemes - - - 1.0 - (1.0) - Recognition of share based payments net of tax - - - - - 0.4 0.4 ------------------------- ----- --------- --------- --------- ----------- --------------- ---------- ------- Balance at 31 August 2018 12.4 60.5 (280.1) (2.1) 0.2 163.2 (45.9) ------------------------- ----- --------- --------- --------- ----------- --------------- ---------- -------
Group Cash Flow Statement for the year ended 31 August 2018
GBPm Note 2018 2017
------------------------------------------ ---- ------ ------
Net cash inflow from operating activities 27 37.5 51.2
------------------------------------------ ---- ------ ------
Investing activities
Dividends received from associates 0.2 0.2
Purchase of property, plant and equipment (6.1) (13.7)
Purchase of intangible assets (2.4) (5.1)
Proceeds on sale of property, plant and
equipment - 1.3
Proceeds on sale of subsidiary (net of
disposal costs) 12.9 56.8
------------------------------------------ ---- ------ ------
Net cash used in investing activities 4.6 39.5
------------------------------------------ ---- ------ ------
Financing activities
Interest paid (5.8) (5.2)
Dividend paid 9 (24.1) (23.6)
Repayments of obligations under finance
leases (3.8) (4.2)
Proceeds on issue of shares 28 - 0.7
Net outflow on purchase of shares for
Employee Benefit Trust 29 - (0.5)
Net increase/(decrease) in revolving
credit facility 25.3 (61.0)
New bank loans raised 48.8 -
Repayment of borrowings (80.0) -
Net cash used in financing activities (39.6) (93.8)
------------------------------------------ ---- ------ ------
Net increase/(decrease) in cash and cash
equivalents 2.5 (3.1)
Effect of foreign exchange rate changes (0.2) 0.4
------------------------------------------ ---- ------ ------
2.3 (2.7)
Opening net cash and cash equivalents 6.4 9.1
Closing net cash and cash equivalents 19 8.7 6.4
------------------------------------------ ---- ------ ------
During the year cash outflow from operating activities attributed to discontinued operations amounted to GBP8.8m (2017: GBP3.8m inflow) and paid GBP4.3m (2017: GBP3.7m) in respect of investing activities. There were no cash flows associated with financing activities attributable to discontinued operations.
Analysis of net debt
GBPm Note 2018 2017 -------------------------- ---- ------ ------ Cash and cash equivalents 19 8.7 6.4 Current borrowings 19 (38.0) (20.0) Non-current borrowings 19 (48.8) (60.0) -------------------------- ---- ------ ------ Net borrowings (78.1) (73.6) Finance lease liabilities 21 (5.3) (8.5) Net debt (83.4) (82.1) -------------------------- ---- ------ ------
Cash and cash equivalents includes cash of GBP18.0m (2017: GBP6.4m) offset by GBP9.2m (2017: GBPnil) of overdrafts.
Notes to the accounts
1. Accounting policies (a) Basis of preparation
The financial information contained within this preliminary announcement for the 12 months to 31 August 2018 and 12 months to 31 August 2017 does not comprise statutory financial statements for the purpose of the Companies Act 2006, but is derived from those statements. The statutory accounts for Connect Group Plc for the 12 months to 31 August 2017 have been filed with the Registrar of Companies and those for the 12 months to 31 August 2018 will be filed following the Company's annual general meeting. The auditor's reports on the accounts for both the 12 months to 31 August 2018 and 12 months to 31 August 2017 were unqualified and did not include a statement under Section 498 (2) or (3) of the Companies Act 2006. The Annual Report and Accounts will be available for shareholders in December 2018.
(b) Going concern
The Group agreed a new bank facility commitment of GBP175m with associated covenants which is in place until January 2021. The Group's forecasts and projections, taking account of reasonable potential variations in trading performance, show that the Group should be able to operate within the level of its current financing covenants for the foreseeable future defined as a period not less than 12 months from the balance sheet date.
Despite the uncertain economic environment the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Thus the Group continues to adopt the going concern basis in preparing its consolidated financial statements.
(c) Alternate performance measures
The directors believe that the alternate performance measures provide additional information for users of the accounts on the performance of the business. These measures are consistent with how business performance is measured internally by the Board and Operating Committee.
The Group uses certain performance measures for internal reporting purposes and employee incentive arrangements. The terms 'net debt', 'Free cash flow (excluding adjusted items)', 'Free cash flow', 'adjusted profit', 'adjusted and adjusted diluted earnings per share', 'adjusted EBITDA' are not defined terms under IFRS and may not be comparable with similar measures disclosed by other companies.
Adjusted items; are items of income or expense that are considered significant, in nature or value, and are excluded in arriving at Adjusted operating profit. The purpose of excluding these items from adjusted measures is to provide additional performance metrics to users of the financial statements that exclude the impact of the items the directors consider to have a significant impact on reported results and do not relate to the underlying trading activity of the Group. The specific items vary between financial years, and for the current year include certain disposal related costs, legal and regulatory provisions, amortisation and impairment of intangibles, impairment of property, plant and equipment, integration costs, business restructuring costs and network re-organisation costs including those relating to strategy changes which are not normal operating costs of the underlying business. They are disclosed and described separately in note 4 of the financial statements to provide further understanding of the financial performance of the Group. A reconciliation of adjusted profit to statutory profit is presented on the income statement.
The following are the key non-IFRS measures identified by the Group in the consolidated financial statements as adjusted results:
Adjusted operating profit is defined as statutory operating profit from continuing operations, excluding the impact adjusting items (defined above). This metric is reconciled on the face of the income statement, with detail of each adjusted item disclosed within note 4.
Adjusted profit before tax is defined as statutory profit before tax, excluding the impact of adjusting items (defined above). This metric is reconciled on the face of the income statement, with detail of each adjusted item disclosed within note 4.
Adjusted EBITDA is calculated as Adjusted operating profit (as defined above) before depreciation and amortisation. This metric is reconciled on page 16.
Adjusted earnings per share; is defined as adjusted PBT, less taxation attributable to adjusted PBT and including any adjustment for minority interest to result in adjusted profit after tax attributable to shareholders; divided by the basic weighted average number of shares in issue. This metric is reconciled in note 10.
Free cash flow; is defined as cash flow excluding the following: payment of dividends, dividends from associates, acquisitions and disposals, the repayment of bank loans, EBT share purchase, proceeds of share issues and cash flows relating to pension deficit repair. This measures shows the cash retained by the Group in the year and is considered by the Directors to provide additional information on the cash available for shareholders returns. A reconciliation of free cash flow to the net movement in cash and cash equivalents is shown in note 35.
Net debt; is calculated as total debt less cash and cash equivalents. Total debt includes loans and borrowings, overdrafts and obligations under finance leases. A reconciliation of net debt is presented in the Group Cash Flow Statement.
Operating profit; is stated after charging Adjusted items relating to operating activities and after the share of results of associates but before investment income and finance costs.
Gross Profit; is stated after charging the direct cost of sales. Gross profit has been restated after reclassifying costs between distribution and cost of inventories expensed see note 3 for details.
Contribution; is stated after charging the distribution costs to gross profit. Contribution is considered to be a key performance measure as it is considered to represent the direct cost of running each business within the Group as distribution is primary operation of the Group. Contribution is reconciled in note 3.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.
(d) Estimates and judgements
The preparation of accounts requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.
Sources of estimation uncertainty
The key assumption concerning the future, and other key sources of estimation uncertainty at the end of the reporting period that may have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year.
Estimated impairment of goodwill
The group tests annually whether goodwill has suffered any impairment, in accordance with the accounting policy. The carrying amounts of cash-generating units (CGU's) have been determined based on value in use calculations. These calculations require the use of estimates (note 13).
An impairment charge of GBP46.1m arose on the Tuffnells CGU during the course of the 2018 year, resulting in the CGU being written down to its recoverable amount. Note 13 include details of management's assumptions and impact of changing these estimates.
Key accounting judgements
The significant judgements made in the accounts for the year ended 31 August 2018 are:
Onerous contracts
Present obligations arising under onerous contracts are recognised and measured as provisions. An onerous contract is considered to exist where the Group has a contract under which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received from the contract. The calculation of onerous contract provisions includes estimates of all future costs and income to occur. Significant judgement is applied in the determination of when contracts become onerous. With reference to Pass My Parcel, management have determined the date at which the contracts became onerous, is the date on which the Board approved to wind down the operations and cease further investment. See note 24 for further details.
(e) Non-current assets held for sale and disposal groups
Non-current assets held for sale and disposal groups are classified as assets held for sale when their carrying amount is to be recovered principally through a sale transaction and a sale is considered highly probable. They are stated at the lower of carrying amount and fair value less costs to sell.
(f) Discontinued operations
In accordance with IFRS 5 'Non-current assets held for sale and Discontinued operations', the net results of discontinued operations are presented separately in the Group Income statement (and the comparatives restated) and the assets and liabilities of these operations are presented separately in the Group balance sheet.
(g) Revenue
Smiths News and DMD
Revenue is recognised on the despatched value of goods sold. Revenue represents the amounts receivable for goods and services provided in the normal course of business, net of discounts, returns (including expected returns), VAT and other sales related taxes. Goods are sold to retailers on a sale or return basis. Revenue for goods supplied with a right of return is stated net of the value of any returns.
Tuffnells
Revenue is recognised on delivery of the service to which it relates, based on agreed rates net of discounts, VAT and other sales related taxes.
(h) Taxation
Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the income statement, except to the extent it relates to items recognised in other comprehensive income or directly in equity. Current tax is the expected tax payable based on the taxable profit for the year, using tax rates enacted, or substantively enacted at the balance sheet date and any adjustment to tax payable in respect of previous years.
Deferred tax is provided on the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is calculated using tax rates enacted or substantively enacted at the balance sheet date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled. Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which these temporary differences can be utilised.
(i) Dividends
Interim and final dividends are recorded in the financial statements in the period in which they are paid.
(j) Capitalisation of internally generated development costs
Expenditure on developed software is capitalised when the Group is able to demonstrate all of the following: the technical feasibility of the resulting asset; the ability (and intention) to complete the development and use it; how the asset will generate probable future economic benefits; and the ability to measure reliably the expenditure attributable to the asset during its development. Subsequent to initial recognition, internally generated intangible assets are reported at cost less accumulated amortisation and accumulated impairment losses, on the same basis as intangible assets that are acquired separately.
(k) Joint ventures
The Group Accounts include the Group's share of the total recognised gains and losses in its joint ventures on an equity accounted basis.
Investments in joint ventures are carried in the balance sheet at cost adjusted by post-acquisition changes in the Group's share of the net assets of the joint ventures, less any impairment losses. The carrying values of investments in joint ventures include acquired goodwill. Losses in joint ventures that are in excess of the Group's interest in the joint venture are recognised only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the joint venture.
(l) Business combinations and goodwill
The Group uses the acquisition method of accounting to account for business combinations. The cost of an acquisition is measured at the fair value of the assets given, equity instruments issued, liabilities incurred or assumed at the date of exchange. Acquisition related costs are recognised in profit or loss as incurred. Any deferred or contingent purchase consideration is recognised at fair value over the period of entitlement. If the contingent purchase consideration is classified as equity, it is not remeasured and settlement is accounted for in equity. Any deferred or contingent payment deemed to be remuneration as opposed to purchase consideration in nature is recognised in profit or loss as incurred, and excluded from the acquisition method of accounting for business combinations. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured, initially, at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The non-controlling interest is measured, initially, at the non-controlling interest's proportion of the net fair value of the assets, liabilities and contingent liabilities recognised. Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer's previously held equity interest in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed.
Goodwill arising on all acquisitions is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses.
The carrying value is reviewed annually for impairment or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Intangible assets arising under a business combination (acquired intangibles) are capitalised at fair value as determined at the date of exchange and are stated at fair value less accumulated amortisation and impairment losses. Amortisation of acquired intangibles is charged to the income statement on a straight-line basis over the estimated useful lives as follows:
Customer relationships - 2.5 to 7.5 years Trade name - 5 to 10 years Software and development costs - 3 to 7 years
Computer software and internally generated development costs which are not integral to the related hardware are capitalised separately as an intangible asset and stated at cost less accumulated amortisation and impairment losses.
Assets held under finance leases are amortised over their expected useful lives on the same basis as owned assets or, where shorter, over the term of the relevant lease. All intangible assets are reviewed for impairment in accordance with IAS 36 'Impairment of Assets' when there are indications that the carrying value may not be recoverable.
(m) Property, plant and equipment
Property, plant and equipment assets are stated at cost less accumulated depreciation and any recognised impairment losses. No depreciation has been charged on freehold land. Other assets are depreciated, to a residual value, on a straight-line over their estimated useful lives, as follows:
Freehold and long term leasehold properties - over 20 years
Short term leasehold properties - shorter of the lease period and the estimated remaining economic life
Fixtures and fittings - 3 to 15 years Equipment - 5 to 12 years Computer equipment - up to 5 years Vehicles - up to 5 years
Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, over the term of the relevant lease. All property, plant and equipment is reviewed for impairment in accordance with IAS 36 'Impairment of Assets' when there are indications that the carrying value may not be recoverable.
(n) Leasing
Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Property, plant and equipment held under finance leases is capitalised in the balance sheet at the lower of the fair value or the present value of the minimum lease payments and is depreciated over its useful life. The capital elements of future obligations under leases are included as liabilities in the balance sheet. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of return on the remaining balance of the liability.
Property and equipment and vehicle rentals paid under operating leases are charged to income on a straight line basis over the lease term. The benefits of rent free periods and similar incentives are credited to the income statement on a straight-line basis to the first break clause.
(o) Inventories
Inventories comprise goods held for resale and are stated at the lower of cost or net realisable value. Inventories are valued using a weighted average cost method. Cost comprises direct materials and, where applicable, direct labour costs and those overheads that have been incurred in bringing the inventories to their present location and condition.
(p) Trade receivables
Trade receivables do not carry any interest and are initially recognised at their fair value. They are subsequently remeasured at amortised cost using the effective interest rate method. Appropriate allowances for estimated irrecoverable amounts are recognised in the income statement when there is evidence that the asset is impaired.
(q) Trade payables
Trade payables are initially measured at fair value, and are subsequently remeasured at amortised cost, using the effective interest rate method.
(r) Treasury
Cash and bank deposits
Cash and cash equivalents in the balance sheet comprise cash at bank and in hand and short term deposits with an original maturity of three months or less. In the consolidated balance sheet, bank overdrafts are shown within borrowings in current liabilities. Cash and cash equivalents in the cash flow statement comprise cash at bank and in hand and bank overdrafts held for trading purposes.
Financial liabilities and equity
Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. Equity instruments issued are recorded at the proceeds received, net of direct issue costs.
Bank borrowings
Interest bearing bank loans and overdrafts are initially measured at fair value (being proceeds received, net of direct issue costs), and are subsequently measured at amortised cost, using the effective interest rate method. Finance charges, including premiums payable on settlement or redemptions and direct issue costs are accounted for on an accruals basis and taken to the income statement using the effective interest rate method and are added to the carrying value of the instrument to the extent that they are not settled in the period in which they arise.
Foreign currencies
Financial statements of foreign operations
The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and are translated at foreign exchange rates ruling at the balance sheet date. The revenues and expenses of foreign operations are translated at an average rate for the period where this rate approximates to the foreign exchange rates ruling at the dates of the transactions.
Net investment in foreign operations
Exchange differences arising from this translation of foreign operations, and of related qualifying hedges are taken directly to equity. They are recycled into the income statement upon disposal.
Foreign currency transactions
Transactions in foreign currencies are recorded using the rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated at foreign exchange rates ruling at the dates the fair value was determined.
(s) Provisions
Provisions are recognised when the Group has a present legal or constructive obligation as a result of a past event and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are measured at the directors' best estimate of the expenditure required to settle the obligation at the balance sheet date and if this amount is capable of being reliably estimated. If such an obligation is not capable of being reliably estimated, no provision is recognised and the item is disclosed as a contingent liability where material. Where the effect is material, the provision is determined by discounting the expected future cash flows.
(t) Retirement benefit costs
The Group operates a number of defined contribution schemes for the benefit of its employees. Payments to the Group's schemes are recognised as an expense in the income statement as incurred. The Group operates two defined benefit pension schemes. The largest scheme The WH Smith Pension Trust is closed to further accrual. The charge to the Group of providing benefits for these two schemes is determined by the Projected Unit Credit Method, with actuarial calculations being carried out at the balance sheet date. Actuarial gains and losses are recognised in full in the period in which they occur in the group statement of comprehensive income. The retirement benefit obligation recognised in the balance sheet represents the present value of the defined benefit, reduced by the fair value of scheme assets. An asset ceiling cap is applied in accordance with IFRIC 14 with an additional liability recognised where there is a contractual obligation to make further payments into the scheme.
(u) Employee Benefit Trust
Smiths News Employee Benefit Trust
The shares held by the Smiths News Employee Benefit Trust are valued at the historical cost of the shares acquired. This value is deducted in arriving at shareholders' funds and presented as the own share reserve in line with IAS 32 'Financial Instruments: Disclosure and Presentation'.
(v) Share schemes
Share based payments
The Group operates several share-based payment schemes, being the Sharesave Scheme, the Executive Share Option Scheme, the LTIP and the Deferred Bonus Plan. Details of these are provided in the Directors' Remuneration report and in note 31.
Equity-settled share-based schemes are measured at fair value at the date of grant. The fair value is expensed with a corresponding increase in equity on a straight-line basis over the period during which employees become unconditionally entitled to the options. The fair values are calculated using an appropriate option pricing model. The income statement charge is then adjusted to reflect expected and actual levels of vesting based on non-market performance related criteria.
Administrative expenses and distribution and marketing expenses include the cost of the share-based payment schemes.
(w) Changes in accounting policies
New Standards and Interpretations applied for the first time:
The following Standards have been adopted without any significant impact on the amounts reported in these financial statements:
Recognition of Deferred Tax Assets for Unrealised Losses (Amendments to IAS 12).
Disclosure initiative (amendments to IAS 7) - The amendment to IAS 7 requires a disclosure of changes in liabilities arising from financing activities. This has been presented in note 19.
Annual improvements 2014 - 2016 cycle effective 1 January 2017.
New Standards and Interpretations not yet applied
At the date of authorisation of these financial statements, the following Standards and Interpretations that are potentially relevant to the Group and which have not been applied in these financial statements were in issue but not yet effective (and in some cases had not yet been adopted by the EU):
IFRS 9 'Financial Instruments' - effective for accounting periods beginning on or after 1 January 2018 therefore effective on the Group financial statements for the year ending 31 August 2019.
The standard introduces changes to three key areas:
-- new requirements for the classification and measurement of financial instruments; -- a new impairment model based on expected credit losses for recognising provisions; and
-- simplified hedge accounting through closer alignment with an entity's risk management methodology.
The Group has completed an assessment of the impact of IFRS 9 and has concluded that adoption will not have a material impact on either the Consolidated Income Statement or the Consolidated Balance Sheet. The Group will apply all aspects of the new standard at the transition date of 1 September 2018 by adjusting opening retained earnings in the balance sheet and no restatement of comparative periods.
IFRS 15 'Revenue from Contracts with Customers'- effective for accounting periods beginning on or after 1 January 2018 therefore effective for the Group financial statements for the year ending 31 August 2019.
IFRS 15 establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. IFRS 15 will supersede the current revenue recognition guidance including IAS 18 Revenue, IAS 11 Construction Contracts and the related Interpretations when it becomes effective.
The core principle of IFRS 15 is that an entity should recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Specifically, the Standard introduces a 5-step approach to revenue recognition:
-- Step 1: Identify the contract(s) with a customer -- Step 2: Identify the performance obligations in the contract -- Step 3: Determine the transaction price -- Step 4: Allocate the transaction price to the performance obligations in the contract -- Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation
Under IFRS 15, an entity recognises revenue when (or as) a performance obligation is satisfied, i.e. when 'control' of the goods or services underlying the particular performance obligation is transferred to the customer.
Far more prescriptive guidance has been added in IFRS 15 to deal with specific scenarios.
Furthermore, extensive disclosures are required by IFRS 15.
In April 2016, the IASB issued Clarifications to IFRS 15 in relation to the identification of performance obligations, principal versus agent considerations, as well as licensing application guidance.
Substantially all revenue earned by the Group is recognised at the point of service or on delivery of goods, and revenue recognised does not vary materially from the consideration to which the Group is entitled therefore no material adjustment is predicted. Were any adjustment to be required, the modified retrospective approach would be adopted with the cumulative impact of any adjustment recognised in retained earnings on transition date.
IFRS 16 'Leases' - effective for accounting periods beginning on or after 1 January 2019 therefore effective in the Group financial statements for the year ending 31 August 2020.
Transition to IFRS 16 will take place for the Group on 1 September 2019. The standard introduces a comprehensive model for the identification of lease arrangements and accounting treatments for both lessors and lessees and will replace the current lease accounting requirements including IAS 17 Leases and the related interpretations.
For lessees, IFRS 16 removes distinctions between operating leases and finance leases. These are replaced by a model where a right of use asset and a corresponding liability are recognised for all leases except for short-term leases and low value assets. In contrast to lessee accounting, IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17, and continues to require a lessor to classify a lease either as an operating lease or a finance lease.
From the work performed to date and based on the undiscounted lease commitments presented in note 25, it is anticipated that implementation of the new standard will have a significant impact on the reported assets and liabilities of the Group. In addition, the implementation of the standard will impact the income statement and classification of cash flows. A reliable estimate of the financial impact on the Group's consolidated results is dependent on a number of unresolved areas, including; choice of transition option, refinement of approach to discount rates, estimates of lease-term for leases with options to break and renew and conclusion of data collection.
In addition, the financial impact is dependent on the facts and circumstances at the time of transition. For these reasons, it is not yet practicable to determine a reliable estimate of the financial impact on the Group.
The directors anticipate that the adoption of the following Standards and Interpretations in future periods will have no material impact on the financial statements of the Group:
Amendments to IFRS 2 Classification and Measurement of Share-based Payment Transactions - effective for accounting periods beginning on or after 1 January 2018.
Annual Improvements 2014-2016 Cycle - effective 1 January 2018.
IFRIC 22 Foreign Currency Transactions and Advance Consideration - effective date 1 January 2018.
IFRIC 23 Uncertainty over Income Tax Treatments - effective date 1 January 2019.
Annual Improvements to IFRS 2015-2017 cycle - effective date 1 January 2019.
Amendments to IAS 19 Plan Amendment, Curtailment or Settlement - effective date 1 January 2019.
2. Segmental analysis
In accordance with IFRS 8 'Operating Segments', management has identified its operating segments. The performance of these operating segments is reviewed, on a monthly basis, by the Board. The Board monitors the tangible, intangible and financial assets attributable to each segment to determine the allocation of resources and the performance of each segment.
The continuing operating segments are:
Smiths News (formerly The UK market leading distributor of newspapers
News & Media: News Distribution and magazines to 27,000 retailers across
also referred to as England and Wales from 39 distribution
Early Distribution) centres.
DMD A supplier of newspaper and magazines to
(formerly News & Media: airlines and a provider of inflight services.
Media)
--------------------------------------------------
Tuffnells A leading provider of next day B2B delivery
(formerly Mixed Freight) of Irregular weight and dimensions consignments.
--------------------------------------------------
As explained in note 11, the Books business, a leading UK distributor of physical and digital books was disposed of on 14 February 2018. The business has been presented as a discontinued operation and has been included below where necessary for the purpose of reconciliation. As detailed in note 12, the Education & Care business was sold on 30 June 2017 and the results for the period to this date are also presented within Discontinued operations.
The following is an analysis of the Group's revenue and results by reportable segment:
Revenue
------------------------------------ ------------------
GBPm 2018 2017
------------------------------------ -------- --------
Smiths News 1,335.1 1,383.4
DMD 26.5 28.8
Tuffnells 175.2 183.2
Elimination of Intra group revenue (2.5) (1.1)
Continuing operations 1,534.3 1,594.3
Discontinued operations 114.3 270.3
Total continuing and discontinued
operations 1,648.6 1,864.6
------------------------------------- -------- --------
The accounting policies of the reportable segments are the same as the Group's accounting policies described in note 1.
Intra group revenue relates to services provided by Tuffnells to Smiths News in respect of Pass My Parcel.
2018 2017
----------------------- ----------------------------------- -----------------------------------
GBPm Adjusted Adjusted Statutory Adjusted Adjusted Statutory
operating items operating operating items operating
profit profit profit profit
----------------------- ----------- --------- ----------- ----------- --------- -----------
Smiths News 35.9 (10.9) 25.0 40.4 (4.3) 36.1
DMD 3.0 (0.3) 2.7 2.3 (1.0) 1.3
Tuffnells (5.0) (52.7) (57.7) 12.0 (7.7) 4.3
------------------------ ----------- --------- ----------- ----------- --------- -----------
Continuing operations 33.9 (63.9) (30.0) 54.7 (13.0) 41.7
Discontinued
operations* 1.8 (10.6) (8.8) 2.0 7.5 9.5
Total continuing
and discontinued
operations 35.7 (74.5) (38.8) 56.7 (5.5) 51.2
------------------------ ----------- --------- ----------- ----------- --------- -----------
Net finance
expense (5.5) - (5.5) (6.7) (0.8) (7.5)
------------------------ ----------- --------- ----------- ----------- --------- -----------
Profit before
taxation 30.2 (74.5) (44.3) 50.0 (6.3) 43.7
------------------------ ----------- --------- ----------- ----------- --------- -----------
*Discontinued operations in the table above are pre-tax measures. Presentation in the Group income statement for discontinued operations are post tax measures.
Information about major customers
Included in revenues arising from Smiths News are revenues of approximately GBP141.3m (2017: GBP147.5m) which arose from sales to the Group's largest customer. No other single customer contributed 6% or more of the Group's revenue in 2018 (2017: 5%).
Segment assets and liabilities
Assets Liabilities Net assets/(liabilities)
----------------------------------- -------------- ------------------ ---------------------------
GBPm 2018 2017 2018 2017 2018 2017
----------------------------------- ------ ------ -------- -------- ------------- ------------
Smiths News 76.9 85.4 (212.2) (220.8) (135.3) (135.4)
DMD 22.7 23.0 (7.3) (8.2) 15.4 14.8
Tuffnells 108.9 167.0 (34.9) (36.3) 74.0 130.7
Discontinued operations - 64.5 - (49.5) - 15.0
Consolidated assets/(liabilities) 208.5 339.9 (254.4) (314.8) (45.9) 25.1
----------------------------------- ------ ------ -------- -------- ------------- ------------
Segment depreciation, amortisation and non-current asset additions
Depreciation Amortisation Additions to
and impairment non-current assets
------------------------- --------------- ------------------ ----------------------
GBPm 2018 2017 2018 2017 2018 2017
------------------------- ------- ------ -------- -------- ---------- ----------
Smiths News (3.8) (4.2) (4.1) (3.0) 3.8 6.8
DMD (0.2) (0.2) (0.3) (0.3) 0.1 0.2
Tuffnells (4.6) (4.1) (53.1) (7.1) 4.4 6.7
------------------------ ------- ------ -------- -------- ---------- ----------
Continuing operations (8.6) (8.5) (57.5) (10.4) 8.3 13.7
Discontinued operations - (0.8) - (12.7) 0.6 3.4
Consolidated total (8.6) (9.3) (57.5) (23.1) 8.9 17.1
------------------------ ------- ------ -------- -------- ---------- ----------
Additions to non-current assets include intangible assets and property, plant and equipment.
Geographical analysis
GBPm Revenue by destination Non-current assets
by location of operation
2018 2017 2018 2017
-------------------------- ------------ ----------- ------------ --------------
United Kingdom 1,521.2 1,579.6 94.6 152.4
Europe 8.6 9.6 - -
Rest of World 4.5 5.1 - -
--------------------------- ------------ ----------- ------------ --------------
Continuing operations 1,534.3 1,594.3 94.6 152.4
--------------------------- ------------ ----------- ------------ --------------
Discontinued operations 114.3 270.3 - -
--------------------------- ------------ ----------- ------------ --------------
Total Continuing and
discontinued operations 1,648.6 1,864.6 94.6 152.4
--------------------------- ------------ ----------- ------------ --------------
3. Operating profit
The Group's results are analysed as follows:
GBPm 2018 Restated*
2017
Continuing operations Note Adjusted Adjusted Total Adjusted Adjusted Total
items items
-------------------------- ---- --------- -------- --------- --------- -------- ---------
Revenue 1,534.3 - 1,534.3 1,594.3 - 1,594.3
-------------------------- ---- --------- -------- --------- --------- -------- ---------
Cost of inventories
recognised as an
expense (1,154.5) - (1,154.5) (1,203.9) - (1,203.9)
Other cost of sales (137.3) (0.5) (137.8) (125.3) - (125.3)
-------------------------- ---- --------- -------- --------- --------- -------- ---------
Cost of sales (1,291.8) (0.5) (1,292.3) (1,329.2) - (1,329.2)
-------------------------- ---- --------- -------- --------- --------- -------- ---------
Gross profit 242.5 (0.5) 242.0 265.1 - 265.1
-------------------------- ---- --------- -------- --------- --------- -------- ---------
Distribution costs (137.8) (3.1) (140.9) (156.3) - (156.3) -------------------------- ---- --------- -------- --------- --------- -------- --------- Contribution 104.7 (3.6) 101.1 108.8 - 108.8 -------------------------- ---- --------- -------- --------- --------- -------- --------- Other administrative expenses (68.3) (7.1) (75.4) (50.5) (8.2) (58.7) Share-based payment expense 31 - - - (0.9) 2.5 1.6 Impairment of intangibles 13 - (46.1) (46.1) - - - Amortisation of intangibles 13 (3.0) (7.1) (10.1) (3.1) (7.3) (10.4) Administrative expenses (71.3) (60.3) (131.6) (54.5) (13.0) (67.5) -------------------------- ---- --------- -------- --------- --------- -------- --------- Share of profits from joint ventures 15 0.5 - 0.5 0.4 - 0.4 -------------------------- ---- --------- -------- --------- --------- -------- --------- Operating profit 33.9 (63.9) (30.0) 54.7 (13.0) 41.7 -------------------------- ---- --------- -------- --------- --------- -------- ---------
*The above note has been restated to move GBP79.2m out of cost of inventory recognised as an expense in to distribution costs as this is considered the most appropriate allocation. A subtotal of contribution has been added as this is considered a key performance metric for the Group.
The operating profit is stated after charging/ (crediting):
GBPm Note 2018 2017
---------------------------------------- ----- ----------------------------------- ----------------------------------
Continuing Discontinued Total Continuing Discontinued Total
Depreciation on
property, plant
& equipment 14 8.6 - 8.6 8.5 0.8 9.3
Amortisation of
intangible assets 13 10.3 - 10.3 10.4 12.7 23.1
Operating lease
charges
* occupied land and buildings 10.2 0.5 10.7 9.6 1.4 11.0
* equipment and vehicles 16.7 0.1 16.8 16.9 0.6 17.5
Operating lease
rental income -
land and buildings (0.2) - (0.2) (0.1) (0.2) (0.3)
Write down of inventories
recognised as an
expense - - - - (1.6) (1.6)
(loss)/gain on
disposal of non-current
assets (0.4) - (0.4) 0.4 (0.8) (0.4)
(loss)/gain on
disposal of non-current
assets held for
sale 12 - (10.5) (10.5) - - -
Staff costs (excluding
share based payments) 5 125.5 6.7 132.2 128.4 23.5 151.9
---------------------------------------- ----- ----------- ------------- ------- ----------- ------------- ------
Included in administrative expenses are amounts payable to Deloitte LLP and their associates by the Company and its subsidiary undertakings in respect of audit and non-audit services which are as follows:
GBPm 2018 2017 --------------------------------------------- ----- ----- Fees payable to the Company's auditor for the audit of the Company's annual accounts 0.5 0.2 Fees payable to the Company's auditor for the audit of the Company's subsidiaries 0.2 0.2 --------------------------------------------- ----- ----- Total audit fees 0.7 0.4 Other services - - --------------------------------------------- ----- ----- Total non-audit fees - - --------------------------------------------- ----- ----- Total fees (continuing and discontinued) 0.7 0.4 --------------------------------------------- ----- -----
Details of the Company's policy on the use of auditors for non-audit services and how the auditor's independence and objectivity was safeguarded are set out in the Audit Committee Report in the Annual Report.
4. Adjusted items GBPm 2018 2017 --------------------------------------- ----- ------- ------- Continuing operations Network and re-organisation costs (a) (3.1) (8.0) Property (b) 0.7 (0.6) Acquisition and disposal costs/income (c) - 2.2 Amortisation of acquired intangibles (d) (7.1) (7.3) Pension (e) - 0.7 Settlement of interest rate swap (f) - (0.8) Impairment of Tuffnells goodwill (g) (46.1) - Pass My Parcel exit costs (h) (6.7) - Impairment of tangible assets (i) (1.1) - NMW regulatory compliance (j) (0.5) ---------------------------------------- ---- ------- ------- Total before tax (63.9) (13.8) Taxation 2.9 2.7 ----------------------------------------------- ------- ------- Total after taxation (61.0) (11.1) Discontinued operations (Loss)/Profit on disposal of subsidiary (k) (10.5) 19.0 Re-organisation costs (l) (0.1) (0.3) Amortisation and impairment of discontinued intangibles (m) - (11.2) ---------------------------------------- ---- ------- ------- Total before tax (10.6) 7.5 Taxation - 1.1 ----------------------------------------------- ------- ------- Total after taxation (10.6) 8.6 Continuing and discontinued operations --------------------------------------- ----- ------- ------- Total before tax (71.6) (6.3) ----------------------------------------------- ------- ------- Taxation 2.9 3.8 ----------------------------------------------- ------- ------- Total after taxation (68.7) (2.5) ----------------------------------------------- ------- -------
The Group incurred a total of GBP48.3m of adjusted items on a continuing basis, after tax (2017: GBP11.1m).
This comprises:
(a) Network and re-organisation costs
There are GBP3.1m (2017: GBP8.0m) network and reorganisation costs. In the current year this includes abortive integration costs of GBP1.6m (2017: GBPnil) with regard to the integration programme announced at the end of the previous financial year. There are further costs of GBP1.8m (2017: GBPnil) relating to redundancies announced in August 2018 arising from the decision to streamline head-office functions which is separate to the network restructuring in the previous financial year. There is a credit of GBP0.3m relating to the release of the remaining redundancy provision related to network restructuring.
The total of GBP8.0m in the prior year comprised: a GBP4.0m charge for the 2017 redundancy provision relating to network restructuring; GBP2.0m related to network rationalisation costs incurred in the Smiths News network; GBP0.6m related to the restructuring of the Smiths News joint venture FMD Limited; GBP0.5m in rationalising overseas operations in DMD and the remaining GBP0.9m related to redundancy costs within Smiths News and Tuffnells.
Costs associated with network and reorganisation are considered adjusted items given they are part of a strategic programme to drive future cost savings and are significant in value to the results of the Group.
(b) Property
There is a GBP0.7m credit (2017: GBP0.6m charge) relating to property costs. During the year the Group made the strategic decision to transfer the previously vacant Slough depot to the Tuffnells business, resulting in a credit from the release of its onerous lease provision of GBP0.7m (2017: GBP0.9m charge relating to three properties). In the prior year GBP0.3m of reversionary lease provisions were released as they were no longer required. Onerous charges on property are charged through adjusted items as they form part of the Group's strategic restructuring programme. The reversal of charges has also been made in adjusted items for consistency.
(c) Acquisition and disposal costs
There are GBPnil (2017: GBP2.2m) costs in the current year relating to acquisition and disposal costs. Prior year acquisition costs included the release of deferred contingent consideration which was payable conditional on the financial performance of Tuffnells and the continued employment of its former owners. This amounted to GBP2.7m comprising equity based amounts and amounts provided for cash rewards (see note 27) which were offset by GBP0.5m fees relating to disposal activity in the prior year that did not meet the criteria to be included within discontinued. Deferred contingent consideration charges and credits in respect of previous acquisitions and costs relating to disposal activity are considered to be adjusted items as they do not form part of normal operating costs/ credits of the business.
(d) Amortisation of acquired intangibles
A charge of GBP7.1m (2017: GBP7.3m) has been recognised relating to amortisation of acquired intangibles. This is considered an adjusting item as it allows comparison between segments and, therefore, consistency in the performance of the Group at a consolidated level as shown in note 2.
(e) Pension
There is GBPnil (2017: GBP0.7m) of pension credits in the current year. The prior year GBP0.7m pension credit relates to a trivial commutation of benefits to members in the Group's section of the WH Smith Pension Trust. The prior year pension credit is not considered to be part of normal operations and is therefore considered to be an adjusted item.
(f) Settlement of interest rate swap
There is GBPnil (2017: GBP0.8m) relating to settlement of interest costs. The costs related to the settlement of swap instruments after the Group took a strategic decision to no longer enter into hedging arrangements. The settlement followed a change in Treasury policy (see note 20). The cost is classified as an adjusted item because it is of significant value and is not expected to be recurrent in nature.
(g) Impairment of Tuffnells goodwill
During the year management reviewed the carrying value of Tuffnells goodwill and concluded that an impairment charge of GBP46.1 million (2017: GBPnil) was required. The recoverable amount of goodwill (in both the current and prior year) is calculated with reference to its value in use based on future cash flow projections. The key assumptions used in the calculation are disclosed in note 14. It is considered adjusting due to its one-off nature and significant value.
(h) Pass My Parcel (PMP) exit costs
Following a review of the PMP proposition on 23 May 2018, the Board decided to close the division and as a result a charge of GBP6.7m (2017: GBPnil) was booked.
Management concluded that losses on winding down the division represented an onerous contract with a cost of GBP4.7m recognised which comprises the forecast excess of costs over income from the date the Group took the decision to close the division. It is considered adjusting due to its one off nature and significant value. Of this balance, GBP2.5m remains in provisions to cover the costs to close all contracts (see note 24). In the period from 1 September 2017 to the date of the decision to close, PMP incurred losses of GBP5.4m (these losses were included in our adjusted operating results).
A further GBP2.0m of impairment charges split GBP1.0m tangible and GBP1.0m intangible were recognised to write off the non-current assets relating to the division (note 13 and 14).
(i) Impairment of tangible assets
The Group took the decision to consider the sale of the Jack's Beans division to focus on its core businesses, bids received indicated an excess of net book value of GBP1.1m therefore the Group has impaired the assets and moved them into non-current assets held for sale. Given the magnitude, the one-off nature and the Group's strategy to focus on its core businesses it is considered to be an adjusting item.
(j) NMW regulatory compliance
The Group has been in discussion with HMRC regarding an historical underpayment in relation to a misapplication of national minimum wage legislation in Tuffnells. Although dialogue continues, a provision amounting to GBP1.3m has been made in the Financial Statements in respect of any potential liabilities, of which GBP0.5m relating specifically to the estimated fine is classified as adjusting due to its one off nature. GBP0.8m has been included within adjusted operating results as it did not meet the definition of an adjusting item.
(k) (Loss)/Profit on disposal of subsidiary
On 14 February 2018, the Group completed the sale of the Books business at a loss of GBP10.5m full details are provided in note 12. In the prior year, on 30 June 2017, the Group completed the sale of the Education & Care business at a profit of GBP19.0m full details are included in note 12.
(l) Re-organisation costs
Re-organisation costs of GBP0.1m (2017 GBP0.3m) were incurred by the Books business during the year. Reorganisation costs are considered to be adjusted items as they are part of the Group's wider restructuring programme to deliver cost savings and were incurred prior to the disposal. These are disclosed separately from other reorganisation costs on the basis the Books business was discontinued.
(m) Amortisation and impairment of discontinued intangibles
Included within discontinued operations results are items of GBPnil (2017 GBP11.2m) relating to amortisation and impairment of discontinued intangibles. The prior year includes impairments of GBP9.9m relating to the Books business and GBP1.3m of amortisation of acquired intangibles. The impairment is considered to be adjusting due to magnitude, the one-off nature and as it does not relate to underlying trade. Amortisation of acquired intangibles is considered adjusting as it skews the results of the non-acquired businesses.
5. Staff costs and employees (a) Staff costs
The aggregate remuneration of employees (including executive directors) was:
GBPm Note 2018 2017 Continuing -------------------- ----- ------ ------ Wages and salaries 112.6 116.5 Social security 11.0 10.1 Pension costs 6 1.9 1.8 -------------------- ----- ------ ------ Total 125.5 128.4 -------------------- ----- ------ ------
Pension costs shown above exclude charges and credits for pension scheme financing and actuarial gains and losses arising on the pension schemes. Wages and salaries shown above exclude amounts related to share based payment charges. On a continuing basis there was a credit of GBPnil in 2018 (2017: credit GBP1.6m) relating to share based payments (refer to note 3). There was GBP6.7m (2017: GBP23.7m) of staff costs relating to discontinued operations these are not included in the above table.
(b) Employee numbers
The average total monthly number of employees relating to continuing operations (including executive directors) was:
Number Restated
2018 2017
------------------- ------- ---------
Operations 3,707 3,859
Support functions 1,137 1,152
Total 4,844 5,011
------------------- ------- ---------
The note has been restated to only to include continuing operations. The average amount of discontinued operations staff in the prior year was 940 (521 operations and 419 support functions).
6. Retirement benefit obligation
Defined benefit pension schemes
The Group operates two defined benefit schemes, the WH Smith Pension Trust (the 'Pension Trust) and the Tuffnells Parcels Express Pension Scheme. The assets and liabilities of the 'Consortium CARE' and 'Platinum' defined benefit schemes were disposed as part of the sale of the Education & Care business (see note 12).
The Group's defined benefit pension plans are final salary pension plans, which provide benefits to members in the form of a guaranteed level of pension payable for life. The level of benefits provided depends on members' length of service and their salary in the final years leading up to retirement. Benefits are paid to members from trustee-administered funds. The trustees are responsible for ensuring that the plan is sufficiently funded to meet current and future benefit payments. If investment experience is worse than expected, the Group's obligations are increased.
The trustees must agree a funding plan with the sponsoring company such that any funding shortfall is expected to be met by additional contributions and investment performance. In order to assess the level of contributions required, triennial valuations are carried out with plan's obligations measured using prudent assumptions (relative to those used to measure accounting liabilities). The trustees' other duties include managing the investment of plan assets, administration of plan benefits and exercising of discretionary powers.
The amounts recognised in the balance sheet are as follows:
GBPm WH Smith Tuffnells 2018 WH Smith Tuffnells 2017
Pension Parcels Pension Parcels
Trust Express Trust Express
---------------------- -------- --------- ------- -------- --------- -------
Present value
of defined
benefit obligation (428.6) (11.8) (440.4) (460.6) (13.0) (473.6)
Fair value
of assets 583.1 9.6 592.7 609.9 10.2 620.1
---------------------- -------- --------- ------- -------- --------- -------
Net surplus/
(loss) 154.5 (2.2) 152.3 149.3 (2.8) 146.5
Amounts not
recognised
due to asset
limit (154.5) - (154.5) (149.3) - (149.3)
---------------------- -------- --------- ------- -------- --------- -------
- (2.2) (2.2) - (2.8) (2.8)
Additional
liability
recognised
due to minimum
funding requirements (5.1) - (5.1) (8.7) - (8.7) ---------------------- -------- --------- ------- -------- --------- ------- Pension liability (5.1) (2.2) (7.3) (8.7) (2.8) (11.5) ---------------------- -------- --------- ------- -------- --------- -------
The primary defined benefit pension scheme (the Smiths News Section of the WH Smith Pension Trust) has an IAS 19 surplus of GBP154.5m at 31 August 2018 (2017: GBP149.3m surplus) which the Group does not recognise in the accounts as the Group do not have an unconditional right to either a reduction of future contributions or right to a refund on closure of the scheme. The valuation of the defined benefit schemes for the IAS 19 disclosures have been carried out by independent qualified actuaries based on updating the most recent funding valuations of the respective schemes, adjusted as appropriate for membership experience and changes in the actuarial assumptions.
The actuarial valuation for funding purposes produces a scheme deficit due to different assumptions and calculation methodologies used compared to those under IAS 19, most notably the use of a discount rate that reflects the actual investment strategy, rather than corporate bond yields as required under IAS 19.
WH Smith Pension Trust
The actuarial valuation of the Smiths News section of the WH Smith Pension Trust, at 31 March 2015 was a deficit of GBP17.5m.
Future cash contributions by the Group to the pension trustees total GBP3.3m per annum through to March 2020. The Group recognises the present value of these agreed contributions as a pension liability of GBP5.1m (2017: GBP8.7m).
Other defined benefit schemes
The triennial actuarial valuation of the Tuffnells Parcels Express scheme as at 1 April 2016 was an agreed liability of GBP4.3m. Guaranteed Minimum Pension ("GMP") equalisation is expected to lead to an increase in scheme liabilities at some future date on the Tuffnells Parcels Express scheme. Deficit recovery contributions to the scheme have been agreed at GBP0.3m per annum.
The weighted average duration of the schemes is 17 years for the Pension Trust and 25 years for the Tuffnells Parcels Express scheme.
The principal long-term assumptions used to calculate scheme liabilities on all Group schemes are:
% p.a. 2018 2017 --------------------------------------- -------------- -------------- Discount rate 2.6 2.3 Inflation assumptions - CPI 2.2 2.3 Inflation assumptions - RPI 3.2 3.3 Demographic assumptions for WH 2018 2017 Smith Pension Trust: Life expectancy at age 65 Male Female Male Female Member currently aged 65 21.4 23.3 21.5 23.3 Member currently aged 45 22.5 24.5 22.5 24.5 --------------------------------------- ----- ------- ----- ------- Demographic assumptions for Tuffnells 2018 2017 Parcels Express scheme: --------------------------------------- -------------- -------------- Life expectancy at age 65 Male Female Male Female Member currently aged 65 22.2 24.1 22.3 24.1 Member currently aged 45 23.3 25.4 23.3 25.3 --------------------------------------- ----- ------- ----- -------
Inflation assumptions
Pension increases in deferment in the both Schemes are granted in line with CPI for all deferred members. RPI inflation is used to determine the increases for pensions currently in payment, subject to any annual caps and floors.
A summary of the movements in the net balance sheet asset/ (liability) and amounts recognised in the Group Income Statement and Other Comprehensive Income are as follows:
GBPm Fair value Defined Impact of Total
of scheme benefit IFRIC 14 on
assets obligation defined benefit
pension schemes
------------------------------------------ ----------- ------------ -------------------------------- -------
At 31 August 2016 671.9 (531.5) (161.6) (21.2)
------------------------------------------ ----------- ------------ -------------------------------- -------
Current service cost - (0.3) - (0.3)
Net interest cost 13.2 (10.3) (3.2) (0.3)
Administration expenses (0.2) - - (0.2)
Past service credits (3.4) 4.1 - 0.7
Total amount recognised in income
statement 9.6 (6.5) (3.2) (0.1)
------------------------------------------ ----------- ------------ -------------------------------- -------
Actual return on scheme assets
(excluding amounts included in
net interest expense) (21.8) - - (21.8)
Actuarial gains arising from experience - 4.5 - 4.5
Actuarial gains arising from changes
in financial assumptions - 4.7 - 4.7
Actuarial gains arising from changes
in demographic assumptions - 4.5 - 4.5
Change in surplus not recognised - - 6.8 6.8
Amount recognised in other comprehensive
income (21.8) 13.7 6.8 (1.3)
Employer contributions 5.2 - - 5.2
Employee contributions - - - -
Benefit payments (27.2) 27.2 - -
------------------------------------------ ----------- ------------ -------------------------------- -------
Amounts included in cash flow
statement (22.0) 27.2 - 5.2
------------------------------------------ ----------- ------------ -------------------------------- -------
Disposal (17.6) 23.5 - 5.9
------------------------------------------ ----------- ------------ -------------------------------- -------
At 31 August 2017 620.1 (473.6) (158.0) (11.5)
------------------------------------------ ----------- ------------ -------------------------------- -------
Current service cost - (0.1) (0.1)
Net interest cost 14.4 (10.9) (3.7) (0.2)
Administration expenses (0.2) - (0.2)
Total amount recognised in income
statement 14.2 (11.0) (3.7) (0.5)
------------------------------------------ ----------- ------------ -------------------------------- -------
Actual return on scheme assets
(excluding amounts included in
net interest expense) (23.4) - (1.7) (25.1)
Actuarial gains/(loss) arising
from experience - (3.1) - (3.1)
Actuarial gains arising from changes
in financial assumptions - 21.9 - 21.9
Actuarial gains arising from changes
in demographic assumptions - 2.5 - 2.5
Change in surplus not recognised - - 3.8 3.8
Amount recognised in other comprehensive
income (23.4) 21.3 2.1 -
Employer contributions 4.7 - - 4.7
Employee contributions - - - -
Benefit payments (22.9) 22.9 - -
------------------------------------------ ----------- ------------ -------------------------------- -------
Amounts included in cash flow
statement (18.2) 22.9 - 4.7
------------------------------------------ ----------- ------------ -------------------------------- -------
At 31 August 2018 592.7 (440.4) (159.6) (7.3)
------------------------------------------ ----------- ------------ -------------------------------- -------
Included within Current liabilities (3.7)
Included within Non-current liabilities (3.6) ------------------------------------------ ----------- ------------ -------------------------------- -------
The charge for the current service cost is included within administrative expenses. 'Net interest costs' are calculated by applying a discount rate to the net defined benefit asset or liability scheme assets and are included within finance income and expense.
An analysis of the assets at the balance sheet date is detailed below:
GBPm 2018 2017
--------------------------- --------------------- ------ ------
Gilts and swaps portfolio Quoted and Unquoted 362.9 401.9
Corporate bonds Quoted and Unquoted 216.0 202.4
Loan fund Unquoted - -
Equity funds Unquoted 9.6 10.2
Bonds Unquoted - -
Cash and other Unquoted 4.2 5.6
592.7 620.1
------------------------------------------------- ------ ------
The return on scheme assets during 2018 was a loss of GBP23.4m (2017: a loss of GBP21.8m) due to a decrease in the value of bonds held to match pension scheme liabilities.
The value of the assets held by the trust in Connect Group PLC issued financial instruments is GBPnil (2017: GBPnil).
Sensitivity of results to changes in the main assumptions:
Assumption Change in assumption Impact on IAS 19 liabilities ------------------ --------------------- ----------------------------- Discount rate +/- 0.5% (GBP35.5m)/ +GBP37.5m Rate of inflation +/- 0.5% GBP36m/ +(GBP33m) Life expectancy +/- 1 year GBP15.5m/ +(GBP15.5m) ------------------ --------------------- -----------------------------
The sensitivity analysis for each significant actuarial assumption has been determined based on reasonably possible changes to the assumptions at the end of the reporting period. It is based on a change in the key assumption while holding all other assumptions constant. The effect of a change in more than one assumption will be different to the sum of the individual changes. When calculating the sensitivities, the same methodology used to calculate the liability recognised in the balance sheet has been applied. The methodology and types of assumptions used in preparing the sensitivity analysis is consistent with the previous period.
The history of experience adjustments is as follows:
GBPm 2018 2017 2016 2015 2014 ---------------------------------- -------- -------- -------- -------- -------- Present value of defined benefit obligation (440.4) (473.6) (531.5) (432.0) (450.7) Fair value of assets 592.7 620.1 671.9 563.3 522.7 Impact of IFRIC 14 on defined benefit pension schemes (159.6) (158.0) (161.6) (149.4) (93.0) ---------------------------------- -------- -------- -------- -------- -------- Net deficit in the schemes (7.3) (11.5) (21.2) (18.1) (21.0) ---------------------------------- -------- -------- -------- -------- -------- Experience adjustments on scheme liabilities 21.3 13.7 (117.4) 25.1 0.8 ---------------------------------- Experience adjustments on scheme assets (23.4) (21.8) 115.4 28.7 44.6 ---------------------------------- -------- -------- -------- -------- --------
The cumulative amount of actuarial gains and losses recognised in the statement of comprehensive income since the adoption of IFRS is a loss of GBP30.5m (2017: a loss of GBP30.5m).
The Group's defined benefit pension plans have a number of areas of risk, the most significant of which are set out below:
-- Life expectancy
The majority of the plans' obligations are to provide a pension for the life of the member, so increases in life expectancy will result in an increase in the plans' liabilities.
-- Inflation risk
The plans' benefit obligations are linked to inflation and higher inflation will lead to higher liabilities.
-- Changes in bond yields
Falling bond yields tend to increase the funding and accounting liabilities. The schemes both hold investments in corporate and government bonds which offer a degree of matching, i.e. the movement in assets arising from changes in bond yields partially matches the movement in the funding or accounting liabilities. In this way, the exposure to movements in bond yields is reduced.
However, as the WH Smith Pension Trust entered into an insurance backed annuity 'buy-in' of the Scheme assets, within the section of the Trust sponsored by Smiths News, which minimises the Group's exposure to future pension obligations (note 32).
Defined contribution schemes
The Group operates a number of defined contribution schemes. For the year ended 31 August 2018, contributions from the respective employing company for continuing operations totalled GBP1.9m (2017: GBP1.8m) which is included in the Income Statement.
A defined contribution plan is a pension plan under which the group pays contributions to an independently administered fund - such contributions are based upon a fixed percentage of employees' pay. The group has no legal or constructive obligations to pay further contributions to the fund once the contributions have been paid. Members' benefits are determined by the amount of contributions paid by the Company and the member, together with investment returns earned on the contributions arising from the performance of each individual's chosen investments and the type of pension the member chooses to buy at retirement. As a result, actuarial risk (that benefits will be lower than expected) and investment risk (that assets invested in will not perform in line with expectations) fall on the employee.
7. Finance costs
GBPm Note 2018 2017
-------------------------------------- ----- ----- -----
Continuing operations
Interest on bank overdrafts and
loans (4.1) (4.4)
Amortisation of loan arrangement
fees (0.5) (1.0)
Net interest expense on defined
benefit obligation 6 (0.2) (0.3)
Interest payable on finance leases (0.6) (1.0)
Foreign exchange gains - 0.2
Unwinding of discount on provisions
- trading 24 (0.1) (0.2)
Adjusted items:
Settlement of interest rate swap 4 - (0.8)
-------------------------------------- ----- ----- -----
Finance costs - continuing operations (5.5) (7.5)
-------------------------------------- ----- ----- -----
Finance costs - continuing and
discontinued operations (5.5) (7.5)
-------------------------------------- ----- ----- -----
8. Income tax expense
GBPm 2018 2017
Continuing operations Adjusted Adjusted Total Adjusted Adjusted Total
items items
------------------------------ --------- --------- ------- --------- --------- ------
Current tax 5.6 (1.9) 3.7 10.0 (0.6) 9.4
Adjustment in respect
of prior year (1.0) - (1.0) (0.8) 0.1 (0.7)
Total current tax charge 4.6 (1.9) 2.7 9.2 (0.5) 8.7
Deferred tax - current
year 0.6 (1.0) (0.4) 0.1 (2.0) (1.9)
Deferred tax - prior
year 0.3 - 0.3 0.5 - 0.5
Deferred tax - impact
of rate change - - - 0.1 (0.2) (0.1)
------------------------------ --------- --------- ------- --------- --------- ------
Total tax charge -
continuing operations 5.5 (2.9) 2.6 9.9 (2.7) 7.2
------------------------------ --------- --------- ------- --------- --------- ------
Effective tax rate 19.4% (7.3%) 20.6% 21.1%
------------------------------ --------- --------- ------- --------- --------- ------
Tax charge - discontinued
operations 0.4 (0.4) - 1.0 (1.1) (0.1)
------------------------------ --------- --------- ------- --------- --------- ------
Tax charge - continuing
and discontinued operations 5.9 (3.3) 2.6 10.9 (3.8) 7.1
------------------------------ --------- --------- ------- --------- --------- ------
The effective adjusted income tax rate for continuing operations in the year was 19.4% (2017: 20.6%). After the impact of Adjusted items of GBP2.9m (2017: GBP2.7m), the effective statutory income tax rate for continuing operations was (7.3)% (2017: 21.1%).
Corporation tax is calculated at the main rates of UK corporation tax, those being 19.0% (2017: 19.6%). Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions.
Of the charge to current tax, approximately GBPnil (2017: GBP1.0m) related to tax on profits arising in the Books business, which was disposed of during the year. No tax charge or credit arose on the disposal of the relevant subsidiary.
The tax charge for the year can be reconciled to the profit in the income statement as follows:
GBPm 2018 2017 ------------------------------------------- ------- ------ Profit before tax - continuing operations (35.5) 34.2 ------------------------------------------- ------- ------ Tax on profit at the standard rate of UK corporation tax 19.0% (2017: 19.6%) (6.7) 6.7 Expenses not deductible for tax purposes 9.8 0.8 Non-taxable income (0.5) (0.6) Share based payments 0.6 0.5 Adjustment in respect of prior years (0.6) (0.2) Impact of change in UK tax rate - (0.1) Impact of higher overseas tax rates - 0.1 Tax charge - continuing operations 2.6 7.2 ------------------------------------------- ------- ------
Expenses not deductible for tax purposes are comprised mainly of the tax effect of the impairment of Goodwill in Tuffnells. See note 4.
Tax charges to other comprehensive income and directly in equity
GBPm 2018 2017 Continuing operations --------------------------------------------------- ------ ------ Current tax relating to the defined benefit pension scheme (0.7) (0.8) Current tax relating to share based payments - - Deferred tax relating to derivative financial instruments - 0.2 Deferred tax relating to share based payments - 0.2 Deferred tax relating to retirement benefit obligations 0.7 0.3 Tax (credit) to other comprehensive income and directly in equity - continuing operations - (0.1) --------------------------------------------------- ------ ------ Tax charge to other comprehensive income and directly in equity - discontinued operations - 0.3 --------------------------------------------------- ------ ------ Tax charge to other comprehensive income and directly in equity - continuing and discontinued operations - 0.2 --------------------------------------------------- ------ ------ 9. Dividends
Amounts paid & proposed as distributions to equity shareholders in the years:
2018 2017 2018 2017
Paid & proposed dividends Per share Per share GBPm GBPm
for the year
------------------------------ ---------- ---------- ----- -----
Interim dividend - paid 3.1p 3.1p 7.6 7.6
Final dividend - proposed nil 6.7p - 16.4
3.1p 9.8p 7.6 24.0
------------------------------ ---------- ---------- ----- -----
Recognised dividends for the
year
Final dividend - prior year 6.7p 6.5p 16.5 16.0
Interim dividend - current
year 3.1p 3.1p 7.6 7.6
------------------------------ ---------- ---------- ----- -----
9.8p 9.6p 24.1 23.6
------------------------------ ---------- ---------- ----- -----
There is no proposed final dividend for the year ended 31 August 2018.
The final dividend payment of GBP16.5m is GBP0.1m higher than that proposed, which is a result of movements in treasury shares between the declaration date and the ex-div date.
10. Earnings per share
2018 2017
GBPm Pence GBPm Pence
Earnings Weighted per share Earnings Weighted per share
average average
number number
of shares of shares
million million
------------------------------------- --------- ----------- ---------- --------- ----------- ----------
Weighted average number of
shares in issue 247.7 247.5
Shares held by the ESOP (weighted) (1.7) (2.1)
Basic earnings per share (EPS)
------------------------------------- --------- ----------- ---------- --------- ----------- ----------
Continuing operations
------------------------------------- --------- ----------- ---------- --------- ----------- ----------
Adjusted earnings attributable
to ordinary shareholders 22.9 246.0 9.3p 38.1 245.4 15.5p
------------------------------------- --------- ----------- ---------- --------- ----------- ----------
Adjusted items (61.0) (11.1)
Earnings attributable to ordinary
shareholders (38.1) 246.0 (15.5p) 27.0 245.4 11.0p
------------------------------------- --------- ----------- ---------- --------- ----------- ----------
Discontinued operations
Earnings attributable to ordinary
shareholder 1.3 246.0 0.5p 9.6 245.4 3.9p
Total - Continuing and discontinued
operations
Adjusted earnings attributable
to ordinary shareholders 24.2 246.0 9.8p 39.1 245.4 15.9p
Adjusted items (71.2) (2.5)
Earnings attributable to ordinary
shareholders (47.0) 246.0 (19.1p) 36.6 245.4 14.9p
------------------------------------- --------- ----------- ---------- --------- ----------- ----------
Diluted earnings per share
(EPS)
------------------------------------- --------- ----------- ---------- --------- ----------- ----------
Effect of dilutive share options - 1.6
Effect of dilutive share options
adjusting 0.7 1.6
------------------------------------- --------- ----------- ---------- --------- ----------- ----------
Continuing operations
------------------------------------- --------- ----------- ---------- --------- ----------- ----------
Diluted adjusted EPS 22.9 246.7 9.3p 38.1 247.0 15.4p
------------------------------------- --------- ----------- ---------- --------- ----------- ----------
Diluted EPS (38.1) 246.0 (15.5p) 27.0 247.0 10.9p
------------------------------------- --------- ----------- ---------- --------- ----------- ----------
Discontinued operations -
Diluted EPS (8.9) 246.0 (3.6p) 9.6 247.0 3.9p
------------------------------------- --------- ----------- ---------- --------- ----------- ----------
Total - Continuing and discontinued
operations
------------------------------------- --------- ----------- ---------- --------- ----------- ----------
Diluted adjusted EPS 24.2 246.7 9.8p 39.1 247.0 15.8p
------------------------------------- --------- ----------- ---------- --------- ----------- ----------
Diluted EPS (47.0) 246.0 (19.1p) 36.6 247.0 14.8p
------------------------------------- --------- ----------- ---------- --------- ----------- ----------
Dilutive shares increase the basic number of shares at 31 August 2018 by 0.7m to 246.7m (31 August 2017: 247.0m).
The calculation of diluted EPS reflects the potential dilutive effect of employee incentive schemes of 0.7m dilutive shares (31 August 2017: 1.6m). In 2017 there was a dilutive impact of a weighted 1.6m shares being the time apportioned share capital relating to the deferred consideration for the acquisition of The Big Green Parcel Holding Company Limited (whose principal trading subsidiary is Tuffnells Parcels Express Limited).
Dilutive shares are only dilutive for the purposes of the Group's adjusted measure, where a profit is recognised. The application of the dilutive shares to the adjusted profits measure reduces the profit per share. For the Group's statutory measures, the potential dilutive effect of employee incentive schemes is antidilutive, in that they would reduce the loss per share. Accordingly, they are not applied to the statutory calculation with basic and dilutive EPS being the same.
11 Discontinued Operations and assets held for sale
The Group took the decision to consider the sale of the Jack's Beans division to focus on its core businesses, bids received indicated an excess of net book value of GBP1.1m, therefore, the Group have impaired the assets down to GBP0.5m and moved them into non-current assets held for sale.
On 30 June 2017 the Education & Care business was sold (refer to note 12 for detail). The results of this business are therefore disclosed as discontinued. The Books business was classified as held for sale on 31 August 2017 as the Group was actively marketing the business, it subsequently disposed of the business on the 14 February 2018. As such, the results of the Books business are also classified as discontinued.
The results of discontinued operations, which have been included within the consolidated income statement, are as follows:
GBPm 12 months to Aug 2018 12 months to Aug 2017
------------------------------
Adjusted Adjusted Total Adjusted Adjusted Total
items items
-------------------------- --------- --------- -------- --------- --------- --------
Revenue 114.3 - 114.3 270.3 - 270.3
Expenses (112.5) (10.6) (123.1) (268.3) 7.5 (260.8)
--------------------------- --------- --------- -------- --------- --------- --------
Operating profit 1.8 (10.6) (8.8) 2.0 7.5 9.5
Finance costs (0.1) - (0.1) - - -
--------------------------- --------- --------- -------- --------- --------- --------
Profit before tax 1.7 (10.6) (8.9) 2.0 7.5 9.5
Income tax expense (0.4) 0.4 - (1.0) 1.1 0.1
--------------------------- --------- --------- -------- --------- --------- --------
Profit from discontinued
operations 1.3 (10.2) (8.9) 1.0 8.6 9.6
--------------------------- --------- --------- -------- --------- --------- --------
The major classes of assets and liabilities comprising the operations classified as held for sale are as follows:
GBPm 2018 2017 Goodwill - 9.7 Intangible assets - 3.0 Property, plant and equipment 0.5 4.0 Inventories - 20.3 Trade and other receivables - 26.1 Current tax asset - 0.5 Cash and bank balances - 0.9 Total assets classified as held for sale 0.5 64.5 Trade and other payables - (48.5) Deferred tax liabilities - (0.4) Provisions - (0.6) --------------------------------------------- ---- ------ Total liabilities classified as held for sale - (49.5) Net assets of assets held for sale/disposal group 0.5 15.0 --------------------------------------------- ---- ------
Impairment of GBPnil (2017: GBP7.9m) was charged in respect of goodwill bringing the carrying value of the business to fair value less cost to sell.
During the year cash outflow from operating activities attributed to discontinued operations amounted to GBP8.8m (2017: inflow GBP3.8m) and paid GBP4.3m (2017: GBP3.7m) in respect of investing activities. There were no cash flows associated with financing activities attributable to discontinued operations.
12 Disposal of subsidiaries
The Group disposed of the Books business on 14 February 2018.
The net assets of the business at the date of disposal were:
GBPm
Goodwill 9.7
Intangible assets 3.6
Property, plant and equipment 4.1
Inventories 20.7
Trade and other receivables 32.7
Cash and bank balances 4.6
Trade and other payables (45.9)
Corporation tax liability (0.1)
Deferred tax liabilities (0.3)
Provisions (0.5)
----------------------------------------------------- -------
Net assets disposed 28.6
Gross proceeds received 18.7
Disposal costs (1.5)
Release of deferred consideration liability 0.9
Net assets disposed (28.6)
----------------------------------------------------- -------
Loss on disposal (10.5)
Total consideration
Satisfied by:
Cash 18.7
Net cash inflow arising on disposal
Equity consideration 6.0
Disposal proceeds to repay overdraft* 12.7
----------------------------------------------------- -------
Consideration received in cash and cash equivalents 18.7
Less: cash and cash deposits disposed (4.6)
Less: cash disposal costs (1.5)
----------------------------------------------------- -------
12.6
----------------------------------------------------- -------
*As part of the sale and purchase agreement a Group overdraft balance was settled which was intrinsically linked to the Books business.
The loss on disposal is included in the profit for the year from discontinued operations.
The Group disposed of the Education & Care business on 30 June 2017.
The net assets of the business at the date of disposal were:
GBPm
Goodwill 20.9
Intangible assets 6.3
Property, plant and equipment 6.0
Pension asset 0.2
Inventories 8.6
Trade and other receivables 11.0
Cash and bank balances 0.5
Deferred tax asset 1.1
Trade and other payables (9.6)
Deferred tax liabilities (0.7)
Pension liability (6.1)
----------------------------------------------------- ------
38.2
Disposal costs 1.8
Gain on disposal 19.0
Total consideration 59.0
Satisfied by:
Cash 58.7
Cash received after 31 August 2017 0.3
Net cash inflow arising on disposal:
Consideration received in cash and cash equivalents 58.7
Less: cash and cash equivalents disposed (0.5)
----------------------------------------------------- ------
58.2
===================================================== ======
The gain on disposal is included in the profit for the year from discontinued operations.
Net cash inflow arising from disposal of Books business 12.6
Cash consideration received in the period to 28 February 2018
arising from disposal of Education & Care 0.3
--------------------------------------------------------------- -----
Net cash inflow arising from disposals 12.9
--------------------------------------------------------------- -----
13. Intangible assets
Acquired Intangibles Internally Computer
generated software
development costs
costs
----------------------------------- ------------- ----------
GBPm Goodwill Customer Trade Software Total
relationships name
---------------- --------- --------------- ------- --------- ------------- ---------- -------
Cost:
At 1 September
2017 57.8 29.3 30.7 0.8 6.4 11.5 136.5
Additions - - - - 0.7 1.1 1.8
Disposals - - - - - (0.1) (0.1)
At 31 August
2018 57.8 29.3 30.7 0.8 7.1 12.5 138.2
---------------- --------- --------------- ------- --------- ------------- ---------- -------
Accumulated
amortisation:
At 1 September
2017 - (11.3) (8.3) (0.7) (3.9) (5.8) (30.0)
Amortisation
charge - (4.0) (3.1) (0.1) (0.4) (2.7) (10.3)
Disposals - - - - - - -
Impairment (46.1) - - - (1.0) - (47.1)
At 31 August
2018 (46.1) (15.3) (11.4) (0.8) (5.4) (8.5) (87.4)
---------------- --------- --------------- ------- --------- ------------- ---------- -------
Net book value
at 31 August
2018 11.7 14.0 19.3 - 1.8 4.0 50.8
---------------- --------- --------------- ------- --------- ------------- ---------- -------
Cost:
At 1 September
2016 96.3 48.8 33.5 1.5 11.2 16.2 207.5 Additions - - - - 2.1 3.0 5.1 Disposals - - - - (2.8) (0.6) (3.4) Disposal of business (20.9) (9.3) (0.9) (0.2) (0.9) (4.3) (36.5) Classified as held for sale (17.6) (10.2) (1.9) (0.5) (3.2) (2.8) (36.2) At 31 August 2017 57.8 29.3 30.7 0.8 6.4 11.5 136.5 ---------------- --------- --------------- ------- --------- ------------- ---------- ------- Accumulated amortisation: At 1 September 2016 - (20.0) (7.5) (1.1) (7.2) (6.9) (42.7) Amortisation charge - (5.1) (3.2) (0.3) (1.4) (3.2) (13.2) Disposals - - - 2.6 0.4 3.0 Disposal of business 5.6 0.5 0.2 0.4 2.6 9.3 Impairment (7.9) (2.0) - - - - (9.9) Classified as held for sale 7.9 10.2 1.9 0.5 1.7 1.3 23.5 At 31 August 2017 - (11.3) (8.3) (0.7) (3.9) (5.8) (30.0) ---------------- --------- --------------- ------- --------- ------------- ---------- ------- Net book value at 31 August 2017 57.8 18.0 22.4 0.1 2.5 5.7 106.5 ---------------- --------- --------------- ------- --------- ------------- ---------- -------
The Group leases software under various finance lease arrangements. The net book value of finance leases contained within the software balance above is GBP0.2m (2017: GBP0.6m).
The net book value of the Groups acquired intangibles split by CGU is included in the table below.
Goodwill Acquired Intangibles Total
GBPm 2018 2017 On acquisition 2018 2017 On acquisition 2018 2017 On acquisition
------------- ----- ----- --------------- ----- ----- --------------- ----- ----- ---------------
DMD 5.7 5.7 5.7 0.2 0.5 2.6 5.9 6.2 8.3
Smiths News - - - - 0.1 0.3 - 0.1 0.3
Tuffnells 6.0 52.1 52.1 33.1 39.9 58.1 39.1 92.0 110.2
11.7 57.8 57.8 33.3 40.5 61.0 45.0 98.3 118.8
----- ----- ----- ----- -----
Impairment tests goodwill
The carrying amount of the Tuffnells business has been reduced to its recoverable amount through recognition of an impairment loss against goodwill, no class of asset other than goodwill was impaired. This loss has been included in adjusting items against operating expenses in the income statement.
Goodwill is not amortised, but tested annually for impairment or more frequently if there are indications that goodwill might be impaired with the recoverable amount being determined from value in use calculations. The recoverable amounts of the combined cash generating units are determined from the value in use calculations. The Group prepares cash flow forecasts derived from the most recent plan for the following as approved by the Board and extrapolates these cash flows on an estimated growth rate into perpetuity.
The rate used to discount the forecast cash flows is 9.5% (2017 10.0%), being the Group's weighted average cost of capital adjusted for industry and market risk.
The table below includes the key assumptions used to calculate the Group's cash generating unit value in use:
Tuffnells Smiths News DMD
Average plan revenue growth 1.4% (6.1%) 0.0%
---------- ------------ ------
Average plan contribution margin(*1) 8.1% 4.8% 10.0%
---------- ------------ ------
Discount Rate 9.5% 9.5% 9.5%
---------- ------------ ------
Long term growth rate 2% 0.0% 0.0%
---------- ------------ ------
(*1) Average contribution margin is considered gross profit less distribution costs
In generating these budgets the Board has considered the overall strategy of the Group, the principal risks and uncertainties inherent within the business, as well as making a number of key strategic planning assumptions which are noted below:
1. No significant impact on trading as a result of the EU Exit or other political change; 2. Modest revenue growth in Tuffnells in the assessment period;
3. Delivery of margin improvement in Tuffnells, driven by efficiencies both in operating and overhead costs in the assessment period;
4. Continued decline in sales of printed media during the assessment period offset by overhead efficiencies in the assessment period; and
5. Retention of major contracts in the news distribution business at rates which maintain acceptable margins.
Consistent with IAS 36 revenues in relation to enhancement of assets has not been included.
Sensitivity to changes in key assumptions
Impairment testing is dependent on management's estimates and judgements, particularly as they relate to the forecasting of future cash flows, the discount rates selected and expected long-term growth rates.
The Group has conducted sensitivity analysis on the impairment test of each of the CGU's classified within continuing operations. There is significant headroom on the carrying value of each CGU except for the Tuffnells CGU. Given the headroom in the other CGU's it would require a significant change in assumptions to require an impairment charge and this level of change is considered unlikely. The Tuffnells CGU has a carrying value of GBP67.5m based on the following assumptions; the effect of a reasonably possible change in the assumptions is disclosed in the table below.
Plan scenario Change Effect on impairment
GBPm
Long term growth rate
(%) 2% -/+ 1% 13.8/(10.5)
-------------- ------- ---------------------
Post tax discount rate
(%) 9.5% -/+ 1% (7.7)/10.1
-------------- ------- ---------------------
Contribution (GBPm)*(1) GBP74.3m - 10% (19.5)
-------------- ------- ---------------------
Average contribution
margin *(2) (% of revenue) 10.0% -/+ 1% (2.1)/1.3
-------------- ------- ---------------------
(*1) Contribution is gross profit less distribution costs
(*2) Average contribution margin is considered gross profit less distribution costs
Other Intangibles
The individual material intangible assets relate to the customer relationships and brand acquired on the acquisition of Tuffnells. The carrying value of these assets at 31 August 2018 is GBP13.8m and GBP19.3m (2017: GBP17.5m and GBP22.4m) respectively with a remaining amortisation period of 4 and 6.5 years respectively. Given the trading performance in the year these assets were reviewed for impairment, no impairment was indicated.
Included within distribution costs is GBP1.0m (2017: GBPnil) in relation to the impairment of intangible assets in the PMP division, this is included with the Smiths News CGU further details are included within note 4.
As detailed in note 12, goodwill and intangibles attributable to the Education & Care CGU were disposed during the previous financial year.
An impairment against goodwill and intangibles attributable to the Books business was charged during the previous financial year bringing the carrying value to the fair value less costs to sell. The resulting goodwill and intangibles values were transferred to assets held for sale in the prior year.
14. Property, plant and equipment
GBPm Land & Buildings
-------------------------------------------
Freehold Long term Short Fixtures Equipment Total
properties leasehold term leasehold & fittings & vehicles
--------------------------- ------------ ----------- ---------------- ------------ ------------ -------
Cost:
At 1 September 2017 14.1 1.5 12.6 4.9 42.7 75.8
Additions - - 1.3 0.9 6.9 9.1
Transfer between asset - - - - - -
classes
Disposals (0.1) (0.2) (0.3) (0.4) (4.0) (5.0)
Classified as held
for sale - - - - (3.4) (3.4)
--------------------------- ------------ ----------- ---------------- ------------ ------------ -------
At 31 August 2018 14.0 1.3 13.6 5.4 42.2 76.5
--------------------------- ------------ ----------- ---------------- ------------ ------------ ------- Accumulated depreciation: At 1 September 2017 - (0.4) (7.7) (3.5) (22.9) (34.5) Depreciation charge (0.2) - (1.0) (1.3) (6.1) (8.6) Transfer between asset classes - - - 0.6 (0.6) - Disposals - 0.1 - 0.6 3.8 4.5 Impairments - - - - (2.0) (2.0) Classified as held for sale - - - - 2.9 2.9 At 31 August 2018 (0.2) (0.3) (8.7) (3.6) (24.9) (37.7) --------------------------- ------------ ----------- ---------------- ------------ ------------ ------- Net book value at 31 August 2018 13.8 1.0 4.9 1.8 17.3 38.8 --------------------------- ------------ ----------- ---------------- ------------ ------------ ------- Cost: At 1 September 2016 15.8 1.4 14.6 12.3 47.5 91.6 Additions 3.5 0.1 1.0 2.2 5.2 12.0 Transfer between asset classes 0.7 - - - (0.7) - Disposals (1.1) - (2.7) (2.0) (5.2) (11.0) Disposal of business (4.8) - - (1.4) (3.7) (9.9) Classified as held for sale - - (0.3) (6.2) (0.4) (6.9) --------------------------- ------------ ----------- ---------------- ------------ ------------ ------- At 31 August 2017 14.1 1.5 12.6 4.9 42.7 75.8 --------------------------- ------------ ----------- ---------------- ------------ ------------ ------- Accumulated depreciation: At 1 September 2016 (0.9) (0.4) (9.3) (7.1) (23.6) (41.3) Depreciation charge (0.2) - (1.0) (1.2) (6.9) (9.3) Disposals 0.6 - 2.4 1.5 4.8 9.3 Disposal of business 0.5 - - 0.9 2.5 3.9 Classified as held for sale - - 0.2 2.4 0.3 2.9 At 31 August 2017 - (0.4) (7.7) (3.5) (22.9) (34.5) --------------------------- ------------ ----------- ---------------- ------------ ------------ ------- Net book value at 31 August 2017 14.1 1.1 4.9 1.4 19.8 41.3 --------------------------- ------------ ----------- ---------------- ------------ ------------ -------
The Group leases plant and equipment under a number of finance lease arrangements and has the option to purchase the equipment at the end of each lease. The net book value of finance leases contained within these balances is GBP3.7m at 31 August 2018 (2017: GBP6.8m). See note 4 for details of impairment and assets held for sale.
Impairments of GBP1.1m and GBP1.0m have been recognised in the current year relating to the write down of Jack's Beans assets to their NBV and write off PMP assets respectively, further detail is included within note 4.
15. Interests in joint ventures
The Group's share of the results, assets and liabilities of joint ventures is as follows:
GBPm 2018 2017 ------------------------- ------ ------ Revenue 5.1 4.9 Profit after tax 0.5 0.4 ------------------------- ------ ------ Non-current assets 1.5 1.4 Current assets 2.5 2.4 ------------------------- ------ ------ Total assets 4.0 3.8 Current liabilities (1.8) (2.0) Non-current liabilities - (0.1) ------------------------- ------ ------ Total liabilities (1.8) (2.1) Goodwill 2.9 2.9 ------------------------- ------ ------ Share of net assets 5.1 4.6
Dividends of GBP0.2m (GBP0.2m FY17) were received in the year to 31 August 2018 from joint ventures.
The Group has a 50% interest in the ordinary shares of Rascal Solutions Limited, a company incorporated in England (2017: 50%), which in turn owns 100% of the ordinary shares of Open-Projects Limited. The latest statutory accounts of Rascal Solutions Limited were drawn up to 31 August 2017. The Group has a 50% investment in FMD Limited, the holding company of Worldwide Magazine Distribution Limited, a company incorporated in England (2017: 50%). The latest statutory accounts of FMD Limited were drawn up to 31 July 2017. Both of these companies are currently in the process of liquidation.
During the prior year, the Group's shares in Bluebox Avionics Limited were exchanged for shares in Bluebox Systems Group Limited (previously named Bluebox Aviation Systems Limited); an entity in which the Group has a 36.1% interest. A loan balance of GBP nil (FY17: GBP0.3m) owed by Bluebox Avionics Limited was converted to an investment in Bluebox Aviation Systems Limited, a subsidiary of Bluebox Systems Group Limited.
16. Inventories
GBPm 2018 2017
------------------------------ ---- ----
Goods held for resale 12.4 12.8
------------------------------ ---- ----
Raw materials and consumables 0.9 1.0
Inventories 13.3 13.8
17. Trade and other receivables
GBPm 2018 2017
------------------------------- ----- -----
Trade receivables 61.3 76.8
Allowance for doubtful debts (0.5) (0.5)
------------------------------- ----- -----
60.8 76.3
Other debtors 14.3 13.5
Prepayments and accrued income 6.6 8.5
Trade and other receivables 81.7 98.3
------------------------------- ----- -----
Trade receivables
The average credit period taken on sale of goods is 20 days (2017: 24 days). Trade receivables are generally non-interest bearing. The Group provides for receivables on an individual customer basis based on circumstances known at that time and the likelihood of recovery.
Included in the outstanding trade receivables balance are debtors with overdue amounts of GBP1.4m (2017: GBP5.4m) that the Group has not provided for as these amounts are still considered recoverable and fall outside our pre-determined provisioning policy.
Ageing of past due but not impaired receivables:
GBPm 2018 2017
--------------- ----- -----
30-60 days 2.0 1.5
61-90 days 0.4 0.8
91-120 days 0.5 0.8
Over 120 days 0.2 2.3
--------------- ----- -----
3.1 5.4
--------------- ----- -----
Of the trade receivables balance at the end of the year:
-- One customer (2017: one) had an individual balance that represented more than 10% of the total trade receivables balance. The total of this was GBP13.2m (2017: GBP13.8m); and
-- A further seven customers (2017: seven) had individual balances that represented more than 5% of the total trade receivables balance. The total of these was GBP32.8m (2017: GBP49.1m).
Movement in the allowance for doubtful debts:
GBPm 2018 2017 -------------------------------------- ------ ------ At 1 September 0.5 0.8 Impairment losses recognised 0.5 0.6 Amounts written off as uncollectible (0.4) - Amounts recovered during the year (0.1) - Amounts released during the year - - Disposal during year - - Transferred as held for sale - (0.9) -------------------------------------- ------ ------ At 31 August 0.5 0.5 -------------------------------------- ------ ------
Ageing of past due and impaired trade receivables:
GBPm 2018 2017 ----------------------------------- ----- ----- 30-60 days - 0.1 61-90 days - - 91-120 days 0.2 0.1 Over 120 days 0.3 0.3 ----------------------------------- ----- ----- Continuing 0.5 0.5 ----------------------------------- ----- ----- Discontinued - 0.9 ----------------------------------- ----- ----- Total continuing and discontinued 0.5 1.4 ----------------------------------- ----- -----
The directors consider that the carrying amount of trade and other receivables approximates their fair value which is considered to be a level 2 methodology of valuing them.
Other debtors and prepayments
The largest items included within this balance are GBP6.8m (2017: GBP6.7m) of publisher debtors and GBP2.6m (2017: GBP3.8m) of accrued revenue.
18. Trade and other payables
GBPm 2018 2017
------------------------------ ------ ------
Trade payables 94.0 102.9
Other creditors 17.5 18.2
Accruals and deferred income 16.1 15.1
------------------------------- ------ ------
127.6 136.2
------------------------------- ------ ------
Trade and other payables principally comprise amounts outstanding for trade purchases and on-going costs. The average credit period taken for trade purchases is 31 days (2017: 32 days). No interest is charged on trade payables. The directors consider that the carrying amount of trade and other payables approximates to their fair value using a level 2 valuation.
19. Cash and borrowings
Cash and borrowings by currency (Sterling equivalent) are as follows:
GBPm Sterling Euro US Dollar Other Total 2017
2018
---------
Cash and bank deposits
- continuing 14.8 1.8 1.2 0.2 18.0 5.5
-------
Cash and bank deposits
- classified as held for
sale - - - - - 0.9
Cash and bank deposits
- total 14.8 1.8 1.2 0.2 18.0 6.4
Term loan - disclosed
within current liabilities - - - - - (20.0)
Overdrafts - disclosed
within current liabilities (9.2) - - - (9.2) -
Revolving credit facility
- disclosed within current
liabilities (38.0) - - - (38.0) -
Term loan - disclosed
within non-current liabilities (48.8) - - - (48.8) (60.0)
Total borrowings (96.0) - - - (96.0) (80.0)
---------
Net borrowings (81.2) 1.8 1.2 0.2 (78.0) (73.6)
-------
Total borrowings
-------
Amount due for settlement
within 12 months (47.2) - - - (47.2) (20.0)
Amount due for settlement
after 12 months (48.8) - - - (48.8) (60.0)
-------
(96.0) - - - (96.0) (80.0)
-------
Cash and bank deposits comprise cash held by the Group and short-term bank deposits with an original maturity of three months or less. The carrying amount of these assets approximates their fair value.
In October 2017, the Group concluded new bank facilities of GBP175m with six relationship banks with a term which runs until January 2021. The new facility comprises of a term loan of GBP50m with no amortisation and a revolving credit facility (RCF) for GBP125m on a higher interest margin than the previous facility but with similar covenant terms to the previous facility (see note 20). The GBP47.2m due for settlement within 12 months relates to the RCF and overdraft.
Available Group bank facilities are outlined in note 20. Interest payable under the facility in place at 31 August 2018 is calculated as the cost of one month LIBOR plus an interest margin of between 1.35% and 2.35% dependent on the net debt/ adjusted EBITDA covenant ratio. The weighted average interest rate for the year was 4.9%.
Reconciliation of liabilities arising from financing activities
The table below details changes in the Group's liabilities arising from financing activities, including both cash and non-cash changes. Liabilities arising from financing activities are those for which cash flows were, or future cash flows will be, classified in the Group's consolidated statement of cash flows as cash flows from financing activities.
GBPm Note 01/09/2017 Financing New finance Other 31/08/2018
cash flows leases changes
Term Loan 19 80.0 (30.0) - (1.2) 48.8
Revolving credit facility 19 - 24.1 - 13.9 38.0
Finance leases 8.5 (3.8) - 0.6 5.3
Total 88.5 (9.7) - 13.3 92.1
Other changes include interest accruals, payments and settlement of a Group overdraft balance intrinsically linked to the Books business (see note 12).
20. Financial Instruments
Treasury policy
The Group operates a centralised treasury function to manage the Group's funding requirements and financial risks in line with the Board approved treasury policies and procedures and their delegated authorities. Treasury's role is to ensure that appropriate financing is available for running the businesses of the Group on a day to day basis, whilst minimising interest cost. No transactions of a speculative nature are undertaken. Dealings are restricted to those banks with suitable credit ratings and counterparty risk and credit exposure is monitored frequently.
Capital risk management
The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising the return to stakeholders through the optimisation of the debt and equity balance. The capital structure of the Group consists of debt, which includes the borrowings, cash and cash equivalents as disclosed in Note 19 and equity attributable to equity holders of the parent, comprising issued capital, reserves and retained earnings as disclosed in the Group Statement of Changes in Equity.
The only externally imposed capital requirements for the Group are debt to EBITDA, fixed charge cover and interest cover under the terms of the bank facilities, with which the Group has fully complied during both the current year and the prior year. To maintain or adjust its capital structure, the Group may adjust the dividend payment to shareholders and/or issue new shares. The Group's capital is only restricted by distributable reserves.
The Board regularly reviews the capital structure. As part of this review, the Board considers the cost of capital and the risks associated with each class of capital, given the recent changes in the Group, a target capital structure is under consideration.
Liquidity risk
The Group manages liquidity risk by maintaining adequate reserves and banking facilities and by monitoring forecast and actual cash flows. The facilities that the Group has at its disposal to further reduced liquidity risk are described below.
As at 31 August 2018, the Group had GBP175m committed bank facilities in place (2017: GBP230m). Bank facilities comprised:
-- a GBP50m syndicated term loan -- a GBP125m syndicated revolving credit facility which expires in January 2021;
The facility described above is subject to the following covenants:
-- Leverage cover - the net debt: adjusted EBITDA ratio which must remain below 2.75x. At 31 August 2018 the ratio was 1.8x (2017: 1.2x);
-- Interest cover - the consolidated net interest: adjusted EBITDA ratio which must remain above 4.0x. As at 31 August 2018 the ratio was 9.6x (2017: 12.0x);
-- Fixed charge cover - the ratio of adjusted EBITDA to consolidated fixed charges is not less than 1.75x to 1. As at 31 August 2018 the ratio was 2.3x (2017: 3.0x); and
-- Guarantor cover - The annual turnover, gross assets and pre-tax profits of the Guarantors contribute at any time 80 per cent or more of the annual consolidated turnover, gross assets and pre-tax profits of the Group for each of its financial years. The guarantors, which are all 100% owned or wholly owned subsidiaries of the Connect Group PLC, are Connect Group PLC, Smiths News Holdings Limited and Tuffnells Parcels Express Limited.
At 31 August 2018, the Group had available GBP87.0m (2017: GBP150.0m) of undrawn committed borrowing facilities. There were no breaches of loan agreements during either the current or prior years.
As the Group is cash generative its liquidity risk is considered low. The Group's cash generation allows it to meet all loan commitments as they fall due as well as sustain a negative working capital position.
The Group invests significant resources in the forecasting and management of its cash flows. This is critical given a routine cash cycle at Smiths News that results in significant predictable swings within each month of around GBP40.0m, which utilises the Revolving Credit Facility of GBP125.0m.
The following is an analysis of the undiscounted contractual cash flows payable under financial liabilities and derivatives. The undiscounted cash flows will differ from both the carrying value and fair value. Floating rate interest is estimated using the prevailing rate at the balance sheet date.
GBPm Due within Due between Due between Greater than
1 Year 1 and 2 years 2 and 3 years 3 years
At 31 August 2018
Non derivative financial
liabilities
Bank and other borrowings (47.2) - (50.0) -
Finance leases (2.8) (1.7) (0.4) (0.6)
Total (50.0) (1.7) (50.4) (0.6)
At 31 August 2017
Non derivative financial
liabilities
Bank and other borrowings (22.5) (60.6) - -
Finance leases (3.8) (2.8) (2.2) (1.0)
Total (26.3) (63.4) (2.2) (1.0)
Counterparty risk
Dealings are restricted to those banks with suitable credit ratings and counterparty risk and credit exposure is monitored.
Foreign currency risk
-- The majority of the Group's transactions are carried out in the functional currencies of its operations, and so transactional exposure is limited.
-- The majority of the Group's net liabilities are held in Sterling, with only GBP1.0m (2017: GBP4.4m) of net assets held in overseas currencies. Translation exposure arises on the re-translation of overseas subsidiaries profits and net assets into sterling for financial reporting purposes and is not seen as significant.
-- Note 19 denotes borrowings by currency. -- There are no material currency exposures to disclose.
Interest rate risk
The Group monitors its exposure to interest rate risk and has used interest rate swaps to manage its exposure to interest rate movements on its bank borrowings. In light of the Group's reduced debt exposure, consideration of the macroeconomic environment and sensitivity to potential interest rate rises.
The Group avoids the use of derivatives or other financial instruments in circumstances when the outcome would effectively be largely dependent upon speculation on future rate movements.
Hedge accounting
It is, and has been throughout the period of review, the Group's policy that no trading in derivative financial instruments shall be undertaken.
All financial assets are classified under loans and receivables and other financial liabilities are held at amortised cost.
Interest rate sensitivity analysis
Based on the assumption that the liabilities outstanding at the balance sheet date were outstanding for the whole year, if interest rates had been 0.5% higher/lower and all other variables were held constant, the Group's profit and equity for the year ended 31 August 2018 would decrease/increase by GBP0.4m (2017: GBP0.4m).
Credit risk
The Group considers its exposure to credit risk at 31 August 2018 to be as follows:
GBPm 2018 2017
Bank deposits 17.9 6.4
Trade and other receivables 78.7 103.4
96.6 109.8
Further detail on the Group's policy relating to trade receivables can be found in note 17.
21. Obligations under finance leases
GBPm 2018 2017
Minimum lease Present value Minimum lease Present value
payments of minimum payments of minimum
lease payments lease payments
Amount payable under
finance leases:
Within one year 2.8 2.8 3.8 3.1
In the second to fifth
years inclusive 2.7 2.5 6.0 5.4
Total 5.5 5.3 9.8 8.5
Less: future finance
charges (0.2) - (1.3)
Present value of lease
obligations 5.3 5.3 8.5 8.5
Less: amount due for
settlement within 12
months (shown under current
liabilities) (2.8) (3.1)
Amount due for settlement
after 12 months 2.5 5.4
Group policy is to acquire certain items of its fixtures, equipment and software under finance leases. The average lease term is 3 years. Interest rates are fixed at the contract date. All leases are on a fixed repayment basis and no arrangements have been entered into for contingent rental payments.
The fair value of the Group's lease obligations approximates to their carrying amount.
22. Other non-current liabilities GBPm 2018 2017 Other creditors 0.6 1.0
The balance disclosed as other creditors within non-current liabilities relates to operating lease incentives which are being recognised over the lease term.
23. Deferred tax
Deferred tax assets and liabilities are attributable to the following:
GBPm Accelerated Other Share Intangible Retirement Total
tax depreciation based assets benefits
payments
At 1 September 2017 1.8 0.9 0.7 (7.2) 2.0 (1.8)
Charge to income 0.1 (0.7) (0.7) 1.3 - -
Charge to other comprehensive
income and directly
in equity - - - - (0.7) (0.7)
Classified as held - - - - - -
for sale
Disposal of subsidiary - - - - - -
At 31 August 2018 1.9 0.2 - (5.9) 1.3 (2.5)
Deferred tax assets 1.9 0.2 - - 1.3 3.4
Deferred tax liabilities - - - (5.9) - (5.9)
At 1 September 2016 2.1 0.5 1.2 (10.8) 3.8 (3.2)
Charge to income (0.2) 0.6 (0.3) 2.5 (0.2) 2.4
Charge to other comprehensive
income and directly
in equity - (0.2) (0.2) - (0.6) (1.0)
Classified as held
for sale - - - 0.4 - 0.4
Disposal of subsidiary (0.1) - - 0.7 (1.0) (0.4)
At 31 August 2017 1.8 0.9 0.7 (7.2) 2.0 (1.8)
Deferred tax assets 1.8 0.9 0.7 - 2.0 5.4
Deferred tax liabilities - - - (7.2) - (7.2)
The Group has recognised the net balance of deferred tax as the liability and asset are with the same tax authority and unwind over the same time period. The deferred tax assets have been deemed recoverable as they are offset by a liability and the Group forecasts that it will continue to make profits against which the assets can be utilised.
The Group has capital losses carried forward of GBP28.2m (2017: GBP28.2m). Deferred tax assets have not been recognised in respect of the capital losses carried forward due to the uncertainty of their utilisation.
On 15 September 2016, the Finance Bill received Royal Assent to enact the previously announced reductions in the rate of corporation tax to 19% from 1 April 2017 and 17% from 1 April 2020. The Group has continued to remeasure its UK deferred tax assets and liabilities at the end of the reporting period at the rates of 19% and 17% based on an updated expectation of when those balances are expected to unwind.
24. Provisions
GBPm Regulatory Reorganisation Insurance Deferred Property Total
provisions and legal contingent provisions
provision consideration
At 1 September
2017 - (4.5) (3.6) (0.8) (6.7) (15.6)
Additions (1.3) (5.3) (2.4) - (0.4) (9.4)
Release - - 0.7 0.8 0.7 2.2
Utilised in period - 5.8 1.9 - 0.9 8.6
Unwinding of discount
utilisation - - - - (0.1) (0.1)
Transfer (1.5) - 1.5 - - -
At 31 August 2018 (2.8) (4.0) (1.9) - (5.6) (14.3)
GBPm 2018 2017
Included within
current liabilities (9.5) (9.0)
Included within
non-current liabilities (4.8) (6.6)
Total (14.3) (15.6)
Included within non-current liabilities is GBPnil (2017: GBP1.5m) relating to insurance and legal provisions and GBP4.8m (2017: GBP5.1m) relating to Property provisions.
Regulatory provisions relate to a GBP1.5m fine and legal costs from the Health & Safety Executive ("HSE") in relation to a fatality at its Brierley Hill depot that occurred in January 2016. This was settled in full on 3 October 2018 following Tuffnells prosecution on 11 September 2018 for an offence under S2(1) of the Health and Safety at Work Act. A further GBP1.3m is in relation to legal costs and estimated historical underpayment of national minimum wage (see note 4 for further information).
Reorganisation provisions include GBP2.2m relating to the closure of Pass My Parcel and GBP1.8m of redundancy costs, that have been announced prior to the year end and are all expected to be utilised during the following financial year (see note 4 for further information).
Insurance & legal provisions represent the expected future costs of employer's liability, public liability, motor accident claims and legal claims.
Deferred contingent consideration related to amounts provided in relation to the acquisition of the remaining 49% share of the former Books business' subsidiary Wordery on 27 August 2015, which has been released through discontinued operations on disposal of the Books business in February 2018.
The property provision represents the estimated future cost of the Group's onerous leases on non-trading properties and for potential dilapidation costs across the Group. These provisions have been discounted at a risk adjusted rate and this discount will be unwound over the life of the leases. The provisions cover the period to 2036, however, a significant portion of the potential liability falls within five years. Included within the provision are amounts of GBP0.3m in relation to estimated PMP related dilapidation costs (see note 4 for further information).
25. Contingent liabilities and capital commitments GBPm 2018 2017 Bank and other loans guaranteed 6.8 6.0
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 from WH Smith PLC, any such contingent liability in respect of assignment prior to demerger, which becomes an actual liability, will be apportioned between Connect Group PLC and WH Smith PLC in the ratio 35:65 (provided that the actual liability of Connect Group PLC in any 12 month period does not exceed GBP5m). The Company's share of these leases has an estimated future cumulative gross rental commitment at 31 August 2018 of GBP1.3m (2017: GBP2.0m).
Contracts placed for future capital expenditure approved by the directors but not provided for amount to: GBPnil (2017: GBPnil).
On 12 September 2018, the Group approved a letter of credit of GBP4.4m to our main insurer for the motor insurance and employer liability insurance policy. The letter of credit covers the employer deductible element of the insurance policy for insurance claims.
26. Operating lease commitments
The group as lessee:
Minimum lease payments under non-cancellable operating leases are as follows:
Continuing 2018 2017
GBPm Land & Equipment Total Land & Equipment Total
buildings & vehicles buildings & vehicles
------
Within one year 12.1 13.3 25.5 9.4 12.5 21.9
In the second to
fifth years inclusive 30.4 18.6 49.0 25.2 23.3 48.5
In more than five
years 22.3 2.3 24.5 18.8 0.5 19.3
-----------
64.8 34.2 99.0 53.4 36.3 89.7
-----------
The Group leases various distribution properties and plant and equipment under non-cancellable operating lease agreements. The leases have varying terms, escalation clauses and renewal rights.
The group as lessor:
At the balance sheet date, the Group had contracted with tenants for the following future minimum lease payments:
GBPm 2018 2017
Within one year 0.1 0.2
In the second to fifth years inclusive - 0.3
0.1 0.5
Property rental income earned during the year was GBP0.2m (2017: GBP0.3m).
27. Net cash inflow from operating activities
GBPm Note 2018 2017
Operating (loss)/profit - continuing 3 (30.0) 41.7
Operating (loss)/profit - discontinued 3 (8.8) 9.5
Operating (loss)/profit - total (38.8) 51.2
Losses on disposal of assets 0.5 0.4
Impairment of assets held for sale 4 1.1 -
Impairment of tangible assets 4 1.0 -
Share of profits of joint ventures (0.5) (0.4)
Loss/ (gain) on disposal of subsidiary 12 10.5 (19.0)
Adjustment for pension funding (4.2) (5.2)
Depreciation of property, plant
and equipment 8.6 9.3
Amortisation and impairment of
intangible assets 57.5 23.1
Impairment of loan to joint venture 4 - 0.6
Share based payments (0.3) (1.2)
(Increase) in inventories 0.5 (2.0)
Decrease in receivables 17.7 3.9
(Decrease) in payables (10.2) (3.0)
(Decrease)/ Increase in provisions (0.3) 4.7
Non cash pension costs 0.3 (0.3)
Amortisation of loan arrangement
fees 7 0.6 -
Income tax paid (6.5) (10.9)
Net cash inflow from operating
activities 37.5 51.2
-----
Net cash flow from operating activities
is stated after the following adjusted
items:
Payment of deferred consideration - (1.1)
Re-organisation & restructuring
costs (4.7) (4.7)
PMP exit costs (2.1)
Fees relating to disposal activity (1.5) (0.5)
-----
(8.3) (6.3)
-----
28. Share Capital
(a) Share capital
GBPm 2018 2017
Issued and fully paid:
At 1 September 12.4 12.3
Shares issued during the year - 0.1
247.7m ordinary shares of 5p each (2017: 247.7m) 12.4 12.4
(b) Movement in share capital
Number (m) Ordinary shares
of 5p each
31 August 2017 247.7
Shares issued during the year -
At 31 August 2018 247.7
The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at the general meetings of the Company. The Company has one class of ordinary shares, which carry no right to fixed income.
During the year to 31 August 2018,125 ordinary 5p shares were issued to satisfy share scheme exercises.
During the year to 31 August 2017, 946,334 ordinary 5p shares were issued. 394,007 ordinary shares were issued in relation to the satisfaction of deferred consideration to the former owners of The Big Green Parcel Holding Company Limited (Tuffnells). The remainder were issued to satisfy share scheme exercises.
(c) Share premium GBPm 2018 2017 Balance at 1 September 60.5 59.2 Premium arising on issue of equity shares - 1.3 Balance at 31 August 60.5 60.5 29. Reserves (a) Demerger reserve GBPm 2018 2017 At 1 September (280.1) (280.1) At 31 August (280.1) (280.1)
This relates to reserves created following the capital re-organisation undertaken as part of the demerger of WH Smith PLC in 2006. The balance represented the difference between the share capital and reserves of the Group restated on a pro-forma basis as at 31 August 2004 and the previously reported share capital.
(b) Own shares reserve GBPm 2018 2017 Balance at 1 September (3.1) (3.5) Acquired in the period - (0.5) Disposed of on exercise of options 1.0 0.9 Balance at 31 August (2.1) (3.1)
The reserve represents the cost of shares in Connect Group PLC purchased in the market and held by the Smiths News Employee Benefit Trust to satisfy awards and options granted under the Group's Executive Share Schemes (see Note 31). The number of ordinary shares held by the Trust as at 31 August 2018 was 1,506,850 (2017: 2,241,459). In accordance with IAS 32, these shares are deducted from shareholders' funds. Under the terms of the Trust, the Trustee has waived all dividends on the shares it holds.
(c) Hedging & translation reserve GBPm 2018 2017 ----------------------------------------- Balance at 1 September 0.5 (1.1) Settlement on termination - 0.8 Net movement in cash flow hedges - 0.6 Exchange differences on translating net assets of foreign operations (0.3) 0.2 ----------------------------------------- Balance at 31 August 0.2 0.5
The hedging reserve represents the cumulative amount of gains and losses on hedging instruments deemed effective in cash flow hedges. The cumulative deferred gain or loss on the hedging instrument is recognised in the profit or loss only when the hedged transaction ceases to be effective.
30. Retained Earnings
GBPm
Balance at 31 August 2016 226.2
Amounts recognised in Total comprehensive
income 35.1
Dividends paid (23.6)
Employee share schemes (0.9)
Equity-settled share based payments, net
of tax (1.9)
Balance at 31 August 2017 234.9
Amounts recognised in Total comprehensive
expense (47.0)
Dividends paid (24.1)
Employee share schemes (1.0)
Equity-settled share based payments, net
of tax 0.4
Balance at 31 August 2018 163.2
31. Share-based payments
In 2018, the Group recognised a total credit of GBP0.4m related to equity-settled share-based payment transactions. In 2017 there was a total credit of GBP1.2m. The average share price throughout the year was 72.0p (2017: 134.0p).
The Group operates the following share incentive schemes:
Sharesave Scheme Under the terms of the Connect Group Sharesave
Scheme, the Board may grant options to
purchase ordinary shares in the Company
to eligible employees who enter into an
HM Revenue & Customs approved Save-As-You-Earn
('SAYE') savings contract for a term of
three years. Options are granted at a 20%
discount to the market price of the shares
on the day preceding the date of offer
and are normally exercisable for a period
of six months after completion of the SAYE
contract.
Executive Share Option Under the terms of the Connect Group Executive
Scheme (ESOS) Share Option Scheme, the Board may grant
options to purchase ordinary shares in
the Company to executives up to an annual
limit of 200% of base salary. The exercise
of options is conditional on the achievement
of adjusted profit after a three year period,
which is determined by the Remuneration
Committee at the time of grant. Provided
that the target is met, options are normally
exercisable until the day preceding the
10(th) anniversary of the date of grant.
--------------------------------------------------
LTIP Under the terms of the Connect Group LTIP,
executive directors and key senior executives
may be awarded each year conditional entitlements
to ordinary shares in the Company (which
may be in the form of nil cost options
or conditional awards) or, in order to
retain flexibility and at the Company's
discretion, a cash sum linked to the value
of a notional award of shares up to a value
of 200% of base salary. The vesting of
awards is subject to the satisfaction of
a three year performance condition, which
is determined by the Remuneration Committee
at the time of grant. Subject to the satisfaction
of the performance condition, awards are
normally exercisable until the 10(th) anniversary
of the date of grant.
Deferred Bonus Plan Under the terms of the Connect Group Deferred
(DBP) Bonus Plan, executive directors and key
senior executives may be granted each year
share awards (in the form of nil cost options)
dependent on the achievement of the Annual
Bonus Plan performance targets. Awards
are normally exercisable after two years
subject to continued employment.
--------------------------------------------------
Details of the options/awards are as follows:
Sharesave ESOS LTIP DBP
Number of No of Weighted No of Weighted No of Weighted No of Weighted
options/ awards shares average shares average shares average shares average
exercise exercise exercise exercise
price price price price
(p) (p) (p)
At 31 Aug
2016 3,333,127 129.9 4,984,971 145.9 2,279,310 - 1,149,805 -
Granted 1,701,823 100.8 1,544,115 139.1 1,910,445 - 417,556 -
Exercised (552,327) 121.6 (164,298) 113.5 - - (501,096) -
Expired /Forfeited (917,432) 126.7 (267,519) 150.6 (1,183,726) - (155,741) -
At 31 Aug
2017 3,565,191 118.1 6,097,269 144.8 3,006,029 - 910,524 -
Granted 3,154,226 43.6 1,353,061 108.8 2,137,786 - 338,976 -
Exercised (9,846) 101.3 (114,935) 86.3 - - (676,941) -
Expired /Forfeited (2,787,326) 115.1 (705,876) 165.0 (2,039,058) - (92,705) -
At 31 Aug
2018 3,922,245 60.4 6,629,519 136.3 3,104,757 - 479,854 -
Exercisable
at 31 Aug
2018 253,052 128.4 2,753,725 134.3 - - - -
Exercisable
at 31 Aug
2017 439,369 142.2 2,256,150 131.7 - - - -
The weighted average remaining contractual life in years of options/awards is as follows:
Sharesave ESOS LTIP DBP
Outstanding at 31 August
2018 2.6 6.6 8.6 1.2
Outstanding at 31 August
2017 2.5 7.1 8.8 1.6
Details of the options/awards granted or commencing during the current and comparative year are as follows:
Sharesave ESOS LTIP DBP
During 2018:
Effective date of grant or Jun 2018 Dec 17 Dec 17 Dec 17
commencement date
Average fair value at date
of grant or scheme commencement
- pence 13.9 11.6 109 109
During 2017:
Effective date of grant or Jun 2017 Nov 2016 Feb 2017 Feb 2017
commencement date and Feb
2017
Average fair value at date
of grant or scheme commencement
- pence 21.8 18.0 138.0 138.0
The options outstanding at 31 August 2018 had exercise prices ranging from nil to 189.5p (2017: nil to 189.5p).
The weighted average share price on the date of exercise was 108p (2017: 150p).
The Sharesave and ESOS options granted during each period have been valued using the Black-Scholes model, the LTIP and DBP schemes are valued by reference to the share price at the date of grant.
The inputs to the Black-Scholes model are as follows:
Sharesave ESOS ESOS LTIP DBP
2018 options/awards: Dec 2017
Share price at grant date
- pence 52.3 109 - 109 109
Exercise price - pence 42.0 109 - - -
Expected volatility -
per cent 50% 33% - - -
Expected life - years 3.0 3.0 - - -
Risk free rate - per cent 0.94% 0.78% - - -
Expected dividend yield
- per cent 1.9% 9.1% - - -
Weighted average fair
value - pence 13.9 11.6 - - -
2017 options/awards: Nov 2016 Feb 2017
Share price at grant date
- pence 126.0 139.5 138.0 138.0 138.0
Exercise price - pence 100.8 139.5 138.0 - -
Expected volatility -
per cent 32% 33% 33% - -
Expected life - years 3.0 3.0 3.0 - -
Risk free rate - per cent 0.63% 0.72% 0.60% - -
Expected dividend yield
- per cent 7.8% 7.0% 7.1% - -
Weighted average fair
value - pence 21.8 18.1 17.7 - -
32. Post balance sheet events
On 22 October 2018 the WH Smith Pension Trust entered into an insurance backed annuity 'buy-in' of the Scheme assets within the section of the Trust sponsored by Smiths News, which minimises the Group's exposure to future pension obligations.
The High Court ruled on 26 October 2018 on the equalisation of Guaranteed Minimum Payments (GMP) on pensions. There will be potential additional liabilities arising for some pension schemes and the High Court approved two different methods for calculation. This judgement is likely to increase the liabilities within the Tuffnells pension scheme. Given the very recent nature of the judgement and the complexities involved in calculating any required liability, the extent to which the judgement will increase the liabilities is under consideration and therefore no provision has been made as at 31 August 2018. The Smiths News section of the WH Smith Pension Trust is not subject to GMP as the Scheme is not contracted out.
On 12 September 2018, the Group approved a letter of credit of GBP4.4m to our main insurer for the motor insurance and employer liability insurance policy. The letter of credit covers the employer deductible element of the insurance policy for insurance claims.
33. 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.
Transactions with the Group's pension schemes are disclosed in Note 6.
Trading transactions
Sales to related parties Amounts owed by related
parties
GBPm 2018 2017 2018 2017
Joint ventures 3.5 3.1 0.8 0.7
Sales to related parties are for management fees, payment is due on the last day of the month following the date of invoice.
Non-trading transactions
Loans to related parties
GBPm 2018 2017
Joint ventures - -
Aggregate remuneration of key management personnel
The remuneration of the directors and the executive leadership team, who are the key management personnel of the continuing Group, is set out below in aggregate for each of the categories specified in IAS 24 'Related Party Disclosures.'
GBPm 2018 2017
Short-term employee benefits 2.1 4.4
Post employment benefits 0.4 0.3
Termination benefits - 0.2
Share based payments (0.1) 0.6
2.4 5.5
Information concerning directors' remuneration, interest in shares and share options are included in the Directors' remuneration report in the Annual Report.
34. Subsidiary and associated undertakings
Company name/ Share Class Group Company name/ Share Class Group
(number) % (number) %
United Kingdom
Rowan House, Cherry Orchard North, Kembrey Park, Swindon SN2 8UH
Martin-Lavell
Connect Limited Ordinary Limited Ordinary
02008952 Shares 100% 02654521 (*) Shares 100%
Connect Logistics Pass My Parcel
Limited Ordinary Limited Ordinary
09172965 Shares 100% 09172022 Shares 100%
Connect News & Phantom Media
Media Limited Ordinary Limited Ordinary
08572634 Shares 100% 03805661 (*) Shares 100%
Connect Parcel Smiths News Holdings
Freight Limited Ordinary Limited Ordinary
09295023 Shares 100% 04236079 Shares 100%
Connect Parcels Smiths News Instore
Limited Ordinary Limited Ordinary
09172850 Shares 100% 03364589 (*) Shares 100%
Connect Services Ordinary Smiths News Investments Ordinary
Limited Shares 100% Limited (*) Shares 100%
08522170 06831284
Connect Specialist
Distribution Group
Limited Ordinary Smiths News Limited Ordinary
08458801 Shares 100% 08506961 Shares 100%
Smiths News Trading
Connect2U Limited Ordinary Limited Ordinary
03920619 (*) Shares 100% 00237811 Shares 100%
The Big Green
Dawson Media Services Ordinary Euro Machine Limited Ordinary
Limited (*) 06882722 Shares 100% 02496549 Shares 100%
Dawson Guarantee The Big Green
Company Limited Ordinary Parcel Group Limited Ordinary
06882393 Shares 100% 05356630 (*) Shares 100%
The Big Green
Dawson Holdings Parcel Holding
Ltd Ordinary Company Ltd 06459283 Ordinary
00034273 (*) Shares 100% (*) Shares 100%
The Big Green
Parcel Machine
Dawson Limited Ordinary Limited 03125293 Ordinary
03433262 Shares 100% (*) Shares 100%
Dawson Media Direct Tuffnells Parcels
Limited Ordinary Express Limited Ordinary
06882366 Shares 100% 00319964 Shares 100%
Jack's Beans Limited Ordinary
09646507 Shares 100%
Two Snowhill, Snow Hill, Birmingham, B4 6GA
Worldwide Magazine
Distribution Limited Ordinary FMD Limited Ordinary
01206287 Shares 50% 03729720 A shares 50%
Estantia House, Pitreavie Drive, Pitreavie Business Park, Dunfermline,
Fife KY11 8US
Bluebox Aviation Bluebox Systems
Systems Ltd Ordinary Group Limited Ordinary
SC267388 Shares 36.1% SC544863 A Shares 36.1%
Inflight House, Hurricane Way, Langley, SL3 8AG
Bluebox Avionics
Limited Ordinary
05684001 Shares 36.1%
Silbury Court, 420 Silbury Boulevard, Milton Keynes MK9 2AF
Rascal Solutions
Open-Projects Limited Ordinary Limited Ordinary
02422753 Shares 50% 05191277 A Shares 50%
France
Dawson Media Direct Ordinary 100% 11 rue Léopold Bellan, 75000
SAS Shares Paris, France
450 101 340 RCS
Bobigny
Spain
Dawson Media Direct Ordinary 100% Avendida de la Industria 38, Nave
Iberica SL Shares C-17, 28223 Coslada, Spain
CIF-B84692904
Germany
Dawson Media Direct Ordinary 100% Auf der Roos 6-12, 65795 Hattersheim
GmbH Shares am Main, Germany
HRB 99445
Belgium
Dawson Media Direct Ordinary 100% Brixtonlaan 1E, 1930 Nossengem,
NV Shares Belgium
474.114323
Turkey
Dawson Media Direct Ordinary 100% Parima Plaza Maltepe Mahallesi
Anonim Sirketi Shares Eski Cirpici Yolu Sok No:8 K:14-176
14449-5 Merter-Zeytinburnu Istanbul Turkey
Australia
Dawson Media Direct Ordinary 100% C/O Grant Thornton Australia Level
Australia Pty Limited Shares 17, 383 Kent Street, Sydney NSW
615545545 2000, Australia
Hong Kong
Dawson Media Direct Ordinary 100% Flat/Rm 5008 50/F, Central Plaza,
China Limited Shares 18 Harbour Road, Wanchai, Hong
1167911 Kong
Thailand
Dawson Media Direct Ordinary 100% 87 M Thai Tower, All Seasons Place,
Co. Ltd Shares 23rd Floor, Wittayu Road, Lumpini
105558138385 Sub-District, Pathumwan District,
Bangkok, Thailand
United Arab Emirates
DMD Holdings Limited Ordinary 100% PO Box 7992, Dubai, United Arab
(JAFZA) Shares Emirates
OF3596
United States
Dawson Media Direct Common Stock 100% Corporation Trust Centre, 1209
Holdings Inc Orange Street, Wilmington IL DE19801,
4056281 United States
Dawson Media Direct Common Stock 100% 40 Wall Street, 28(th) Floor, New
Inc York, NY 10005, USA
4056283
* Audit exemption statement
For the year ended 31 August 2018, the companies as indicated in the table by '(*)' above were entitled to exemption from audit under section 479A of the Companies Act 2006 relating to subsidiary companies. The members of these companies have not required them to obtain an audit of their financial statements for the year ended 31 August 2018.
Bluebox Systems Group Limited, Bluebox Aviation Systems Limited and Bluebox Avionics Limited are associated undertakings. Rascal Solutions Limited, Open-Projects Limited, FMD Limited and Worldwide Magazine Distribution Limited are joint ventures (see note 15).
35. Reconciliation of Free cash flow to net movement in cash and cash equivalents
A reconciliation between free cash flow and the net increase/ (decrease) in cash and cash equivalents is shown below:
GBPm 2018 2017
Net increase/(decrease) in cash
& cash equivalents 2.5 (3.1)
Dividend paid 24.1 23.6
Proceeds on sale of subsidiary
(net of disposal costs) (12.9) (56.8)
Increase/Decrease in borrowings 5.9 61.0
Adjustment for pension funding 4.7 5.2
Net outflow on purchase of shares
for EBT - 0.5
Proceeds on issue of shares - (0.7)
Dividends received from associates (0.2) (0.2)
Total Free cash flow 24.1 29.5
Discontinued free cash flow (3.9) (0.8)
------- -------
Continuing free cash flow 20.2 28.7
------- -------
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
END
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