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Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
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Smiths News | LSE:NWS | 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 | |
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0.00 | 0.00% | 162.00 | 0.00 | 01:00:00 |
Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
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0 | 0 | N/A | 0 |
TIDMCNCT
RNS Number : 1677C
Connect Group PLC
14 October 2015
Connect Group PLC
('Connect Group' or 'the Group')
Preliminary Results Announcement for the year ended 31 August 2015
Transformational year establishes foundations for growth
Connect Group, a leading specialist distributor operating in four divisions: News & Media, Books, Education & Care and Parcel Freight, is pleased to announce its preliminary results for the year ended 31 August 2015.
Adjusted results (1) FY2015 FY2014 Change Revenue GBP1,875.1m GBP1,808.5m +3.7% Profit before tax GBP56.5m GBP50.0m +13.0% Earnings per share 19.7p 19.6p (5) +0.5% Statutory results Revenue GBP1,875.1m GBP1,808.5m +3.7% Profit before tax GBP29.0m GBP43.1m -32.8% Earnings per share 9.3p 16.8p -44.6% Dividend per share 9.2p 8.8p (5) +4.5% Free cash flow (2) GBP39.8m GBP37.2m +7.0% Net debt (4) GBP153.4m GBP93.0m ---------------------- ------------ ------------ -------
HIGHLIGHTS:
Strong performance with Adjusted profit ahead of expectations
-- Revenue of GBP1,875.1m up 3.7% and Adjusted profit before tax up 13.0% to GBP56.5m, benefitting from the post-acquisition contribution from Tuffnells
-- Adjusted earnings per share of 19.7p up 0.5%, reflecting post-acquisition profits from Tuffnells and impact of rights issue shares
-- Free cash flow of GBP39.8m, up 7.0%; Net debt GBP153.4m; Net debt/Adjusted EBITDA (3) 1.9x, starting paydown from peak post acquisition debt level
-- Final dividend of 6.3p up 5.0%, making a full year dividend of 9.2p, up 4.5%
Transformational year for the Group
-- Scale acquisition of Tuffnells completed in December 2014
o Excellent early performance under Connect Group ownership
o Integration and synergies on track and creating new growth opportunities
-- Launch of Click & Collect delivery service: Pass My Parcel
o Successfully accelerated rollout to over 3,000 stores
o Agreement in principle to launch new mobile enabled returns service with new client
Foundations in place for continuing growth
-- Strategy on track with clear opportunities across the Group
Mark Cashmore, Group Chief Executive, commented:
"It has been a transformational year for the Group. Profits were ahead of expectations and we have made significant progress towards our medium-term strategic goals. The foundations for further growth are well established, with a clear strategy in each division enabling us to leverage the Group's capabilities and strengths. We are better positioned than ever to continue growing the business and generating strong shareholder returns."
The Group uses certain performance measures for internal reporting purposes and employee incentive arrangements. The terms 'net debt', 'free cash flow', 'adjusted revenue', 'adjusted operating profit', 'adjusted profit before tax', 'adjusted earnings per share' 'adjusted EBITDA' and 'non-recurring and other items' 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 revenue; is defined as revenue including the revenue of businesses from the date of acquisition and excludes revenue of businesses disposed of in the prior year.
Adjusted operating profit; is defined as operating profit including the operating profit of businesses from the date of acquisition and excludes non-recurring and other items and operating profit of businesses disposed of in the prior year.
Adjusted profit before tax; is defined as adjusted operating profit less finance costs attributable to adjusted operating profit and before non-recurring and other items; including amortisation of intangibles and network and reorganisation costs.
Adjusted earnings per share; is defined as adjusted PBT, less taxation attributable to adjusted PBT and including any adjustment for minority interest to result in adjusted PAT attributable to shareholders; divided by the basic weighted average number of shares in issue.
Non-recurring and other items; 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 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; is defined as cash flow excluding the following: payment of the dividend, acquisitions and disposals, the proceeds on the disposal of freehold properties, payments of obligations under finance leases, the repayment of bank loans, EBT share purchase and cash flows relating to non-recurring and other 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, non-recurring 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.
(5) Rebased earnings per share and rebased dividends per share adjust last year reported figures by the rights issue bonus factor adjustment of 0.9015 following the 2 for 7 rights issue in December 2014.
(6) Like for like revenues exclude the impact of gains and losses (including contracts, new business and acquisitions) reported in the current or prior year total revenues.
(7) FY2015 refers to the full year ended 31 August 2015, FY2014 refers to the full year ended 31 August 2014.
Enquiries:
Connect Group PLC Mark Cashmore, Group Chief Executive Today: 020 7466 5000 Nick Gresham, Chief Financial Officer Thereafter: 01793 563641 www.connectgroupplc.com Buchanan Sophie McNulty / Richard Oldworth / Gabriella Clinkard 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 14 October 2015 commencing at 9.30am. Connect Group PLC's Preliminary Results 2015 are available at www.connectgroupplc.com
An audio webcast will be available on:
http://vm.buchanan.uk.com/2015/connect141015/registration.htm
About Connect Group PLC:
Connect Group PLC is a leading specialist distributor operating in large and diverse markets. The Group has four separate divisions, connecting suppliers to customers in an efficient, knowledgeable and service oriented way:
-- Connect News & Media - Encompassing: Smiths News and Dawson Media Direct. 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 majority of the major national publishers as well as a large number of regional publishers. It serves approximately 30,000 customers across England and Wales, including large general retailers as well as smaller independent newsagents delivering approximately 35 million newspapers and 11 million magazines weekly. The News business also wholly owns Pass My Parcel, a new Click & Collect delivery service for outbound and returns parcels with Amazon as its first client; Dawson Media Direct is an international media direct business supplying newspapers, magazines, inflight entertainment technology and content to over 80 airlines in 50 countries.
-- Connect Books - Combining a number of recognised brands in print and digital bookselling across four customer focused business units: Wholesale, including Bertrams Books; Libraries, including Dawson Books; Direct to Consumer, including Wordery and International, including Houtschild. The division serves over 8,200 customers in approximately 100 countries, with over 156,000 in stock titles and access to over a further seven million consumer and twenty million academic titles.
-- Connect Education & Care - A leading independent supplier of consumable products through The Consortium and West Mercia Supplies. The division holds an approximate 5 per cent. market share of the estimated addressable market, comprising the consumables element of education spend. It serves over 30,000 customers with an extensive range of over 40,000 products across a branded, own-brand and value range, including exercise books, stationery, arts and craft and cleaning products through a paper based catalogue and increasing focus on e-commerce trading with schools.
-- Connect Parcel Freight - Tuffnells is a leading provider of next-day B2B delivery of mixed freight/ parcel consignments, specialising in items of irregular dimension and weight ("IDW"), examples of which include bulky furnishings, building materials and automotive parts. Tuffnells offers distribution coverage throughout the UK through a network of 35 depots and operates a largely depot-to-depot operational model, providing over 10 million deliveries per annum, through a wide range of services to over 4,200 largely 'SME' customers.
Notes to Editors
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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 2015 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.
OPERATING REVIEW
INTRODUCTION
2015 was a strong year for the Group, achieving Adjusted profit ahead of expectations and making considerable strategic progress, establishing clear growth opportunities.
Total revenue of GBP1,875.1m was up 3.7% and Adjusted profit before tax of GBP56.5m was up 13.0%. This overall performance was helped by a first-time contribution from Tuffnells (our Parcel Freight division) but was also underpinned by the performance of our other divisions. Both News & Media and Books grew Adjusted operating profit, excluding the prior year profits from World Cup sales, while making pleasing progress with organic sales initiatives. Education & Care was broadly flat for the year with a stronger second half and an encouraging peak performance in what remains a competitive market.
Free cash flow of GBP39.8m was up 7.0%, another good result given the Group's investments made in the year and starting a pay down of peak net debt post-acquisition. Adjusted EPS at 19.7p was slightly ahead of the prior year, reflecting post-acquisition profits from Tuffnells and impact of rights issue shares. Looking ahead, the Board is confident that Tuffnells will be earnings accretive in its first full year of trading in the Group.
The acquisition of Tuffnells for an initial consideration of GBP114.5m has transformed the shape and future prospects of the Group. It provides entry to a new and growing market and it enhances our position as a leading UK specialist distributor, giving national coverage and access to a wide variety of new customers and sales opportunities. The early trading performance under Connect Group ownership has been excellent.
Pass My Parcel, our Click & Collect offer, was successfully launched and, following the proof of concept trial last Autumn, the plan to accelerate expansion of stores, services and clients is well on track. We have also reached an agreement in principle to launch a new mobile enabled returns service with a new client.
The Group's divisions are in enviable market positions and are well placed to make further progress with strategic initiatives identified. Each has a clear strategy, combining our trademark of service and efficiency with a mix of market share gains, organic initiatives and leveraging of the Group's capabilities. The Board is confident of the Group's future prospects and continued cash generation and has recommended a final dividend of 6.3p, an increase of 5.0%, resulting in a full year dividend of 9.2p, an increase of 4.5%.
CONNECT NEWS & MEDIA
Total News and Media revenue of GBP1,504.7m was down 2.9% and Adjusted operating profit of GBP43.7m was down 3.3% with the News Distribution business being the main driver of performance. Excluding the prior year profits from World Cup sales, Adjusted operating profit would be up 3.3%.
The News Distribution business has made further progress in the year, with planned operational efficiencies mitigating the decline in sales and the GBP2m net investment in organic opportunities. Revenue was down 3.0% to GBP1,479.3m and on a like for like basis down 3.4%, comfortably within our medium term strategic forecast of -3% to -5% per annum. Adjusted operating profit of GBP41.4m was down 3.5%.
Revenues of newspapers have remained resilient, albeit with lower cover price inflation this year. The decline in overall magazine sales has continued to slow from historic trends.
With contracts securing over 85% of our current newspaper and magazine revenues through to 2019 and beyond, the Group has the foundation for further efficiencies. A small regional press gain was made in the year in Liverpool. The Metro distribution areas were also extended to cover both Liverpool and additional areas of London.
The cost efficiency programme continues to deliver sustainable savings with a further GBP5m achieved this year, meeting in full our GBP20m target over the past three years. We remain confident of delivering a further GBP5m per annum of cost savings in each of the next two years.
DMD, our media supply business, performed well, winning a number of new contracts and making further progress with its digital offer. Total revenue of GBP25.4m was up 1.0%, with Adjusted operating profit of GBP2.3m down 0.9%. Highlights of the year include a new contract with Virgin Atlantic, the renewal of our Eurostar contract and the launch of a Media Wall concept at Gatwick airport which has had promising initial results and is on track to distribute 20 million copies per annum directly to consumers.
News & Media - Strategy for Growth:
Organic diversification remains a key strategic priority for this division and good progress has been made in all of our targeted areas. We have extended our relationship with Amazon's logistics division, demonstrating our ability to make 'last mile' deliveries to consumers' homes. A trial service in Newcastle and Brighton launched in January and was quickly extended to Southampton. We will shortly be expanding into Newport and Newmarket.
Jack's Beans, our vended coffee offer, has made steady progress and we now have over 300 outlets across the network with almost half a million cups of coffee sold since launch. The introduction of a fixed rental charge for the vending machines has proved attractive and is supporting further expansion while limiting risk.
We remain very excited about the opportunities for Pass My Parcel which uses the existing Smiths News network to create a twice daily delivery that has the UK's fastest turn-around from 'click to collection'. The service was launched in October 2014 with Amazon as our first client. The initial low volume trial period demonstrated that the process worked efficiently and that the consumer demand was there for a fast and convenient local service. In April 2015, we announced an accelerated investment and parcel-shop roll-out. Our targets have been achieved in full with over 3,000 stores live ahead of this year's seasonal peak.
The market for Click & Collect continues to exhibit high levels of growth, forecasted at a rate of 20% per year for all Click & Collect options, including in-store, parcel-shops and lockers (Source: IMRG CollectPlus UK Click & Collect Review 2015). Barclays also recently estimated that the online consumer market will grow to 1.3 billion parcels by 2018, of which 35% will be handled through Click & Collect deliveries. Our current network of over 3,000 stores gives us coverage of an estimated two thirds of the UK's online consumer traffic. Our aim is to deliver a national footprint targeting between 5,000 and 6,000 stores.
The launch of a returns service is the next step in our strategy to grow Pass My Parcel and it is therefore pleasing that we have reached an agreement in principle with a new client. Industry experience demonstrates the importance of returns for Click & Collect volumes, indicating that up to twice the number of returns parcels are handled by Click & Collect shops for every outward delivery. We believe that the speed, efficiency, ease of use and local availability of Pass My Parcel positions the business to benefit from these current market trends.
As part of the drive to increase our service, stores and client base, we intend to make a further net GBP2-3m investment in Pass My Parcel in the current financial year, supporting expansion of the parcel-shop network and meeting the needs of our clients. We are committed to investing in this fast growing and innovative market, and believe it is a significant medium term profit opportunity.
CONNECT BOOKS
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The Books Division has made good progress after a challenging year in 2014. Revenue of GBP190.1m was 1.8% lower than the prior year, however like for like revenue was up 3.1%. Adjusted operating profit was up 4.6% to GBP2.6m helped by better margins and a strong second half, also creating momentum into the current financial year.
The new management team, led by Justin Adams, has stabilised the business and set out a clear strategy for sustainable growth. A comprehensive review of the business has been completed and action has been taken to restructure the business into four business units, each with a distinct market focus and a strategy for growth: Wholesale, Direct to Consumer, Libraries and International. Progress has also been made in improving the productivity and service of the warehouse operation.
The wholesale sector remains our largest trade segment and recent trends have seen some recovery from independent bookshops and improving sales through online and multiple retailers. The library markets, however, continue to be challenging with tight budgets limiting growth and affecting the order levels anticipated under contract agreements.
In implementing a stronger commercial focus, we have been rigorous in achieving a more sustainable return through improved gross margin which is up 130 basis points on last year.
Wordery, one of the UK's largest online independent book shops, continues to grow with total revenue up 65% to GBP38.3m, an impressive performance in just three years since its launch. We have also acquired the minority 49% stake in Wordery for an initial consideration of GBP5.1m and future potential consideration of a further GBP3.3m, reflecting the importance of Wordery to the division's future plans.
Books - Strategy for Growth:
The review of the business has been comprehensive in its assessment of future opportunities and the actions required to achieve a sustainable return to growth. Plans have been put in place to address each of the four business units which will strengthen the division as a whole and improve our commercial position in each sector.
Investment in Wordery will be accelerated, improving the wordery.com website, expanding its international reach and increasing direct to consumer marketing to grow sales and brand awareness. This will improve margin and further establish Wordery as a major online book retailer.
The core wholesale offer will be refocused, with a more rigorous commercial approach fed into pricing and contract tenders. Underpinning this is a greater attention to service, targeting productivity and quality metrics that will improve customer experience and reduce overall operating costs.
Investment will be made in our academic and digital capability. The academic market remains large and there is opportunity to win further share by ensuring tenders demonstrate a more distinct offering based on the combination of printed and digital services while being priced appropriately. The launch of Dawsonera 5 (an online academic portal) in June 2015 was a significant step in addressing the needs of UK academic libraries improving the quality of the digital offer to match the service in printed books.
The International segment will see operations being integrated into a European hub in Amsterdam. There is opportunity for further growth, through a combination of cost synergies, harmonisation of operating systems and potential rationalisation of the brands which are marketed to European customers.
Underpinning these plans, the Norwich warehouse operation has been reconfigured and now operates as a third party supplier to the business units. This gives greater visibility of efficiency, service and cost to serve that can be built into pricing models which will support growth in net margin. It also means the running of the large fulfilment operation is given the focus and investment that is required to support the reconfigured sales and marketing activity.
CONNECT EDUCATION & CARE
Our Education & Care division has had a challenging year impacted by a tougher market environment, particularly in the Secondary education sector. The division has however made good progress with its strategic initiatives and delivered a solid peak trading performance. Revenue of GBP65.9m is up 1.7%, with core revenues up 1.8% from continued strength in Primary up 6.7% and Early Years up 15.6%.
Adjusted operating profit is broadly flat at GBP7.8m, with improved gross margin up 100 basis points, and increased costs in the first half which related to the introduction of the new warehouse management system. Second half performance showed encouraging progress with profit up 4.0%, particularly pleasing in the context of tougher trading conditions. We have recently renewed the largest framework agreement in Wales, covering 15 out of 22 local authorities. The Care sector was down by 3.2% over the year but with a steadily improving trend that saw a return to growth in the last quarter.
Our strategy to develop the leading e-commerce offer is taking shape; overall web traffic is up by over 20% and we now have 25% of all school orders being placed online.
Education & Care - Strategy for Growth:
Looking at our growth strategy in more detail, we believe the overall market will remain in growth at low single digit percentages. Plans to gain market share remain in place from a combination of increased share of wallet and expansion into new territories with focus on service, margin and e-commerce.
Our aim is to be the best and most responsive education supplier in the market. This means making the shopping and buying experience as easy as possible - delivering great value to customers and backing this with excellent service. This will be achieved through three main initiatives.
To attract customers through 'easy shopping' in what is otherwise a complex paper-based process. The website has been developed to better reflect customers' needs with a more consumer-facing approach rather than traditional B2B websites. A comprehensive web-based platform and integrated order process with schools' accounting software will increase customer loyalty and order frequency, while also being used for marketing to drive promotional offers. We are targetting to have 50% of all school orders placed online which, aside from the sales benefits, will create overhead reductions and drive further profit growth.
The development of our catalogue range and quality own brand offer is an important part of the value proposition, delivering value to customers and an improved margin level for the business.
The drive for sales and margin will be underpinned by 'best in class' service. Our new warehouse management system is expected to improve stock control, product availability and the achievement of 'on time and in full' delivery.
Together, these actions will enhance our leading offer in the market, attracting new business and securing greater share of spend from existing customers.
CONNECT PARCEL FREIGHT
The performance of the Parcel Freight division, established with the acquisition of Tuffnells in December 2014, has been excellent. Revenues of GBP114.4m and Adjusted operating profit of GBP9.7m reflected strong growth of 19.6% and 10.8% respectively for the first eight months of ownership compared to the comparable pre-acquisition period. This strong performance is driven by a combination of new business wins, an increase in consignments from existing customers and a rate-card increase which did not adversely impact our volumes.
Tuffnells has a clear market position with capabilities that set the business apart from other parcel carriers; in particular the ability to handle items of irregular dimension and weight and the long term partnerships with many of the small and medium sized businesses that form the majority of the customer base. These characteristics reflect a service that is primarily focused on B2B customers with premium offerings such as 9.30 am next day delivery or a guaranteed tailgate service for especially heavy items.
During the period, Tuffnells opened one new site to close the year at 35 depots. Another new site opened in September 2015 and an additional site is due to open in October 2015. During the year, we also extended and invested in five sites and extended our vehicle fleet by 102 vehicles. To support future growth, we expect to grow the number of depots from 35 to 40 over the next three years.
Supporting the improvement of the network, the Group has also committed to upgrading the facilities at all current depots. A two-year rolling programme commenced in July 2015 to review the working environment at all our depots, prioritising investments in infrastructure that will improve capacity, operational efficiency and on-site safety.
The shortage of qualified drivers is a well-documented industry issue that limits in-house capability and could be a potential constraint on the pace of growth. Following the failure of City Link in December 2014, we were able to recruit over 50 drivers, but the challenge is ongoing. In response, we have introduced a variety of incentives to attract new drivers and launched an apprentice scheme for young people. As a division of Connect Group we can provide further opportunities for those with the talent and ambition to develop their careers.
The early integration into the wider Group has gone well, with the immediate cost synergies being realised and the transition to new leadership under Chris Ward achieved by the end of August 2015. The majority of the other members of the senior team remain in their roles providing continuity and the retention of key skills and knowledge. Tuffnells is now well placed to continue to drive growth from the core business as well as looking at cross-Group opportunities.
Parcel Freight - Strategy for Growth:
Ambitious plans are in place for the Parcel Freight division. The market is in structural growth, further aided by the trend of small to medium sized enterprises seeking to outsource distribution.
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Our expertise and focus on irregular by dimension and/ or weight ("IDW") freight strengthens the Tuffnells market position, which is being further improved by large players moving away from unconventional IDW freight to more regular parcel delivery.
Our aim is to manage ongoing volume growth while keeping a tight control of costs and maintaining Tuffnells' service and reputation for excellence. We currently deliver a 'next day and on time' delivery for over 96% of our consignments. Network expansion and fleet optimisation levels will be key to sustaining and improving this measure and we are investing to ensure we have the number of depots and vehicle mix and flexible routing planning to support our leading service.
As highlighted at the time of the acquisition, there are also clear opportunities to leverage Tuffnells' services across the Connect Group which we continue to explore.
BOARD SUCCESSION
As reported last year, Dennis Millard, Anthony Cann and John Worby would each have served as directors for nine years in August 2015. Accordingly, following a thorough process Gary Kennedy was duly appointed as a non-executive director and Chairman designate on 2 March 2015 and became Chairman on Dennis Millard's retirement on 1 May 2015.
The process to identify suitable candidates to succeed Anthony Cann and John Worby, who are both expected to step down from the Board during the first half of 2016 is nearing completion and appointments are expected to be made shortly.
SUMMARY AND OUTLOOK
In summary, the Group delivered a strong performance in 2015 ahead of expectations for the year. Exciting progress has been made with the Group's organic sales opportunities and the overall growth strategy is on track. Each division has a focused plan for growth underpinned by leveraging Connect Group's commercial, operational and capital management opportunities.
In News & Media, we will continue to operate a lean, efficient News distribution business, underpinned by long term contracts and generating good levels of cash generation, while building Pass My Parcel into a scale business with 5,000 - 6,000 stores, more customers and more services. In the medium term, the goal is to become a major player in the Click & Collect market, the contribution from which is expected to offset the future decline in the core News distribution revenues.
In Books, we will continue to drive profit growth in the next 12 months with a strong focus on Wordery while investing in the infrastructure of the business. As a result of these ongoing actions, we will aim to double profitability of the division in the next three years.
In Education & Care, we are developing a market leading e-commerce platform, increasing choice and margins through the 'own brand' offering and maintaining a focus on excellent service levels. The division is well placed to outperform its market with a focus on continually improving service, margin and e-commerce sales; targeting to achieve at least 50% of orders online within the next three years.
Parcel Freight will be a key driver of growth in the immediate future, with the Group providing investment to increase capacity and exploit our unique market position. We aim to continue to grow ahead of the market through optimising volume growth, keeping a tight control on costs and delivering a best in class service. Network expansion will be an important part of this growth and, as previously indicated, we are planning to reach 40 depots within the next three years.
Looking ahead, recent trading is in line with current management expectations and we remain in a good position to build on the progress made in the year under review. We will continue to invest to support long term progress and leverage the capabilities of the Connect Group network, technology and people. As a result, the Board is confident of the outlook for the current financial year and beyond.
FINANCIAL REVIEW
GROUP
Adjusted results (1) GBPm 2015 2014 Change --------------------------- -------- -------- -------- Revenue 1,875.1 1,808.5 3.7% Gross profit 236.9 199.0 19.0% Operating costs (173.1) (143.5) (20.6)% --------------------------- -------- -------- -------- Operating profit 63.8 55.5 14.9% Net finance costs (7.3) (5.5) (31.8)% --------------------------- -------- -------- -------- Profit before tax 56.5 50.0 13.0% Taxation (11.1) (9.3) (20.4)% --------------------------- -------- -------- -------- Tax rate 19.7% 18.7% --------------------------- -------- -------- -------- Profit after tax 45.4 40.7 11.3% --------------------------- -------- -------- --------
Group revenues were GBP1,875.1m, up 3.7% and Group Adjusted operating profit of GBP63.8m was up 14.9%, driven by the acquisition of Tuffnells and supported by the performance of our other divisions.
Net finance costs at GBP7.3m (FY2014: GBP5.5m) were up GBP1.8m in the year. Net bank interest and related charges were GBP5.8m (FY2014: GBP4.7m) as a result of higher average borrowings following the part debt funding of the Tuffnells acquisition. In addition, finance costs include a charge for fair value movements in interest rate hedges of GBP0.2m (FY2014: GBP0.4m credit).
Group Adjusted profit before tax of GBP56.5m was up 13.0%.
The underlying tax charge for the year of GBP11.1m represented an effective tax rate of 19.7%. This was up on prior year of 18.7% which included a higher level of favourable corporation tax adjustments. Future effective tax rates are expected to be broadly in line with standard UK corporation tax rates.
Adjusted profit after tax of GBP45.4m was up 11.3%.
EPS AND DIVIDEND
Adjusted (1) Statutory -------------------------------------- --------------- ----------------- 2015 2014 2015 2014 (5) -------------------------------------- ------- ------ ------ --------- Earnings attributable to ordinary shareholders (GBPm) 45.5 40.5 21.5 34.6 Basic weighted average number of shares (millions) (5) 230.9 206.4 230.9 206.4 Basic EPS (5) 19.7p 19.6p 9.3p 16.8p Diluted weighted number of shares (millions) (5) 238.5 213.4 238.5 213.4 Diluted EPS (5) 19.0p 19.0p 9.0p 16.2 p Dividend per share (paid & proposed) (5) 9.2p 8.8p 9.2p 8.8p Dividend per share (recognised) (5) 8.8p 8.5p 8.8p 8.5p -------------------------------------- ------- ------ ------ ---------
(5) Rebased earnings per share and rebased dividends per share adjust last year reported figures by the rights issue bonus factor adjustment of 0.9015 following the 2 for 7 rights issue in December 2014.
On an Adjusted basis, earnings attributable to shareholders of GBP45.5m resulted in an EPS of 19.7p, an increase of 0.1p or 0.5% on prior year. The increase reflects post-acquisition profits from Tuffnells and impact of rights issue shares.
Including non-recurring and other items, statutory earnings attributable to shareholders of GBP21.5m resulted in an EPS of 9.3p, a decrease of 7.5p on prior year.
In December 2014, the Group successfully completed a 2 for 7 Rights Issue, issuing c.54m shares which impact both the weighted and fully diluted share numbers. The weighted average basic number of shares issued for the year was 230.9m (FY2014: 206.4m). The fully diluted number of shares was 238.5m (FY2014: 213.4m).
Fully diluted shares include 4.1m for employee incentive schemes (FY2014: 5.4m) and 3.5m shares (FY2014: 1.6m) being the weighted impact of future share schemes and shares allotted in relation to Tuffnells deferred consideration.
Including the proposed final dividend of 6.3p, the full year dividend of 9.2p is an increase of 0.4p or 4.5% on the rebased prior year figure of 8.8p.
The proposed final dividend for the year ended 31 August 2015 of 6.3p is subject to approval by shareholders at the Annual General Meeting on 4 February 2016 and has not been included as a liability in these accounts. The proposed dividend, if approved, will be paid on 12 February 2016 to shareholders on the register at close of business on 15 January 2016.
NEWS DISTRIBUTION
Adjusted figures (1) - GBPm 2015 2014 Change LFL (6) ----------------------------- -------- -------- ------- -------- Revenue 1,479.3 1,524.8 (3.0%) (3.4%) Gross profit 120.7 125.1 (3.6%) Operating costs (79.3) (82.2) 3.5% ----------------------------- -------- -------- ------- -------- Operating profit 41.4 42.9 (3.5%) ----------------------------- -------- -------- ------- -------- Gross margin 8.2% 8.2% - Cost ratio (5.4%) (5.4%) - Operating margin 2.8% 2.8% - ----------------------------- -------- -------- ------- --------
News Distribution revenues of GBP1,479.3m were down 3.0%, like for like revenues were down 3.4% which remains well within our medium term forecast range of between -3.0% and -5.0%, in part due to continued resilient newspaper and magazine sales.
Gross margin was in line with the prior year.
The cost ratio was in line with prior year, as a result of total cost savings of GBP5m. Network savings and continued operational efficiencies combined to deliver our targeted cost savings for the year, being partly offset by our investments to grow organic opportunities, including GBP2m net investment in Pass My Parcel.
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Adjusted operating profit of GBP41.4m decreased 3.5% on the prior year, which includes GBP2.9m of profits from World Cup sales not repeating in FY2015. Operating margin of 2.8% remained flat on prior year. After excluding the benefit of last year's World Cup, Adjusted operating profit would be up 3.5%.
MEDIA
Adjusted figures (1) - GBPm 2015 2014 Change LFL (6) ----------------------------- -------- -------- -------- -------- Revenue 25.4 25.1 1.0% (3.1%) Gross profit 12.5 12.3 1.5% Operating costs (10.2) (10.0) (2.0%) ----------------------------- -------- -------- -------- -------- Operating profit 2.3 2.3 (0.9%) ----------------------------- -------- -------- -------- -------- Gross margin 49.2% 49.0% 20bps Cost ratio (40.2%) (39.8%) (40bps) Operating margin 9.1% 9.2% (10bps) ----------------------------- -------- -------- -------- --------
Media revenues of GBP25.4m were up 1.0% on the prior year, as a result of winning a number of new contracts and making further progress with its digital offer. On a like for like basis revenues were down 3.1%.
Gross margin was up 20bps to 49.2%.
Adjusted operating profit of GBP2.3m decreased 0.9% on the prior year and resulted in an operating margin of 9.1%, down 10bps.
BOOKS
Adjusted figures (1) - GBPm 2015 2014 Change LFL (6) ----------------------------- -------- -------- --------- -------- Revenues 190.1 193.7 (1.8%) 3.1% Gross profit 36.4 34.6 5.2% Operating costs (33.8) (32.1) (5.2%) ----------------------------- -------- -------- --------- -------- Operating profit 2.6 2.5 4.6% ----------------------------- -------- -------- --------- -------- Gross margin 19.2% 17.9% 130bps Cost ratio (17.8%) (16.6%) (120bps) Operating margin 1.4% 1.3% 10bps ----------------------------- -------- -------- --------- --------
Books revenue of GBP190.1m was down 1.8%, like for like revenue was up 3.1% with Wordery continuing its impressive growth - sales are up from GBP23.2m to GBP38.3m, an increase of 65%. The Wholesale sector remains our largest trade segment and recent trends have seen a good recovery from independent booksellers, supported by improving sales through online retailers and key chains. Library markets continue to be challenging with tight budgets limiting growth and affecting the order levels anticipated under contract agreements.
Gross margin was up 130bps due to a focus on exiting or renegotiating low margin contracts. The cost ratio declined 120bps on the prior year, as we continued to invest to grow the business and protect service.
Adjusted operating profit of GBP2.6m increased 4.6% on the prior year and resulted in an operating margin of 1.4% up 10bps on last year.
EDUCATION & CARE
Adjusted figures (1) - GBPm 2015 2014 Change LFL (6) ----------------------------- -------- -------- --------- -------- Revenue 65.9 64.9 1.7% 1.7% Gross profit 28.0 26.9 4.1% Operating costs (20.2) (19.1) (5.9%) ----------------------------- -------- -------- --------- -------- Operating profit 7.8 7.8 (0.2%) ----------------------------- -------- -------- --------- -------- Gross margin 42.5% 41.5% 100bps Cost ratio (30.7%) (29.5%) (120bps) Operating margin 11.8% 12.0% (20bps) ----------------------------- -------- -------- --------- --------
Education & Care revenues of GBP65.9m were up 1.7% on the prior year and up 1.7% on a like for like basis. Core revenues in Education, Care and Early Years increased 1.8% on a like for like basis, as a result of increased spend with existing customers and winning new contracts, with particular strength in Primary and Early Years.
Gross margin was up 100bps as a result of a focus on profitable sales in core markets, buying synergies and a stronger own brand mix. The cost ratio declined 120bps as a result of increased costs in the first half which related to the implementation of the new warehouse management system.
Adjusted operating profit of GBP7.8m remained broadly flat on the prior year down 0.2% and resulted in an operating margin of 11.8%, down 20bps.
PARCEL FREIGHT
Adjusted figures (1) - GBPm 2015 2014 Change LFL ---------------------------- ------- ----- ------- ---- Revenue 114.4 - Gross profit 40.3 - Operating costs (30.6) - ---------------------------- ------- ----- ------- ---- Operating profit 9.7 - ---------------------------- ------- ----- ------- ---- Gross margin 35.2% - Cost ratio 26.8% - Operating margin 8.5% - ---------------------------- ------- ----- ------- ----
Tuffnells Parcels Express, the Group's Parcel Freight division, was acquired on 19 December 2014 and these results represent the 36 week post acquisition period to 31 August 2015.
Parcel Freight revenues of GBP114.4m were up 19.6% on the same pre-acquisition period last year. Progress came from a combination of new business, an increase in consignments from existing customers, and pricing increases.
Adjusted operating profit of GBP9.7m increased 10.8% on the same pre-acquisition period last year and resulted in an operating margin of 8.5%.
The twelve month annualised figures to 31 August 2015 would be revenue of GBP162.6m and Adjusted operating profit of GBP14.3m.
NON-RECURRING AND OTHER ITEMS (1)
GBPm 2015 2014 ----------------------------------------- ------- ------ Network and re-organisation costs (4.4) (3.0) Acquisition and disposal costs (15.1) (0.9) (Charge)/release of property provisions (0.1) 0.5 Impairment - (0.5) Amortisation of acquired intangibles (7.9) (3.0) Total before finance costs and taxation (27.5) (6.9) ----------------------------------------- ------- ------ Finance costs - - ----------------------------------------- ------- ------ Total before taxation (27.5) (6.9) ----------------------------------------- ------- ------ Taxation 3.5 1.0 ----------------------------------------- ------- ------ Total after taxation (24.0) (5.9) ----------------------------------------- ------- ------
Non-recurring and other items were GBP27.5m before tax and GBP24.0m after tax which was GBP18.1m higher than the prior year, principally arising from acquisition costs and the associated increase in amortisation of acquired intangibles from the Tuffnells acquisition in December 2014.
Network and reorganisation costs of GBP4.4m are predominantly rationalisation costs to drive efficiency savings in Smiths News. They also include costs to support the strategic review and reorganisation of the Books division and one off costs for the implementation of the warehouse management system in Education & Care.
Acquisition related costs include GBP3.5m for deal expenses and cost of integration plus GBP11.6m of deferred consideration for the acquisition of Tuffnells in December 2014. A further GBP3.1m of equity raise expenses were charged direct to reserves.
A charge of GBP0.1m was made in relation to vacant property arising from network reorganisation. In the prior year the Group released GBP0.5m relating to the historical property reversionary lease provisions following the settlement of two historical claims.
Amortisation of acquired intangibles of GBP7.9m has been incurred relating to acquisitions amortised over their expected economic lives for which there is no ongoing cash impact. The amortisation charge has increased compared to the prior year due to the acquisition of Tuffnells. The net book value of acquired intangibles of GBP65.4m will be amortised over future years.
Non-recurring and other items are largely non-cash items. The cash impact for the period was GBP8.2m (FY2014: GBP4.4m).
FREE CASH FLOW (2)
GBPm 2015 2014 ----------------------------------------- ------ ------- Adjusted profit before interest and tax 63.8 55.5 Depreciation & amortisation 10.8 8.0 ----------------------------------------- ------ ------- Adjusted EBITDA 74.6 63.5 Working capital movements (8.0) 1.2 Capital expenditure (9.2) (10.3) Net interest paid (5.8) (6.1) Taxation (8.7) (9.8) Pension funding (5.4) (4.6) Other 2.3 3.3 ----------------------------------------- ------ ------- Free cash flow 39.8 37.2 ----------------------------------------- ------ -------
The Group continued to generate strong free cash flow, delivering GBP39.8m in FY2015, an increase of GBP2.6m or 7.0% on prior year.
Increased Adjusted EBITDA is partially offset by a working capital outflow of GBP8.0m, with last year's working capital supported by World Cup receipts.
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Capital expenditure was GBP9.2m including investment in organic initiatives Pass My Parcel and Jack's Beans, as well as the Warehouse Management system in Education & Care and digital platform investments in Books.
Net interest paid was lower year on year as a result of refinancing fees taken in FY2014. Taxation paid was lower, in line with the declining statutory tax charge.
Cash contributions into pension funds increased year on year mainly as a result of the defined benefit scheme for Tuffnells.
NET DEBT (4)
GBPm 2015 2014 --------------------------------------------- -------- ------- Opening net debt (93.0) (98.5) Free cash flow 39.8 37.2 Dividend paid (21.4) (17.7) Non-recurring items (8.2) (4.4) Acquisitions and investment in subsidiaries (119.1) (0.3) Net acquisition financing 52.1 - Other (3.6) (9.3) Closing net debt (153.4) (93.0) --------------------------------------------- -------- -------
As at 31 August 2015 net debt was GBP153.4m (FY2014: GBP93.0m) including acquisition outflows of GBP119.1m and proceeds from the issue of shares of GBP52.1m. Net debt is a combination of GBP164.3m of gross debt and GBP10.9m of cash held in local entities to finance local operations.
As at 31 August 2015 Net Debt/Adjusted Bank EBITDA ratio was 1.9x up from the prior year end (FY2014: 1.4x), but already showing a pay down from the point of Tuffnells completion when debt peaked at GBP159m and 2.0x Net Debt/Adjusted Bank EBITDA.
The Group borrowings are cyclical during the financial year resulting in average borrowings GBP40m higher than the closing position and maximum borrowings of GBP196.4m.
The Group completed a refinancing through a syndicate of five banks in January 2014. The facility was extended in November 2014 to GBP250m of committed facilities to support the acquisition of Tuffnells. The facility provides funding for over three years to November 2018 and comprises a term loan, with limited amortisation, and a revolving credit facility with margin and covenants favourable to the previous facility.
We continue to remain comfortably within our banking covenants with Net debt/Adjusted Bank EBITDA of 1.9x as at 31 August 2015 versus a covenant test of 2.75x. We also remain comfortably within our other covenants of fixed charge cover, interest cover, and guarantor cover.
PENSION
The Group operates four defined benefit schemes, all closed to new entrants and two closed to future accrual.
The Smiths News section of the WH Smith pension trust has assets of GBP536.8m and an actuarial deficit of GBP23.0m as at June 2013. As at 31 August 2015 the IAS 19 surplus of GBP135.6m (FY2014: GBP75.7m) 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 actuarial deficit agreed schedule of future contributions as a pension liability of GBP13.8m on the balance sheet (FY2014: GBP17.3m). A March 2015 actuarial valuation has commenced.
The Consortium defined benefit schemes together have combined assets of GBP15.9m and a combined actuarial deficit of GBP1.5m as at December 2013. As at 31 August 2015 the IAS 19 deficit was GBP3.6m.
The Tuffnells defined benefit scheme, which is open to future accrual, has assets of GBP10.6m and an actuarial deficit of GBP2.5m as at April 2013. As at 31 August 2015 the IAS 19 deficit was GBP0.7m.
As at 31 August 2015, the Group's total net pension liability recognised on the balance sheet was GBP18.1m (FY2014: GBP21.0m). The total cash contribution of defined benefit schemes and expenses in the cash flow statement for FY2015 was GBP5.4m (FY2014: GBP4.6m).
FUTURE ASSUMPTIONS
Looking forward, key inputs for future modelling include;
Tuffnells, the Parcel Freight division, achieved revenue of GBP114.4m and Adjusted operating profit of GBP9.7m for the 36 weeks to 31 August 2015. On a last twelve month basis, this would equate to GBP162.6m and GBP14.3m respectively.
Pass My Parcel will continue to roll out to more parcel shops, with more services and more clients in FY2016 and the expected impact on Smiths News profit is a net cost of GBP2-3m, compared to the net cost of GBP2m incurred in the year to 31 August 2015.
Employee related costs include an estimate of National Living Wage increases and auto enrolment pension costs, both of which are due to rise over the next couple of years. We expect the cost increase in FY2016 to be approximately GBP1m for employees over 25 years of age and currently paid under GBP7.20 per hour. However, as wages rise towards GBP9.00 per hour, employer pension contributions increase and the potential knock-on to other staff whose wage differential will be eroded is included, we could experience a gross increase of GBP3m per annum over the medium term before future mitigating actions. At operating profit level, mitigating actions include accelerating cost efficiencies to drive staff productivity and some pricing flexibility outside of Smiths News long term contracts. At profit after tax level, two already announced future reductions in the corporate tax rate will further mitigate the impact on earnings.
Capital investment for FY2016 and FY2017 is likely to be approximately GBP20m per annum as we continue to invest, largely in Pass My Parcel and Tuffnells capacity increases to support our longer term growth opportunities.
Continued focus on cash and capital management is expected to drive free cash inflow of approximately GBP45m in FY2016, after increased capital expenditure. Total net debt is expected to fall by GBP10m in FY2016 after continued shareholder returns, with a target of GBP100m net debt by August 2018.
The full year impact of the December 2014 rights issue will continue to flow through the weighted share number in FY2016, with the estimated number for basic average weighted shares being 245m.
GOING CONCERN
Despite the uncertain economic environment the directors are satisfied that the Group has sufficient resources to continue in operation for the foreseeable future, a period of not less than 12 months from the date of this report. Accordingly they continue to adopt the going concern basis in preparing the condensed financial statements.
RISKS AND UNCERTAINTIES
The Group has robust risk management processes in place including the identification and review of its principal risks, an annual risk appetite assessment and robust monitoring and reporting of its internal control environment.
The Director's assessment of the Group's principal risks are aligned to the strategic business planning process, the outputs from the annual risk appetite exercise and the business/ divisions internal risk committees. Risks are mapped for impact and likelihood, ownership assigned, and reviewed quarterly by the Group Executive and Audit Committee including the appropriateness of mitigating actions.
The Group's principal risks are detailed below.
Principal Risks Potential Impact Mitigating actions and assurance Structural market Sales decline in newspaper A consistent pattern and clear changes are deeper/ and magazines are worse view of market volumes ensures quicker than predicted, than expected (3%-5% more accurate forecasting and including print range) and/ or the combines with an expectation migration to digital. Books market is impacted, of continued declines for newspapers each resulting in lower and magazines. Management continues profit and negative to identify efficiencies to market sentiment related compensate for market declines. to printed media. Connect Parcel Freight is a significant contributor toward the Group, mitigating market declines for newspapers and magazines. The Group's organic strategy including Pass my Parcel and Jack's Beans, seeks to further protect the Group from over exposure to individual market risks. ---------------------------------- ----------------------------------------- Uncertainty of Reductions in discretionary Annual budgets and quarterly Government policy spending may impact forecasts set realistic expectations could adversely sales of newspapers, internally and externally allowing impact current magazines, parcels for or changing objectives business performance. and books with reductions to meet short and medium-term in Government spending financial targets. Management potentially reducing has a track record of delivering consumables budgets revenues and efficiencies to
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in schools. compensate for market impacts. ---------------------------------- ----------------------------------------- Major supplier Impact on supply of In Connect News & Media, publishers or customer loss product or route to typically award 5 year contracts or consolidation market may erode margin supporting the market structure. impacts the trading and/ or increase cost Connect Books, Connect Education relationship. to serve. & Care and Connect Parcel Freight operate in very fragmented markets with fewer significant suppliers or customers. Strong relationships across the supply chain help the Group to understand and demonstrate its strengths for the benefit of its suppliers and customers. ---------------------------------- ----------------------------------------- Competitive environment Challenges to sales Market scale and expertise becomes more challenging. growth and margin performance provides the ability to offer remain a key risk / value and service to customers. focus. Current performance Connect Books, Connect Education and strategic actions & Care and Connect Parcel Freight have placed the Group monitor and track propositions in a strong position to ensure competitive positioning, to meet these challenges able to adjust pricing throughout although impact remains the period if required. the same. ---------------------------------- ----------------------------------------- Failure to prevent Customer service and/ External specialist advice cyber-attacks that or satisfaction could supports a strong central governance cause disruption be adversely impacted framework including responsibilities or loss of systems leading to compensation, for reviewing the Group's exposure, and/ or commercially/ increased costs for measuring effectiveness of employee sensitive rectification and/or existing controls and recommending data. increased future investment new controls if required. Controls requirements. Continued further enhanced through implementing risk of penalty through a robust Security Governance breach of regulation Framework, establishing a Vulnerability such as the Data Protection Management solution and strengthening Act. of the Security Architecture and process landscape. ---------------------------------- ----------------------------------------- Failure to deliver Sales and profit expected Financial and operational metrics business plan and from acquisitions may are considered along with risk financial returns not be met and/ or assessments and impact on management on recent acquisitions. reputation of the Group before decisions are made. and support for future Performance to plans are reviewed acquisitions are challenged. monthly with post investment Cultural change for analysis producing a more thorough acquisitions results review of each acquisition in reduced performance within 12 months after completion. and financial returns. Detailed integration process, governance and support framework ensures effective and timely adoption of standards and process into recent acquisitions. ---------------------------------- ----------------------------------------- Legislative changes Increased number of Contractors have clearly articulated or interpretation employees or cost per agreements defining tasks they impacting the engagement employee increases are contracted to provide to of employees and the cost base and potentially News with annually set commercial delivery contractors creates greater redundancy terms. Minimum number of employees resulting in an costs from future efficiency are directly impacted by living increase in the programmes. wage, however knock-on impact number of employees across grades will be monitored. and costs. Regular checks are carried out by Internal Audit across the News network ensures understanding and compliance. ---------------------------------- ----------------------------------------- Failure by DMD Costs could increase External security advice supports to prevent breach through additional internal staff to review DMD's of airside security security requirements exposure, measure effectiveness causes disruption and/ or penalties with of controls and recommend new or loss. severe reputational controls if required. In addition, damage potentially insurance is taken out to cover causing the loss of the Group from major risks. contracts for our media business. ---------------------------------- ----------------------------------------- Increasing reliance Trading capability, Investment is made by the organisation on centralised customer experience to provide Disaster Recovery system solutions, and sales/ margin performance capability across the Group complex operations impacted through inability for all essential systems. and networks are to operate due to systems External expertise is used not supported by outages or location to provide guidance and a Disaster sufficiently robust access. Recovery facility. In addition, Business Continuity a programme led centrally ensures Planning & Disaster Business Continuity Planning Recovery solutions procedures and standards are to prevent disruption embedded across the business outside of expected divisions. tolerances. ---------------------------------- ----------------------------------------- Loss of key executives Loss of key skills Performance and capability and subsequent and leadership impacts management processes in place, loss of knowledge the capability of the reviewed by the Remuneration and skills in established Group to deliver its Committee and Group Executive and recently acquired strategic goals. Committee. Succession planning businesses impacts for critical roles and development current and future plans for key individuals reviewed business performance. by the Nominations Committee. Integration plans in place to support key executives within
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Connect Parcel Freight. ---------------------------------- ----------------------------------------- 3 year strategic Inability of warehousing/ FY2015 Business Planning process business plan and operational/ IT and has considered this risk and scale of business support systems to has ensured appropriate investment change at risk meet growth expectations is budgeted to ensure growth from constraints of the Group, creates targets are achieved, including on capacity of poor customer experience, a capital expenditure budget divisional premises increased investment of circa GBP20m. and equipment/ costs and reduced profitability. systems to meet growth plans, leading to increased investment costs and reduced profitability. ---------------------------------- ----------------------------------------- Effort and/ or Management's focus Key imperatives identified specialist skills on current business for organisational and cultural required to complete operations and performance change, leading to investment organisational is distracted by organisational in resources and skills that change are missing change and new initiatives. are required to deliver the from new structures/teams, Management become overstretched successful integration/ development thus increasing and demotivated by of new businesses and business demand on existing demands of the Group critical initiatives, including management skills and exit, taking valuable investment in expert skills and impacting current skills and knowledge in change management and project business performance. with them. management. ---------------------------------- -----------------------------------------
RESPONSIBILITY STATEMENT
The responsibility statement below has been prepared in connection with the Group's full annual report for the year ending 31 August 2015. Certain parts thereof are not included within this announcement.
We confirm that to the best of our knowledge:
- the financial statements, prepared in accordance with IFRSs as adopted by the European Union, 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;
- the strategic report 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 they face; and
- the annual report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the company's performance, business model and strategy.
The responsibility statement was approved by the board of directors on 14 October 2015 and is signed on its behalf by:
Mark Cashmore Nick Gresham Group Chief Executive Chief Financial Officer
Connect Group PLC
Group Income Statement for the year ended 31 August 2015
GBPm 2015 2014 ------------------------ ---- -------------------------------- -------------------------------- Note Adjusted Non-recurring Total Adjusted Non-recurring Total (1) and other (1) and other items items ------------------------ ---- -------- ------------- ------- -------- ------------- ------- Continuing operations Revenue 2 1,875.1 - 1,875.1 1,808.5 - 1,808.5 ------------------------ ---- -------- ------------- ------- -------- ------------- ------- Operating profit 2,3 63.8 (27.5) 36.3 55.5 (6.9) 48.6 Investment revenue 6 - - - 0.4 - 0.4 Finance costs 6 (7.3) - (7.3) (5.9) - (5.9) ------------------------ ---- -------- ------------- ------- -------- ------------- ------- Profit before tax 56.5 (27.5) 29.0 50.0 (6.9) 43.1 Income tax expense 7 (11.1) 3.5 (7.6) (9.3) 1.0 (8.3) ------------------------ ---- -------- ------------- ------- -------- ------------- ------- Profit for the year 45.4 (24.0) 21.4 40.7 (5.9) 34.8 ------------------------ ---- -------- ------------- ------- -------- ------------- ------- Profit attributable to equity shareholders 45.5 (24.0) 21.5 40.5 (5.9) 34.6 ------------------------ ---- -------- ------------- ------- -------- ------------- ------- (Loss)/ Profit attributable to non-controlling interest (0.1) - (0.1) 0.2 - 0.2 ------------------------ ---- -------- ------------- ------- -------- ------------- ------- 45.4 (24.0) 21.4 40.7 (5.9) 34.8 ------------------------ ---- -------- ------------- ------- -------- ------------- ------- Earnings per share Basic 919.7p 9.3p 19.6p 16.8p Diluted 919.0p 9.0p 19.0p 16.2p Equity dividends per share (paid and proposed) 8 9.2p 8.8p ------------------- ----- ---- ----- -----
Group Statement of Comprehensive Income for the year ended 31 August 2015
GBPm Note 2015 2014 -------------------------------------------------- ---- ------ ------ Items that will not be reclassified to the Group Income Statement Actuarial gain on defined benefit pension scheme 5 53.5 14.8 Impact of IFRIC 14 on defined benefit pension scheme 5 (52.8) (16.2) Tax relating to components of other comprehensive income that will not be reclassified 7 (0.1) 0.1 -------------------------------------------------- ---- ------ ------ 0.6 (1.3) Items that may be reclassified to the Group Income Statement (Loss)/ gain on cash flow hedges (0.6) 0.6 Currency translation differences (0.1) (0.2) Tax relating to components of other comprehensive income that may be reclassified 7 - (0.1) -------------------------------------------------- ---- ------ ------ (0.7) 0.3 Other comprehensive income for the year (0.1) (1.0) Profit for the year 21.4 34.8 -------------------------------------------------- ---- ------ ------ Total comprehensive income for the year 21.3 33.8 Total comprehensive income attributable to equity shareholders 21.4 33.6 Total comprehensive income attributable to non-controlling interest (0.1) 0.2 -------------------------------------------------- ---- ------ ------
Group Balance Sheet at 31 August 2015
GBPm Note 2015 2014 ---------------------------------------- ---- ------- ------- Non-current assets Intangible assets 10 174.8 65.7 Property, plant and equipment 44.6 29.0 Interest in jointly controlled entities 4.5 4.3 Derivative financial instruments - 0.6 Retirement benefit assets 5 0.4 0.3 Deferred tax assets 7.5 7.2 231.8 107.1 ---------------------------------------- ---- ------- ------- Current assets Inventories 42.0 45.3 Trade and other receivables 147.3 128.1 Cash and cash equivalents 13 10.9 20.4 200.2 193.8 ---------------------------------------- ---- ------- ------- Total assets 432.0 300.9 ---------------------------------------- ---- ------- ------- Current liabilities Trade and other payables (203.5) (192.3) Current tax liabilities (5.4) (6.1) Bank loans and other borrowings 13 (56.5) (60.9) Obligations under finance leases (2.9) (0.9) Retirement benefit obligations 5 (3.3) (4.1) Provisions 14 (10.4) (3.4) (282.0) (267.7) ---------------------------------------- ---- ------- ------- Non-current liabilities Retirement benefit obligations 5 (15.2) (17.2) Bank loans and other borrowings 13 (98.4) (48.4)
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Obligations under finance leases (6.5) (3.2) Derivative financial instruments (0.2) - Other non-current liabilities (1.0) (1.4) Deferred tax liabilities (13.5) (3.2) Non-current provisions 14 (6.0) (1.9) ---------------------------------------- ---- ------- ------- (140.8) (75.3) ---------------------------------------- ---- ------- ------- Total liabilities (422.8) (343.0) ---------------------------------------- ---- ------- ------- Total net assets/ (liabilities) 9.2 (42.1) ---------------------------------------- ---- ------- -------
Group Balance Sheet at 31 August 2015 (continued)
GBPm Note 2015 2014 ------------------------------------ ----- ------- ------- Equity Called up share capital 17(a) 12.2 9.5 Share premium account 17(c) 55.2 5.3 Demerger reserve 18(a) (280.1) (280.1) Own shares reserve 18(b) (4.1) (5.2) Hedging & translation reserve 18(c) (0.5) (0.3) Retained earnings 226.5 228.5 ------------------------------------ ----- ------- ------- Total shareholders' equity 9.2 (42.3) ------------------------------------ ----- ------- ------- Non-controlling interests in equity - 0.2 ------------------------------------ ----- ------- ------- Total equity 9.2 (42.1) ------------------------------------ ----- ------- -------
The accounts were approved by the Board of Directors and authorised for issue on 14 October 2015 and were signed on its behalf by:
Registered number - 05195191
Mark Cashmore Nick Gresham
Group Chief Executive Chief Financial Officer
Group Statement of Changes in Equity for the year ended 31 August 2015
GBPm Share Share Demerger Own shares Hedging Retained Non-controlling Total capital Premium reserve reserve & earnings interests account translation in equity reserve ------------------ --------- --------- --------- ----------- ------------- ---------- ---------------- ------- Balance at 31 August 2013 9.2 1.2 (280.1) (1.5) (0.6) 214.9 - (56.9) Profit for the year - - - - - 34.6 0.2 34.8 Gain on cash flow hedges - - - - 0.6 - - 0.6 Actuarial gain on defined benefit pension scheme - - - - - 14.8 - 14.8 Impact of IFRIC 14 on defined benefit pension scheme - - - - - (16.2) - (16.2) Currency translation differences - - - - (0.2) - - (0.2) Tax relating to components of other comprehensive income - - - - (0.1) 0.1 - - ------------------ --------- --------- --------- ----------- ------------- ---------- ---------------- ------- Total comprehensive income for the year - - - - 0.3 33.3 0.2 33.8 Issue of share capital 0.3 4.1 - - - - - 4.4 Purchase of own shares - - - (6.3) - - - (6.3) Dividends paid - - - - - (17.7) - (17.7) Employee share schemes - - - 2.6 - (2.6) - - Recognition of share based payments - - - - - 0.6 - 0.6 Balance at 31 August 2014 9.5 5.3 (280.1) (5.2) (0.3) 228.5 0.2 (42.1) ------------------ --------- --------- --------- ----------- ------------- ---------- ---------------- ------- Profit/ (loss) for the year - - - - - 21.5 (0.1) 21.4 Loss on cash flow hedges - - - - (0.6) - - (0.6) Actuarial gain on defined benefit pension scheme - - - - - 53.5 - 53.5 Impact of IFRIC 14 on defined benefit pension scheme - - - - - (52.8) - (52.8) Currency translation differences - - - - (0.1) - - (0.1) Tax relating to components of other comprehensive income - - - - - (0.1) - (0.1) ------------------ --------- --------- --------- ----------- ------------- ---------- ---------------- ------- Total comprehensive income for the year - - - - (0.7) 22.1 (0.1) 21.3 Issue of share capital 2.7 49.9 - - - - - 52.6 Reclassification between reserves - - - - 0.5 (0.5) - - Purchase of own shares - - - (4.2) - - - (4.2) Dividends paid - - - - - (21.4) - (21.4) Employee share schemes - - - 5.3 - (5.3) - - Adjustment arising from change in NCI - - - - - (5.1) (0.1) (5.2) Recognition of share based payments net of tax - - - - - 8.2 - 8.2 Balance at 31 August 2015 12.2 55.2 (280.1) (4.1) (0.5) 226.5 - 9.2 ------------------ --------- --------- --------- ----------- ------------- ---------- ---------------- -------
Group Cash Flow Statement for the year ended 31 August 2015
GBPm Note 2015 2014 --------------------------------------------- ---- ------- ------ Net cash inflow from operating activities 16 46.5 47.4 --------------------------------------------- ---- ------- ------ Investing activities Dividends received from associates 0.2 0.2 Acquisitions 11 (105.7) (0.3) Purchase of property, plant and equipment (4.7) (6.8) Purchase of intangible assets (4.5) (3.5) Net cash used in investing activities (114.7) (10.4) --------------------------------------------- ---- ------- ------ Financing activities Interest paid (5.8) (6.1) Dividend paid (21.4) (17.7) Purchase of equity in subsidiary 12 (5.1) - Repayments of obligations under finance leases (2.9) (1.3) Proceeds on issue of shares 52.6 0.7 Purchase of shares for Employee Benefit Trust (4.2) (6.3) Repayments of borrowings - (34.0) New bank loans raised 50.0 50.0 Decrease in borrowings (4.4) (11.9) Net cash from/(used in) financing activities 58.8 (26.6) --------------------------------------------- ---- ------- ------ Net (decrease)/ increase in cash and cash equivalents (9.4) 10.4 Effect of foreign exchange rate changes (0.1) (0.1) --------------------------------------------- ---- ------- ------ (9.5) 10.3 Opening net cash and cash equivalents 20.4 10.1 Closing net cash and cash equivalents 13 10.9 20.4 --------------------------------------------- ---- ------- ------
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Analysis of net debt
GBPm Note 2015 2014 -------------------------- ---- ------- ------ Cash and cash equivalents 13 10.9 20.4 Current borrowings 13 (56.5) (60.9) Non-current borrowings 13 (98.4) (48.4) -------------------------- ---- ------- ------ Net borrowings (144.0) (88.9) Finance lease liabilities (9.4) (4.1) Net debt (153.4) (93.0) -------------------------- ---- ------- ------
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 set out in the accounting policies section of the Connect Group PLC Annual Report and Accounts 2014. The accounting policies have been applied consistently throughout the years ended 31 August 2014 and 31 August 2015.
The following Standards with an effective date of 1 January 2014 have been adopted without any significant impact on the amounts reported in these financial statements:
IFRS 10 'Consolidated Financial Statements'
IFRS 10, IFRS 12 and IAS 27 (amended) 'Investment Entities'
IFRS 11 'Joint Arrangements'
IAS 12 (amended) 'Deferred Tax: Recovery of Underlying Assets'
IAS 27 (revised) 'Separate Financial Statements'
IAS 28 (revised) 'Investments in Associates and Joint Ventures'
IAS 32 (amended) 'Offsetting Financial Assets and Financial Liabilities'
IAS 39 (amended) 'Novation of Derivatives and Continuation of Hedge Accounting'.
The financial information set out in these results does not constitute the Group's statutory accounts for the years ended 31 August 2015 and 31 August 2014 but is derived from those accounts. Statutory accounts for Connect Group PLC for the year ended 31 August 2014 have been delivered to the Registrar of Companies and those for the year ended 31 August 2015 will be delivered following the Company's Annual General Meeting. The auditor's reports on the 2014 and the 2015 accounts were unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain a statement under section 498(2) or (3) of the Companies Act 2006.
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 2015 at www.connectgroupplc.com.
These results were approved by the Board of Directors on 14 October 2015.
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.
These operating segments are:
Connect News & Media: The UK market leading distributor of newspapers News Distribution (also and magazines to 30,000 retailers across referred to as Smiths England and Wales from 42 distribution News) centres. Connect News & Media: A supplier of newspaper and magazines to Media airlines and a provider of inflight services. (also referred to as DMD) ----------------------------------------------------- Connect Books A leading UK distributor of physical and (also referred to as digital books to high street and on-line Bertrams, Dawson Books retailers, public libraries, academic institutions and Wordery) and direct to consumers with a strong international presence, supplying 100 countries. ----------------------------------------------------- Connect Education and A leading distributor of education and Care care consumable products servicing 30,000 (also referred to as customers across the UK. The Consortium) ----------------------------------------------------- Connect Parcel Freight A leading provider of next day B2B delivery (also referred to as of mixed parcel freight consignments. Tuffnells) -----------------------------------------------------
The following is an analysis of the Group's revenue and results by reportable segment:
Revenue ----------------------------- ------------------ GBPm 2015 2014 ----------------------------- -------- -------- Connect News & Media: News Distribution 1,479.3 1,524.8 Connect News & Media: Media 25.4 25.1 Connect Books 190.1 193.7 Connect Education and Care 65.9 64.9 Connect Parcel Freight 114.4 - Total Group 1,875.1 1,808.5 ------------------------------ -------- --------
The accounting policies of the reportable segments are the same as the Group's accounting policies.
2015 2014 --------------------------- --------------------------------------- ---------------------------------------- GBPm Adjusted Non-recurring Operating Adjusted Non-recurring Statutory operating and other profit operating and other operating profit items profit items profit --------------------------- ----------- -------------- ---------- ----------- -------------- ----------- Connect News & Media: News Distribution 41.4 (18.2) 23.2 42.9 (2.1) 40.8 Connect News & Media: Media 2.3 (0.4) 1.9 2.3 (0.3) 2.0 Connect Books 2.6 (2.2) 0.4 2.5 (2.5) - Connect Education and Care 7.8 (2.1) 5.7 7.8 (2.0) 5.8 Connect Parcel Freight 9.7 (4.6) 5.1 - - - Total group 63.8 (27.5) 36.3 55.5 (6.9) 48.6 ---------------------------- ----------- -------------- ---------- ----------- -------------- ----------- Net finance expense (7.3) (5.5) ---------------------------- ----------- -------------- ---------- ----------- -------------- ----------- Profit before taxation 29.0 43.1 ---------------------------- ----------- -------------- ---------- ----------- -------------- -----------
Information about major customers
Included in revenues arising from newspaper and magazine wholesaling are revenues of approximately GBP155.1m (2014: GBP162.1m) which arose from sales to the Group's largest customer. No other single customer contributed 8% or more of the Group's revenue in either 2015 or 2014.
Segment assets and liabilities
Assets Liabilities Net assets/(liabilities) ------------------------ -------------- ------------------ --------------------------- GBPm 2015 2014 2015 2014 2015 2014 ------------------------ ------ ------ -------- -------- ------------- ------------ Connect News & Media: News 93.1 144.5 (293.0) (261.1) (199.9) (116.6) Connect News & Media: Media 18.9 18.8 (7.2) (7.2) 11.7 11.6 Connect Books 79.9 79.8 (63.2) (56.9) 16.7 22.9 Connect Education and Care 63.6 57.8 (18.9) (17.8) 44.7 40.0 Connect Parcel Freight 176.5 - (40.5) - 136.0 - Consolidated assets/ (liabilities) 432.0 300.9 (422.8) (343.0) 9.2 (42.1) ------------------------ ------ ------ -------- -------- ------------- ------------
Segment depreciation, amortisation and non-current asset additions
Depreciation Amortisation Additions to non-current assets ----------------------- --------------- --------------- ---------------------- GBPm 2015 2014 2015 2014 2015 2014 ----------------------- ------- ------ -------- ----- ---------- ---------- Connect News & Media: News (4.2) (4.0) (1.8) (1.4) 8.0 7.7 Connect News & Media: Media (0.1) (0.1) (0.4) (0.3) 0.2 - Connect Books (0.7) (0.6) (2.5) (2.4) 1.9 2.5 Connect Education and Care (0.5) (0.5) (2.0) (1.7) 1.8 1.2 Connect Parcel Freight (1.8) - (4.7) - 131.8 - Consolidated total (7.3) (5.2) (11.4) (5.8) 143.7 11.4
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----------------------- ------- ------ -------- ----- ---------- ----------
Additions to non-current assets include intangible assets and property, plant and equipment. The intangible assets (GBP110.2m) and fair value of the property, plant and equipment (GBP18.6m) acquired on the acquisition of Tuffnells are included within Connect Parcel Freight.
Geographical analysis
GBPm Revenue by destination Non-current assets by location of operation 2015 2014 2015 2014 -------------------- ------------ ----------- --------------- ----------- United Kingdom 1,791.9 1,729.9 223.7 98.6 Europe 48.8 51.2 0.2 0.2 Rest of World 34.4 27.4 - - --------------------- ------------ ----------- --------------- ----------- Consolidated total 1,875.1 1,808.5 223.9 98.8 --------------------- ------------ ----------- --------------- -----------
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 2015 2014 Note Adjusted Non-recurring Total Adjusted Non-recurring Total and other and other items items -------------------------- ---- --------- ------------- --------- --------- ------------- --------- Revenue 1,875.1 - 1,875.1 1,808.5 - 1,808.5 -------------------------- ---- --------- ------------- --------- --------- ------------- --------- Cost of inventories recognised as an expense (1,562.1) - (1,562.1) (1,607.7) - (1,607.7) Write down of inventories recognised as an expense (0.1) - (0.1) (0.6) - (0.6) Other cost of sales (76.0) - (76.0) (1.2) - (1.2) -------------------------- ---- --------- ------------- --------- --------- ------------- --------- Cost of sales (1,638.2) - (1,638.2) (1,609.5) - (1,609.5) -------------------------- ---- --------- ------------- --------- --------- ------------- --------- Gross profit 236.9 - 236.9 199.0 - 199.0 -------------------------- ---- --------- ------------- --------- --------- ------------- --------- Distribution costs (92.3) - (92.3) (73.9) - (73.9) -------------------------- ---- --------- ------------- --------- --------- ------------- --------- Administrative expenses (76.3) (12.9) (89.2) (65.6) (3.4) (69.0) Share-based payment expense (1.3) (6.7) (8.0) (1.5) - (1.5) Amortisation of intangibles 10 (3.5) (7.9) (11.4) (2.8) (3.0) (5.8) Impairment 10 - - - - (0.5) (0.5) Administrative expenses (81.1) (27.5) (108.6) (69.9) (6.9) (76.8) -------------------------- ---- --------- ------------- --------- --------- ------------- --------- Share of profits from jointly controlled entities 0.3 - 0.3 0.3 - 0.3 -------------------------- ---- --------- ------------- --------- --------- ------------- --------- Operating profit 63.8 (27.5) 36.3 55.5 (6.9) 48.6 -------------------------- ---- --------- ------------- --------- --------- ------------- ---------
The operating profit is stated after charging/ (crediting):
GBPm Note 2015 2014 --------------------------------------------- ----- ------ ------ Depreciation on property, plant & equipment 7.3 5.2 Amortisation of intangible assets 10 11.4 5.8 Operating lease charges * occupied land and buildings 9.3 8.5 * equipment and vehicles 12.1 0.8 Operating lease rental income - land and buildings (0.1) (0.1) Loss on disposal of fixed assets 0.2 - Staff costs 136.5 93.4 --------------------------------------------- ----- ------ ------
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 2015 2014 --------------------------------------------- ----- ----- Fees payable to the Company's auditor for the audit of the Company's annual accounts 0.2 0.1 Fees payable to the Company's auditor for the audit of the Company's subsidiaries 0.2 0.2 --------------------------------------------- ----- ----- Total audit fees 0.4 0.3 Other services 0.2 0.1 --------------------------------------------- ----- ----- Total non-audit fees 0.2 0.1 --------------------------------------------- ----- ----- Total fees 0.6 0.4 --------------------------------------------- ----- -----
In the current year the Group incurred GBP0.2m of non-audit fees with Deloitte relating to acquisition/ transaction support, remuneration advice and other advisory services. In the prior year the Group incurred GBP0.1m of non-audit fees with Deloitte relating to remuneration advice and other advisory services.
4. Non-recurring and other items GBPm 2015 2014 -------------------------------------- ----- ------- ------ Network re-organisation costs (a) (4.4) (3.0) Acquisition and disposal costs (b) (15.1) (0.9) (Charge)/release of property provisions (c) (0.1) 0.5 Impairment (d) - (0.5) Amortisation of acquired intangibles (e) (7.9) (3.0) Total before taxation (27.5) (6.9) ---------------------------------------------- ------- ------ Income tax expense 3.5 1.0 ---------------------------------------------- ------- ------ Total after taxation (24.0) (5.9) ---------------------------------------------- ------- ------
The Group incurred a total of GBP24.0m (2014: GBP5.9m) in non-recurring and other items, after tax.
This comprises:
(a) Network re-organisation costs
Network and reorganisation costs of GBP4.4m are predominantly rationalisation costs to drive efficiency savings in Smiths News. They also include costs to support the strategic review and reorganisation of the Books division and one off costs for the implementation of the warehouse management system in Education & Care.
(b) Acquisition and disposal costs
Acquisition related costs for the Tuffnells acquisition include GBP3.5m for deal expenses and cost of integration plus GBP11.6m of deferred contingent consideration which is payable conditional on the financial performance and on continued employment of former owners. A further GBP3.1m of equity raise expenses were charged direct to reserves. Details of the acquisition are included in note 11. In the prior year acquisition and disposal costs of GBP0.9m relate primarily to reviewing and targeting future acquisitions, together with the final apportionment of deferred consideration from the acquisition of The Consortium in April 2012 and costs associated with the acquisition of Martin Lavell in September 2013.
(c) (Charge)/ release of property provisions
A charge of GBP0.1m was made in relation to vacant property arising from network reorganisation. In the prior year the Group released GBP0.5m relating to the historical property reversionary lease provisions following the settlement of two historical claims.
(d) Impairment
No impairment was recognised during the year. During the year to 31 August 2014 the carrying value of acquired intangibles from the acquisition of Blackwell customer relationships in the Books division was reviewed and as a result of lower than anticipated sales conversion an amount of GBP0.5m was written off.
(e) Amortisation of acquired intangibles
Amortisation of acquired intangibles of GBP7.9m (FY2014: GBP3.0m) has been incurred relating to acquisitions amortised over their expected economic lives for which there is no ongoing cash impact. The amortisation charge has increased compared to the prior year due to the acquisition of Tuffnells. The net book value of acquired intangibles of GBP65.4m will be amortised over future years.
5. Retirement benefit obligation
Defined benefit pension schemes
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The Group now operates four defined benefit schemes, of which the WH Smith Pension Trust (the 'Pension Trust') represents 93% of the total obligation at 31 August 2015. As part of the acquisition of the Consortium, the Group acquired the assets and liabilities in respect of two other defined benefit schemes (the 'Consortium CARE' and 'Platinum' schemes). The Group acquired the assets and liabilities of Tuffnells Parcels Express Pension Scheme on its acquisition of The Big Green Parcel Holding Company Limited on 19 December 2014.
The Group's defined benefit pension plans are final salary pension plans, which provide benefits to members in the form of a guaranteed level of pension payable for life. The level of benefits provided depends on members' length of service and their salary in the final years leading up to retirement. Benefits are paid to members from trustee-administered funds. The trustees are responsible for ensuring that the plan is sufficiently funded to meet current and future benefit payments. If investment experience is worse than expected, the Group's obligations are increased.
The trustees must agree a funding plan with the sponsoring company such that any funding shortfall is expected to be met by additional contributions and investment performance. In order to assess the level of contributions required, triennial valuations are carried out with plan's obligations measured using prudent assumptions (relative to those used to measure accounting liabilities). The trustees' other duties include managing the investment of plan assets, administration of plan benefits and exercising of discretionary powers.
The amounts recognised in the balance sheet are as follows:
GBPm WH Smith Consortium Platinum Tuffnells 2015 WH Smith Consortium Platinum 2014 Pension CARE Parcels Pension CARE Trust Express Trust ---------------- --------- ----------- --------- ---------- -------- --------- ----------- --------- -------- Present value of defined benefit obligation (401.2) (18.7) (0.8) (11.3) (432.0) (431.6) (18.4) (0.6) (450.6) Fair value of assets 536.8 14.7 1.2 10.6 563.3 507.3 14.4 0.9 522.6 ---------------- --------- ----------- --------- ---------- -------- --------- ----------- --------- -------- Net surplus/ (loss) 135.6 (4.0) 0.4 (0.7) 131.3 75.7 (4.0) 0.3 72.0 Amounts not recognised due to asset limit (135.6) - - - (135.6) (75.7) - - (75.7) ---------------- --------- ----------- --------- ---------- -------- --------- ----------- --------- -------- - (4.0) 0.4 (0.7) (4.3) - (4.0) 0.3 (3.7) Additional liability recognised due to minimum funding requirements (13.8) - - - (13.8) (17.3) - - (17.3) ---------------- --------- ----------- --------- ---------- -------- --------- ----------- --------- -------- Pension liability (13.8) (4.0) (0.7) (18.5) (17.3) (4.0) - (21.3) ---------------- --------- ----------- --------- ---------- -------- --------- ----------- --------- -------- Pension asset - - 0.4 - 0.4 - - 0.3 0.3 ---------------- --------- ----------- --------- ---------- -------- --------- ----------- --------- --------
The primary defined benefit pension scheme (the Smiths News Section of the WH Smith Pension Trust) has an IAS19 surplus of GBP135.6m at 31 August 2015 (2014:GBP75.7m 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 (2014: 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 process to complete the triennial valuation as at 31 March 2015 is underway and is scheduled to be reported during 2016. The actuarial valuation of the Smiths News section of the WH Smith Pension Trust, at June 2013 was a deficit of GBP23.0m. A cash contribution of GBP4.1m was made during the year to reduce the funding shortfall.
Future cash contributions by the Group to the pension trustees and investment manager total GBP4.1m per annum through to March 2019. The Group recognises the present value of these agreed contributions as a pension liability of GBP13.8m (2014: GBP17.3m).
Other defined benefit schemes
For the Consortium CARE and Platinum schemes, the Group contributed GBP0.6m in 2015. The funding valuation of the Consortium CARE scheme as at 31 December 2013 was a deficit of GBP1.5m. The Platinum scheme's 31 December 2013 funding valuation showed no deficit. The triennial actuarial valuation of the Tuffnells Parcels Express scheme as at 1 April 2013 was an agreed liability of GBP2.5m (1 April 2010: GBP0.15m). Guaranteed Minimum Pension ("GMP") equalisation is expected to lead to an increase in scheme liabilities at some future date on the Consortium Care and the Tuffnells Parcels Express scheme.
The weighted average duration of the schemes is 17 years for the Pension Trust, 20 years for the Consortium Care scheme, 29 years for the Platinum scheme and 21 years for the Tuffnells Parcels Express scheme.
The principal long-term assumptions used to calculate scheme liabilities on all Group schemes are:
% p.a. 2015 2014 -------------------------------- -------------- -------------- Discount rate 3.80 3.85 Inflation assumptions - CPI 2.25 2.25 Inflation assumptions - RPI 3.25 3.25 Demographic assumptions for WH Smith pension trust: Life expectancy at age 65 Male Female Male Female Member currently aged 65 21.7 23.7 21.7 23.9 Member currently aged 45 23.0 25.2 23.1 25.4 -------------------------------- ----- ------- ----- -------
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 of Total value benefit IFRIC 14 of scheme obligation on defined assets benefit pension schemes ------------------------------------------ ----------- ------------ ----------------- ------- At 31 August 2013 469.6 (419.2) (73.5) (23.1) ------------------------------------------ ----------- ------------ ----------------- ------- Current service cost (1.3) 1.2 - (0.1) Net interest cost 20.6 (18.2) (3.3) (0.9) Total amount recognised in income statement 19.3 (17.0) (3.3) (1.0) ------------------------------------------ ----------- ------------ ----------------- ------- Actual less expected return on scheme assets 44.6 - - 44.6 Actuarial losses arising from experience - 0.8 - 0.8 Actuarial loss arising from changes in financial assumptions - (33.3) - (33.3) Actuarial loss arising from changes in demographic assumptions - 2.6 - 2.6 Change in surplus not recognised - - (16.2) (16.2) Amount recognised in other comprehensive income 44.6 (29.9) (16.2) (1.5) Employer contributions 4.6 - - 4.6 Benefit payments (15.4) 15.4 - - ------------------------------------------ ----------- ------------ ----------------- ------- Amounts included in cash flow statement (10.8) 15.4 - 4.6 ------------------------------------------ ----------- ------------ ----------------- ------- At 31 August 2014 522.7 (450.7) (93.0) (21.0) ------------------------------------------ ----------- ------------ ----------------- ------- Current service cost (0.5) - (0.5) Net interest cost 20.0 (17.2) (3.6) (0.8)
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Total amount recognised in income statement 19.5 (17.2) (3.6) (1.3) ------------------------------------------ ----------- ------------ ----------------- ------- Actual less expected return on scheme assets 28.7 - - 28.7 Actuarial gains arising from experience - 25.1 - 25.1 Actuarial loss arising from changes in financial assumptions - (2.2) - (2.2) Actuarial gains arising from changes in demographic assumptions - 1.9 - 1.9 Change in surplus not recognised - - (52.8) (52.8) Amount recognised in other comprehensive income 28.7 24.8 (52.8) 0.7 Employer contributions 5.3 0.1 - 5.4 Employee contributions 0.1 (0.1) - - Benefit payments (23.6) 23.6 - - ------------------------------------------ ----------- ------------ ----------------- ------- Amounts included in cash flow statement (18.2) 23.6 - 5.4 ------------------------------------------ ----------- ------------ ----------------- ------- Acquisition of subsidiary 10.6 (12.5) (1.9) ------------------------------------------ ----------- ------------ ----------------- ------- At 31 August 2015 563.3 (432.0) (149.4) (18.1) ------------------------------------------ ----------- ------------ ----------------- ------- Included within Non-current assets 0.4 Included within Current liabilities (3.3) Included within Non-current liabilities (15.2) ------------------------------------------ ----------- ------------ ----------------- -------
The charge for the current service cost is included within administrative expenses. 'Net interest costs' are calculated by applying a discount rate to the net defined benefit asset or liability scheme assets and are included within finance income and expense.
An analysis of the assets at the balance sheet date is detailed below:
GBPm 2015 2014 ---------------------------- ---------- ------ ------ Swap financing portfolio (1) Unquoted 431.9 477.0 Interest rate and inflation swaps Unquoted 79.5 6.2 Loan fund (2) Unquoted 25.4 24.2 Equities (CARE, Tuffnells) Unquoted 21.0 10.4 Bonds (CARE, Platinum) Unquoted 5.0 4.7 Cash (CARE,Platinum, Tuffnells) 0.5 0.2 ---------------------------------------- ------ ------ 563.3 522.7 --------------------------------------- ------ ------
(1) Investments with the aim of generating a return above LIBOR to finance the interest and inflation swaps in the Pension Trust. At 31 August 2015 this comprised GBP179m total return swap and GBP252m in a fund comprising a range of assets from government bonds, hedge funds and equities that targets a return above LIBOR.
(2) The loan fund looks to generate a return over a portfolio of loans.
The assets held in the swap financing portfolio provide a swap-based hedge against the change in value of a proportion of the Trust's liabilities for changes in long-term interest rates and inflation expectations.
The actual return on scheme assets during 2015 was a gain of GBP48.7m (2014: a gain of GBP65.2m).
The value of the assets held by the trust in Connect Group PLC issued financial instruments is GBPnil (2014: GBPnil).
Sensitivity of results to changes in the main assumptions:
Assumption Change in assumption Impact on IAS 19 liabilities ------------------ --------------------- ----------------------------- Discount rate +/- 0.5% -GBP34.8m/ +GBP39.1m Rate of inflation +/- 0.5% +GBP36.3m/ -GBP33.3m Life expectancy +/- 1 year +GBP15.2m/ -GBP15.2m ------------------ --------------------- -----------------------------
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 2015 2014 2013 2012 2011 ---------------------------------- -------- -------- -------- -------- -------- Present value of defined benefit obligation (432.0) (450.7) (419.2) (395.3) (348.3) Fair value of assets 563.3 522.7 469.6 433.1 375.1 Impact of IFRIC 14 on defined benefit pension schemes (149.4) (93.0) (73.5) (73.8) (63.1) ---------------------------------- -------- -------- -------- -------- -------- Net deficit in the schemes (18.1) (21.0) (23.1) (36.0) (36.3) ---------------------------------- -------- -------- -------- -------- -------- Experience adjustments on scheme liabilities 25.1 0.8 (1.4) (1.0) (4.1) ---------------------------------- Experience adjustments on scheme assets 28.7 44.6 27.9 34.0 (45.8) ---------------------------------- -------- -------- -------- -------- --------
The cumulative amount of actuarial gains and losses recognised in the statement of comprehensive income since the adoption of IFRS is a loss of GBP20.7m (2014: a loss of GBP21.4m).
Defined contribution schemes
The Group operates a number of defined contribution schemes. For the year ended 31 August 2015, participating employer contributions totalled GBP3.0m (2014: GBP2.8m) which is included in the Income Statement.
6. Investment revenue and finance costs GBPm Note 2015 2014 ---------------------------------------- ------- ---------- -------- Net change in fair value of derivative assets - 0.4 Investment revenue - 0.4 ------------------------------------------------ ---------- -------- Interest on bank overdrafts and loans (5.8) (4.7) Net interest expense on defined benefit obligation 5(0.8) (0.9) Interest payable on finance leases (0.4) (0.2) Net change in fair value of derivative assets (0.2) - Unwinding of discount on provisions - trading (0.1) (0.1) --------------------------------------- ----- ----- Finance costs (7.3) (5.9) --------------------------------------- ----- ----- Net finance costs (7.3) (5.5) --------------------------------------- ----- ----- 7. Income tax expense GBPm 2015 2014 Adjusted Non-recurring Total Adjusted Non-recurring Total and other and other items items ------------------------------- --------- -------------- ------ --------- -------------- ------ Current tax 12.4 (2.3) 10.1 12.3 (1.0) 11.3 Adjustment in respect of prior year UK corporation tax (1.1) (0.9) (2.0) (2.4) - (2.4) Total current tax charge 11.3 (3.2) 8.1 9.9 (1.0) 8.9 Deferred tax - current year (0.2) (0.3) (0.5) (0.4) - (0.4) Deferred tax - prior year - - - (0.2) - (0.2) Total tax on profit 11.1 (3.5) 7.6 9.3 (1.0) 8.3 ------------------------------- --------- -------------- ------ --------- -------------- ------ Effective tax rate 19.7% 26.3% 18.7% 19.4% ------------------------------- --------- -------------- ------ --------- -------------- ------
The effective adjusted income tax rate for the year was 19.7% (2014: 18.7%). After adjusting for the impact of non-recurring and other items of GBP3.5m (2014: GBP1.0m), the effective statutory income tax rate was 26.3% (2014: 19.4%).
The tax rates used in the 2015 and 2014 reconciliations of the tax charge are the main rates of UK corporation tax, those being 20.6% (2014: 22.2%).
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Reconciliation of the tax charge
GBPm 2015 2014 ---------------------------------------------------- ------ ------ Profit before tax 29.0 43.1 ---------------------------------------------------- ------ ------ Tax on profit at the standard rate of UK corporation tax 20.6% (2014: 22.2%) 5.9 9.5 Permanent differences 3.5 1.3 Share schemes - (0.2) Adjustment in respect of prior year UK corporation tax (2.0) (2.6) Impact of overseas tax rates 0.2 0.3 Total tax charge 7.6 8.3 ---------------------------------------------------- ------ ------
Tax charges to other comprehensive income and directly in equity
GBPm 2015 2014 ----------------------------------------------- ------ ------ Current tax relating to the defined benefit pension scheme (0.8) (0.7) Current tax relating to share based payments (0.6) (0.5) Deferred tax relating to derivative financial instruments - 0.1 Deferred tax relating to share based payments 0.6 (0.5) Deferred tax relating to retirement benefit obligations 0.9 0.6 Tax charges to other comprehensive income and directly in equity 0.1 (1.0) ----------------------------------------------- ------ ------ 8. Dividends
Amounts paid & proposed as distributions to equity shareholders in the years:
Paid & proposed dividends 2015 2014 2015 2014 for the year Per share Per share GBPm GBPm (5) ------------------------------ ---------- ---------- ----- ----- Interim dividend - paid 2.9p 2.8p 7.0 5.8 Final dividend - proposed 6.3p 6.0p 15.4 12.3 9.2p 8.8p 22.4 18.1 ------------------------------ ---------- ---------- ----- ----- Recognised dividends for the year Final dividend - prior year 6.0p 5.7p 14.4 11.9 Interim dividend - current year 2.9p 2.8p 7.0 5.8 ------------------------------ ---------- ---------- ----- ----- 8.9p 8.5p 21.4 17.7 ------------------------------ ---------- ---------- ----- -----
(5) Rebased dividend per share adjusts last year's reported figures by the rights issue bonus factor adjustment of 0.9015 following the 2 for 7 rights issue in December 2014
The proposed final dividend for the year ended 31 August 2015 of 6.3p is subject to approval by shareholders at the Annual General Meeting on 4 February 2016 and in line with IAS 10 - '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 12 February 2016 to shareholders on the register at close of business on 15 January 2016.
9. Earnings per share 2015 2014 GBPm Pence GBPm Pence Earnings Weighted per Earnings Weighted Rebased average share average (1) per number number share of shares of shares million million ------------------------------------ --------- ----------- ------- --------- ----------- --------- Weighted average number of shares in issue 233.9 208.0 Shares held by the ESOP (weighted) (3.0) (1.6) Basic earnings per share (EPS) ------------------------------------ --------- ----------- ------- --------- ----------- --------- Adjusted earnings attributable to ordinary shareholders 45.5 230.9 19.7p 40.5 206.4 19.6p ------------------------------------ --------- ----------- ------- --------- ----------- --------- Non-recurring and other items (24.0) (5.9) Earnings attributable to ordinary shareholders 21.5 230.9 9.3p 34.6 206.4 16.8p ------------------------------------ --------- ----------- ------- --------- ----------- --------- Diluted earnings per share (EPS) Effect of dilutive share options 7.6 7.0 Diluted adjusted EPS 45.5 238.5 19.0p 40.5 213.4 19.0p ------------------------------------ --------- ----------- ------- --------- ----------- --------- Diluted EPS 21.5 238.5 9.0p 34.6 213.4 16.2p ------------------------------------ --------- ----------- ------- --------- ----------- ---------
(1) Rebased Earnings per share and rebased Dividends per share adjust last year reported figures by the rights issue bonus factor adjustment of 0.9015 following the 2 for 7 rights issue in December 2014
Dilutive shares increased the basic number of shares at 31 August 2015 by 7.6m to 238.5m (31 August 2014: 213.4m).
The calculation of diluted EPS reflects the potential dilutive effect of employee incentive schemes of 4.1m dilutive shares (31 August 2014: 5.4m) and a weighted 3.5m shares being the time apportioned share capital relating to the deferred consideration for the acquisition of The Big Green Parcel Holding Company Limited.
10. Intangible assets Acquired Intangibles Internally Computer generated software development costs costs ---------------------------------- ------------- ---------- GBPm Goodwill Customer Trade Software Total relationships name ------------------- --------- --------------- ------ --------- ------------- ---------- ------- Cost: At 1 September 2014 44.2 22.0 3.0 0.7 6.0 6.8 82.7 Additions - - - - 1.6 3.6 5.2 Acquisition of subsidiary 52.1 26.8 30.5 0.8 - - 110.2 Transfers between asset classes - - - - 2.3 5.1 7.4 Disposals - - - - (0.8) (1.7) (2.5) At 31 August 2015 96.3 48.8 33.5 1.5 9.1 13.8 203.0 ------------------- --------- --------------- ------ --------- ------------- ---------- ------- Accumulated amortisation: At 1 September 2014 - 8.5 1.4 0.6 3.9 2.6 17.0 Amortisation charge - 5.1 2.6 0.2 1.6 1.9 11.4 Transfers between asset classes - - - - 0.7 1.6 2.3 Disposal - - - - (0.8) (1.7) (2.5) At 31 August 2015 - 13.6 4.0 0.8 5.4 4.4 28.2 ------------------- --------- --------------- ------ --------- ------------- ---------- ------- Net book value at 31 August 2015 96.3 35.2 29.5 0.7 3.7 9.4 174.8 ------------------- --------- --------------- ------ --------- ------------- ---------- ------- Cost: At 1 September 2013 44.2 21.7 3.0 0.7 5.6 25.3 100.5 Additions - 0.3 - - 1.6 1.9 3.8 Disposals - - - - (1.2) (20.4) (21.6) At 31 August 2014 44.2 22.0 3.0 0.7 6.0 6.8 82.7 ------------------- --------- --------------- ------ --------- ------------- ---------- ------- Accumulated amortisation: At 1 September 2013 - 5.6 0.9 0.5 3.5 21.8 32.3 Amortisation charge - 2.4 0.5 0.1 1.6 1.2 5.8 Impairment - 0.5 - - - - 0.5 Disposals - - - - (1.2) (20.4) (21.6) At 31 August 2014 - 8.5 1.4 0.6 3.9 2.6 17.0
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------------------- --------- --------------- ------ --------- ------------- ---------- ------- Net book value at 31 August 2014 44.2 13.5 1.6 0.1 2.1 4.2 65.7 ------------------- --------- --------------- ------ --------- ------------- ---------- -------
During the year to 31 August 2015, goodwill and intangibles totalling GBP110.2m arose on the Group's acquisition of Tuffnells on 19 December 2014. Further details are disclosed in note 11. The Group leases software under various finance lease arrangements. The net book value of finance leases contained within the software balance above is GBP0.7m (2014: GBP0.9m).
In prior year the Group acquired the trade and assets of Martin Lavell giving rise to the recognition of an intangible asset of GBP0.3m for customer relationships.
Goodwill and Intangibles by CGU
Goodwill of GBP4.1m and acquired intangibles totalling GBP5.1m arose from the acquisition of the business and assets of Bertrams on 20 March 2009 have been allocated to the Connect Books combined cash generating unit (CGU).
The acquisition of Dawson Holdings PLC on 23 August 2011, resulted in goodwill of GBP18.1m and acquired intangibles of GBP7.8m. These have been allocated to the two remaining individual CGU's identified at the time of the acquisition; Dawson Books and Media Direct.
On the acquisition of Hedgelane Limited on 23 April 2012, the Group recognised goodwill of GBP20.9m and acquired intangibles of GBP10.4m which have been allocated to the Education and Care CGU.
The acquisition of 100% of the issued share capital of Houtschild Internationale Boekhandel B.V. on 13 June 2012 produced a further GBP0.3m of goodwill.
The acquisition of Erasmus on 17 January 2013 generated GBP0.8m of goodwill and GBP0.3m of acquired intangible assets.
The acquisition of certain Blackwell contracts on 20 May 2013 generated GBP2.0m of acquired intangibles.
The acquisition of trade and assets of Martin Lavell acquired on 1 September 2013 generated acquired intangibles of GBP0.3m.
The acquisition of Tuffnells on 19 December 2014 generated GBP52.1m of goodwill and GBP58.1m of intangible assets. Further details are disclosed in note 11. None of the goodwill arising on the acquisition in the year is expected to be deductible for tax purposes.
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 3 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 12.1% to 12.5%, 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. Given the improved outlook in the performance of Connect Books, higher growth rates included in the assumptions for this division increase the value in use. Management believes that no reasonable potential change in the above key assumptions would cause the carrying value to exceed its recoverable amount.
Goodwill Acquired Total Intangibles ------------------ ---------- -------------- -------------- -------------- ----------- -------------- GBPm 2015 2014 On acquisition 2015 2014 On acquisition 2015 2014 On acquisition ------------------ ---- ---- -------------- ------ ------ -------------- ----- ---- -------------- Connect Books 17.6 17.6 17.6 4.2 5.6 12.7 21.8 23.2 30.3 Connect Media 5.7 5.7 5.7 1.2 1.6 2.6 6.9 7.3 8.3 Connect News - - - 0.2 0.2 0.3 0.2 0.2 0.3 Connect Education and Care 20.9 20.9 20.9 6.2 7.8 10.4 27.1 28.7 31.3 Connect Parcel Freight 52.1 - 52.1 53.6 - 58.1 105.7 - 110.2 96.3 44.2 96.3 65.4 15.2 84.1 161.7 59.4 180.4 ------------------ ---- ---- -------------- ------ ------ -------------- ----- ---- --------------
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 2015 is GBP24.5m and GBP28.5m respectively with a remaining amortisation period of 7 and 9.5 years respectively.
11. Acquisitions
The acquisition of Tuffnells made during the period contributed GBP114.4m to the Group's revenue and GBP9.7m to the Group's operating profit before acquired intangible amortisation and acquisition related costs.
The estimated contributions of the acquired business to the results of the Group, as if the acquisition had been made at the beginning of the period, are as follows:
GBPm ------------------------------------------------- ------ Revenue 159.8 Operating profit before intangible amortisation and acquisition related costs 14.4
The net cash outflow in respect of the acquisition of the Big Green Parcel Holding Company Limited (Tuffnells) in the year comprised:
GBPm ----------------------------------------------- -------- Cash consideration (114.0) Cash acquired 8.3 ------------------------------------------------ -------- Net cash outflow relating to acquisition (105.7) Acquisition related costs (recorded in non-recurring and other items) (3.2) Total cash outflow in respect of acquisitions (108.9) ------------------------------------------------ --------
Acquisitions are accounted for under the acquisition method of accounting. The Group undertakes a process to identify the fair values of the assets acquired and the liabilities assumed, including the separate identification of intangible assets in accordance with IFRS 3 'Business Combinations'. Until this assessment is complete, the allocation period remains open up to twelve months from the acquisition date.
On 19 December 2014, Smiths News Holdings Limited acquired 100% of the issued share capital of The Big Green Parcel Holding Company Limited (Tuffnells) for a cash consideration of GBP114.0m and deferred contingent consideration of up to GBP15.3m, payable over 3 years following the acquisition contingent on both profit targets and the continued employment of certain former owners. The acquisition has been accounted for in accordance with IFRS 3 Business Combinations. The Big Green Parcel Holding Company Limited's main trading subsidiary is Tuffnells Parcels Express Limited. Tuffnells Parcels Express Limited is a leading UK provider of next-day B2B delivery of mixed freight and parcel consignments, specialising in items of irregular dimension and weight, examples of which include bulky furnishings, building materials and automotive parts.
The initial cash cost of the acquisition was GBP114.0m, financed by a combination of increased debt facilities and a c.GBP55m Rights Issue. The initial cash cost of GBP114.0m plus GBP0.5m of deferred consideration is consideration as defined by IFRS 3 and has been allocated against the identified net assets with the balance recorded as goodwill.
IFRS 3 requires that any payments that are contingent on future employment be charged to the income statement. The total GBP15.3m of deferred consideration includes GBP14.8m that is contingent on both profit targets and the continued employment of the former owners of The Big Green Parcel Holding Company Limited. This comprises:
- Up to GBP4.8m of deferred share capital and GBP3.8m in cash being the fair value of deferred contingent consideration payable conditional on the financial performance and on continued employment in the 12 month period from 1 September 2014 to 31 August 2015;
- Up to a further GBP2.0m of deferred share capital and GBP1.1m of cash payable conditional on the financial performance and continued employment in the 12 month period from 1 September 2015 to 31 August 2016; and
- Up to a further GBP2.0m of deferred share capital and GBP1.1m of cash payable conditional on the financial performance and continued employment in the 12 month period from 1 September 2016 to 31 August 2017.
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The remaining GBP0.5m deferred consideration is contingent solely upon future profit targets across the 36 month period from 1 September 2014 to 31 August 2017 and is included on the Director's best estimate of the likely overall payment. The provisional effect of the acquisition on the Group's assets and liabilities is as follows:
Allocation of purchase price GBPm Acquired balance Fair value Fair value sheet adjustments Fixed assets 21.7 (3.1) 18.6 Stock 0.6 - 0.6 Trade and other receivables 13.1 (0.1) 13.0 Acquired intangible assets - 58.1 58.1 Deferred tax 0.9 (9.9) (9.0) Other liabilities (4.6) (4.2) (8.8) Trade and other payables (14.4) (2.1) (16.5) Net debt 8.3 - 8.3 Pensions (1.9) - (1.9) ------------------------------ ----------------- ------------- ----------- Net assets 62.4 Cash consideration 114.0 Contingent purchase consideration 0.5 ------------------------------ ----------------- ------------- ----------- Total Consideration 114.5 Goodwill arising on acquisition 52.1
The fair value of receivables acquired (shown above) approximate to the gross contractual amounts receivable. The amount of gross contractual receivables not expected to be recovered is immaterial.
The excess of the fair value of the consideration paid over the fair value of the assets acquired is represented by customer related intangibles of GBP26.8m, the value of the 'Big Green Parcel Machine' trade name of GBP30.5m and other intangibles of GBP0.8m with residual goodwill arising of GBP52.1m. The goodwill represents:
- The value of the acquired workforce
- Potential to leverage the expertise and achieve synergies with other Connect Group distribution businesses
The potential undiscounted amount of all future payments that Connect Group plc could be required to make under the contingent consideration arrangement, which has been measured based on current expectations of future performance is GBP15.3m and the fair value is GBP15.3m.
In the prior year the Group acquired the trade and assets from Martin Lavell Ltd on 1 September 2013, a significant distributor in the Business-to-Business sector of newspaper and magazine supplies in London, for a consideration of GBP0.3m. The acquisition gave rise to the recognition of a GBP0.3m intangible asset for customer relationships.
12. Acquisition of non-controlling interests
On 27 August 2015, the Group purchased the remaining 49% of shares in Magpie Investments Limited for an initial cash consideration of GBP5.1m with a deferred consideration of GBP3.3m which is contingent on both profit targets and continued employment of the former owners. This deferred contingent consideration will be charged to the income statement over a five year period to August 2020.
13. Cash and borrowings
Cash and borrowings by currency (Sterling equivalent) are as follows:
GBPm Sterling Euro US Dollar Other Total 2014 2015 --------- ----- ---------- ------ ------- Cash and cash equivalents 6.2 3.2 0.9 0.6 10.9 20.4 ----------------------------- --------- ----- ---------- ------ ------- ------- Term loan - disclosed within - - - - - - current liabilities Term loan - disclosed within non-current liabilities (98.4) - - - (98.4) (48.4) Revolving credit facility (55.0) (1.5) - - (56.5) (60.9) Total borrowings (153.4) (1.5) - - (154.9) (109.3) Net borrowings (147.2) 1.7 0.9 0.6 (144.0) (88.9) ----------------------------- --------- ----- ---------- ------ ------- ------- Total borrowings ----------------------------- --------- ----- ---------- ------ ------- ------- Amount due for settlement within 12 months (55.0) (1.5) - - (56.5) (60.9) Amount due for settlement after 12 months (98.4) - - - (98.4) (48.4) ----------------------------- --------- ----- ---------- ------ ------- ------- (153.4) (1.5) - - (154.9) (109.3)
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 2015, the Group had GBP95.1m (2014: GBP90.7m) of undrawn committed borrowing facilities in respect of which all conditions precedents had been met. Interest payable under the current facility 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.
As at 31 August 2015, the Group had GBP250m committed bank facilities in place (2014: GBP200m). The facility was extended in November 2014 to GBP250m to support the acquisition of Tuffnells.
Bank facilities now comprise:
-- a GBP100m syndicated term loan with GBP10m repayable in February 2017, August 2017, February 2018 and August 2018 with the balance repayable in November 2018;
-- a GBP150m syndicated revolving credit facility which expires in November 2018; 14. Provisions GBPm Reorganisation Insurance Deferred Property Total provisions provision contingent provisions consideration Gross provision: At 1 September 2014 0.7 1.4 - 3.6 5.7 Additions 2.3 0.1 5.2 1.0 8.6 Acquisition of business - 1.3 - 4.1 5.4 Released (0.2) - - (0.2) (0.4) Utilised in year (1.8) - - (0.6) (2.4) At 31 August 2015 1.0 2.8 5.2 7.9 16.9 Discount: At 1 September 2014 - - - (0.4) (0.4) Additions - - - - - Acquisition of business - - - (0.1) (0.1) Unwinding of discount - - - - - utilisation At 31 August 2015 - - - (0.5) (0.5) Net book value at 31 August 2015 1.0 2.8 5.2 7.4 16.4 Gross provision: At 1 September 2013 1.4 1.4 1.9 6.4 11.1 Additions 0.7 0.2 0.2 1.3 2.4 Released (0.1) - - (1.5) (1.6) Utilised in year (1.3) (0.2) (2.1) (2.6) (6.2) At 31 August 2014 0.7 1.4 - 3.6 5.7 Discount: At 1 September 2013 - - - (0.8) (0.8) Additions - - - (0.1) (0.1) Disposals - - - 0.4 0.4 Unwinding of discount utilisation - - - 0.1 0.1 At 31 August 2014 - - - (0.4) (0.4) Net book value at 31 August 2014 0.7 1.4 - 3.2 5.3 GBPm 2015 2014 Included within current liabilities 10.4 3.4 Included within non-current liabilities 6.0 1.9 Total 16.4 5.3
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 provisions represent the expected future costs of employer's liability, public liability and motor accident claims.
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