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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 : 6489U
Connect Group PLC
26 October 2017
Connect Group PLC
('Connect Group' or 'the Group')
Unaudited Preliminary Results Announcement for the year ended 31 August 2017
A challenging year with significant strategic progress
Connect Group, a UK leading specialist distributor, is pleased to announce its unaudited preliminary results for the year ended 31 August 2017.
Adjusted continuing FY17 FY16 restated Change results (1) (7) (8) Revenue GBP1,594.3m GBP1,645.8m -3.1% Profit before tax GBP48.0m GBP50.4m -4.6% Earnings per share 15.5p 16.2p -4.3% Statutory continuing results Revenue GBP1,594.3m GBP1,645.8m -3.1% Profit before tax GBP34.2m GBP35.2m -2.8% Earnings per share 11.0p 11.3p -2.7% Dividend per share 9.8p 9.5p 3.2% Free cash flow (including Adjusted items) (2) GBP28.7m GBP36.2m -20.7% Net debt (4) GBP82.1m GBP141.7m 42.1% --------------------------- ------------ -------------- -------
STRATEGIC HIGHLIGHTS:
-- Focused strategy continues, concentrating on opportunities in Early Distribution and Mixed Freight
-- Adjusted continuing PBT GBP48.0m down GBP2.4m, due to weaker performance in Mixed Freight -- Resilient trading in News offset by higher costs in Pass My Parcel -- Step change in the integration of Smiths News and Tuffnells -- Plans to deliver an initial GBP15m of savings over two years
-- Sale of Education & Care for an enterprise value of GBP64.4m and net cash proceeds of GBP58.2m
-- Books planned disposal expected in FY18 -- Leverage (4) reduces to 1.2x and bank facilities renewed in October 2017 until January 2021 -- Final dividend of 6.7p up 3.1%, making a full year dividend of 9.8p, up 3.2%
Mark Cashmore, Chief Executive Officer, commented:
"In what has been a challenging year, we have concurrently managed a period of tough trading while refocusing our strategy, restructuring our leadership, and disposing of the Education & Care division.
A two-year transformation programme is underway, centred on a comprehensive integration of our core businesses, extending from leadership and central services through to the network and frontline delivery.
We are now wholly focused on opportunities in Early Distribution and Mixed Freight - and we are moving at pace with a transformation programme, to deliver a combination of efficiencies, service and organic sales that will underpin growth."
Enquiries:
Connect Group PLC Mark Cashmore, Chief Executive Today: 020 7466 5000 Officer Thereafter: 01793 David Bauernfeind, Chief Financial 563641 Officer www.connectgroupplc.com Buchanan Richard Oldworth 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 26 October 2017 commencing at 9.30am. Connect Group PLC's Preliminary Results 2017 are available at www.connectgroupplc.com
An audio webcast will be available on:
http://vm.buchanan.uk.com/2017/connect261017/registration.htm
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:
Early Distribution
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 world's fastest physical supply chains.
Dawson Media Direct supplies newspapers, magazines and inflight entertainment technology and content to over 80 airlines in 50 countries. 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.
Pass My Parcel is a wholly owned Click & Collect service which leverages our combined networks to provide efficient solutions for online and high street retailers. Its network of parcelshops provides national consumer reach for deliveries and returns. Bespoke services for larger clients, serving their early morning and in-store requirements are a recent development in this rapidly evolving sector.
Mixed Freight
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 "Risks and Uncertainties". 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 2017 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 to equity', '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 operating profit including the operating profit of businesses from the date of acquisition and excludes Adjusted items and operating profit of businesses disposed of.
Adjusted profit before tax: is defined as adjusted operating profit less finance costs attributable to adjusted operating profit and before Adjusted items; including amortisation of intangibles and network and reorganisation costs.
Adjusted earnings per share: is defined as adjusted profit before tax, less taxation attributable to Adjusted profit before tax 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.
Adjusted: are material items of income or expense excluded in arriving at adjusted operating profit to enable a more representative view of underlying performance. These include certain Mergers & Acquisitions related costs, amortisation of intangibles, integration costs, business restructuring costs, legal provisions 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 the accounts where necessary to provide further understanding of the financial performance of the Group.
(2) Free cash flow to equity: is defined as cash flow excluding the following: payment of the dividend, acquisitions and disposals, the repayment of bank loans, EBT share purchase and cash flows relating to pension deficit repair. Free cash flow (excluding Adjusted items) is Free cash flow to equity before adjusted cash cost items.
(3) Adjusted EBITDA: is calculated as adjusted operating profit before depreciation and amortisation. In line with loan agreements Adjusted Bank EBITDA used for covenant calculations is calculated as adjusted operating profit before depreciation, amortisation, Adjusted items and share based payments charge but after adjusting for the last 12 months of profits for any acquisitions or disposals made in the year.
(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. Leverage is calculated as net debt divided by EBITDA.
(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. Discontinued profit for the year is the combined results for Education and Care and Books for the period after tax.
(6) FY17 refers to the full year ended 31 August 2017, FY16 refers to the full year ended 31 August 2016.
(7) FY16 has been restated to remove discontinued operations to aid comparability with FY17. (8) All movements are calculated to round thousands.
OPERATING REVIEW
INTRODUCTION
In what was a challenging year, the Group concurrently managed a period of tough trading while also disposing of the Education & Care division and restructuring for the future. A comprehensive transformation of our core businesses is now well underway, and we are making rapid progress in unlocking both efficiencies and opportunities for growth.
Group Adjusted profit before tax for continuing operations of GBP48.0m is down by 4.6% (FY16 (restated): GBP50.4m) and Adjusted Earnings per Share is down 4.3% to 15.5p. This reflects a resilient performance in Smiths News, offset by weaker performance at Tuffnells and increased losses in Pass My Parcel. Statutory continuing profit before tax of GBP34.2m is down by 2.8% (FY16 restated: GBP35.2m) and Statutory continuing earnings per share is down 2.7% to 11.0p (FY16 restated: 11.3p). Statutory continuing & discontinued profit after tax of GBP36.6m is up by 9.6% (FY16: GBP33.4m), and Statutory continuing & discontinued earnings per share is up 8.8% to 14.9p (FY16: 13.7p). The Statutory continuing & discontinued results are impacted by the sale of the Education & Care division in June 2017 for an enterprise value of GBP64.4m, and the Board's decision to sell the Books division, consequent to effecting the integration and reshaping of the Group's core businesses. FY16 has been restated to remove discontinued operations to aid comparability with FY17.
We remain committed to delivering attractive shareholder returns through a combination of a progressive dividend and capital growth. Strong free cash flow to equity of GBP28.7m from continuing operations (FY16 restated: GBP36.2m), together with the Board's confidence in the future prospects of the integrated business, supports a proposed full year dividend of 9.8p, up 3.2%. The renewal of our banking facilities in October 2017 has extended the term to January 2021 and provides further certainty for the Group's underlying financial position as we accelerate the process of business transformation.
INTEGRATION OF THE GROUP
In July 2017 we announced and launched the integration of the Group's core businesses, bringing their operational networks, sales and marketing, and central support services under a single leadership team. This followed a detailed strategic review of the Group's opportunities for growth, which we determined was best implemented after the sale of the Education & Care division.
The Group's growth strategy is now wholly focused on distribution opportunities in the Early Distribution and Mixed Freight markets. This approach will leverage our strengths as a specialist distributor, and clarifies our role and purpose for customers. In uniting the skills, infrastructure and capabilities of our network, we will operate more efficiently and strengthen our propositions to deliver organic growth.
The integration is moving at pace. A single Executive Leadership Team is now in place across the combined business, and we are committed to delivering a two-year programme of scale efficiencies amounting to GBP15m over two years, in parallel with an upgraded and more agile capability. The previous divisional structures have been replaced with a single functional structure with centralised support functions such as Finance, Technology, Sales and Operations and we have introduced an integrated regional management structure, with responsibilities for these senior roles encompassing Tuffnells and Smiths News depots.
As a consequence of the integration, we have announced plans for a reduction of 340 roles (equivalent to 6% of the workforce) across the combined business in FY18; employee consultation is underway and a provision of GBP4.0m has been made for costs associated with the change programme.
The opportunities for network and process efficiencies give confidence that the cost reductions we have delivered over the last decade can be sustained. In parallel, we plan to use the skills and capabilities of the unified national network to deliver organic growth in the Mixed Freight and Early Distribution markets.
EARLY DISTRIBUTION
News Distribution
Revenue in Smiths News was GBP1,383.4m (FY16: GBP1,443.8m) and adjusted operating profit was GBP40.4m (FY16: GBP40.0m). This performance includes the sales and costs of Pass My Parcel, amounting to a loss of GBP6.3m (FY16: GBP4.0m). Sales and profit were also impacted by the absence of a major international football championship in 2017, materially reducing the sales of sticker collections this year.
Newspaper and magazine sales have continued to perform in line with long term trends - the performance from newspapers was slightly stronger than expected, helping to offset weaker magazine sales this year. Newspaper sales of GBP875.6m were down 4%, with price increases mitigating volume declines. Combined sales of all magazine categories, including one-shots and partworks, were down by 10.4%.
The business again achieved GBP5m of efficiency savings from network restructuring and process changes, broadly offsetting the anticipated decline in sales. The capabilities of our news business, including its track record in managing costs while driving service improvement, are key strengths of the Group that will be central to our integrated operating model.
The opening of the new warehouse at Hemel Hempstead was a step change in the scale of our hub depots, with capacity to deliver supplies to 7,650 customers, equivalent to 28% of our total customer base. The Smiths News network now has 7 magazine hub locations, supported by 32 smaller 'last mile and newspaper packing' depots which operate for limited hours each day. The integration of the Smiths News and Tuffnells networks will, over time, create a host of new opportunities for efficiencies across our operation.
For the 10th year running, in independently conducted surveys, Smiths News has been ranked the best in industry for service to customers and publishers. We remain committed to improving service by constantly reviewing our processes, communication and technology; this in turn drives efficiency improvements and ensures any changes are beneficial to all stakeholders.
In what was anticipated to be a quiet year for contract renewals we secured a three year agreement with Johnson Press for the distribution of 'i' newspaper and gained a number of smaller regional titles. Over 94% of publisher revenues in the current year were generated from contracts that are secured through to at least 2019.
Media
DMD, our specialist distributor of printed and digital media to airlines and travel points responded flexibly to tougher conditions. Revenue of GBP28.8m (FY16: GBP27.6m) and Adjusted operating profit of GBP2.3m (FY16: GBP2.4m) reflected a mix of new and renewed contracts, partially offsetting reductions in order values and margins from some established customers; such minor variations in demand are normal in this marketplace.
Major contract renewals and extensions in FY17 include Eurostar for London, Paris and Brussels, Delta Airlines global contract and Qatar Airways global contract. Geographically we have successfully introduced our services in Australia and are now supplying customers at six airports. An internal restructure in the second half of the year delivered efficiency savings and repositioned management resources on those markets which offer the best prospects for growth.
On the digital side of our business we extended agreements with Virgin Trains and Eurostar and won contracts for a wide range of magazine content to new airline customers.
Click & Collect
Pass My Parcel continues to grow volume and develop new services in response to emerging opportunities and growing demand for rapid overnight and early morning delivery. Total volume for the year was 1 million outbound and returns parcels (FY16: 500k), building in the second half, such that the annual run rate, prior to the seasonal peak, in October 2017 was circa 2 million units. The loss made in supporting the business was GBP6.3m (FY16: GBP4.0m) including investment in IT to support future service propositions. We aim for volumes to increase significantly in the current financial year and losses to reduce as a result.
Overall volume growth through parcelshops was lower than expected, a consequence of weaker than predicted volumes in outbound and returns, and delays to implementing contracts that require clients to adopt and integrate supporting technology. The introduction of returns services for Amazon in February 2017 contributed to a significant increase in volume in the second half, supporting momentum for further growth as we approach the Christmas and New Year peak.
As the Click & Collect market grows, a range of models and opportunities are emerging which dovetail with the Group's capabilities. In response to growing demand for pre-10am business to business delivery we can leverage the drop density and speedy distribution of the Group's network to serve the needs of high street and online retailers. Progress this year included a direct to store delivery service for clothing retailer H&M, supporting their Click & Collect offering to customers; a successful store trial has since been expanded with a view to rolling out the service across the UK in 2018. A further small scale trial with Hovis, delivering fresh bread supplies to local retailers, has now been extended to additional areas. Our contract with UK Mail to route their returns and failed household deliveries via our parcelshop network is now scheduled to commence in 2018, following the implementation of supporting IT.
The growth of our Click & Collect propositions has taken longer than anticipated, but we are pleased with the direction of travel and see many related opportunities for the integrated Group. Customer satisfaction and feedback from clients and consumers remains excellent, and the acceleration of volume increases will substantially increase the scale and efficiency of operations. These developments reinforce our belief that there is significant opportunity to serve a wider range of customers, with a range of propositions in the Early Distribution market. The potential for organic growth will be further enhanced by the combining of the Group's network and operations, providing a seamless UK wide customer offer. Although there remains uncertainty regarding volume projections, we expect a significant reduction in losses as the business builds, and are maintaining a break even target in FY19.
MIXED FREIGHT
Tuffnells had a challenging year, with the combination of tough markets, inconsistencies of process and changes to management impacting operational performance across the business. Total revenue of GBP183.2m was up by 5.0% (FY16: GBP174.4m). However, Adjusted operating profit of GBP12.0m was down by 19.9% (FY16: GBP15.0m). Performance was also impacted by increased costs from planned investments that have delivered a slower return than anticipated.
The spring peak saw Tuffnells handling record daily volumes, but with significant spikes in demand that made the maintaining of efficiencies more difficult to achieve than usual. Inevitably, the volume increases were not uniform which led to increased variable costs and pinch points in the network, particularly in the South East, resulting in further erosion of returns.
Despite these challenges we have maintained our commitment to putting in place the people and structures that we believe are necessary to deliver longer term improvement. At acquisition in 2014, the business was decentralised with highly variable infrastructure and standards which compromised our overall capability and were not compatible with our vision for the Group. Increased costs this year included the introduction of new and standard operating procedures to improve KPIs, reviewing pay frameworks, health & safety improvements and additional resources in training, sales, marketing and leadership. In retrospect, introducing this level of change during a period of toughening markets has impacted performance in the year.
The integration will directly address these issues, spearheaded by an operational management team, primarily drawn from Smiths News, with proven skills and capability demonstrated by a track record of delivering consistent efficiency savings and service leadership. Bringing this expertise to bear across the combined operations will unlock a wealth of sustainable opportunities encompassing both cost efficiency, process compliance and service improvement.
Capital expenditure amounting to GBP8.4m (FY16: GBP5.4m) has included the upgrading of depot facilities, and a major relocation of the Sheffield operation, which opened in September 2017.
Our focus on improving health & safety and transport compliance has been relentless. Many of the lessons we have learned at Smiths News, in steadily reducing accidents over a 10 year period, are now being applied to Tuffnells. The introduction of new procedures, together with encouraging a culture of greater attention to safety concerns has led to an increased awareness of incidents. A spike in reporting is therefore to be expected and welcomed; meanwhile we are pleased with progress and remain resolute in our plans.
DISCONTINUED OPERATIONS
In June 2017, the Group completed the sale of the Education & Care division, delivering an Internal Rate of Return of 10.0% over our period of ownership. Proceeds of the sale have reduced the Group's net debt, and its completion this year was critical to creating the management bandwidth for the introduction of a fully integrated business, which we had been planning for some time.
In August 2017, the Board resolved to divest the Books division, resulting in the classification of the division as held for sale at year end. This followed a strategic review, which determined the business was no longer core to the Group's future direction. Connect Books remains a leading player in its markets with strengths and prospects that are not dependent on ownership by the Group. We are currently taking steps to find a purchaser who can provide the necessary focus and investment to take the business forward, and expect to conclude a disposal in the next twelve months. Meanwhile, we are grateful for the continued efforts and professionalism of colleagues in the business.
The combined Adjusted discontinued profit before tax contributed GBP2.0m over the full year compared to GBP10.3m adjusted profit from both divisions in FY16. A profit of GBP19.0m arose on the disposal of the Education & Care division on 30 June 2017. The Books division's carrying value was written down to a fair value less cost to sell of GBP15.0m when it became classified as held for sale on 31 August 2017.
GROUP STRATEGY
This year we conducted a thorough review of our strategy in the light of market developments and the opportunities for growth presented by the evolution of the Group since the acquisition of Tuffnells in December 2014.
Externally, the distribution market is experiencing opportunity and challenge as a result of changes on many fronts. These include changing consumer expectations, the growth of click & collect and home delivery alternatives, the need for more flexible and speedy solutions, a trend of SMEs supplying direct to consumers, and wider developments such as restricted access to city centres and environmental charging. In this environment we concluded there is clear opportunity for specialist distributors with the most agile and flexible customer propositions.
Within the Group, the acquisition of Tuffnells in 2014 has transformed the scale and reach of our distribution capability, creating opportunities for synergies and organic growth by collaborating more closely with Smiths News. Our other divisions, though leaders in their markets did not offer the same opportunity for synergy and growth. We have therefore taken decisive action to concentrate our activities on opportunities that will best leverage our core strength of specialist third-party distribution, linking suppliers to their customers in efficient and service oriented ways.
The focused strategy will address two market opportunities. Firstly, our expertise in high drop density, early morning distribution - every night the Smiths News network delivers to approximately 27,000 customers, a phenomenal operation that was built on the news industry, but is capable of serving other customers. Secondly, our leadership in business to business Mixed Freight - we specialise in the difficult, outsize parcels that don't fit standard hubs, but we also have strengths in the growing demand for business to consumer delivery, and for the multitude of specialist requirements from small to medium sized enterprises which form the majority of our customer base.
In line with this strategy, we are establishing an integrated business model that will transform the scope and reach of our customer propositions, bringing in new skills as required, as well as improving the efficiency of our physical operations. A two-year transformation programme encompasses cost efficiencies, network optimisation and new customer propositions for organic growth.
Central Efficiencies
The move to a single business structure will unlock efficiencies in leadership, central support services and operational structures. Systems and process will be aligned with a relentless focus on cost and service. Our experience and expertise in driving continual improvement, garnered from more than ten years of success in Smiths News, will be deployed across the network and corporate centre.
Network Optimisation
The 76 depots of Smiths News and Tuffnells serve overlapping territories, operating with similar processes and hours of business. Service and efficiency will drive progress, with changes taking full account of our capability and its match to customer needs. Ongoing review will identify where investment in new and improved facilities can unlock further efficiencies and increase our capacity for growth.
Customer Propositions and Service
The integration will create opportunities by leveraging the reach, density and time sensitivity of our combined operations. Working as one business will strengthen our capabilities in both Early Distribution and Mixed Freight. We plan to bring new and exciting propositions to market, specialising in the business to business and business to consumer markets.
BOARD CHANGES
As announced on 22 March 2017 Colin Child left the Board and Gary Kennedy (Chairman of Connect Group) assumed the role of interim Chair of the Audit Committee until a replacement was found. On 1 September 2017, Mark Whiteling joined the Board taking on the role of Chair of the Audit Committee as well as becoming a member of the Remuneration and Nominations Committees.
Mark Whiteling is currently the senior independent director of Hogg Robinson Group PLC where he also chairs its Audit Committee and is also a member of its Nominations and Remuneration Committees. He was a Non-Executive Director of Future plc until December 2014 and was also Chair of its Audit Committee and a member of its Nominations and Remuneration Committees. With effect from 1 October 2017 Mark was appointed as executive director and Chief Financial Officer of Interserve PLC.
SUMMARY AND OUTLOOK
Despite a challenging year in FY17, significant underlying progress was made in refocusing our strategy and operating structure to support future growth. We are now moving at pace, and as we integrate the Group's core businesses we are confident of delivering the key targets that will underpin our future success. We expect a return to growth in FY18.
The Group expects to deliver solid financial returns throughout the period of transformation, maintaining strong cash flows that will allow for both investment and continued strong returns to shareholders.
FINANCIAL REVIEW
In a challenging year for trading, we have significantly reduced net debt and delivered strong free cash flow.
CONTINUING ADJUSTED RESULTS (1) (5)
GROUP
Hot Features
Premium
Continuing Adjusted results 2017 2016 Change
GBPm Restated
(7)
----------------------------- -------- ---------- -------
Revenue 1,594.3 1,645.8 (3.1%)
Operating profit 54.7 57.4 (4.7%)
Net finance costs (6.7) (7.0) 4.3%
----------------------------- -------- ---------- -------
Profit before tax 48.0 50.4 (4.6%)
Taxation (9.9) (10.8) 8.0%
----------------------------- -------- ---------- -------
Tax rate 20.8% 21.5%
----------------------------- -------- ---------- -------
Profit after tax 38.1 39.6 (3.7%)
----------------------------- -------- ---------- -------
(Note: FY16 has been restated to remove discontinued operations to aid comparability with FY17)
Continuing adjusted operating profit for the year was GBP54.7m, down 4.7% on the prior year (FY16 restated: GBP57.4m), benefitting from a solid performance from News & Media, but adversely impacted by tougher trading market conditions at Mixed Freight.
Net finance charges of GBP6.7m (FY16: GBP7.0m) were down on prior year. Included within net finance charges are: interest costs on borrowing incurred in the period of GBP4.4m (FY16: GBP4.9m), lower year-on-year as the drawn borrowing facility requirement was favourable from cash flow generation and cash proceeds from the Education & Care disposal; finance lease interest of GBP1.0m (FY16: GBP0.7m); amortisation of bank arrangement fees GBP0.9m (FY16: GBP0.7m); and pension interest costs GBP0.3m (FY16: GBP0.6m).
Adjusted profit before tax was GBP48.0m, down 4.6% on last year.
Taxation of GBP9.9m resulted in an effective tax rate of 20.8%, which was slightly lower than last year in line with the reduction in UK corporation tax rate.
STATUTORY CONTINUING & DISCONTINUED RESULTS
Statutory continuing profit before tax of GBP34.2m is down by 2.8% (FY16 restated: GBP35.2m) and Statutory continuing earnings per share is down 2.7% to 11.0p (FY16 restated:11.3p), primarily driven by network and reorganisation costs of GBP8.1m (FY16: GBP3.1m), GBP4m of the increase relates to a year end provision for the reduction in 340 roles as a consequence of the announced integration programme.
Statutory continuing & discontinued profit after tax of GBP36.6m is up by 9.6% (FY16: GBP33.4m), and Statutory continuing & discontinued earnings per share is up 8.8% to 14.9p (FY16:13.7p). The Statutory continuing & discontinued results are impacted by: the sale of the Education & Care division in June 2017 for an enterprise value of GBP64.4m and a profit of GBP19.0m; the Board's decision to sell the Books division with amortisation and impairment of acquired intangibles charges of GBP11.2m (FY16: GBP2.9m); and the consequence of integrating and reshaping the Group's core businesses.
EARNINGS PER SHARE
Continuing Continuing
Adjusted (1) Statutory (7)
--------------------------------- ---------------- -----------------
2017 2016 2017 2016
--------------------------------- ------- ------- -------- -------
Earnings attributable to
ordinary shareholders (GBPm) 38.1 39.6 27.0 27.4
Basic weighted average number
of shares (millions) 245.4 243.4 245.4 243.4
Basic EPS 15.5p 16.2p 11.0p 11.3p
Diluted weighted number
of shares (millions) 247.0 247.2 247.0 247.2
Diluted EPS 15.4p 16.0p 10.9p 11.1p
Dividend per share (paid
& proposed) 9.8p 9.5p 9.8p 9.5p
Dividend per share (recognised) 9.6p 9.3p 9.6p 9.3p
--------------------------------- ------- ------- -------- -------
Earnings attributable to shareholders on a continuing adjusted basis of GBP38.1m resulted in an adjusted EPS of 15.5p, a decrease of 4.3% on last year, driven by the more challenging trading conditions in Mixed Freight.
The fully diluted weighted number of shares was 247.0m (FY16: 247.2m). Fully diluted shares includes 1.6m shares for employee incentive schemes (FY16: 2.3m) and nil shares (FY16: 1.5m) relating to the remaining deferred consideration arising from the Tuffnells acquisition in December 2014.
Including Adjusted items; statutory continuing earnings per share is down 2.7% to 11.0p (FY16 restated: 11.3p). Statutory continuing and discontinued earnings attributable to shareholders of GBP36.6m (FY16: GBP33.4m) resulted in an EPS of 14.9p, up 8.8% on FY16, benefiting from profit on disposal of the Education and Care division.
DIVID
The Board is proposing a final dividend of 6.7p, taking the full year dividend to 9.8p, an increase of 0.3p or 3.2% (FY16: 9.5p). The proposed final dividend for the year ended 31 August 2017 of 6.7p is subject to approval by shareholders at the Annual General Meeting on 23 January 2018 and has not been included as a liability in these accounts. The proposed dividend, if approved, will be paid on 9 February 2018 to shareholders on the register at close of business on 12 January 2018.
NEWS DISTRIBUTION
Adjusted figures (1) 2017 2016 Change - GBPm ---------------------- -------- -------- ------- Revenue 1,383.4 1,443.8 (4.2%) Operating profit 40.4 40.0 0.9% ---------------------- -------- -------- ------- Operating margin 2.9% 2.8% ---------------------- -------- -------- -------
Revenue in News Distribution was GBP1,383.4m (FY16: GBP1,443.8m) down 4.2%. Newspaper and magazine sales have continued to perform in line with long term trends, with the relatively stronger performance than expected from newspapers helping to offset weaker magazine sales. Newspaper sales of GBP875.6m were down 4.0%, with price increases helping to offset volume declines. Combined sales of all magazine categories were down by 10.4%.
Adjusted operating profit was GBP40.4m (FY16: GBP40.0m) up 0.9%. In line with recent years the News Distribution operation achieved GBP5m of efficiency savings from network restructuring and process changes, broadly offsetting the anticipated decline in sales. This performance includes the sales and costs of Pass My Parcel, the net loss of which was GBP6.3m (FY16: GBP4.0m). Sales and profit were also impacted by the absence of a major international football championship in 2017, materially reducing the sales of sticker collections this year.
MIXED FREIGHT
Adjusted figures 2017 2016 Change (1) - GBPm ------------------ ------ ------ -------- Revenue 183.2 174.4 5.0% Operating profit 12.0 15.0 (19.9%) ------------------ ------ ------ -------- Operating margin 6.6% 8.6% ------------------ ------ ------ --------
Tuffnells had a challenging year, achieving total revenue of GBP183.2m (FY16: GBP174.4m), up 5.0%.
Adjusted operating profit of GBP12.0m (FY16: GBP15.0m) is down 19.9%. In what was an increasingly tough market, as the year progressed, disruptive price competition for larger customers particularly in the second half of the year, impacted margins. Operationally, the move from a highly decentralised model to more standardised procedures and controls has taken longer than we anticipated, impacting on consistency of profitability across the business as has regional cost control to handle spikes in volumes. Performance was also adversely impacted by increased costs from planned investments that have delivered a slower return than anticipated.
MEDIA
Adjusted figures 2017 2016 Change (1) - GBPm ------------------ ----- ----- ------- Revenue 28.8 27.6 4.4% Operating profit 2.3 2.4 (2.9%) ------------------ ----- ----- ------- Operating margin 8.0% 8.6% ------------------ ----- ----- -------
DMD is our specialist distributor of printed and digital media to airlines and travel points. Revenue of GBP28.8m (FY16: GBP27.6m) is up 4.4% reflecting a mix of new and renewed contracts partially offsetting reductions in order values from some established customers. Adjusted operating profit of GBP2.3m (FY16: GBP2.4m) is down 2.9% as a result of internal restructuring of management operations in the second half of the year.
ADJUSTED ITEMS (1)
Continuing Operations (5)
GBPm 2017 2016
restated
------------------------------------------ ------- ----------
Network and re-organisation costs (8.0) (3.2)
Property (0.6) -
Acquisition and disposal related profits
& costs 2.2 (3.2)
Amortisation of acquired intangibles (7.3) (7.3)
Pension credit 0.7 -
Legal provision - (1.5)
Settlement of interest rate swap (0.8) -
Total before taxation (13.8) (15.2)
------------------------------------------ ------- ----------
Taxation 2.7 3.0
------------------------------------------ ------- ----------
Total after taxation (11.1) (12.2)
------------------------------------------ ------- ----------
The continuing operations profit impact of adjusted items charged in the year was GBP13.8m before tax (FY16: restated GBP15.2m).
Network and reorganisation costs of GBP8.0m (FY16: GBP3.1m) includes a balance sheet provision of GBP4m relating to future costs for the integration of News & Media and Mixed Freight divisions as announced in July 2017. Separately, staff rationalisation costs to drive efficiency savings in News & Media of GBP3.5m (FY16: GBP3.1m) were incurred in the period.
Property provisions of GBP0.9m (FY16: GBPnil) were charged in respect of three onerous depot leases in FY17 offsetting a release of GBP0.3m which related to reversionary leases.
Acquisition & disposal related credit of GBP2.2m (FY16: GBP3.2m charge) includes GBP0.5m incurred on external fees relating to disposal activity in the period. This was offset by a net deferred consideration release of GBP2.7m as Tuffnells FY17 performance fell below the earn-out performance targets.
The non-cash amortisation of intangibles from past acquisitions was GBP7.3m (FY16: GBP7.3m.) The net book value of acquired intangibles of GBP40.5m (excluding those held for sale) will continue to be amortised over future years.
Pension past service credit of GBP0.7m (FY16: GBPnil) relates to the Smiths News section of the W H Smiths Pension Trust and is a commutation of trivial benefits accrued to members.
Legal provision charge GBPnil (FY16: GBP1.5m) represents a provision for a HSE investigation and legal costs.
Interest costs of GBP0.8m (FY16: GBPnil) relates to the settlement of interest rate swaps, terminated as a result of a change in Treasury policy.
Discontinued operations
The statutory continuing and discontinued profit impact of Adjusted items charged in the year was GBP6.3m before tax (FY16: GBP18.8m). Adjusted discontinued operations charges are shown in note 4.
Profit on disposal of the Education & Care division was GBP19.0m on completion of the sale on the 30 June 2017.
Reorganisation/other costs of GBP0.3m (FY16: GBP1.2m) relates to legal and restructuring costs incurred in the Books division.
Pension past service credit of GBPnil (FY16: GBP1.1m). The pension credit from last year relates to the Trustees decision to cease payment of discretionary increases on pre-1997 pension rights within the Consortium Care scheme which resulted in past service credit.
Amortisation and impairment of acquired intangibles GBP11.2m (FY16: GBP2.9m) includes impairments of GBP9.9m which result in a fair value less costs to sell of GBP15.0m for the Books division.
The total cash impact of Adjusted items was GBP49.7m. Cash receipts on the disposal of Education & Care were GBP58.2m. The key components of Adjusted cash costs were the deferred consideration in relation to Tuffnells of GBP1.1m paid in December 2016, network reorganisation and other restructuring costs.
CONTINUING FREE CASH FLOW (2)
Free cash flow generation remains one of the Group's key strengths. We have changed the alternative performance measure on free cash flow to better reflect the cash generation available to pay dividends. Free cash flow (2) now includes finance leases, Adjusted items, interest and tax; it excludes pension deficit recovery payments.
GBPm 2017 2016
Restated(7)
----------------------------- ------- -------------
Adjusted operating profit 54.7 57.4
Depreciation & amortisation 11.7 10.3
----------------------------- ------- -------------
Adjusted EBITDA 66.4 67.7
Working capital movements 0.4 3.8
Capital expenditure (13.8) (10.7)
Finance lease payments (4.2) (3.5)
Net interest and fees (4.4) (4.9)
Taxation (9.1) (7.6)
Other 0.3 0.3
----------------------------- ------- -------------
Free cash flow (excluding
adjusted items) 35.6 45.1
----------------------------- ------- -------------
Adjusted items (6.9) (8.9)
Free cash flow to equity 28.7 36.2
----------------------------- ------- -------------
We have focused on a strong cash performance in the period, with the Group generating GBP28.7m in free cash flow, a decrease of GBP7.5m (20.7%) on the prior year.
Adjusted EBITDA of GBP66.4m compared to (FY16: GBP67.7m), is down by 1.9%, although the increase in capital expenditure since acquiring Tuffnells in December 2014 is now resulting in higher depreciation and amortisation charges of GBP11.7m (FY16: GBP10.3m).
The increase in working capital in the period was GBP0.4m (FY16: increase GBP3.8m) driven largely by timing of weekly receipt and payment cycles at year end.
Capital expenditure in the year was GBP13.8m (FY16: GBP10.7m) an increase of GBP3.1m, of which new and existing depot and network investments represented GBP5.9m, technology and equipment investment of GBP5.2m.
Cash tax costs have increased in the year reflecting the full impact of moving Tuffnells to a quarterly payment profile and the prior year including a one-off GBP0.9m refund of overpaid tax.
Net interest and fees of GBP4.4m (FY16: GBP4.9m) is down on the prior year as the drawn down bank facility requirement was lower following the cash receipt from the disposal of Education & Care in June 2017.
The total net cash impact of Adjusted items was GBP6.9m (FY16: GBP8.9m). This comprised GBP1.1m (FY16: GBP5.1m) deferred consideration payments relating to Tuffnells, with the remainder being network reorganisation, other restructuring costs and professional fees relating to the disposal of Books.
Therefore, prior to pension deficit recovery payments and disposal proceeds, cash flow available for dividends, acquisitions or repayment of debt was GBP28.7m.
NET DEBT
GBPm 2017 2016
Restated(7)
----------------------------------- -------- -------------
Opening net debt (141.7) (153.4)
Free cash flow to equity 28.7 36.2
Finance lease creditor movement 2.2 (1.3)
Pension deficit recovery (4.8) (4.8)
Dividend paid (23.6) (22.7)
Disposal proceeds 58.2 -
Discontinued operations cash flow (1.1) 4.3
Closing net debt (82.1) (141.7)
----------------------------------- -------- -------------
Net debt closed the period at GBP82.1m, of which GBP8.5m (FY16: GBP10.7m) relates to finance leases.
Net debt improved on the prior year and our Net debt/EBITDA ratio of 1.2x, (down from FY16 1.7x) improved year on year as a result of disposal proceeds from the sale of Education & Care, and free cash flow generation from trading, even after Adjusted items. This has enabled a GBP59.6m reduction in net debt while delivering GBP23.6m (FY16: GBP22.7m) in dividend payments.
Pension funding remained consistent at GBP4.8m (FY16: GBP4.8m). Pension deficit repair payments are considered as a non-free cash flow item.
We were comfortably within our bank facilities of GBP230m and our covenant ratios at year end. We made two loan amortisation payments of GBP10m each in the year reducing our existing facility from GBP250m. Our previous bank facility ran to November 2018. Following the disposal of Education & Care we agreed in October 2017 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 GBP609.9m and had an actuarial deficit of GBP17.5m as at 31 March 2015. As at 31 August 2017 the IAS19 surplus of GBP149.3m (FY16: GBP151.3m) 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 GBP8.7m on the balance sheet (FY16: GBP10.3m).
The Tuffnells defined benefit scheme has assets of GBP10.2m and an actuarial deficit of GBP4.3m as at 1 April 2016. As at 31 August 2016 the IAS19 deficit was GBP2.8m.
The total cash contribution of defined benefit schemes and expenses in the cash flow statement for FY17 was GBP5.2m (FY16: GBP5.3m).
The assets and liabilities of the 'Consortium CARE' and 'Platinum' defined benefit schemes were disposed of as part of the sale of the Education & Care division.
DISCONTINUED OPERATIONS
In June 2017 the Group completed the sale of the Education & Care division and in August 2017 the Board agreed to divest the Books division resulting in the classification of the division as held for sale based on an expectation that the business will be sold in the next twelve months.
The Books division's carrying value was written down to a fair value less cost to sell of GBP15.0m when it became classified as held for sale on 31 August 2017. The carrying value less costs to sell of the Books division represents an estimate based on a range of factors and scenarios.
The Education & Care division was sold in June 2017 for an enterprise value of GBP64.4m and net cash proceeds of GBP58.2m. A profit of GBP19.0m arose on the disposal of the Education and Care division delivering an Internal Rate of Return of 10.0% over our period of ownership.
The combined discontinued operations contributed GBP2.0m operating profit before tax during the year for the period they remained part of the Group (FY16: GBP10.3m).
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.
PRINCIPAL RISKS
The Group has a clear framework in place to continuously identify and review its principal risks
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 2016 the risk relating to Non-Adherence to Transport Operator Licence Conditions is new, and the risk relating to a breach of airside security within the Media business has been removed as it is no longer considered material enough to be considered a principal risk. This risk is 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
------------------------------ ----------------------- ------------------------------ -----------------------------
Health & Safety - The risk of No Change The impact of a Health and Safety is a key priority of
failing to provide employees Safety failure negatively the Group. Health and Safety
with appropriate training and impacts operations, performance is reviewed at
a profitability and/or Board
safe environment results in corporate reputation, Meetings, Audit Committee,
serious injury to employees together with the risk of and Executive Meetings and
and/or the public. Combined possible enforcement action. at business unit level.
with the
risk that the Group fails to Dedicated Health and Safety
comply with relevant Health teams exist throughout the
and Safety legislation. business, executing
improvement programs
and promoting a safety
culture. Significant
continued investment in
Health and Safety
improvements
were made during FY17 and
further planned targeted
investment in FY18.
------------------------------ ----------------------- ------------------------------ -----------------------------
Non-Adherence to Transport New The impact of poor adherence The Group maintains a
Operator Licence Conditions - to Operator licence comprehensive governance
The risk of failing to adhere conditions results in framework. Dedicated
to sanctions which may Transport Compliance teams
external laws and regulations curtail our ability to exist specifically focused
by employees, sub-contractors operate and/or increase on transport related
and third parties resulting operating costs. compliance. Improvement
in programs exist to
a breach of our Transport ensure continued legal
Operator Licence conditions. compliance, operational
efficiencies and to minimise
mistakes. Applicable
legislation is diligently
tracked and monitored and
any changes reflected in
policies and
controls within required
timeframes.
------------------------------ ----------------------- ------------------------------ -----------------------------
Changing Consumer Behaviour - No Change Sales decline in newspapers Historic price increases in
The risk of new technologies and magazines are worse than newspapers and magazines
and demographics drive change expected (forecasted have consistently offset a
in expectation large part
customer behaviour and/or of a -3% to -5% range) and of the impact of falling
supply chain dynamics that there may be a 'tipping volumes. Major publishers
result in structural market point' where some titles continue to commit to print
changes being cease to publish distribution,
deeper and quicker than rather than slowly decline. given the superior
predicted, including advertising revenue from
migration from print to The Books market is impacted print over digital (lack of
digital, reducing demand resulting in lower profit and intermediaries) and
for our services. negative market sentiment the slow take up of digital
related paid subscriptions.
to printed media. Management continues to
identify efficiencies
to compensate for market
declines.
Tuffnells is a significant
financial contributor toward
the overall results,
mitigating market
declines for newspapers,
magazines and books. The
strategy, including "Early"
delivery propositions
(including Pass My Parcel),
seeks to further protect the
organisation from over
exposure to
individual market risks.
------------------------------ ----------------------- ------------------------------ -----------------------------
Optimising Contract Renewals No Change Impact on supply of product In Smith News, publishers
and Tendering - The risk of or route to market may erode typically award five year
failing to retain major margin and/or increase cost contracts supporting the
contracts to serve. market structure.
at acceptable rates and /or Tuffnells and Books operate
win new contracts in in fragmented markets with
competitive markets affected fewer key suppliers or
by aggressive customers. Strong
pricing strategies impacts relationships across the
current and projected supply chain help the
business performance. business to understand and
demonstrate its
strengths for the benefit of
its suppliers and customers.
------------------------------ ----------------------- ------------------------------ -----------------------------
Increased Labour Costs - The No Change In the event of any legal The Group regularly reviews
risk of legislative changes claim as to worker status by its legal terms of
or interpretation impact the consultants, sub-contractors engagement with contractors
engagement or agency and has appropriate
of employees and delivery workers the business could be contractual and operational
contractors resulting in an liable for increased costs arrangements in place.
increase in the number of (national insurance
employees contributions) Self-employed delivery
and/or liabilities and cost. and liabilities (such as contractors have clearly
employee rights). The articulated agreements
inability to pass on such defining tasks they
statutory increases are contracted to provide
to our customers could impact whether personally or by a
profitability, and affect the substitute.
cost of future efficiency
programmes. Increasing employment cost
associated with National
Living Wage/Apprentices
Levy/ Auto Enrolment
has been factored into
latest budgets. Future
impact of Brexit on
employment risks are unknown
at the date of this report
and therefore no change.
Legal developments are
monitored to ensure that the
business maintains
compliance with legislation
and best practice.
------------------------------ ----------------------- ------------------------------ -----------------------------
Network and IT Robustness - No change Any material failure Disaster recovery and
The risk of Network and IT resulting from systems business continuity plans
disruptions in key outages, process failures, exist and are reviewed
infrastructure facilities location access or periodically. Investment
leads to an inability to employee/contractor disputes is made to provide disaster
deliver according to customer may lead to an adverse impact recovery capability for all
expectations and contractual on operations, financial essential systems.
obligations. performance Protections are
and reputational impact. in place to defend IT
systems against cyber
attacks.
------------------------------ ----------------------- ------------------------------ -----------------------------
Failure to execute strategy - No change Sales and/or profit expected Financial and operational
The risk of failing to from acquisitions / organic metrics are considered along
deliver business plans and/or growth may not be met and/or with risk assessments and
financial the impact on
returns in line with the Company's reputation and management before decisions
planned strategic evolution support for future are made. Performance to
of the Group, impacts acquisitions are challenged. plans is reviewed monthly
external confidence Cultural change required with post investment
and shareholder perception, for diversification / analysis undertaken.
bringing into question the restructuring may result in Detailed integration
future strategic direction reduced performance and process, governance and
and confidence financial returns. support framework ensures
in its delivery. effective and timely
adoption of standards and
process into acquisitions
and restructuring
activity.
------------------------------ ----------------------- ------------------------------ -----------------------------
Constraints on capacity No change The impact of the inability The annual business and
and/or failure to execute of warehousing / operational strategic planning process
restructuring and other / IT and support systems to ensures appropriate
change management meet investment is budgeted
programmes - The risk of growth expectations creates to ensure growth targets are
failing to re-engineer the poor customer experience, achieved. Organisational and
business to create a platform increased investment costs cultural change is a key
for future and reduced imperative,
growth combined with profitability. leading to investment in
excessive demands on new and resources and skills that
existing resources and Management's focus on current are required to deliver the
capability results business operations and successful
in loss of customers or key performance is distracted by integration and development
people impacting both current organisational of new businesses and
and future business change and new initiatives. business critical
prospects. Management leave the business initiatives, including
taking valuable skills and investment in expert skills
knowledge in change management and
with them. project management.
------------------------------ ----------------------- ------------------------------ -----------------------------
Deterioration of the Macro No change Reductions in discretionary Annual budgets and quarterly
Economic Environment - The spending may impact sales of forecasts take into account
risk of volatility and/or newspapers, magazines or potential macro market and
prolonged books and/or competitive
economic downturn causes a see a reduction in parcel impacts when setting
decline in demand for our volumes. Uncertainty from expectations internally and
services including the Brexit may affect the externally, allowing for or
uncertainty associated business in both changing objectives
with Brexit, impacts current the short and medium term on to meet short and medium
and/or projected business trade arrangements, future term financial targets.
performance above that capital investment strategies
included in and
the business planning and resourcing costs.
review process.
------------------------------ ----------------------- ------------------------------ -----------------------------
DIRECTORS' RESPONSIBILITIES STATEMENT
The responsibility statement has been prepared in connection to the Company's full Annual Report for the year ended 31 August 2017. 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 26 October 2017 and is signed on its behalf by:
Mark Cashmore David Bauernfeind Chief Executive Officer Chief Financial Officer
Group Income Statement for the year ended 31 August 2017 - unaudited
GBPm 2017 2016 restated
------------------------ ---- ---------------------------- ----------------------------
Note Adjusted* Adjusted Total Adjusted* Adjusted Total
items items
------------------------ ---- --------- -------- ------- --------- -------- -------
Revenue 2 1,594.3 - 1,594.3 1,645.8 - 1,645.8
------------------------ ---- --------- -------- ------- --------- -------- -------
Operating profit 2,3 54.7 (13.0) 41.7 57.4 (15.2) 42.2
Finance costs 6 (6.7) (0.8) (7.5) (7.0) - (7.0)
------------------------ ---- --------- -------- ------- --------- -------- -------
Profit before
tax 48.0 (13.8) 34.2 50.4 (15.2) 35.2
Income tax
expense 7 (9.9) 2.7 (7.2) (10.8) 3.0 (7.8)
------------------------ ---- --------- -------- ------- --------- -------- -------
Profit for
the year from
continuing
operations 38.1 (11.1) 27.0 39.6 (12.2) 27.4
------------------------ ---- --------- -------- ------- --------- -------- -------
Discontinued
operations
------------------------ ---- --------- -------- ------- --------- -------- -------
Profit for
the year from
discontinued
operations 1.0 8.6 9.6 8.7 (2.7) 6.0
------------------------ ---- --------- -------- ------- --------- -------- -------
Profit attributable
to equity shareholders
continuing
and discontinued
operations 39.1 (2.5) 36.6 48.3 (14.9) 33.4
------------------------ ---- --------- -------- ------- --------- -------- -------
Earnings per
share from
continuing
operations
Basic 915.5 11.0 16.2 11.3
Diluted 915.4 10.9 16.0 11.1
Equity dividends
per share (paid
and proposed) 8 9.8p 9.5p
----------------- ---- ---- ---- ----
Adjusted items are set out in note 4.
Group Statement of Comprehensive Income for the year ended 31 August 2017 - unaudited
GBPm Note 2017 2016 restated
Continuing
------------------------------------ ---- ----- -------------
Items that will not be reclassified
to the Group Income Statement
Actuarial (loss)/gain on defined
benefit pension scheme 5 (8.1) 3.6
Impact of IFRIC 14 on defined
benefit pension scheme 5 6.8 (6.5)
Tax relating to components
of other comprehensive income
that will not be reclassified 7 0.3 0.1
------------------------------------ ---- ----- -------------
(1.0) (2.8)
Items that may be subsequently
reclassified to the Group Income
Statement
Gain/ (loss) on cash flow hedges 0.6 (1.2)
Termination of interest rate
swap 0.8 -
Currency translation differences - 0.3
Tax relating to components
of other comprehensive income
that may be reclassified 7 (0.2) 0.2
------------------------------------ ---- ----- -------------
1.2 (0.7)
Other comprehensive loss for
the year - continuing 0.2 (3.5)
Profit for the year - continuing 27.0 27.4
------------------------------------ ---- ----- -------------
Total comprehensive income
for the year - continuing 27.2 23.9
Other comprehensive loss for
the year - discontinued (0.1) (4.2)
Profit for the year - discontinued 9.6 6.0
------------------------------------ ---- ----- -------------
Total comprehensive income
for the year - discontinued 9.5 1.8
Total comprehensive income
for the year 36.7 25.7
------------------------------------ ---- ----- -------------
Group Balance Sheet at 31 August 2017 - unaudited
GBPm Note 2017 2016
--------------------------------- ---- ------- -------
Non-current assets
Intangible assets 12 106.5 164.8
Property, plant and equipment 41.3 50.3
Interest in jointly controlled
entities 4.6 4.1
Retirement benefit assets 5 - 0.3
Deferred tax assets 5.4 7.7
157.8 227.2
--------------------------------- ---- ------- -------
Current assets
Inventories 13.8 42.3
Trade and other receivables 98.3 139.2
Derivative financial instruments - 0.1
Cash and cash equivalents 13 5.5 9.1
Assets classified as held for
sale 10 64.5 -
--------------------------------- ---- ------- -------
182.1 190.7
--------------------------------- ---- ------- -------
Total assets 339.9 417.9
--------------------------------- ---- ------- -------
Current liabilities
Trade and other payables (136.2) (198.8)
Current tax liabilities (5.3) (6.9)
Bank loans and other borrowings 13 (20.0) (61.0)
Obligations under finance leases 14 (3.1) (3.0)
Retirement benefit obligations 5 (4.1) (4.1)
Provisions 15 (9.0) (8.5)
Liabilities classified as held
for sale 10 (49.5) -
--------------------------------- ---- ------- -------
(227.2) (282.3)
--------------------------------- ---- ------- -------
Non-current liabilities
Retirement benefit obligations 5 (7.4) (17.4)
Bank loans and other borrowings 13 (60.0) (79.1)
Obligations under finance leases 14 (5.4) (7.7)
Derivative financial instruments - (1.5)
Other non-current liabilities (1.0) (1.1)
Deferred tax liabilities (7.2) (10.9)
Non-current provisions 15 (6.6) (4.9)
--------------------------------- ---- ------- -------
(87.6) (122.6)
--------------------------------- ---- ------- -------
Total liabilities (314.8) (404.9)
--------------------------------- ---- ------- -------
Total net assets 25.1 13.0
--------------------------------- ---- ------- -------
Group Balance Sheet at 31 August 2017 (continued) - unaudited
GBPm Note 2017 2016 ------------------------------ ----- ------- ------- Equity Called up share capital 18(a) 12.4 12.3 Share premium account 18(c) 60.5 59.2 Demerger reserve 19(a) (280.1) (280.1) Own shares reserve 19(b) (3.1) (3.5) Hedging & translation reserve 19(c) 0.5 (1.1) Retained earnings 20 234.9 226.2 ------------------------------ ----- ------- ------- Total shareholders' equity 25.1 13.0 ------------------------------ ----- ------- -------
The accounts were approved by the Board of Directors and authorised for issue on 26 October 2017 and were signed on its behalf by:
Registered number - 05195191
Mark Cashmore David Bauernfeind
Chief Executive Officer Chief Financial Officer
Group Statement of Changes in Equity for the year ended 31 August 2017 - unaudited
GBPm Note Share Share Demerger Own Hedging Retained Total
capital premium reserve shares & translation earnings
account reserve reserve
--------------------- ----- --------- --------- --------- --------- --------------- ---------- -------
Balance at
31 August
2015 12.2 55.2 (280.1) (4.1) (0.5) 226.5 9.2
Profit for
the year - - - - - 33.4 33.4
Loss on cash
flow hedges - - - - (1.2) - (1.2)
Actuarial
loss on defined
benefit pension
scheme - - - - - (2.0) (2.0)
Impact of
IFRIC 14
on defined
benefit pension
scheme - - - - - (6.5) (6.5)
Currency
translation
differences - - - - 0.6 - 0.6
Tax relating
to components
of other
comprehensive
income - - - - - 1.4 1.4
--------------------- ----- --------- --------- --------- --------- --------------- ---------- -------
Total comprehensive
income for
the year - - - - (0.6) 26.3 25.7
Issue of
share capital 18 0.1 4.0 - - - - 4.1
Purchase
of own shares - - - (1.1) - - (1.1)
Dividends
paid 8 - - - - - (22.7) (22.7)
Employee
share schemes - - - 1.7 - (1.7) -
Recognition
of share
based payments
net of tax - - - - - (2.2) (2.2)
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 18 0.1 1.3 - - - - 1.4
Purchase
of own shares - - - (0.5) - - (0.5)
Dividends
paid 8 - - - - - (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
--------------------- ----- --------- --------- --------- --------- --------------- ---------- -------
Group Cash Flow Statement for the year ended 31 August 2017 - unaudited
GBPm Note 2017 2016 -------------------------------------- ---- ------ ------ Net cash inflow from operating activities 17 51.2 58.2 -------------------------------------- ---- ------ ------ Investing activities Dividends received from associates 0.2 0.7 Purchase of property, plant and equipment (13.7) (9.1) Purchase of intangible assets (5.1) (4.8) Proceeds on sale of property, plant and equipment 1.3 - Proceeds on sale of subsidiary (net of disposal costs) 56.8 - -------------------------------------- ---- ------ ------ Net cash used in investing activities 39.5 (13.2) -------------------------------------- ---- ------ ------ Financing activities Interest paid (5.2) (4.9) Dividend paid 20 (23.6) (22.7) Repayments of obligations under finance leases (4.2) (3.5) Proceeds on issue of shares 0.7 0.4 Net outflow on purchase of
shares for Employee Benefit
Trust (0.5) (1.1)
Decrease in borrowings (61.0) (15.5)
Net cash used in financing
activities (93.8) (47.3)
-------------------------------------- ---- ------ ------
Net decrease in cash and cash
equivalents (3.1) (2.3)
Effect of foreign exchange
rate changes 0.4 0.5
-------------------------------------- ---- ------ ------
(2.7) (1.8)
Opening net cash and cash equivalents 9.1 10.9
Closing net cash and cash equivalents 13 6.4 9.1
-------------------------------------- ---- ------ ------
During the year cash inflow from operating activities attributed to discontinued operations amounted to GBP3.8m (2016: GBP13.1m) and paid GBP3.7m (2016: GBP3.2m) in respect of investing activities. There were no cashflows associated with financing activities attributable to discontinued operations.
Analysis of net debt
GBPm Note 2017 2016 -------------------------- ---- ------ ------- Cash and cash equivalents 13 6.4 9.1 Current borrowings 13 (20.0) (61.0) Non-current borrowings 13 (60.0) (79.1) -------------------------- ---- ------ ------- Net borrowings (73.6) (131.0) Finance lease liabilities (8.5) (10.7) Net debt (82.1) (141.7) -------------------------- ---- ------ -------
Notes to the accounts
1. Basis of preparation
The Results are based on the Company's financial statements which are prepared in accordance with International Financial Reporting Standards (IFRS) adopted for use in the European Union (EU) and therefore comply with Article 4 of the EU IAS legislation and with those parts of the Companies Act 2006 that are applicable to companies reporting under IFRS.
There have been no significant changes in accounting policies from those set out in the accounting policies section of the Connect Group PLC Annual Report and Accounts 2017. The accounting policies have been applied consistently throughout the years ended 31 August 2017 and 31 August 2016.
The Education & Care and Books divisions have been reclassified as discontinued operations in accordance with IFRS 5 "Non-current Assets Held for Sale and Discontinued Operations" and the consolidated financial statements and affected notes for the year ended 31 August 2016 have been restated to reflect this.
The following Standards have been adopted without any significant impact on the amounts reported in these financial statements:
-- Investment Entities: - Applying the Consolidation Exception (Amendments to IFRS 10, IFRS 12 and IAS 28 - effective for accounting periods beginning on or after 1 January 2016.
-- IAS 16 and IAS 38 (amended) 'Clarification of Acceptable Methods of Depreciation and Amortisation' - effective for accounting.
-- periods beginning on or after 1 January 2016. -- Annual Improvements 2012-2014 Cycle - effective 1 January 2016.
-- Amendments to IAS 1 - effective for accounting periods beginning on or after 1 January 2016.
-- Amendments to IAS 27 'Equity Method in Separate Financial Statements' - applicable for accounting periods beginning on or after 1 January 2016.
-- Amendments to IFRS 11 'Accounting for Acquisitions of Interests in Joint Operations' - applicable for accounting periods beginning on or after 1 January 2016.
The financial information for the year ended 31 August 2017 does not constitute statutory accounts for the purposes of section 435 of the Companies Act 2006. A copy of the accounts for the year ended 31 August 2016 has been delivered to the Registrar of Companies. The auditor's report on those accounts was not qualified and did not contain statements under section 498(2) or 498(3) of the Companies Act 2006. The audit of the statutory accounts for the year ended 31 August 2017 is not yet complete. These accounts will be finalised on the basis of the financial information presented by the Directors in this preliminary announcement and will be delivered to the Registrar of Companies following the Company's annual general meeting.
The Company intends to publish the Annual Report and Accounts that comply with IFRSs. The Annual Report and Accounts will be available for shareholders in December 2017 at www.connectgroupplc.com.
These results were approved by the Board of Directors on 26 October 2017.
2. Segmental analysis
In accordance with IFRS 8 'Operating Segments', Group 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:
News & Media: News The UK market leading distributor Distribution (also of newspapers and magazines to referred to as 27,000 retailers across England Smiths News or and Wales from 39 distribution Early Distribution) centres. --------------------- -------------------------------------- News & Media: Media A supplier of newspaper and magazines (also referred to airlines and a provider of to as DMD) inflight services. --------------------- -------------------------------------- Mixed Freight A leading provider of next day (also referred B2B delivery of Mixed Freight to as Tuffnells consignments. and formerly Parcel Freight) --------------------- --------------------------------------
As explained in note 10, Connect Books, a leading UK distributor of physical and digital books is held for sale. The division has been presented as a discontinued operation and has been included below where necessary for the purpose of reconciliation. As detailed in note 11, the Connect Education & Care division was sold on 30 June 2017 and the results for the period to this date is also presented within Discontinued operations.
The following is an analysis of the Group's revenue and results by reportable segment:
Revenue
----------------------------------- ------------------
GBPm 2017 2016
----------------------------------- -------- --------
News & Media: News Distribution 1,383.4 1,443.8
News & Media: Media 28.8 27.6
Mixed Freight 183.2 174.4
Intra group revenue (1.1) -
Continuing operations 1,594.3 1,645.8
Discontinued operations 270.3 260.7
Total continuing and discontinued
operations 1,864.6 1,906.5
------------------------------------ -------- --------
Intra group revenue relates to services provided by the Mixed Freight division to News Distribution in respect of "Pass My Parcel".
2017 2016
--------------------- ----------------------------------- -----------------------------------
GBPm Adjusted Adjusted Statutory Adjusted Adjusted Statutory
operating items operating operating items operating
profit profit profit profit
--------------------- ----------- --------- ----------- ----------- --------- -----------
News & Media:
News Distribution 40.4 (4.3) 36.1 40.0 (5.9) 34.1
News & Media:
Media 2.3 (1.0) 1.3 2.4 (0.4) 2.0
Mixed Freight 12.0 (7.7) 4.3 15.0 (8.9) 6.1
---------------------- ----------- --------- ----------- ----------- --------- -----------
Continuing
operations 54.7 (13.0) 41.7 57.4 (15.2) 42.2
Discontinued
operations* 2.0 7.5 9.5 10.3 (3.6) 6.7
Total continuing
and discontinued
operations 56.7 (5.5) 51.2 67.7 (18.8) 48.9
---------------------- ----------- --------- ----------- ----------- --------- -----------
Net finance
expense (6.7) (0.8) (7.5) (7.0) - (7.0)
---------------------- ----------- --------- ----------- ----------- --------- -----------
Profit before
taxation 50.0 (6.3) 43.7 60.7 (18.8) 41.9
---------------------- ----------- --------- ----------- ----------- --------- -----------
*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 News & Media are revenues of approximately GBP147.5m (2016: GBP156.8m) which arose from sales to the Group's largest customer. No other single customer contributed 5% or more of the Group's revenue in either 2017 (2016: 8%)
Segment assets and liabilities
Assets Liabilities Net assets/(liabilities)
----------------------------------- -------------- ------------------ ---------------------------
GBPm 2017 2016 2017 2016 2017 2016
----------------------------------- ------ ------ -------- -------- ------------- ------------
News & Media: News 85.4 89.4 (220.8) (280.4) (135.4) (191.0)
News & Media: Media 23.0 20.5 (8.2) (7.6) 14.8 12.9
Mixed Freight 167.0 175.9 (36.3) (49.0) 130.7 126.9
Discontinued operations 64.5 132.1 (49.5) (67.9) 15.0 64.2
Consolidated assets/(liabilities) 339.9 417.9 (314.8) (404.9) 25.1 13.0
----------------------------------- ------ ------ -------- -------- ------------- ------------
Segment depreciation, amortisation and non-current asset additions
Depreciation Amortisation Additions
and impairment to non-current
assets
------------------------- --------------- ------------------ ------------------
GBPm 2017 2016 2017 2016 2017 2016
------------------------- ------- ------ -------- -------- -------- --------
News & Media: News (4.2) (4.5) (3.0) (2.3) 6.8 5.2
News & Media: Media (0.2) (0.1) (0.3) (0.4) 0.2 0.3
Mixed Freight (4.1) (3.3) (7.1) (7.1) 6.7 11.1
------------------------ ------- ------ -------- -------- -------- --------
Continuing operations (8.5) (7.9) (10.4) (9.8) 13.7 16.6
Discontinued operations (0.8) (1.0) (12.7) (4.9) 3.4 2.7
Consolidated total (9.3) (8.9) (23.1) (14.7) 17.1 19.3
------------------------ ------- ------ -------- -------- -------- --------
Additions to non-current assets includes intangible assets and property, plant and equipment.
Geographical analysis
GBPm Revenue by destination Non-current assets
by location of
operation
2017 2016 2017 2016
------------------------- ------------ ----------- ---------- ---------
United Kingdom 1,579.6 1,630.9 152.4 218.9
Europe 9.6 10.1 - -
Rest of World 5.1 4.8 - -
-------------------------- ------------ ----------- ---------- ---------
Continuing operations 1,594.3 1,645.8 152.4 218.9
-------------------------- ------------ ----------- ---------- ---------
Discontinued operations 270.3 260.7 - 0.3
-------------------------- ------------ ----------- ---------- ---------
Total Continuing
and discontinued
operations 1,864.6 1,906.5 152.4 219.2
-------------------------- ------------ ----------- ---------- ---------
Non-current assets in the table above exclude retirement benefit assets, deferred tax assets and derivative financial instruments.
3. Operating profit
The Group's results are analysed as follows:
GBPm 2017 2016 restated Continuing Note Adjusted Adjusted Total Adjusted Adjusted Total operations items items -------------------- ---- --------- -------- --------- ---------- -------- --------- Revenue 1,594.3 - 1,594.3 1,645.8 - 1,645.8 -------------------- ---- --------- -------- --------- ---------- -------- --------- Cost of inventories recognised as an expense (1,283.8) - (1,283.8) (1,335.7) - (1,335.7) Other cost of sales (124.8) - (124.8) (118.2) - (118.2) -------------------- ---- --------- -------- --------- ---------- -------- --------- Cost of sales (1,408.6) - (1,408.6) (1,453.9) - (1,453.9) -------------------- ---- --------- -------- --------- ---------- -------- --------- Gross profit 185.7 - 185.7 191.9 - 191.9 -------------------- ---- --------- -------- --------- ---------- -------- --------- Distribution costs (76.9) - (76.9) (82.8) - (82.8) -------------------- ---- --------- -------- --------- ---------- -------- --------- Administrative expenses (50.5) (8.2) (58.7) (47.9) (7.9) (55.8) Share-based payment expense (0.9) 2.5 1.6 (1.7) - (1.7) Amortisation of intangibles 12 (3.1) (7.3) (10.4) (2.4) (7.3) (9.7) Administrative expenses (54.5) (13.0) (67.5) (52.0) (15.2) (67.2) -------------------- ---- --------- -------- --------- ---------- -------- --------- Share of profits from jointly controlled entities 0.4 - 0.4 0.3 - 0.3 -------------------- ---- --------- -------- --------- ---------- -------- --------- Operating profit 54.7 (13.0) 41.7 57.4 (15.2) 42.2 -------------------- ---- --------- -------- --------- ---------- -------- ---------
The operating profit is stated after charging/ (crediting):
GBPm Note 2017 2016 restated
---------------------------------------- ----- ---------------------------------- ----------------------------------
Continuing Discontinued Total Continuing Discontinued Total
Depreciation
on property,
plant & equipment 8.5 0.8 9.3 7.9 1.0 8.9
Amortisation
of intangible
assets 12 10.4 12.7 23.1 9.7 5.0 14.7
Operating lease
charges
* occupied land and buildings 9.6 1.4 11.0 9.7 1.3 11.0
* equipment and vehicles 16.9 0.6 17.5 18.6 0.8 19.4
Operating lease
rental income
- land and
buildings (0.1) (0.2) (0.3) (0.2) (0.2) (0.4)
Write down
of inventories
recognised
as an expense - (1.6) (1.6) - - -
Gain/ (loss)
on disposal
of non current
assets 0.4 (0.8) (0.4) - - -
Staff costs 128.4 23.7 152.1 129.4 24.3 153.7
---------------------------------------- ----- ----------- ------------- ------ ----------- ------------- ------
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 2017 2016 ------------------------------------------ ----- ----- Fees payable to the Company's auditor for the audit of the Company's annual accounts 0.2 0.2 Fees payable to the Company's auditor for the audit of the Company's subsidiaries 0.2 0.2 ------------------------------------------ ----- ----- Total audit fees 0.4 0.4 Other services - - ------------------------------------------ ----- ----- Total non-audit fees - - ------------------------------------------ ----- ----- Total fees (continuing and discontinued) 0.4 0.4 ------------------------------------------ ----- ----- 4. Adjusted items GBPm 2017 2016 restated --------------------------------- ----- ------- -------------- Continuing operations Network and re-organisation costs (a) (8.0) (3.2) Property (b) (0.6) - Acquisition and disposal costs (c) 2.2 (3.2) Amortisation of acquired intangibles (d) (7.3) (7.3) Pension (e) 0.7 - Legal provision (f) - (1.5) Settlement of interest (g) (0.8) - rate swap --------------------------------- ----- ------- -------------- Total before tax (13.8) (15.2) Taxation 2.7 3.0 ----------------------------------------- ------- -------------- Total after taxation (11.1) (12.2) Discontinued operations
Profit on disposal (h) 19.0 - of subsidiary Acquisition and disposal costs (deferred consideration) (i) - (0.7) Re-organisation/ other costs (j) (0.3) (1.1) Pension (k) - 1.1 Amortisation and impairment of acquired intangibles (d) (11.2) (2.9) ---------------------------------- ---- ------- -------------- Total before tax 7.5 (3.6) Taxation 1.1 0.9 ----------------------------------------- ------- -------------- Total after taxation 8.6 (2.7) Continuing and discontinued operations --------------------------------- ----- ------- -------------- Total before tax (6.3) (18.8) ----------------------------------------- ------- -------------- Taxation 3.8 3.9 ----------------------------------------- ------- -------------- Total after taxation (2.5) (14.9) ----------------------------------------- ------- --------------
The Group incurred a total of GBP11.1m of adjusted items on a continuing basis after tax (2016: GBP12.2m).
This comprises:
(a) Network and re-organisation costs
GBP2.0m related to network rationalisation costs incurred in the Smiths News network to drive cost savings. GBP0.6m related to the restructuring of the News joint venture FMD Limited (whose principal trading subsidiary is Worldwide Magazine Distribution Limited) with part of the magazine operation being absorbed into the main News business. There are a further GBP4m costs relating to redundancies announced in August arising from the decision to integrate the News & Media and Mixed Freight divisions. GBP0.5m was incurred in rationalising overseas operations in Media and the remaining amount related to redundancy costs within Smiths News and Tuffnells.
(b) Property
Provisions of GBP0.9m (FY2016: GBPnil) were charged on three onerous depot leases in FY2017 offsetting a release of GBP0.3m in respect of reversionary leases. The onerous lease charges are considered to be part of the Group's strategic restructuring initiative and are therefore treated as an adjusted item.
(c) Acquisition and disposal costs
Acquisition costs include the release of deferred consideration for Tuffnells of GBP2.7m comprising equity based amounts and amounts provided for cash rewards which were offset by GBP0.5m fees relating to disposal activity in the year.
(d) Amortisation and impairment of acquired intangibles
Amortisation of acquired intangibles relates to acquisitions amortised over their expected economic lives for which there is no ongoing cash impact. Discontinued operations includes impairments of GBP9.9m which result in a fair value less costs to sell of GBP15.0m.
(e) Pension credit
The GBP0.7m pension credit relates to a trivial commutation of benefits to members in the WH Smith Pension Trust.
(f) Legal provision - potential health and safety offences
Potential fine and legal costs arising from the outcome of the HSE investigation into the fatality at Tuffnells' Brierley Hill depot in January 2016. See note 15 for further details.
(g) Settlement of interest rate swap
The Group took a strategic decision to no longer hedge interest rates. The cost relates to the settlement of the swap instruments. The settlement followed a change in Treasury policy. The cost is classified as an adjusted item because it is of significant value and is not expected to be recurrent in nature.
(h) Profit on disposal of subsidiary
Profit on the sale of the Education & Care division on 30 June 2017 (see note 11 for details).
(i) Acquisition and disposal costs (deferred consideration)
Deferred consideration charged in relation to the Group's acquisition of the remaining 49% of Wordery in 2015.
(j) Re-organisation / other costs
Re-organisation/ other costs of GBP0.3m relates to legal and restructuring costs incurred in the Books division during the year. In the prior year GBP1.2m related to the re-organisation of the Books international divisions and operations in the Education & Care division.
(k) Pension
Impact of the Trustees decision to cease payment of discretionary increases on pre 97 pension rights within the Consortium Care scheme which resulted in a past service credit.
Whilst costs associated with network reorganisation recur across financial years, they are considered adjusted items given they are part of a strategic programme and are significant in value to the results of the Group. Other reorganisation costs are considered to be adjusted items as they are also related to strategic initiatives, are of significant value and not considered to be a normal operating cost of the business. The Pension credits described above are not considered to be part of normal operations and are therefore considered to be an adjusted item. Deferred 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.
5. 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 division (see note 11).
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 Tuffnells 2017 WH Consortium Platinum Tuffnells 2016
Smith Parcels Smith CARE Parcels
Pension Express Pension Express
Trust Trust
---------------- -------- --------- ------- -------- ---------- -------- --------- -------
Present
value of
defined
benefit
obligation (460.6) (13.0) (473.6) (490.2) (24.0) (1.6) (15.7) (531.5)
Fair value
of assets 609.9 10.2 620.1 641.5 15.8 1.9 12.7 671.9
---------------- -------- --------- ------- -------- ---------- -------- --------- -------
Net surplus/
(loss) 149.3 (2.8) 146.5 151.3 (8.2) 0.3 (3.0) 140.4
Amounts
not recognised
due to
asset limit (149.3) - (149.3) (151.3) - - - (151.3)
---------------- -------- --------- ------- -------- ---------- -------- --------- -------
- (2.8) (2.8) - (8.2) 0.3 (3.0) (10.9)
Additional
liability
recognised
due to
minimum
funding
requirements (8.7) - (8.7) (10.3) - - - (10.3)
---------------- -------- --------- ------- -------- ---------- -------- --------- -------
Pension
liability (8.7) (2.8) (11.5) (10.3) (8.2) - (3.0) (21.5)
---------------- -------- --------- ------- -------- ---------- -------- --------- -------
Pension
asset - - - - - 0.3 - 0.3
---------------- -------- --------- ------- -------- ---------- -------- --------- -------
The primary defined benefit pension scheme (the Smiths News Section of the WH Smith Pension Trust) has an IAS 19 surplus of GBP149.3m at 31 August 2017 (2016: GBP151.3m surplus) which the Group does not recognise in the accounts as the investment policy being used means that the amount available on a reduction of future contributions is expected to be GBPnil (2016: GBPnil). 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 GBP3.8m per annum through to March 2018. Thereafter contributions of GBP3.8m per annum have been agreed until the period ended March 2020. The Group recognises the present value of these agreed contributions as a pension liability of GBP8.7m (2016: GBP10.3m).
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. 2017 2016
--------------------------------- -------------- --------------
Discount rate 2.3 2.0
Inflation assumptions -
CPI 2.3 2.0
Inflation assumptions -
RPI 3.3 3.0
2017 2016
Demographic assumptions
for WH Smith pension trust:
Life expectancy at age Male Female Male Female
65
Member currently aged 65 21.5 23.3 21.5 23.5
Member currently aged 45 22.5 24.5 22.8 25.0
--------------------------------- ----- ------- ----- -------
2017 2016
Demographic assumptions
for Tuffnells Parcels Express
scheme:
--------------------------------- -------------- --------------
Life expectancy at age Male Female Male Female
65
Member currently aged 65 22.3 24.1 21.9 24.2
Member currently aged 45 23.3 25.3 23.2 25.7
--------------------------------- ----- ------- ----- -------
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 Defined Impact Total
value benefit of IFRIC
of obligation 14 on
scheme defined
assets benefit
pension
schemes
-------------------------------- -------- ------------ ---------- --------
At 31 August 2015 563.3 (432.0) (149.4) (18.1)
-------------------------------- -------- ------------ ---------- --------
Current service cost - (0.3) - (0.3)
Net interest cost 20.9 (15.8) (5.7) (0.6)
Administration expenses (0.1) - - (0.1)
Past service credits - 1.1 1.1
Total amount recognised
in income statement 20.8 (15.0) (5.7) 0.1
-------------------------------- -------- ------------ ---------- --------
Actual less expected
return on scheme assets 115.4 - - 115.4
Actuarial gains arising
from experience - 7.5 - 7.5
Actuarial loss arising
from changes in financial
assumptions - (128.3) - (128.3)
Actuarial gains arising
from changes in demographic
assumptions - 3.4 - 3.4
Change in surplus not
recognised - - (6.5) (6.5)
Amount recognised in other
comprehensive income 115.4 (117.4) (6.5) (8.5)
Employer contributions 5.3 - - 5.3
Employee contributions 0.1 (0.1) - -
Benefit payments (33.0) 33.0 - -
-------------------------------- -------- ------------ ---------- --------
Amounts included in cash
flow statement (27.6) 32.9 - 5.3
-------------------------------- -------- ------------ ---------- --------
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 less expected
return on scheme assets (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)
-------------------------------- -------- ------------ ---------- --------
Included within Current
liabilities (4.1)
Included within Non-current
liabilities (7.4)
-------------------------------- -------- ------------ ---------- --------
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.
The actual return on scheme assets during 2017 was a loss of GBP12.2m (2016: a gain of GBP136.2m) 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 (2016: GBPnil).
Sensitivity of results to changes in the main assumptions:
Assumption Change in assumption Impact on IAS
19 liabilities
------------------ --------------------- ---------------------
Discount rate +/- 0.5% -GBP37.5m/ +GBP40.5m
Rate of inflation +/- 0.5% +GBP38m/-GBP35m
Life expectancy +/- 1 year +GBP16.5m/-GBP16.5m
------------------ --------------------- ---------------------
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 2017 2016 2015 2014 2013 ---------------------------- -------- -------- -------- -------- -------- Present value of defined benefit obligation (473.6) (531.5) (432.0) (450.7) (419.2) Fair value of assets 620.1 671.9 563.3 522.7 469.6 Impact of IFRIC 14 on defined benefit pension schemes (158.0) (161.6) (149.4) (93.0) (73.5) ---------------------------- -------- -------- -------- -------- -------- Net deficit in the schemes (11.5) (21.2) (18.1) (21.0) (23.1) ---------------------------- -------- -------- -------- -------- -------- Experience adjustments on scheme liabilities 13.7 (117.4) 25.1 0.8 (1.4) ---------------------------- Experience adjustments on scheme assets (21.8) 115.4 28.7 44.6 27.9
---------------------------- -------- -------- -------- -------- --------
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 (2016: a loss of GBP29.2m).
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.
Defined contribution schemes
The Group operates a number of defined contribution schemes. For the year ended 31 August 2017, contributions from the respective employing company for continuing operations totalled GBP1.2m (2016: GBP2.0m) 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.
6. Finance costs
GBPm Note 2017 2016
----------------------------- ----- ----- -----
Continuing operations
Interest on bank overdrafts
and loans (5.4) (5.5)
Net interest expense on
defined benefit obligation 5 (0.3) (0.6)
Interest payable on finance
leases (1.0) (0.7)
Foreign exchange gains 0.2 -
Unwinding of discount on
provisions - trading 15 (0.2) (0.2)
Adjusted items:
Settlement of interest
rate swap 4 (0.8) -
----------------------------- ----- ----- -----
Finance costs - continuing
operations (7.5) (7.0)
----------------------------- ----- ----- -----
Finance costs - continuing
and discontinued operations (7.5) (7.0)
----------------------------- ----- ----- -----
7. Income tax expense
GBPm 2017 2016
Continuing operations Adjusted Adjusted Total Adjusted Adjusted Total
items items
--------------------------- --------- --------- ------ --------- --------- ------
Current tax 10.0 (0.6) 9.4 11.2 (0.8) 10.4
Adjustment in
respect of prior
year (0.8) 0.1 (0.7) (0.3) (0.1) (0.4)
Total current
tax charge 9.2 (0.5) 8.7 10.9 (0.9) 10.0
Deferred tax -
current year 0.1 (2.0) (1.9) (0.4) (1.5) (1.9)
Deferred tax -
prior year 0.5 - 0.5 - - -
Deferred tax -
impact of rate
change 0.1 (0.2) (0.1) 0.3 (0.6) (0.3)
--------------------------- --------- --------- ------ --------- --------- ------
Total tax charge
- continuing operations 9.9 (2.7) 7.2 10.8 (3.0) 7.8
--------------------------- --------- --------- ------ --------- --------- ------
Effective tax
rate 20.8% 21.1% 21.5% 22.2%
--------------------------- --------- --------- ------ --------- --------- ------
Tax charge - discontinued
operations 1.0 (1.1) (0.1) 1.6 (0.9) 0.7
--------------------------- --------- --------- ------ --------- --------- ------
Tax charge - continuing
and discontinued
operations 10.9 (3.8) 7.1 12.4 (3.9) 8.5
--------------------------- --------- --------- ------ --------- --------- ------
The effective adjusted income tax rate for continuing operations the year was 20.8% (2016: 21.5%). After the impact of Adjusted items of GBP2.7m (2016: GBP3.0m), the effective statutory income tax rate for continuing operations was 21.1% (2016: 22.2%).
Corporation tax is calculated at the main rates of UK corporation tax, those being 19.6% (2016: 20.0%). Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions.
Of the charge to current tax, approximately GBP1.0m (2016: GBP1.1m) related to tax on profits arising in the Education & Care division, 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 2017 2016 ------------------------------------ ------ ------ Profit before tax - continuing operations 34.2 35.2 ------------------------------------ ------ ------ Tax on profit at the standard rate of UK corporation tax 19.6% (2016: 20.0%) 6.7 7.1 Expenses not deductible for tax purposes 0.8 1.3 Non taxable income (0.6) - Share based payments 0.5 - Adjustment in respect of prior years (0.2) (0.4) Impact of change in UK tax rate (0.1) (0.3) Impact of higher overseas tax rates 0.1 0.1 Tax charge - continuing operations 7.2 7.8 ------------------------------------ ------ ------
Tax charges to other comprehensive income and directly in equity
GBPm 2017 2016 Continuing operations ------------------------------------------ ------ ------ Current tax relating to the defined benefit pension scheme (0.8) (0.8) Current tax relating to share based payments - (0.1) Deferred tax relating to derivative financial instruments 0.2 (0.2) Deferred tax relating to share based payments 0.2 0.4 Deferred tax relating to retirement benefit obligations 0.3 0.4 Tax (credit) to other comprehensive income and directly in equity - continuing operations (0.1) (0.3) ------------------------------------------ ------ ------ Tax charge/ (credit) to other comprehensive income and directly in equity - discontinued operations 0.3 (1.1) ------------------------------------------ ------ ------ Tax charge/ (credit) to other comprehensive income and directly in equity - continuing and discontinued operations 0.2 (1.4) ------------------------------------------ ------ ------ 8. Dividends
Amounts paid & proposed as distributions to equity shareholders in the years:
Paid & proposed dividends 2017 2016 2017 2016
for the year
Per share Per share GBPm GBPm
--------------------------- ---------- ---------- ----- -----
Interim dividend -
paid 3.1p 3.0p 7.6 7.3
Final dividend - proposed 6.7p 6.5p 16.4 15.9
9.8p 9.5p 24.0 23.2
--------------------------- ---------- ---------- ----- -----
Recognised dividends
for the year
Final dividend - prior
year 6.5p 6.3p 16.0 15.4
Interim dividend -
current year 3.1p 3.0p 7.6 7.3
--------------------------- ---------- ---------- ----- -----
9.6p 9.3p 23.6 22.7
--------------------------- ---------- ---------- ----- -----
The proposed final dividend for the year ended 31 August 2017 of 6.7p is subject to approval by shareholders at the Annual General Meeting on 23 January 2018 and in line with IAS10 - 'Events after the reporting period', this dividend has not been included as a liability in these accounts. The proposed dividend, if approved, will be paid on 9 February 2018 to shareholders on the register at close of business on 12 January 2018.
9. Earnings per share
2017 2016
GBPm Pence GBPm Pence
Earnings Weighted per Earnings Weighted per
average share average share
number number
of shares of shares
million million
-------------------------------- --------- ----------- ------- --------- ----------- -------
Weighted average number
of shares in issue 247.5 245.9
Shares held by the
ESOP (weighted) (2.1) (2.5)
Basic earnings per
share (EPS)
-------------------------------- --------- ----------- ------- --------- ----------- -------
Continuing operations
-------------------------------- --------- ----------- ------- --------- ----------- -------
Adjusted earnings attributable
to ordinary shareholders 38.1 245.4 15.5p 39.6 243.4 16.2p
-------------------------------- --------- ----------- ------- --------- ----------- -------
Adjusted items (11.1) (12.2)
Earnings attributable
to ordinary shareholders 27.0 245.4 11.0p 27.4 243.4 11.3p
-------------------------------- --------- ----------- ------- --------- ----------- -------
Total - Continuing
and discontinued operations
Adjusted earnings attributable
to ordinary shareholders 39.1 245.4 15.9p 48.3 243.4 19.8p
Adjusted items (2.5) (14.9)
Earnings attributable
to ordinary shareholders 36.6 245.4 14.9p 33.4 243.4 13.7p
-------------------------------- --------- ----------- ------- --------- ----------- -------
Diluted earnings per
share (EPS)
-------------------------------- --------- ----------- ------- --------- ----------- -------
Effect of dilutive
share options 1.6 3.8
Continuing operations
-------------------------------- --------- ----------- ------- --------- ----------- -------
Diluted adjusted EPS 38.1 247.0 15.4p 39.6 247.2 16.0p
-------------------------------- --------- ----------- ------- --------- ----------- -------
Diluted EPS 27.0 247.0 10.9p 27.4 247.2 11.1p
-------------------------------- --------- ----------- ------- --------- ----------- -------
Total - Continuing
and discontinued operations
-------------------------------- --------- ----------- ------- --------- ----------- -------
Diluted adjusted EPS 39.1 247.0 15.8p 48.3 247.2 19.5p
-------------------------------- --------- ----------- ------- --------- ----------- -------
Diluted EPS 36.6 247.0 14.8p 33.4 247.2 13.5p
-------------------------------- --------- ----------- ------- --------- ----------- -------
Dilutive shares increase the basic number of shares at 31 August 2017 by 1.6m to 247.0m (31 August 2016: 247.2m).
The calculation of diluted EPS reflects the potential dilutive effect of employee incentive schemes of 1.6m dilutive shares (31 August 2016: 2.3m). In 2016 there was a dilutive impact of a weighted 1.5m 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).
10 Discontinued Operations
On 30 June 2017 the Education & Care division was sold (refer to note 11 for detail). The results of this division are therefore disclosed as discontinued. The Books division was classified as held for sale on 31 August 2017 as the Group is actively marketing the division for sale and disposal is expected to be completed within a year. As such the results of the Books division 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 12 months to Aug
2017 2016
-------------------- ------------------------------ ------------------------------
Adjusted Adjusted Total Adjusted Adjusted Total
items items
-------------------- --------- --------- -------- --------- --------- --------
Revenue 270.3 - 270.3 260.7 - 260.7
Expenses (268.3) 7.5 (260.8) (250.4) (3.6) (254.0)
--------------------- --------- --------- -------- --------- --------- --------
Operating
profit 2.0 7.5 9.5 10.3 (3.6) 6.7
Finance - - - - - -
costs
-------------------- --------- --------- -------- --------- --------- --------
Profit
before
tax 2.0 7.5 9.5 10.3 (3.6) 6.7
Income
tax expense (1.0) 1.1 0.1 (1.6) 0.9 (0.7)
--------------------- --------- --------- -------- --------- --------- --------
Profit
from discontinued
operations 1.0 8.6 9.6 8.7 (2.7) 6.0
--------------------- --------- --------- -------- --------- --------- --------
The major classes of assets and liabilities comprising the operations classified as held for sale are as follows:
GBPm 2017 Goodwill 9.7 Intangible assets 3.0 Property, plant and equipment 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 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 disposal group 15.0 -------------------------------- ------
Impairment of GBP7.9m was charged in respect of goodwill bringing the carrying value of the division to fair value less cost to sell.
During the year cash inflow from operating activities attributed to discontinued operations amounted to GBP3.8m (2016: GBP13.1m), paid GBP3.7m (2016: GBP3.2m) in respect of investing activities. There were no cashflows associated with financing activities attributable to discontinued operations.
11 Disposal of subsidiary
The Group disposed of the Connect Education & Care division on 30 June 2017.
The net assets of the division 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.
There were no disposals during the year ended 31 August 2016.
12. Intangible assets
Acquired Intangibles Internally generated Computer
development costs software
costs
----------
GBPm Goodwill Customer Trade name Software Total
relationships
----------
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)
Disposal - - - 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
-------- -------- -------------------- ---------- ------
Cost:
At 1 September 2015 96.3 48.8 33.5 1.5 9.1 13.8 203.0
Additions - - - - 2.1 2.6 4.7
Disposals - - - - - (0.2) (0.2)
At 31 August 2016 96.3 48.8 33.5 1.5 11.2 16.2 207.5
-------------------- ----------
Accumulated
amortisation:
At 1 September 2015 - (13.6) (4.0) (0.8) (5.4) (4.4) (28.2)
Amortisation charge - (6.4) (3.5) (0.3) (1.8) (2.7) (14.7)
Disposal - - - - - 0.2 0.2
At 31 August 2016 - (20.0) (7.5) (1.1) (7.2) (6.9) (42.7)
Net book value at 31
August 2016 96.3 28.8 26.0 0.4 4.0 9.3 164.8
The Group leases software under various finance lease arrangements. The net book value of finance leases contained within the software balance above is GBP0.6m (2016: GBP0.4m).
Goodwill and Intangibles by CGU
As detailed in note 11, goodwill and intangibles attributable to the Education & Care CGU were disposed during the year.
An impairment against goodwill and intangibles attributable to the Books division was charged during the 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.
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 budgets and forecasts for the following 5 years as approved by the Board and extrapolates these cash flows on an estimated growth rate of 1% into perpetuity. The rate used to discount the forecast cash flows range from 12% to 15%, being the Group's risk adjusted pre-tax WACC, specific for each cash generating unit. Pre-tax discount rates are derived from the Group's post-tax WACC of 8% risk adjusted by 2%. The calculation of value in use is sensitive to the discount rate and growth rates used.
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 Parcels CGU. The Parcels CGU has headroom on its carrying value of GBP12.6m prior to any sensitivities. A reasonably possible increase in the risk adjusted post tax WACC by 0.7% or a reduction in operating profits by 5.5% would cause the carrying value to equal the recoverable amount.
Goodwill Acquired Intangibles Total
GBPm 2017 2016 On acquisition 2017 2016 On acquisition 2017 2016 On acquisition
----- -----
Media 5.7 5.7 5.7 0.5 0.8 2.6 6.2 6.5 8.3
News - - - 0.1 0.1 0.3 0.1 0.1 0.3
Mixed Freight 52.1 52.1 52.1 39.9 46.7 58.1 92.0 98.8 110.2
57.8 57.8 57.8 40.5 47.6 61.0 98.3 105.4 118.8
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 2017 is GBP17.3m and GBP22.4m respectively with a remaining amortisation period of 5 and 7.5 years respectively.
13. Cash and borrowings
Cash and borrowings by currency (Sterling equivalent) are as follows:
GBPm Sterling Euro US Dollar Other Total 2017 2016
Cash and cash equivalents - continuing 2.7 2.2 0.4 0.2 5.5
Cash and cash equivalents - classified as held for sale (2.0) 2.4 0.4 0.1 0.9
Cash and cash equivalents - total 0.7 4.6 0.8 0.3 6.4 9.1
Term loan - disclosed within current liabilities (20.0) (20.0) (20.0)
Term loan - disclosed within non-current liabilities (60.0) (60.0) (79.1)
Revolving credit facility - (41.0)
Total borrowings (80.0) (80.0) (140.1)
Net borrowings (79.3) 4.6 0.8 0.3 (73.6) (131.0)
Total borrowings
Amount due for settlement within 12 months (20.0) (20.0) (61.0)
Amount due for settlement after 12 months (60.0) (60.0) (79.1)
(80.0) (80.0) (140.1)
Cash and cash equivalents 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.
At 31 August 2017, the Group had GBP150.0m (2016: GBP109.0m) of undrawn committed borrowing facilities in respect of which all conditions precedent had been met. Interest payable under the facility in place at 31 August 2017 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. In October 2017, the Group agreed a new bank facility of GBP175m.
14. Obligations under finance leases
GBPm 2017 2016
Minimum lease payments Present value of Minimum lease payments Present value of
minimum lease minimum lease
payments payments
Amount payable under
finance leases:
Within one year 3.8 3.1 3.8 3.0
In the second to fifth
years inclusive 6.0 5.4 8.8 7.7
Total 9.8 8.5 12.6 10.7 Less: future finance charges (1.3) (1.9) - Present value of lease obligations 8.5 8.5 10.7 10.7 Less: amount due for settlement within 12 months (shown under current liabilities) (3.1) (3.0) Amount due for settlement after 12 months 5.4 7.7
Group policy is to acquire certain items of its fixtures, equipment and software under finance leases. The average lease term is 4 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.
15. Provisions
GBPm Reorganisation Insurance and legal Deferred contingent Property provisions Total
provisions provision consideration
At 1 September 2016 (0.6) (4.3) (2.0) (6.5) (13.4)
Additions (4.7) (2.3) - (1.9) (8.9)
Release - 1.7 0.1 0.4 2.2
Utilised in period 0.7 1.3 1.1 1.0 4.1
Unwinding of discount
utilisation - - - (0.2) (0.2)
Transferred as held
for sale 0.1 - - 0.5 0.6
At 31 August 2017 (4.5) (3.6) (0.8) (6.7) (15.6)
GBPm 2017 2016
Included within
current liabilities (9.0) (8.5)
Included within
non-current
liabilities (6.6) (4.9)
Total (15.6) (13.4)
Reorganisation provisions include amounts for programmes which consist primarily redundancy costs, that have been announced prior to the year end and are all expected to be utilised during the following financial year.
Insurance & legal provisions represent the expected future costs of employer's liability, public liability, motor accident claims and legal claims. In January 2016, an employee in the Tuffnells business was fatally injured in an accident at our Brierley Hill depot. Since the accident we have been assisting the Health & Safety Executive ("HSE") in its investigation and gave evidence at a Coroner's inquest held in September 2016. The HSE recently notified the Group's legal advisers that it intends to charge Tuffnells Parcels Express Limited with an offence under section 2(1) of the Health and Safety at Work etc Act 1974 and the business now awaits the letter of summons. A provision of GBP1.5m (GBP1.5m August 2016) is held in respect of a potential fine and associated legal costs.
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 2031 however a significant portion of the potential liability falls within five years.
Deferred contingent consideration relates to amounts provided in relation to the acquisition of the remaining 49% share of Wordery on 27 August 2015, the cost being contingent upon achievement of profit targets and the future employment of the former owners of the business.
16. Operating lease commitments
The group as lessee:
Minimum lease payments under non-cancellable operating leases are as follows:
Continuing 2017 2016
GBPm Land & buildings Equipment & Total Land & buildings Equipment & vehicles Total
vehicles
Within one year 9.4 12.5 21.9 9.6 13.7 23.3
In the second to
fifth years
inclusive 25.2 23.3 48.5 25.4 23.1 48.5
In more than five
years 18.8 0.5 19.3 16.9 - 16.9
53.4 36.3 89.7 51.9 36.8 88.7
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 2017 2016
Within one year 0.2 0.3
In the second to fifth years inclusive 0.3 0.2
0.5 0.5
Property rental income earned during the year was GBP0.3m (2016: GBP0.3m).
17. Net cash inflow from operating activities
GBPm Note 2017 2016
Operating profit - continuing 41.7 42.2
Operating profit - discontinued 9.5 6.7
Operating profit - total 51.2 48.9
Losses on disposal of assets 0.4 -
Share of profits of jointly controlled entities (0.4) (0.3)
Gain on disposal of subsidiary 11 (19.0) -
Adjustment for pension funding (5.2) (5.3)
Depreciation of property, plant and equipment 9.3 8.9
Amortisation and impairment of intangible assets 23.1 14.7
Impairment of loan to joint venture 0.6 -
Share based payments (1.2) 1.6
(Increase) in inventories (2.0) (0.3)
Decrease in receivables 2.7 9.7
(Decrease) in payables (1.8) (7.2)
Increase/ (Decrease) in provisions 4.7 (3.4)
Non cash pension costs (0.3) (0.6)
Income tax paid (10.9) (8.5)
Net cash inflow from operating activities 51.2 58.2
------
Net cashflow from operating activities is stated after the following adjusted items:
Payment of deferred consideration (1.1) (5.1)
Re-organisation & restructuring costs (4.7) (5.7)
Fees relating to disposal activity (0.5)
(6.3) (10.8)
18. Share Capital
(a) Share capital
GBPm 2017 2016
-----
Issued and fully paid:
At 1 September 12.3 12.2
Shares issued during the year 0.1 0.1
-----
247.7m ordinary shares of 5p each (2016: 246.7m) 12.4 12.3
-----
(b) Movement in share capital
Number (m) Ordinary shares of 5p each
31 August 2016 246.7
Shares issued during the year 1.0
At 31 August 2017 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 2017, 946,334 ordinary 5p shares were issued. 394,007 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.
During the year to 31 August 2016, 2,606,751 ordinary 5p shares were issued. 2,164,181 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 2017 2016
-----
Balance at 1 September 59.2 55.2
Premium arising on issue of equity shares 1.3 4.0
-----
Balance at 31 August 60.5 59.2
19. Reserves
(a) Demerger reserve
GBPm 2017 2016
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 2017 2016 Balance at 1 September (3.5) (4.1) Acquired in the period (0.5) (1.1) Disposed of on exercise of options 0.9 1.7 Balance at 31 August (3.1) (3.5)
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. The number of ordinary shares held by the Trust as at 31 August 2017 was 2,241,459 (2016: 2,313,644).
(c) Hedging & translation reserve GBPm 2017 2016 ------------------------------------- ------ ------ Balance at 1 September (1.1) (0.5) Settlement on termination 0.8 - Net movement in cash flow hedges 0.6 (1.2) Exchange differences on translating net assets of foreign operations 0.2 0.6 ------------------------------------- ------ ------ Balance at 31 August 0.5 (1.1)
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.
20. Retained Earnings
GBPm
Balance at 31 August 2015 226.5
Amounts recognised in Total comprehensive income 26.3
Dividends paid (22.7)
Employee share schemes (1.7)
Equity-settled share based payments, net of tax (2.2)
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
21. Post balance sheet events
In October 2017 the Group agreed 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 an RCF for GBP125m on a higher interest margin than the previous facility but with similar covenant terms to the previous facility.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR FMMZGZKVGNZZ
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October 26, 2017 02:00 ET (06:00 GMT)
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