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WH Smith PLC Preliminary Results

12/11/2020 7:00am

UK Regulatory (RNS & others)


Wh Smith (LSE:SMWH)
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RNS Number : 0584F

WH Smith PLC

12 November 2020

12 November 2020

WH SMITH PLC

PRELIMINARY RESULTS ANNOUNCEMENT

FOR THE YEARED 31 AUGUST 2020

Financially strong Group; well positioned for the recovery

-- Decisive actions taken to protect colleagues, customers and the business since the start of the pandemic

-- Challenging year with a Headline loss of GBP69m but with improving trends prior to current lockdown

-- Focused plan on customer conversion, increasing average transaction value, category development and cost management; delivering good results across all UK and international travel markets

   --    Continue to focus on opportunities for further growth 

-- Encouraging signs of recovery in North America; continue to open new stores and win new business

-- Resilient performance from High Street business; steady recovery since first lockdown; 558 stores currently trading

-- Robust balance sheet; finished October ahead of plan with cash on deposit of GBP83m and undrawn facilities of GBP320m

   --    Underlying cash burn for November approximately GBP20m 
   --    The Group is well positioned as travel markets recover 

Group financial summary:

 
                                                                      Aug 2020    Aug 2019    % Change 
                                                   Aug 2020 (IFRS)    (IAS 17*)    (IAS 17)    (IAS 17) 
 Travel trading (loss)/profit(1)                      GBP(27)m        GBP(33)m     GBP117m     (128)% 
 High Street trading (loss)/profit(1)                  GBP(4)m        GBP(10)m     GBP60m      (117)% 
 Group (loss)/profit from trading operations(1)       GBP(31)m        GBP(43)m     GBP177m     (124)% 
------------------------------------------------  ----------------  -----------  ----------  ---------- 
 Headline Group (loss)/profit before tax(1)           GBP(68)m        GBP(69)m     GBP155m     (145)% 
 Headline (loss)/earnings per share(1)                 (43.3)p        (44.2)p      114.7p      (139)% 
------------------------------------------------  ----------------  -----------  ----------  ---------- 
 Non-underlying costs(1)                              GBP(212)m      GBP(157)m    GBP(20)m 
 Group (loss)/profit before tax                       GBP(280)m      GBP(226)m     GBP135m     (267)% 
 Basic (loss)/earnings per share                      (199.2)p        (160.0)p      98.1p      (263)% 
 Diluted (loss)/earnings per share                    (199.2)p        (160.0)p      97.2p      (265)% 
------------------------------------------------  ----------------  -----------  ----------  ---------- 
 

Revenue performance:

 
 
 Travel          553    (32)%   (43)% 
               ------  ------ 
 High Street     468    (19)%   (19)% 
 Group          1,021   (27)%   (33)% 
               ------  ------ 
 

* The Group adopted IFRS 16 'Leases' with effect from 1 September 2019 using the modified retrospective approach to transition and has therefore not restated prior periods. The results for the year ended 31 August 2020 are not directly comparable with those reported in prior periods under the previous applicable accounting standard, IAS 17 'Leases'. In order to aid comparability, the results for the year ended 31 August 2020 have also been presented on a pre-IFRS 16 (IAS 17) basis and commentary throughout this report will refer to these pre-IFRS 16 numbers. Measures presented under IAS 17 are identified with a "*". All prior period measures are presented on an IAS 17 basis. Reconciliations from IAS 17 measures to IFRS 16 measures are provided in the Glossary on page 53. Group revenue was not affected by the adoption of IFRS 16, and therefore all references to and discussion of revenue, and like-for-like revenue are based on statutory measures.

Monthly recurring cash burn before any cost deferrals or one-off savings/costs

(1) Alternative Performance Measure (APM) defined and explained in the Glossary on page 53. Unless otherwise stated, all references in this announcement to growth rates and year-on-year comparisons relating to the Group's statutory and alternative performance measures are stated on a consistent basis under IAS 17.

Carl Cowling, Group Chief Executive, commented:

"The Group delivered a strong first half performance and traded strongly prior to the outbreak of Covid-19. Since March, we have been heavily impacted by the pandemic. Despite the many challenges faced, we responded quickly and took decisive actions to protect our colleagues, customers and the business, including strengthening our financial position.

"While passenger numbers continue to be significantly impacted in the UK, our North American business, where 85% of passengers are domestic, is beginning to see some encouraging signs of recovery. In addition, we continue to open new stores in the US and win significant tenders across major US airports.

"In High Street, we had seen a steady recovery and we were well set up both in stores and online as we went into the second lockdown. We currently have 558 stores open.

"We have a robust plan across all our businesses focusing on cost management and initiatives within our control which support us in the immediate term and position us well to emerge stronger as our markets recover.

"I have nothing but enormous admiration for all our colleagues across the business, be it in stores, our distribution centres or our head offices. Their support and commitment has been outstanding during this difficult period and I would like to thank every one of them for how they have responded.

"We are a resilient and agile business. The actions we have taken have put us in a strong position to navigate this time of uncertainty and we are well positioned to benefit as our markets return to growth."

WEBCAST:

A live webcast will be held today at 8.30am GMT for investors and analysts and will be available on our website at www.whsmithplc.co.uk .

ENQUIRIES:

 
 WH Smith PLC 
 Nicola Hillman    Media Relations       01793 563354 
 Mark Boyle        Investor Relations    07879 897687 
 
 Brunswick 
 Tim Danaher                             020 7404 5959 
 
 

WH Smith PLC's Preliminary Results 2020 are available at www.whsmithplc.co.uk .

GROUP OVERVIEW

Impact of Covid-19

Following the outbreak of Covid-19, the Group acted fast to take a number of actions to support our colleagues, customers and our business. Our number one priority is the health and wellbeing of our colleagues and our customers. All stores, distribution centres and head offices have effective safety measures in place, including social distancing measures, PPE for colleagues' use, protective screens and guidelines to limit the number of customers in store. In addition, all head office staff have worked from home throughout the lockdown periods.

We immediately focused on cost and cash management, including the following activities:

-- Reduced stock purchases to reflect ongoing demand, returning sale or return stock and negotiating extended payment terms

   --    Reviewed all capital expenditure to focus on essential and strategic projects 
   --    Stopped all discretionary expenditure and reduced corporate overheads 

-- Worked with landlords to significantly reduce or remove rent payments and to link, as far as possible, with revenue

-- Significant reduction in headcount across stores and head offices through furlough arrangements; including participating in the UK Government Job Retention Scheme, and subsequently restructuring to ensure headcount is in line with business requirements and reduced sales

   --    Deferred tax payments in line with UK government announcements 

-- The Board has decided not to pay a dividend in respect of the financial year ending 31 August 2020

-- Focused on strengthening the balance sheet and the Group's liquidity position including bank covenant waivers for February 2021 and August 2021

Throughout the first lockdown period, and in line with government guidance, we committed to keeping a number of our stores open to serve those communities that most needed our services. As a result, 203 High Street stores which host Post Offices remained open and c.130 Travel stores located within hospitals across the UK continued to serve NHS frontline workers.

As lockdown restrictions were eased, we focused on the re-opening of our store estate based on the safety of our colleagues and customers, where we were able to make a cash contribution from each individual unit taking into account passenger and customer traffic flows, and the opening of transport infrastructure. We were able to open 570 High Street stores by the end of June 2020, and at the end of August 2020, we had 285 Travel stores open in the UK and 365 stores open outside of the UK.

Following the announcement of a second lockdown in England, we have 558 stores open in High Street and 243 stores open in Travel, including 206 Post Offices and 135 hospital stores. We were able to apply the learnings from the first lockdown to act fast where necessary to return stock, furlough staff and manage our supply chain. We also took measures to make sure our stores can open swiftly as lockdown eases.

Strategic Initiatives

As we have re-opened our stores, we have focused on initiatives within our control that support us in the immediate term and position us well to emerge stronger as our markets recover. These key areas of focus include:

-- Driving average transaction value and sales per passenger. We have seen increases across all our businesses

-- Extending our categories and ranges to reflect the specific needs of our customers in each location. For example, health and beauty and hygiene and wellbeing products across our Travel stores and working from home and electrical accessories ranges across our High Street stores

-- Forensic focus on costs; completing the previously announced restructures in stores and head offices and minimising discretionary spend

-- Working with landlords building on our strong relationships to create opportunities for business development as the recovery continues

-- Investing capex in completing strategically important projects which set us up well for the future. These deliver unique and creative propositions for landlords and customers, such as our new store at London Heathrow Airport Terminal 2 and Bowery Bay at La Guardia Airport, New York

   --    Integrating our North American businesses into Las Vegas, saving c.GBP5m of costs annually 

-- Building our internet proposition by extending our ranges, increasing our distribution capacity and building customer engagement through social media

Group Summary

As lockdown restrictions eased throughout the world we saw a gradual recovery. Total Group revenue as a percentage of 2019 total revenue has been:

 
                            % of 2019 Revenue 
                  -------  ------------------ 
                   Travel      High Street      Group 
                  -------  ------------------  ------ 
 April 2020          8%            29%           17% 
                  -------  ------------------  ------ 
 May 2020            9%            35%           18% 
                  -------  ------------------  ------ 
 June 2020          16%            59%           31% 
                  -------  ------------------  ------ 
 July 2020          27%            75%           43% 
                  -------  ------------------  ------ 
 August 2020        37%            81%           53% 
                  -------  ------------------  ------ 
 September 2020     41%            89%           59% 
                  -------  ------------------  ------ 
 October 2020       39%            92%           59% 
                  -------  ------------------  ------ 
 

Covid-19 has had a significant impact on the Group, particularly in the second half of the financial year. Total Group revenue was down 27% compared to last year at GBP1,021m (2019: GBP1,397m) with Group LFL revenue down 33% (down 64% in the second half).

The Headline Group loss from trading operations (1) for the year was GBP43m* (2019: profit of GBP177m) with Headline Group loss before tax (1) at GBP69m* (2019: profit of GBP155m). Including non-underlying items the Group loss before tax (1) was GBP226m* (2019: profit of GBP135m). The Group loss before tax, after non-underlying items and including IFRS 16, was GBP280m.

Following disruption to the business from Covid-19, the Board has announced that it will not be paying a dividend in respect of the financial year ending 31 August 2020.

As announced on 6 April 2020, we raised net proceeds of c.GBP160m via a share placing and at the same time agreed a GBP120m 12 month (plus 7 months at the option of the Group) committed banking facility from BNP Paribas, HSBC Bank PLC and Santander UK PLC. This was in addition to our existing facilities. The Group has also agreed waivers for the bank covenant tests at August 2020, February 2021 and August 2021.

As at 31 August net debt (1) was GBP301m* (2019: GBP180m). Group free cash flow (1) was an outflow of GBP41m* (2019: free cash flow generated of GBP109m). As at 31 August 2020, the Group had cash of GBP108m of which GBP82m was cash on deposit(2) giving us access to GBP402m of liquidity (undrawn revolving credit facility (RCF) of GBP200m, liquidity loan of GBP120m and cash on deposit(2) of GBP82m.)

The Group has the following debt facilities as at 11 November 2020:

 
                                     Amount Drawn at 31           Maturity 
                                 August and 11 November 
                                                   2020 
 Available facilities 
                               ------------------------  ----------------- 
 GBP120m 'Liquidity' Facility                    GBPnil   November 2021*** 
                               ------------------------  ----------------- 
 GBP200m Revolving Credit                        GBPnil      December 2023 
  Facility 
                               ------------------------  ----------------- 
 Existing debt 
                               ------------------------  ----------------- 
 GBP200m Term Loan                              GBP200m       October 2022 
                               ------------------------  ----------------- 
 GBP200m MRG Loan                               GBP200m    October 2022*** 
                               ------------------------  ----------------- 
 

*** The maturity dates above include extension options at the Group's control

(2) Cash and cash equivalents of GBP108m is cash on deposit/cash at bank of GBP82m, plus GBP26m of cash in transit/held at stores.

As at 30 October 2020, the Group had cash on deposit of GBP83m and access to GBP320m of committed facility from the RCF and liquidity loan. At that point, the Group owed approximately GBP80m primarily relating to rent, restructuring charges, and outstanding creditors as we entered the second lockdown. We anticipate these payments will be made during the first half of the financial year. Therefore, the Group had GBP323m of available cash and facilities at the end of October 2020. We have worked hard to reduce the cash outflow, managing costs, stock in-take, capex projects and negotiating rent reductions as well as improved trading. The Group's underlying monthly cash burn for November is expected to be GBP20m including any furlough mitigation. The improved trading and good cash management resulted in our underlying cash burn in September and October being GBP5m to GBP10m per month which was better than we had originally expected.

In April, the Group secured eligibility to the Government's Covid Corporate Financing Facility (CCFF) for up to GBP300m. The Group never utilised the facility. The CCFF is currently being reviewed and like many companies, the Group is in dialogue with the CCFF concerning its eligibility.

TRAVEL

Prior to Covid-19, our Travel business was trading very well having delivered its seventh year of like-for-like sales growth. The second half however was significantly impacted by Covid-19 across our UK and international markets resulting in a full year trading loss(1) of GBP33m* (2019: profit of GBP117m), of which GBP32m* (2019: profit of GBP20m) relates to our international business including MRG and InMotion. Total revenue was GBP553m (2019: GBP817m), down 32% compared to last year and down 43% on a LFL basis.

The table below shows the impact of Covid-19 in the second half of our financial year:

 
 Travel                      H1      H2     Full Year 
 YOY movement in Revenue 
  (%)                       19%    (73)%      (32)% 
                           -----  -------  ---------- 
 Trading (loss)/profit      49m*   (82)m*    (33)m* 
  (1) (GBPm) 
                           -----  -------  ---------- 
 

As at 31 August 2020, our global Travel business, including MRG and InMotion, operated from 1,174 units (31 August 2019: 1,019 units). Of these, 650 were open as at 31 August 2020. Excluding franchise units, Travel occupies 1.0m square feet.

UK Travel

In our UK Travel business, we saw a significant decline in passenger numbers as a result of travel restrictions in the second half of the financial year. Total revenue in the year was GBP344m, (2019: GBP565m), down 39% on the previous year. In air, total revenue was down 48% with LFL revenue also down 48%; in our hospital channel, total revenue was down 15% with LFL revenue down 20%, and in rail, total revenue was down 42% with LFL revenue down 40%. This resulted in a trading loss(1) of GBP1m* (2019: profit of GBP97m).

Recent trading in UK Travel has been impacted by quarantine measures and reduced passengers on public transport. Revenue in September and October was 32% of 2019 sales. Hospital revenue continues to track at around 64% of 2019 sales. Following the announcement of the second lockdown in England, we expect to be further impacted and for the recovery not to begin until the second half.

We have worked hard across all our channels to implement a robust plan focusing on key priorities within our control that support us in the immediate term and will enable us to emerge stronger when our markets recover. Our key areas of focus include: cost management, increasing conversion and average transaction value, category development and identifying opportunities for further growth.

Air

In air, whilst we saw some early signs of recovery from leisure passengers in July as lockdown restrictions were eased, passenger numbers stalled as quarantine requirements were broadened. Despite the reduction in passenger numbers, we have continued to build on our strong position in this channel by focusing on increasing conversion and our average transaction value. This has been achieved by further extending our categories and existing ranges into new categories such as health and beauty, and hygiene and wellbeing products. We have seen some positive results with scope to do more.

During the second half, we opened a new flagship store at London Heathrow Airport Terminal 2. This new format store builds upon the success of our combined WHSmith and pharmacy format store that opened at London Gatwick Airport in the prior year. Our experience shows that we can deliver higher sales per passenger from these large stores, through improved layouts, increased capacity and by providing a one-stop-shop for time pressed passengers. With over 5,000 square feet of selling space, this flagship store features an extensive news, books and convenience offer with the addition of a world class health and wellbeing department with specialist staff. The health and wellbeing department comprises a comprehensive range of over 3,000 products curated through our partnership with market leading, global brands. In addition, the pharmacy counter offers healthcare advice along with a wide selection of medicines. We have received very positive feedback from both our customers and landlords. While this format is not suitable for all locations, we expect it to be of

interest to landlords as they reconfigure their space in the future.

Hospitals

Hospitals are an important channel for us and this is now our second largest channel by sales in UK Travel. This channel is a great example of how we continue to innovate to meet the specific needs of each hospital. We have developed a strong customer offer and aligned our ranges to the NHS strategy on healthy eating. Our broad suite of brands, which include Costa and M&S Simply Food, also ensure that we can tailor and adapt our proposition to each hospital's requirements. We believe there are further opportunities to improve the hospital retail offer in the UK and we are well positioned to grow this channel further.

Throughout the second half, during the height of the pandemic and in the second lockdown, we committed to keeping our stores open in c.130 hospitals across the UK in order to support frontline NHS staff. While sales were clearly impacted with no hospital visitors, these stores performed well. We also extended our grocery ranges in these stores to further support NHS staff, ensuring we continued to play our part in the communities we serve.

Rail

Rail remains an important channel with significant long-term investment in new lines and station redevelopments. During the year, our performance was impacted by travel restrictions in the second half. We saw some improvement in performance in July, however this was stalled by further government restrictions in early September. Similar to air, we have focused on extending our ranges and increasing average transaction value.

We now have c.60% of our UK Travel store estate open.

We have focused on all areas of cost across our UK Travel business. As a result of the significant decline in passenger numbers, we took the difficult decision to review our store operations in August 2020, reducing headcount across the Travel business.

International

Within our International Travel division, North America now represents c.50% of our stores outside of the UK and we continue to see further opportunities to grow this business. Outside of North America, we still have a relatively small market share of the international news, books and convenience (NBC) market and we believe there is good long-term potential for us to continue to grow our space. During the first half of the financial year, our strategy to grow our International Travel business progressed well. In line with our UK Travel business, the second half was adversely impacted by Covid-19.

Total revenue for the year, including Marshall Retail Group (MRG) and InMotion, was GBP209m (2019: GBP252m), down 17% versus the previous year. LFL revenue, on a constant currency basis, was down 43%. The trading loss for the year was GBP32m* (2019: profit GBP20m).

North America

We completed the acquisition of MRG, a leading and fast-growing US travel retailer in December 2019. The combination of WH Smith, MRG and InMotion now enables the Group to participate in the entire North American airport specialty retail market. Differentiated from its competitors by its strategy of developing highly customised retail experiences tailored to local customers and landlords, MRG has a highly successful and proven business model with a strong track record of concession and tender wins. Although impacted by Covid-19 in the second half, MRG won a further 8 stores, including stores at San Francisco, Denver and Newark airports, and along with InMotion have a further 39 stores won but yet to open.

During the second half, MRG opened a new walk-through format of stores at La Guardia Airport, New York. This format is a first in North America. The Bowery Bay showcases around 15,000 square feet of selling space, curating a number of travel essential and specialty international retailers and brands including Kate Spade and Kiehl's. All these stores are operated by MRG with the digital accessories range provided by InMotion. This is the first InMotion implant within MRG and we believe there is scope for further opportunities for InMotion to be part of the MRG assortment of products and brands and for InMotion to open further stores in resorts.

InMotion has an excellent store portfolio with 116 stores across 43 airports in North America. During the year, InMotion opened 8 units, including units at San Francisco, Washington Dulles and Salt Lake City international airports.

While Covid-19 has had a significant impact on our North American business, approximately 85% of passengers in the US are domestic with leisure passengers an important segment, and we therefore anticipate a faster recovery in this market versus the rest of the world. TSA data continues to show a consistent, gradual recovery in passenger numbers week on week, with passenger numbers now at 35% of 2019 levels. In addition, the Las Vegas resorts business is proving resilient with occupancy rates continuing to improve, particularly at the weekend. Importantly, a significant number of visitors travel by car to Las Vegas. Data from the Las Vegas Conventions and Visitors Authority suggests that vehicle movements between California and Nevada remain robust with volumes up 10% in September compared to 2019. Our sales performance has reflected these trends with overall sales in North America at 44% of 2019 levels in October. We currently have 224 stores open (136 MRG and 88 InMotion).

During the second half, we accelerated the integration of InMotion into the MRG head office in Las Vegas. Given the exceptional circumstances, with the majority of stores closed, we acted quickly to integrate the businesses much earlier than we originally planned at acquisition. The integration is progressing well, and we expect it to be complete by the end of the calendar year. Going forward, we expect this to deliver savings of c.GBP5m per annum.

Rest of the World

Outside of the UK and North America, our WH Smith international business is seeing broadly similar trends with passenger numbers significantly down year on year. Similar to the UK, we remain focused on areas within our control, including increasing average transaction value, re-negotiating rents and extending our leases. Of the 307 WH Smith stores outside the UK, we have re-opened 159 stores to date. Recovery in these markets is likely to take some time and we are planning accordingly. We will temporarily close stores if they become uneconomic and as airlines adjust volumes and schedules. Revenue in September and October was at 18% of 2019 levels.

Despite the disruption in the second half, outside of North America we won 26 new WH Smith units internationally in the year and opened 16 units, making a total of 307 WH Smith international units as at 31 August 2020. 40% are directly run, 52% are franchised with the balance being joint ventures. We will continue to use these three economic models flexibly in order to create value and win new business.

In total, across our global Travel business outside of the UK, we are now present in over 100 airports and 30 countries with 277 units open in North America, 83 units open in Europe, 104 in the Middle East and India, and 120 in Asia Pacific.

HIGH STREET

High Street delivered a resilient performance despite a very challenging second half with a full year trading loss(1) of GBP10m* (2019: profit of GBP60m). Total revenue was down 19% with like-for-like revenue down 19%.

The table below shows the impact of Covid-19 on the second half of our financial year:

 
 High Street                 H1      H2     Full Year 
 YOY movement in Revenue 
  (%)                       (5)%   (39)%      (19)% 
                           -----  -------  ---------- 
 Trading (loss)/profit      44m*   (54)m*    (10)m* 
  (1) (GBPm) 
                           -----  -------  ---------- 
 

Throughout the first lockdown period we kept 203 stores open to ensure that those stores that include a Post Office could continue to serve their local communities and provide access to vital postal and banking services.

We consider retail space as a strategic asset and we utilise our space to maximise a return in the current year in ways that are sustainable for future years. We have extensive and detailed space and range elasticity data for every store, built up over many years and we utilise our space to maximise the return on every metre drop of display space in every store. This approach remains as appropriate today as it has ever been.

As with our Travel business, we have focused on initiatives within our control with a greater focus on: increasing average transaction value, where we have seen some very positive results; category development, introducing new ranges such as health and hygiene, electrical accessories and working from home ranges; and good cost control.

Driving efficiencies remains a core part of our strategy and we continue to focus on all areas of cost in the business. We achieved cost savings of GBP23m in the year. These savings come from right across the business, including rent savings at lease renewal (on average over 45%) which continue to be a significant proportion, government property rates holiday, marketing efficiencies and productivity gains from our distribution centres. An additional GBP34m of cost savings have been identified over the next three years of which GBP21m are planned for 2021.

Over the years, we have actively looked to put as much flexibility into our store leases as we can, and this leaves us well positioned in the current environment. The average lease length in our High Street business, including where we are currently holding over at lease end is 2.5 years. We only renew a lease where we are confident of delivering economic value over the life of that lease. We have c.420 leases due for renewal over the next three years, including 120 where we are holding over and in negotiation with the landlord. Depending on the negotiations with our landlords and the government's future approach to property rates, we anticipate closing c.25 stores in the current financial year as the leases on these stores expire. While this is not an easy decision to make for our colleagues or the communities we serve, it is vital we retain a strong and cash generative high street portfolio going forward.

As at 31 August 2020, the High Street business operated from 568 WH Smith stores (2019: 576) which occupy 2.7m square feet (2019: 2.7m square feet). Eight WH Smith stores were closed in the year.

Online

Our online businesses have delivered strong growth, particularly in the second half.

i. Our online personalised greetings card business, www.funkypigeon.com , has delivered high levels of growth with record sales over key trading events and good profit growth.

ii. www.whsmith.co.uk provides customers with a comprehensive book and stationery offer and, during the year we invested in a new website. In addition, we have focused on extending our ranges and building our customer base. In the second half, we delivered growth of over 240%.

iii. Our specialist pen website, www.cultpens.com has continued to perform well in the year. During the year, we have focused on extending our luxury pen range which now includes a full range of Montblanc pens and accessories.

Outlook

Despite the challenges and uncertainties faced in the second half, the Group responded quickly to protect the business and we are in a stronger position than forecast in August 2020. We had reduced our cash burn to GBP5m-GBP10m per month in September and October, managed our cash position well and entered November with access to GBP323m of liquidity. We expect cash burn in November of approximately GBP20m. We have a robust plan in place, and we expect to emerge stronger operationally as our markets recover.

We have a resilient hospital channel and we are committed to playing our part to support NHS staff on the frontline. In air, we expect a gradual improvement in domestic passenger numbers first, particularly in the US where c.85% of passengers are domestic, followed by international and inter-continental passengers. In rail, as government restrictions are lifted, and more people return to work, we expect to see a gradual improvement in sales. Outside the UK, we will continue to focus on our key initiatives and we expect to see a continued improvement in passenger traffic in North America.

We are financially strong and are an important retail partner for our travel landlords. As a result, we are well positioned to benefit from further opportunities, including extending our user clauses to drive spend per passenger. We will continue to invest in new stores and new store formats in the UK and North America where we see attractive opportunities for profitable growth.

In view of the continuing uncertainty from the impact of Covid-19 we continue to plan cautiously for a wide range of outcomes. As we have done since March, we will manage the business by focusing on the short-term actions that manage cash and costs along with ensuring we are well positioned for economic recovery, particularly in our Travel business.

GROUP

The Group generated Headline loss before tax(1) of GBP69m* (2019: Headline profit before tax GBP155m) and, after non-underlying items and IFRS 16, statutory loss before tax of GBP280m (2019: profit before tax GBP135m). During the second half, the Group received a total of GBP22m from the UK Government's Job Retention Scheme and similar schemes in other countries. The Group also benefited from the Business Rates holiday implemented by the UK Government which was worth GBP20m in the year.

 
                                     2020      2020      2019 
   GBPm                              IFRS    IAS 17    IAS 17 
--------------------------------   ------  --------  -------- 
 Travel trading (loss) / profit 
  (1)                                (27)      (33)       117 
 High Street trading (loss) 
  / profit (1)                        (4)      (10)        60 
 Group (loss) / profit from 
  trading operations (1)             (31)      (43)       177 
 Unallocated costs (1)               (17)      (17)      (17) 
---------------------------------  ------  --------  -------- 
 Headline Group operating 
  (loss) / profit (1)                (48)      (60)       160 
 Net finance costs                   (20)       (9)       (5) 
---------------------------------  ------  --------  -------- 
 Headline Group (loss) / 
  profit before tax (1)              (68)      (69)       155 
 Non-underlying items               (212)     (157)      (20) 
---------------------------------  ------  --------  -------- 
 Group (loss) / profit before 
  tax                               (280)     (226)       135 
---------------------------------  ------  --------  -------- 
 

Non-underlying Items (1)

Items which are not considered part of the normal operating costs of the business, are non-recurring and are exceptional because of their size, nature and incidence, are treated as non-underlying items and disclosed separately. Non-underlying items this year include items relating to the acquisition of MRG, a pension past service charge and items specifically relating to the impact of Covid-19 on the business. The majority of these items are non-cash.

Non-underlying items included in the year ending 31 August 2020 are shown in the table below (2019: GBP20m). The expected cash impact in the year to 31 August 2021 relating to these items is GBP27m. See reconciliation of net debt on page 13 for the cash spend in the year ended 31 August 2020 in relation to non-underlying items.

 
                                                 Income statement        Cash Outflow 
------------------------------------  -----  -----------------------  --------------- 
                                       Ref.         2020        2020             2021 
   GBPm                                             IFRS      IAS 17 
------------------------------------  -----  -----------  ----------  --------------- 
 Costs directly attributable 
  to Covid-19 
 Impairment                             (1)        (135)        (55)                - 
 Onerous leases                         (2)          n/a        (13)                - 
 Stock provisions and write-offs        (3)         (14)        (14)                - 
 Restructuring                          (4)         (25)        (25)               24 
 Other property costs                   (5)          n/a        (12)                3 
 Other                                               (1)         (1)                - 
------------------------------------  -----  -----------  ----------  --------------- 
 Other non-underlying costs                        (175)       (120)               27 
 Transaction costs                      (6)         (11)        (11)                - 
 Integration costs                      (6)          (9)         (9)                - 
 Amortisation                           (7)          (3)         (3)                - 
 Pensions past service cost             (8)         (14)        (14)                - 
------------------------------------  -----  -----------  ----------  --------------- 
                                                   (212)       (157)               27 
------------------------------------  -----  -----------  ----------  --------------- 
 
 
 

Items 1-5 in the above table have arisen as a direct consequence of Covid-19, and reflect the impact of lost revenues as a result of store closures, and downward revisions to budgeted revenues following government interventions.

(1) Impairment of Property, plant and equipment and Right-of-use assets

The impact on the Group's operations of Covid-19 is expected to continue during the current year and beyond. As a result, the Group has carried out a review for potential impairment across the entire store portfolio. The impairment review compared the value-in-use of individual store cash-generating units, based on managements' assumptions regarding likely future trading performance taking into account the effect of Covid-19 to the carrying values at 31 August 2020. Following this review, a charge of GBP55m* was recorded for impairment of retail store assets on an IAS 17 basis, and GBP135m on an IFRS 16 basis which includes an impairment of the right of use assets of GBP95m.

(2) Onerous leases

As a result of the impact of Covid-19, the Group has carried out a review of leases where the obligations of those leases exceed the potential economic benefits expected to be received under them. This resulted in a charge for the year of GBP13m*. This concept relates to IAS 17 only and does not exist under IFRS 16.

(3) Stock provisions and write-offs

Provisions of GBP 9 m have been recorded against inventory mainly relating to dated and perishable stock and stock subject to obsolescence such as technology and apparel where the sell through rate has significantly reduced due to store closures and lower footfall as a consequence of Covid-19. In addition since the outbreak of Covid-19 the Group has incurred stock write-offs of GBP 5 m mainly relating to perishable and dated product.

(4) Restructuring costs

As a result of the impact of Covid-19 on passenger numbers and lower footfall on the UK high street, in August 2020 the Group announced a review of store operations across both our Travel and High Street businesses. The charge of GBP 21 m is principally attributable to redundancies and restructuring costs relating to that along with other corporate office restructuring undertaken by the Group. In addition the Group has incurred GBP 4 m relating to costs of exiting WHSmith France and the Brazil joint venture both of which were as a result of Covid-19.

(5) Other property costs

Property costs relate to reinstatement liabilities for stores where the long-term viability has been impacted by Covid-19. Under IFRS 16 these costs are included in right-of-use assets and are therefore included within the impairment figure of GBP135m.

(6) Costs relating to business combinations

During the year, the Group incurred transaction and integration costs of GBP 20 m in relation to the acquisition of MRG, which completed on 20 December 2019. Integration costs relate to the integration of MRG into the Group and the merging of the InMotion and MRG corporate offices into Las Vegas.

(7) Amortisation of acquired intangible assets

Amortisation of acquired intangible assets primarily relates to the MRG and InMotion brands.

(8) Pension past service cost

Past service cost of GBP 14 m has been recognised in the year ended 31 August 2020. This relates to equalisation of pension benefits between men and women for the period from 1 April 1992 to 29 July 1993 ('Barber equalisation'). The WHSmith Pension Trust has historically been administered assuming gender equalisation was achieved on 1 April 1992, and thus a Barber equalisation window of 17 May 1990 to 1 April 1992 applied. A new Trust Deed and Rules reflecting the equalisation of normal retirement ages at 65 was executed on 29 July 1993. It has since been determined that Barber equalisation was not effective until 29 July 1993. Accordingly, this past service cost is the expected cost of providing these benefits based on a normal retirement age of 60 rather than 65 for the period between 1 April 1992 and 29 July 1993.

A tax credit of GBP25m has been recognised in relation to the above items (GBP18m* under IAS 17).

Net Finance Costs

 
                                                   2020      2020      2019 
 GBPm                                              IFRS    IAS 17    IAS 17 
-----------------------------------------------  ------  --------  -------- 
 Interest payable on bank loans and overdrafts        9         9         5 
 Interest on lease liabilities                       11         -         - 
-----------------------------------------------  ------  --------  -------- 
 Net finance costs                                   20         9         5 
-----------------------------------------------  ------  --------  -------- 
 

Net finance costs relating to bank loans were GBP9m compared with GBP5m last year. The non-cash pension interest charge was GBPnil (2019: GBPnil). Lease interest of GBP11m in the current year arises on lease liabilities recognised under IFRS 16.

Tax

The effective tax rate (1) was 23%* on the loss made in the year (2019: 18%). The effective tax rate is higher than the prior year rate due to the profile of losses incurred in the UK and overseas.

In August 2020 the Group received a corporation tax refund of GBP5m following the carry back of 2020 losses against prior year profits. The Group does not anticipate making any corporation tax payments in the current year.

Fixed Charges Cover (1)

 
 GBPm                                 2020   2019 
----------------------------------   -----  ----- 
Net finance charges* (IAS 17)            9      5 
Net operating lease rentals (IAS 
 17) (1)                               210    236 
Total fixed charges                    219    241 
Headline (loss)/profit before tax 
 (1)                                  (69)    155 
-----------------------------------  -----  ----- 
Headline (loss)/profit before tax 
 and fixed charges                     150    396 
-----------------------------------  -----  ----- 
Fixed charges cover - times           0.7x   1.6x 
-----------------------------------  -----  ----- 
 

Fixed charges, comprising property operating lease rentals and net finance charges, were covered 0.7 times* (2019: 1.6 times) by Headline loss/profit before tax and fixed charges.

Cash Flow

Free cash flow (1) reconciliation

 
 GBPm                                           2020   2019 
--------------------------------------------   -----  ----- 
 Headline Group operating (loss)/profit* 
  (1)                                           (60)    160 
 Depreciation, amortisation and impairment* 
  (3)                                             60     49 
 Non-cash items                                    3      5 
---------------------------------------------  -----  ----- 
                                                   3    214 
 Capital expenditure                            (79)   (59) 
 Working capital* (3)                             40   (13) 
 Net tax refunded / (paid)                         5   (27) 
 Net interest paid*                              (7)    (4) 
 Other                                           (3)    (2) 
---------------------------------------------  -----  ----- 
 Free cash flow                                 (41)    109 
---------------------------------------------  -----  ----- 
 

(3) Excludes cash flow impact of non-underlying items.

The Group had a free cash outflow(1) of GBP(41)m* in the year, heavily impacted by Covid-19 in the second half. The Group delivered a net GBP3m EBITDA and non-cash items compared to GBP214m in 2019. Capital expenditure was GBP79m, GBP20m higher than last year reflecting new stores primarily in Travel and additional capex in 2020 relating to MRG. Following the outbreak of Covid-19 we reviewed all our capital commitments and plans and saved GBP24m compared to our expectations at the end of February 2020. We continued to invest in strategically important projects such as our new flagship store in Heathrow Terminal 2 and Bowery Bay in La Guardia, New York. We expect capex spend for the current financial year to be around GBP55m although we retain some discretion over part of this.

 
 GBPm                                2020    2019 
----------------------------------  -----  ------ 
 New stores and store development      34      31 
 Refurbished stores                    17      16 
 Systems                               14      11 
 Other                                 14       1 
----------------------------------  -----  ------ 
 Total capital expenditure             79      59 
----------------------------------  -----  ------ 
 

We worked hard to manage our working capital as lockdown fell, managing our payment profile whilst continuing to pay our small suppliers promptly. We utilised government schemes and payment initiatives such as the UK Government's moratorium on rent payments for the UK High Street and the deferral of the March quarter VAT payment. Overall for the year we saw a working capital net inflow of GBP40m*.

Net corporation tax refunded in the year was GBP5m, compared to a payment of GBP27m last year, as a result of the refund of corporation tax payments on account due to Covid-19.

Reconciliation of net debt (1)

Net debt is presented on an IAS 17 basis. See Note 9 of the Financial statements for the impact of IFRS 16 on net debt.

As at 31 August 2020 the Group had net debt(1) of GBP301m* comprising term loans of GBP400m relating to the acquisitions of InMotion and MRG, GBP9m* of finance lease liabilities and net cash(4) of GBP108m, of which GBP82m was on deposit (2019: net debt of GBP180m, comprising term loan of GBP200m relating to the acquisition of InMotion, GBP14m of finance lease liabilities and net cash of GBP34m ).

 
 GBPm                                                  2020     2019 
 Opening net debt                                     (180)      (2) 
 Movement in year 
  Free cash flow*                                      (41)      109 
 Dividends                                             (47)     (60) 
 Pensions                                               (3)      (3) 
 Non-underlying items                                  (20)     (16) 
 Net purchase of own shares for employee share 
  schemes                                               (2)      (6) 
 Purchase of own shares for cancellation                (-)     (32) 
  Acquisition of businesses, net of cash acquired 
   - MRG/InMotion                                     (316)    (161) 
 Proceeds from placings                                 312        - 
 Other                                                  (4)      (9) 
--------------------------------------------------  -------  ------- 
 Closing net debt*                                    (301)    (180) 
--------------------------------------------------  -------  ------- 
 Cash                                                   108       34 
 Term Loans                                           (400)    (200) 
 Finance leases*                                        (9)     (14) 
--------------------------------------------------  -------  ------- 
                                                      (301)    (180) 
--------------------------------------------------  -------  ------- 
 

The Group had a movement in net debt of GBP121m in the year. In addition to the free cash outflow, the Group paid, in January 2020, the final dividend relating to the 2019 financial year of GBP47m; pension funding of GBP3m (see Note 17 on pensions); and GBP20m of non-underlying items which mainly relate to the acquisition and integration costs of MRG.

During the year the Group raised GBP312m through two share placings firstly for the acquisition of MRG raising GBP152m, and secondly raising GBP160m as part of the refinancing announced on 6 April 2020 following the impact of Covid-19. We spent GBP316m on the acquisition of MRG on 20 December 2019 funded through the above placing and a GBP200m term loan. At the same point we also extended our RCF from GBP140m to GBP200m.

Re-financing

The Group undertook an equity raise on 6 April 2020 which raised net proceeds of c.GBP160m through a 13.7% placing of new shares. The Group also secured a new GBP120m 12 month (plus 7 month at the option of the Group) committed banking facility from BNP Paribas, HSBC Bank PLC and Santander UK PLC. In addition, the maturity on the Group's two GBP200m term loans was extended to October 2022.

 
                                         31 August 2020   31 August 2019 
 Net cash at bank (4)                           GBP108m           GBP34m 
                             --------------------------  --------------- 
 Revolving Credit Facility                  GBP200m (5)          GBP140m 
                             --------------------------  --------------- 
 Further Liquidity Facility                 GBP120m (5) 
                             --------------------------  --------------- 
 InMotion - Term Loan                           GBP200m          GBP200m 
                             --------------------------  --------------- 
 MRG - Term Loan                                GBP200m 
                             --------------------------  --------------- 
 

(4) Net cash at bank includes cash at bank and, for 2019, drawdown on the revolving credit facility.

(5) Undrawn as at 11 November 2020

Balance sheet

 
                                             2020      2020      2019 
 GBPm                                        IFRS    IAS 17    IAS 17 
-----------------------------------------  ------  --------  -------- 
 Goodwill and other intangible assets         493       495       225 
 Property, plant and equipment                192       190       201 
 Right of use assets                          413         -         - 
 Investments in joint ventures                  2         2         4 
-----------------------------------------  ------  --------  -------- 
                                            1,100       687       430 
-----------------------------------------  ------  --------  -------- 
 
 Inventories                                  150       150       174 
 Payables less receivables                  (183)     (226)     (178) 
-----------------------------------------  ------  --------  -------- 
 Working capital                             (33)      (76)       (4) 
-----------------------------------------  ------  --------  -------- 
 
 Derivative financial asset                     -         -         2 
 Net current and deferred tax asset 
  / (liability)                                28        17       (3) 
 Provisions                                  (14)      (27)       (5) 
-----------------------------------------  ------  --------  -------- 
 Operating assets employed                  1,081       601       420 
 Net debt                                   (851)     (301)     (180) 
-----------------------------------------  ------  --------  -------- 
 Net assets excluding pension liability       230       300       240 
 Pension liability                            (4)       (4)       (4) 
 Deferred tax asset on pension liability        1         1         1 
-----------------------------------------  ------  --------  -------- 
 Total net assets                             227       297       237 
-----------------------------------------  ------  --------  -------- 
 

The Group had net assets of GBP300m* before pension liabilities and associated deferred tax assets, GBP60m higher than last year end, reflecting the acquisition of MRG along with share placements in October 2019 and April 2020. Net assets after the pension liability and associated deferred tax asset were GBP297m* compared to GBP237m at 31 August 2019. Under IFRS the Group had net assets of GBP227m.

Pensions

The latest actuarial revaluation of the main defined benefit pension scheme, the WH Smith Pension Trust, was at 31 March 2020 at which point the deficit was GBP9m (31 March 2017 actuarial revaluation deficit of GBP11m). The Group has agreed a continuation of the annual funding schedule with the Trustees from March 2020 for the next five years, which includes the deficit recovery contributions and other running costs of just under GBP3m per annum. During the year ended 31 August 2020, the Group made a contribution of GBP3m to the scheme.

The scheme has been closed to new members since 1996 and closed to defined benefit service accrual since 2007. The Liability Driven Investment (LDI) policy adopted by the scheme continues to perform well with around 94% of the inflation and interest rate risks hedged.

As at 31 August 2020, the Group has an IFRIC 14 minimum funding requirement in respect of the WH Smith Pension Trust of GBP3m (2019: GBP3m) and an associated deferred tax asset of GBP1m (2019: GBP1m) based on the latest schedule of contributions agreed with the Trustees. As at 31 August 2020, the scheme had an IAS 19 surplus of GBP268m (2019: surplus of GBP354m) which the Group has continued not to recognise. There is an actuarial deficit due to the different assumptions and calculation methodologies used compared to those under IAS 19.

The IAS 19 pension deficit on the relatively small UNS defined benefit pension scheme was GBP1m (2019: GBP1m).

Brexit

Following the UK's withdrawal from the EU, there remains a period of further uncertainty until a trading agreement has been agreed between the UK and the EU. In these circumstances, the extent to which our operations and financial performance are affected both in the longer term and at the end of the current transition period up to 31 December 2020, will only become clear as details of any agreement are clarified. We have continued to review the possible consequences that Brexit could have upon our business and have concluded that it does not raise any principal new risks, although it does have the potential to impact a number of our existing risks, for example, regulatory changes and economic uncertainty, including impacts from changes in foreign exchange rates. We will continue to monitor the risks and uncertainties arising from Brexit as part of the Company's risk management and control processes.

Principal Risks and Uncertainties

The Board has undertaken a robust assessment of the principal risks and uncertainties facing the Group, including those that would threaten its business model, future performance, solvency or liquidity. T he Board has assessed the ongoing impact of Covid-19 as a significant risk facing the Group, due to uncertainty around the timing and extent of recovery on our ability to re-open and operate our Travel and High Street stores, both in the UK and Internationally, and its impact upon the levels of global and domestic travel. The Group has deployed a framework of operational procedures, mitigating actions and business continuity plans as outlined in this announcement and will continue to adapt these plans as the situation evolves.

Changes to the Risk Profile due to Covid-19

Where the consequences of the Covid-19 pandemic may impact the business, we have incorporated these considerations into our assessment in relation to each of our principal risk headings. The grid below explains where the potential risk implications of the pandemic link with, and impact upon, our other Principal Risks.

A full disclosure of the Group's principal risks and uncertainties including the factors which mitigate them will be set out within the Strategic Report of the 2020 Annual Report and Accounts.

 
 Relevant Principal         Covid-19 Impact 
  Risk 
 Economic, political,       The Group may fail to effectively respond to the 
  competitive & market       pressures of an increasingly changing retail environment, 
  risks                      where Covid-19 materially changes consumer spending 
                             patterns and habits, such as shifting from physical 
                             to online shopping, and from any longer-term damage 
                             to the travel industry and reductions in the level 
                             of International travel. 
                           ----------------------------------------------------------- 
 Brand and reputation       The reputation of the Brand may be impacted in 
                             the event that customers were to perceive that 
                             our Store environments are insufficiently safe 
                             and secure in response to the continuing experience 
                             of the virus. 
                           ----------------------------------------------------------- 
 Key suppliers and          Given that large elements of our sourcing rely 
  supply chain management    on factories and shipment from the Far East, these 
                             supply chains and principal product flows could 
                             be negatively impacted by any interruptions due 
                             to any further shutdown of factories and supply 
                             routes or growing international outbreaks. 
                           ----------------------------------------------------------- 
 Store portfolio            The Group's performance is reliant upon trading 
                             from our wide portfolio of premier shopping locations, 
                             where our performance may be negatively impacted 
                             in the event of further store closures, constraints 
                             on trading and travel restrictions, or further 
                             extensions in the scale and nature of local lockdowns. 
                           ----------------------------------------------------------- 
 Business interruption      The business could be negatively impacted by any 
                             concentration of illness in a particular location 
                             such as Head Office, DC or particular stores, should 
                             these need to close temporarily and large numbers 
                             staff were required to self-isolate. 
                           ----------------------------------------------------------- 
 Reliance on key            The business could be negatively impacted in the 
  personnel                  event that any of the senior leadership team were 
                             to fall ill or be personally impacted by the virus. 
                           ----------------------------------------------------------- 
 International expansion    The ongoing growth of the business has been generated 
                             through continued international expansion. Such 
                             ongoing growth could therefore be negatively impacted 
                             from further enforced store closures, constraints 
                             on trading and the longer-term continuation of 
                             international travel restrictions or curtailment 
                             in passenger numbers. 
                           ----------------------------------------------------------- 
 Treasury, financial        Significantly reduced trading over an extended 
  and credit risk            period from further outbreaks of new Covid strains 
  management                 and the lack of an effective vaccine could cause 
                             further negative impact on the Group's financial 
                             position in the longer term. 
                           ----------------------------------------------------------- 
 Cyber risk, Data           Further risks from significant increases in industry 
  Security and GDPR          wide phishing activity and cyber threats could 
  compliance                 pose further risks of potential systems interruption. 
                           ----------------------------------------------------------- 
 

This announcement contains inside information which is disclosed in accordance with the Market Abuse Regulations.

This announcement contains certain forward-looking statements with respect to the operations, performance and financial condition of the Group. By their nature, these statements involve uncertainty since future events and circumstances can cause results to differ from those anticipated. Nothing in this announcement should be construed as a profit forecast. We undertake no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

WH Smith PLC

Unaudited Group Income Statement

For the year ended 31 August 2020

 
                                                     2020 (1)                                2019 
------------------------------  ----  --------------------------------------  ---------------------------------- 
                                                   Non-underlying                          Non-underlying 
GBPm                            Note  Headline(2)        items(3)      Total  Headline(2)        items(3)  Total 
------------------------------  ----  -----------  --------------  ---------  -----------  --------------  ----- 
 
Revenue                          2          1,021               -      1,021        1,397               -  1,397 
Group operating (loss) 
 / profit                       3, 4         (48)           (212)      (260)          160            (20)    140 
Finance costs                    5           (20)               -       (20)          (5)               -    (5) 
(Loss) / profit before 
 tax                                         (68)           (212)      (280)          155            (20)    135 
Income tax expense               6             16              25         41         (28)               1   (27) 
------------------------------  ----  -----------  --------------  ---------  -----------  --------------  ----- 
(Loss) / profit for the 
 period                                      (52)           (187)      (239)          127            (19)    108 
------------------------------  ----  -----------  --------------  ---------  -----------  --------------  ----- 
 
Attributable to equity holders 
 of the parent                               (52)           (187)      (239)          125            (19)    106 
Attributable to non-controlling 
 interests                                      -               -          -            2               -      2 
------------------------------------  -----------  --------------  ---------  -----------  --------------  ----- 
                                             (52)           (187)      (239)          127            (19)    108 
 
 
  Earnings per share 
Basic                             7                                 (199.2)p                               98.1p 
Diluted                           7                                 (199.2)p                               97.2p 
 
Equity dividends per share(4)     8                                                                        58.2p 
 
 
 
 
 
 
 
 
 
 
 

(1) The Group has initially applied IFRS 16 at 1 September 2019, using the modified retrospective approach. Under this approach, comparative information is not restated and the cumulative effect of applying IFRS 16 is recognised in Retained earnings at the date of initial application (see Note 19).

(2) ' Headline' denotes an Alternative Performance Measure. The Group has defined and explained the purpose of its alternative performance measures in the Glossary on page 53.

(3) See Note 4 for an analysis of Non-underlying items. See Glossary on page 53 for definition of Alternative Performance Measures.

(4) Prior year equity dividends per share is the final dividend of 41.0p and the interim dividend of 17.2p. The Board of Directors do not propose a dividend in respect of the year end 31 August 2020.

WH Smith PLC

Unaudited Group Statement of Comprehensive Income

For the year ended 31 August 2020

 
 GBPm                                                        Note   2020(1)   2019 
----------------------------------------------------------  -----  --------  ----- 
 (Loss) / profit for the year                                         (239)    108 
----------------------------------------------------------  -----  --------  ----- 
 Other comprehensive (loss) / income: 
 Items that will not be reclassified subsequently 
  to the income statement: 
 Actuarial gains / (losses) on defined 
  benefit pension schemes                                     17         11    (3) 
                                                                         11    (3) 
 Items that may be reclassified subsequently 
  to the income statement: 
 (Losses) / gain on cash flow hedges 
 
   *    Net fair value (losses) /gains                                  (8)      2 
                                                                          8      - 
   *    Reclassified and recognised in goodwill 
 
   *    Reclassified and recognised in inventories                      (1)    (1) 
                                                                        (1)      - 
   *    Reclassified and reported in the income statement 
 Exchange differences on translation of 
  foreign operations                                                   (22)     10 
----------------------------------------------------------  -----  --------  ----- 
                                                                       (24)     11 
 
 Other comprehensive (loss) / income for 
  the year, net of tax                                                 (13)      8 
----------------------------------------------------------  -----  --------  ----- 
 Total comprehensive (loss) / income for 
  the year                                                            (252)    116 
----------------------------------------------------------  -----  --------  ----- 
 Attributable to equity holders of the 
  parent                                                              (252)    114 
 Attributable to non-controlling interests                                -      2 
----------------------------------------------------------  -----  --------  ----- 
                                                                      (252)    116 
----------------------------------------------------------  -----  --------  ----- 
 

(1) The Group has initially applied IFRS 16 at 1 September 2019, using the modified retrospective approach. Under this approach, comparative information is not restated and the cumulative effect of applying IFRS 16 is recognised in Retained earnings at the date of initial application (see Note 19).

WH Smith PLC

Unaudited Group Balance Sheet

As at 31 August 2020

 
GBPm                                    Note                2020(1)       2019 
-------------------------------------  -------  --------  ---------  --------- 
Non-current assets 
Goodwill                                 11                     418        176 
Other intangible assets                  11                      75         49 
Property, plant and equipment            12                     192        201 
Right-of-use assets                      13                     413          - 
Investments in joint ventures                                     2          4 
Deferred tax assets                                              23          8 
Trade and other receivables                                       9         10 
-------------------------------------  -------  --------  ---------  --------- 
                                                              1,132        448 
-------------------------------------  -------  --------  ---------  --------- 
Current assets 
Inventories                                                     150        174 
Trade and other receivables                                      49         73 
Derivative financial assets                                       -          2 
Current tax receivable                                            8          - 
Cash and cash equivalents                 9                     108         49 
-------------------------------------  -------  --------  ---------  --------- 
                                                                315        298 
-------------------------------------  -------  --------  ---------  --------- 
Total assets                                                  1,447        746 
-------------------------------------  -------  --------  ---------  --------- 
Current liabilities 
Trade and other payables                                      (241)      (250) 
Bank overdrafts and other borrowings      9                       -       (15) 
Retirement benefit obligations           17                     (1)        (1) 
Lease liabilities                        14                   (130)        (5) 
Current tax liabilities                                           -        (7) 
Short-term provisions                                           (5)        (1) 
                                                              (377)      (279) 
 
Non-current liabilities 
Bank loans and other borrowings           9                   (400)      (200) 
Retirement benefit obligations           17                     (3)        (3) 
Long-term provisions                                            (9)        (4) 
Lease liabilities                        14                   (429)        (9) 
Deferred tax liabilities                                        (2)        (3) 
Other non-current liabilities                                     -       (11) 
-------------------------------------  -------  --------  ---------  --------- 
                                                              (843)      (230) 
-------------------------------------  -------  --------  ---------  --------- 
Total liabilities                                           (1,220)      (509) 
-------------------------------------  -------  --------  ---------  --------- 
Total net assets                                                227        237 
-------------------------------------  -------  --------  ---------  --------- 
 
Shareholders' equity 
Called up share capital                  15                      29         24 
Share premium                                                   315          9 
Capital redemption reserve                                       13         13 
Translation reserve                                            (14)          8 
Other reserves                                                (279)      (274) 
Retained earnings                                               158        455 
-------------------------------------  -------  --------  ---------  --------- 
Total equity attributable to equity 
 holders of the parent                                          222        235 
-------------------------------------  -------  --------  ---------  --------- 
Non-controlling interest                                          5          2 
-------------------------------------  -------  --------  ---------  --------- 
Total equity                                                    227        237 
-------------------------------------  -------  --------  ---------  --------- 
 
 

(1) The Group has initially applied IFRS 16 at 1 September 2019, using the modified retrospective approach. Under this approach, comparative information is not restated and the cumulative effect of applying IFRS 16 is recognised in Retained earnings at the date of initial application (see Note 19).

WH Smith PLC

Unaudited Group Cash Flow Statement

For the year ended 31 August 2020

 
GBPm                                         Note   2020   2019 
-------------------------------------------  ----  -----  ----- 
Operating activities 
Cash generated from operating activities      10      94    153 
Interest paid(1)                                    (13)    (4) 
-------------------------------------------  ----  -----  ----- 
Net cash inflow from operating activities             81    149 
-------------------------------------------  ----  -----  ----- 
Investing activities 
Purchase of property, plant and equipment           (67)   (47) 
Purchase of intangible assets                       (12)   (12) 
Acquisition of subsidiaries, net of 
 cash acquired                                     (316)  (161) 
Net cash outflow from investing activities         (395)  (220) 
-------------------------------------------  ----  -----  ----- 
Financing activities 
Dividend paid                                 8     (47)   (60) 
Net cash flows from non-controlling 
 interests                                             1    (2) 
Proceeds from share placing                   15     312      - 
Issue of new shares for employee share 
 schemes                                      15       -      1 
Purchase of own shares for cancellation                -   (32) 
Purchase of own shares for employee 
 share schemes                                15     (2)    (7) 
Proceeds from borrowings                      9      200    200 
Repayment of borrowings                       9     (15)   (18) 
Financing arrangement fees                           (3)    (1) 
Repayments of obligations under leases              (72)    (6) 
Net cash inflow from financing activities            374     75 
-------------------------------------------  ----  -----  ----- 
 
Net increase in cash and cash equivalents 
 in the period                                        60      4 
-------------------------------------------  ----  -----  ----- 
 
Opening cash and cash equivalents                     49     45 
Effect of movements in foreign exchange 
 rates                                               (1)      - 
-------------------------------------------  ----  -----  ----- 
Closing cash and cash equivalents                    108     49 
-------------------------------------------  ----  -----  ----- 
 
 
   (1)   Includes interest payments of GBP6m on lease liabilities. 

WH Smith PLC

Unaudited Group Cash Flow Statement (continued)

For the year ended 31 August 2020

Reconciliation of net cash flow to movement in net debt(2)

 
 
GBPm                                           Note              2020(1)        2019 
---------------------------------------------  ----  --------  ---------  ---------- 
Net debt at beginning of the year                                  (180)         (2) 
Net increase in cash and cash equivalents                             60           4 
Impact of adoption of IFRS 16                   19                 (479)           - 
Lease liability acquired through business 
 combination                                    18                 (106)           - 
Decrease in debt                                9                     15          18 
Increase in long-term borrowings                9                  (200)       (200) 
Net movement in lease liability                                       32           - 
Effect of movements in foreign exchange 
 rates                                                                 7           - 
---------------------------------------------  ----  --------  ---------  ---------- 
Net debt at end of the year                     9                  (851)       (180) 
---------------------------------------------  ----  --------  ---------  ---------- 
 
 

(1) The Group has initially applied IFRS 16 at 1 September 2019, using the modified retrospective approach. Under this approach, comparative information is not restated and the cumulative effect of applying IFRS 16 is recognised in Retained earnings at the date of initial application (see Note 19).

(2) Net debt is an Alternative Performance Measure defined and explained in the Glossary on page 53. Further information on the items in the above reconciliation are provided in Note 9.

WH Smith PLC

Unaudited Group Statement of Changes in Equity

For the year ended 31 August 2020

 
                      Called                                                               Total 
                          up                                                              equity 
                       share                                                        attributable 
                     capital                                                           to equity 
                         and       Capital                                               holders 
                       share    redemption   Translation         Other   Retained         of the   Non-controlling    Total 
 GBPm                premium       reserve      reserves   reserves(1)   earnings         parent          interest   equity 
------------------  --------  ------------  ------------  ------------  ---------  -------------  ----------------  ------- 
 Balance at 1 
  September 
  2019                    33            13             8         (274)        455            235                 2      237 
 Impact of 
  adoption 
  of IFRS 16               -             -             -             -       (22)           (22)                 -     (22) 
------------------  --------  ------------  ------------  ------------  ---------  -------------  ----------------  ------- 
 Adjusted balance 
  at 
  1 September 2019        33            13             8         (274)        433            213                 2      215 
 Loss for the year         -             -             -             -      (239)          (239)                 -    (239) 
------------------  --------  ------------  ------------  ------------  ---------  -------------  ----------------  ------- 
 Other 
 comprehensive 
 loss: 
 Actuarial gains 
  on 
  defined benefit 
  pension 
  schemes                  -             -             -             -         11             11                 -       11 
 Cash flow hedges          -             -             -           (2)          -            (2)                 -      (2) 
 Exchange 
  differences 
  on translation 
  of 
  foreign 
  operations               -             -          (22)             -          -           (22)                 -     (22) 
------------------  --------  ------------  ------------  ------------  ---------  -------------  ----------------  ------- 
 Total 
  comprehensive 
  loss for the 
  year                     -             -          (22)           (2)      (228)          (252)                 -    (252) 
 
 Net cash flows 
  from 
  non-controlling 
  interests                -             -             -             -          -              -                 1        1 
 Dividends paid 
  (Note 
  8)                       -             -             -             -       (47)           (47)                 -     (47) 
 Employee share 
  schemes                  -             -             -           (3)          -            (3)                 -      (3) 
 Issue of shares         311             -             -             -          -            311                 -      311 
 Non-controlling 
  interest 
  arising on 
  acquisition 
  (Note 18)                -             -             -             -          -              -                 2        2 
------------------  --------  ------------  ------------  ------------  ---------  -------------  ----------------  ------- 
 Balance at 31 
  August 
  2020                   344            13          (14)         (279)        158            222                 5      227 
------------------  --------  ------------  ------------  ------------  ---------  -------------  ----------------  ------- 
 
 
 Balance at 1 
  September 
  2018                    32            13           (2)         (268)        437            212                 -      212 
 Profit for the 
  year                     -             -             -             -        106            106                 2      108 
------------------  --------  ------------  ------------  ------------  ---------  -------------  ----------------  ------- 
 Other 
 comprehensive 
 income/(loss): 
 Actuarial losses 
  on 
  defined benefit 
  pension 
  schemes                  -             -             -             -        (3)            (3)                 -      (3) 
 Cash flow hedges          -             -             -             1          -              1                 -        1 
 Exchange 
  differences 
  on translation 
  of 
  foreign 
  operations               -             -            10             -          -             10                 -       10 
------------------  --------  ------------  ------------  ------------  ---------  -------------  ----------------  ------- 
 Total 
  comprehensive 
  income for the 
  year                     -             -            10             1        103            114                 2      116 
 Recognition of 
  share-based 
  payments                 -             -             -             -          6              6                 -        6 
 Dividends paid 
  (Note 
  8)                       -             -             -             -       (60)           (60)                 -     (60) 
 Employee share 
  schemes                  -             -             -           (7)          -            (7)                 -      (7) 
 Non-controlling 
  interest 
  arising on an 
  acquisition              -             -             -             -          -              -                 2        2 
 Distributions to 
  non-controlling 
  interests                -             -             -             -          -              -               (2)      (2) 
 Issue of shares           1             -             -             -          -              1                 -        1 
 Purchase of own 
  shares 
  for cancellation         -             -             -             -       (31)           (31)                 -     (31) 
------------------  --------  ------------  ------------  ------------  ---------  -------------  ----------------  ------- 
 Balance at 31 
  August 
  2019                    33            13             8         (274)        455            235                 2      237 
------------------  --------  ------------  ------------  ------------  ---------  -------------  ----------------  ------- 
 
 

(1) Other reserve includes Revaluation reserve of GBP2m (2019: GBP2m), ESOP reserve of GBP(4)m (2019: GBP(6)m), Hedging reserve of GBPnil (2019: GBP2m) and Other reserves of GBP(277)m (2019: GBP(272)m). The 'Other' reserve includes reserves created in relation to the historical capital reorganisation, proforma restatement and the demerger from Connect Group PLC (formerly Smiths News PLC) in 2006.

WH Smith PLC

Notes to the Unaudited Condensed Financial Statements

For the year ended 31 August 2020

   1.   Basis of preparation 

The condensed financial statements for the year ended 31 August 2020 are unaudited and do not comprise statutory accounts of the Group within the meaning of Section 434(3) of the Companies Act 2006.

The statutory accounts for the year ended 31 August 2019 have been filed with the Registrar of Companies. The auditors' report for those accounts was unqualified, did not draw attention to any matters by way of emphasis and did not include a statement under Section 498 (2) or (3) of the Companies Act 2006.

The Annual Report and Accounts for the year ended 31 August 2020 will be available for shareholders in December 2020.

Whilst the information included in the condensed financial statements has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards ("IFRSs") as adopted by the European Union and as issued by the International Accounting Standards Board, this announcement does not itself contain sufficient information to comply with IFRSs. The condensed financial statements for the year ended 31 August 2020 have been prepared on a consistent basis with the financial accounting policies set out in the Accounting Policies section of the WH Smith PLC Annual Report and Accounts 2019 except as described below.

The Group has adopted the following standards and interpretations which became mandatory for the first time during the current financial year. The Group has considered the below new standards and amendments and has concluded that, with the exception of IFRS 16, they are either not relevant to the Group or they do not have a significant impact on the Group's consolidated financial statements.

 
 IFRS 16 (including 
  amendments)            Leases 
 IFRIC 23              Uncertainty over Income Tax Treatment 
 Amendment to IFRS     Financial instruments - Prepayment features 
  9                     with negative compensation 
 Amendments to IAS     Investments in associates - Long term interests 
  28                    in associates and joint ventures 
 Amendments to IAS     Employee benefits - Plan amendment, curtailment 
  19                    or settlement 
 Annual Improvements   2015-2017 cycle 
 

The impact of the adoption of IFRS 16, and the revised accounting policy is described in Note 19.

At the Group balance sheet date, the following standards and interpretations, which have not been applied in these condensed financial statements, were in issue but not yet effective (and in some cases had not yet been adopted by the EU):

 
 IFRS 17                      Insurance Contracts 
 Amendments to IFRS 3         Reference to the Conceptual Framework 
 Amendments to IFRS 9, IAS    Interest Rate Benchmark Reform 
  39 and IFRS 7 
 Amendments to IFRS 3         Definition of a Business 
 Amendments to IAS 1          Classification of liabilities as current 
                               or non-current 
 Amendments to IAS 1 and      Definition of Material 
  IAS 8 
 Amendments to IAS 16         Proceeds before intended use 
 Amendments to IAS 37         Onerous contracts - Cost of fulfilling 
                               a contract 
 Amendments references to the Conceptual Framework in IFRS Standards 
 Annual Improvements to IFRS Standards 2018-2020 
 
 

The directors anticipate that the adoption of these standards and interpretations in future years will have no material impact on the Group's condensed financial statements.

Alternative Performance Measures

The Group has identified certain Alternative Performance Measures ("APMs") that it believes will assist the understanding of the performance of the business. These APMs are not defined or specified under the requirements of IFRS.

The Group believes that these APMs, which are not considered to be a substitute for, or superior to, IFRS measures, provide stakeholders with additional useful information on the underlying trends, performance and position of the Group and are consistent with how business performance is measured internally. The APMs are not defined by IFRS and therefore may not be directly comparable with other companies' Alternative Performance Measures.

The key APMs that the Group uses include: Headline profit before tax, Headline earnings per share, High Street and Travel trading profit, Group profit from trading operations, like-for-like revenue, gross margin, fixed charges cover, Net debt / funds and free cash flow. These APMs are set out in the Glossary on page 53 including explanations of how they are calculated and how they are reconciled to a statutory measure where relevant.

WH Smith PLC

Notes to the Unaudited Condensed Financial Statements

For the year ended 31 August 2020

   1.   Basis of preparation (continued) 

Non-underlying items

The Group has chosen to present a Headline measure of profit and earnings per share which excludes certain items, which are considered non-underlying and exceptional due to their size, nature or incidence, and are not considered to be part of the normal operating costs of the Group. These costs may include the financial effect of non-underlying items which are considered exceptional and occur infrequently such as, inter alia, restructuring costs linked to a Board approved programme, amortisation of acquired intangibles, costs relating to business combinations, impairment charges and onerous lease charges, significant items relating to pensions, and impairment charges and items meeting the definition of non-underlying specifically related to the Covid-19 pandemic, and the related tax effect of these items. The Group believes that the separate disclosure of these costs provides additional useful information to users of the condensed financial statements to enable a better understanding of the Group's underlying financial performance.

Further details of the non-underlying items are provided in Note 4.

Going concern

The consolidated condensed financial statements have been prepared on a going concern basis. The directors are required to assess whether the Group can continue to operate for the 12 months from the date of approval of these condensed financial statements, and to prepare the condensed financial statements on a going concern basis. The directors report that they have assessed the principal risks, reviewed current performance and forecasts, combined with expenditure commitments, including capital expenditure, and borrowing facilities. The directors have concluded that it is appropriate to adopt the going concern basis of accounting in preparing these condensed financial statements, having undertaken a rigorous assessment of the financial forecasts particularly in the context of the ongoing Covid-19 pandemic, for the reasons set out below.

The Group overview describes the Group's financial position, cash flows and borrowing facilities and also highlights the principal risks and uncertainties facing the Group. The Group acted quickly to mitigate the impact of Covid-19 by taking steps to strengthen our balance sheet and to ensure access to further funding. As announced on 6th April 2020, we raised cGBP160m of additional funding via a share placing. In addition, we agreed a GBP120m 12 month (plus 7 months at the option of the Group) committed banking facility.

As at 12 November 2020, the Group has in place a five-year committed multi-currency revolving credit facility of GBP200m maturing on 8 December 2023. In addition, the Group has a further GBP120m multi-currency revolving credit facility as described above which is in place until 8 November 2021. As at 12 November 2020, the Group is not drawn down on either of these facilities.

The Group has a four-year committed GBP200m term loan, that was drawn down at the time of the acquisition of InMotion. This loan is due to mature on 29 October 2022. In addition, during the year, the Group agreed an additional committed term loan of GBP200m which matures in October 2022.

In making the going concern assessment, the directors have modelled a number of scenarios for the period to February 2022. The base case scenario is consistent with the Board approved 2021 Budget, adjusted for the lockdown across England announced by the UK Government on 31 October and the three year plan. These reflect our expectations of ongoing challenging trading conditions, with sales remaining significantly below pre-Covid levels for the duration of the going concern period.

In light of the considerable uncertainty surrounding the ongoing impact of Covid-19, a downside scenario has also been modelled, applying severe but plausible assumptions to the base case. This scenario assumes a further two month lockdown in addition to the November lockdown, with High Street store sales down over 80% from November 2020 through to January 2021 compared to the equivalent 2019 levels and down over 50% in February 2021. We then assume a gradual recovery, reflecting our experience of the post-lockdown recovery period from earlier in the year, to a position in February 2022 where High Street store sales are down over 20% compared to February 2019. This scenario assumes that our 207 Post Office stores and 130 hospital stores continue to trade during a second national lockdown reflecting our experience from the national lockdown earlier in 2020. In Travel UK we have assumed a sales reduction of over 80% from November 2020 through to January 2021 compared to last year and down over 70% in February 2021. We then assume a gradual recovery, reflecting our experience of the post-lockdown recovery period from earlier in the year, to a position in February 2022 where Travel store sales are down over 30% compared to February 2019. The severe but plausible scenario includes a number of mitigating actions including further savings in store and head office payrolls, a reduction in inventory purchases, a reduction in discretionary spend and reductions in capital expenditure across High Street and Travel.

In both the base case and severe but plausible scenarios the Group would continue to have sufficient liquidity headroom on its existing facilities, as described above.

WH Smith PLC

Notes to the Unaudited Condensed Financial Statements

For the year ended 31 August 2020

   1.   Basis of preparation (continued) 

The covenants on the above facilities, tested half-yearly, are based on fixed charges cover and net borrowings. In response to the impact of the Covid-19 pandemic on the Group's operations, the Group has secured waivers on the existing bank covenants at 31 August 2020, 28 February 2021 and 31 August 2021.

The Group will next be tested on its covenants at 28 February 2022, over 15 months from the date of signing these condensed financial statements. Under current conditions, it is likely that the Group would require a further waiver or amendment to its February 2022 covenant tests. If this situation prevailed, the Group would engage its lending banks in advance of this date to secure a further covenant waiver. Throughout the pandemic we have received excellent support from our banks who have granted covenant waivers for February 2021 and August 2021. This Preliminary announcement also sets out the Group's business activities together with the factors that are likely to affect its future developments, performance and position.

As a result of the above analysis, the directors believe that the Group has sufficient financial resources to continue in operation and meet its obligations as they fall due for the 12 months from the date of approval of these condensed financial statements.

Critical accounting judgements and key sources of estimation uncertainty

The preparation of condensed financial statements in conformity with generally accepted accounting principles requires management to make judgements, estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities. Actual results could differ from these estimates and any subsequent changes are accounted for with an effect on income at the time such updated information becomes available.

The most critical accounting judgements and sources of estimation uncertainty in determining the financial condition and results of the Group are those requiring the greatest degree of subjective or complex judgement. These relate to the classification of items as non-underlying, assessment of lease substitution rights, determination of the lease term, determination of the incremental borrowing rate, valuation of retirement benefit obligations, valuation of goodwill and other non-current assets and inventory valuation. The critical accounting judgements and sources of estimation uncertainty in relation to leasing are discussed in Note 19.

Critical accounting judgements

Non-underlying items

The Group has chosen to present a Headline measure of profit and earnings per share which excludes certain items that are considered non-underlying and exceptional due to their size, nature or incidence, and are not considered to be part of the normal operating costs of the Group. These costs may include the financial effect of non-underlying items which are considered exceptional and occur infrequently such as, inter alia, restructuring costs linked to a Board agreed programme, amortisation of acquired intangible assets, costs relating to business combinations, significant items related to pension schemes, and impairment charges and items meeting the definition of non-underlying specifically related to the Covid-19 pandemic, and the related tax effect of these items. The Group believes that they provide additional useful information to users of the condensed financial statements to enable a better understanding of the Group's underlying financial performance. The classification of items as non-underlying requires significant management judgement. The definition of non-underlying items has been applied consistently year on year. Further details of non-underlying items are provided in Note 4.

Sources of estimation uncertainty

Retirement benefit obligation

The Group recognises and discloses its retirement benefit obligation in accordance with the measurement and presentational requirement of IAS 19 'Retirement Benefit Obligations'. The calculations include a number of judgements and estimations in respect of the discount rate, inflation assumptions, the rate of increase in salaries, and life expectancy, among others. Changes in these assumptions can have a significant effect on the value of the retirement benefit obligation. Further information and sensitivity analysis in respect of the Group's retirement benefit obligation is included in Note 17

Goodwill impairment review

The Group is required to review goodwill annually to determine if any impairment has occurred. Value-in-use calculations require the use of estimates in relation to future cash flows and suitable discount rates. A sensitivity analysis showed that no reasonably possible change in assumptions would lead to an impairment of Goodwill in the next financial year (see Note 11). Further information in respect of the Group's goodwill and other intangible assets is included in Note 11.

WH Smith PLC

Notes to the Unaudited Condensed Financial Statements

For the year ended 31 August 2020

   1.   Basis of preparation (continued) 

Intangible assets, property, plant and equipment and right-of-use asset impairment reviews

Property, plant and equipment, right-of use assets and intangible assets are reviewed for impairment if events or changes in circumstances indicate that the carrying amount may not be recoverable. When a review for impairment is conducted, the recoverable amount of an asset or a cash-generating unit is determined based on value-in-use calculations prepared on the basis of management's assumptions and estimates.

The key assumptions in the value-in-use calculations include growth rates of revenue and expenses, discount rates and likelihood of lease renewal. Due to the ongoing Covid-19 global pandemic, there is an increased level of uncertainty in all of the above assumptions such that a reasonably possible change in these assumptions could lead to a material change in the carrying value of assets.

Further information in respect of the Group's property, plant and equipment and right-of-use assets is included in Notes 12 and 13 respectively.

Inventory valuation

Inventory is carried at the lower of cost and net realisable value which requires the estimation of sell through rates, and the eventual sales price of goods to customers in the future. Any difference between the expected and the actual sales price achieved will be accounted for in the period in which the sale is made. A sensitivity analysis has been carried out on the calculation of inventory provisions, including consideration of the uncertainties arising from Covid-19. The key assumption driving the stock provision calculation is forecast revenue. A 10 per cent change in the revenue assumptions applied in the provision calculation, representing a reasonably possible outcome, would reduce the net realisable value of inventories by GBP 2m.

WH Smith PLC

Notes to the Unaudited Condensed Financial Statements

For the year ended 31 August 2020

   2.   Segmental analysis of results 

For management and financial reporting purposes, the Group is organised into two operating divisions and reportable segments - Travel and High Street. The Travel operating segment includes both MRG and InMotion from the dates of acquisition, as the MRG and InMotion operations share similar economic characteristics with Travel and are managed within the Travel segment.

The Group's operating segments are based on the reports reviewed by the Board of Directors (who are collectively considered to be the chief operating decision maker) to make strategic decisions and allocate resources.

IFRS 8 requires segment information to be presented on the same basis as that used by the Board for assessing performance and allocating resources. The information presented to the Board is prepared in accordance with the Group's IFRS accounting policies, with the exception of IFRS 16, and is shown below as Headline information in Section b). A reconciliation to statutory measures is provided below in accordance with IFRS 8, and in the Glossary on page 53 (Note A2).

 
a)   Group revenue 
 
 
 GBPm               2020             2019 
---------------   ------  --------------- 
 Travel              553              817 
 High Street         468              580 
 Group revenue     1,021            1,397 
----------------  ------  --------------- 
 
 
b)   Group results 
 
 
                                                          2020                             2019 
-------------------------------  -----------  -----------------------------  -------------------------------- 
                                              Non-underlying   IFRS                    Non-underlying 
GBPm                             Headline(1)           items     16   Total  Headline           items   Total 
-------------------------------  -----------  --------------  -----  ------  --------  --------------  ------ 
 
Travel trading (loss) / profit          (33)               -      6    (27)       117               -     117 
High Street trading (loss) 
 / profit                               (10)               -      6     (4)        60               -      60 
-------------------------------  -----------  --------------  -----  ------  --------  --------------  ------ 
Group (loss) / profit from 
 trading operations                     (43)               -     12    (31)       177               -     177 
Unallocated costs                       (17)               -      -    (17)      (17)               -    (17) 
-------------------------------  -----------  --------------  -----  ------  --------  --------------  ------ 
Headline Group operating 
 (loss) / profit                        (60)               -     12    (48)       160               -     160 
Non-underlying items                       -           (157)   (55)   (212)         -            (20)    (20) 
-------------------------------  -----------  --------------  -----  ------  --------  --------------  ------ 
Group operating (loss) / 
 profit                                 (60)           (157)   (43)   (260)       160            (20)     140 
Finance costs                            (9)               -   (11)    (20)       (5)               -     (5) 
-------------------------------  -----------  --------------  -----  ------  --------  --------------  ------ 
(Loss) / profit before tax              (69)           (157)   (54)   (280)       155            (20)     135 
Income tax credit / (expense)             16              18      7      41      (28)               1    (27) 
-------------------------------  -----------  --------------  -----  ------  --------  --------------  ------ 
(Loss) / profit for the period          (53)           (139)   (47)   (239)       127            (19)     108 
-------------------------------  -----------  --------------  -----  ------  --------  --------------  ------ 
 
 

(1) Presented on a pre-IFRS 16 basis. Alternative Performance Measures are defined and explained in the Glossary on page 53.

Included within Travel revenue and Trading profit is International revenue of GBP209m (2019: GBP252m) and International Trading loss of GBP32m (2019: profit of GBP20m). International revenue includes revenue from the USA of GBP116m (2019: GBP94m) and revenue from Australia of GBP38m (2019: GBP57m).

WH Smith PLC

Notes to the Unaudited Condensed Financial Statements

For the year ended 31 August 2020

   2.   Segmental analysis of results (continued) 
 
c)   Other segmental items 
 
 
                                                                       2020 
GBPm                                        Travel  High Street  Unallocated      Group 
-------------------------------------  -----------  -----------  -----------  --------- 
Capital additions(1)                            48           24            -         72 
Depreciation and amortisation of 
 non-current assets(1)                        (32)         (23)            -       (55) 
Depreciation of Right-of-use assets           (52)         (52)          (6)      (110) 
Impairment of non-current assets(2)              -            -         (40)       (40) 
Impairment of Right-of-use assets(3)             -            -         (95)       (95) 
-------------------------------------  -----------  -----------  -----------  --------- 
 
 
 
                                                                2019 
GBPm                                           Travel  High Street  Group 
---------------------------------------------  ------  -----------  ----- 
Capital additions                                  35           30     65 
Depreciation and amortisation of non-current 
 assets                                          (25)         (25)   (50) 
Impairment losses                                 (1)            -    (1) 
---------------------------------------------  ------  -----------  ----- 
 

(1) Excludes Right-of-use assets under IFRS 16.

(2) Impairment charges relating to non-current assets for the year ended 31 August 2020 as a result of the impact of Covid-19 which have been included in Non-underlying items as described in Note 4.

(3) Impairment charges relating to Right-of-use assets for the year ended 31 August 2020 as a result of the impact of Covid-19 which have been included in Non-underlying items as described in Note 4.

WH Smith PLC

Notes to the Unaudited Condensed Financial Statements

For the year ended 31 August 2020

   3.   Group operating profit 
 
                                              2020                             2019 
------------------------  ----  --------------------------------  ------------------------------- 
                                          Non-underlying                    Non-underlying 
GBPm                      Note  Headline           items   Total  Headline           items  Total 
------------------------  ----  --------  --------------  ------  --------  --------------  ----- 
 
Revenue                            1,021               -   1,021     1,397               -  1,397 
Cost of sales                      (441)               -   (441)     (552)               -  (552) 
------------------------  ----  --------  --------------  ------  --------  --------------  ----- 
Gross profit                         580               -     580       845               -    845 
Distribution costs(1)              (538)               -   (538)     (592)               -  (592) 
Administrative expenses             (92)               -    (92)     (100)               -  (100) 
Other income(2)                        2               -       2         7               -      7 
Non-underlying items       4           -           (212)   (212)         -            (20)   (20) 
------------------------  ----  --------  --------------  ------  --------  --------------  ----- 
Group operating (loss) 
 / profit                           (48)           (212)   (260)       160            (20)    140 
------------------------  ----  --------  --------------  ------  --------  --------------  ----- 
 

(1) During the year there was no impairment charge (2019: GBP1m) for property, plant and equipment and other intangible assets included in distribution costs. Impairment charges related to Covid-19 are included in non-underlying items. See Note 4.

(2) Other income is profit attributable to property and the sale of property, plant and equipment. The prior year includes the sale of a head office building.

 
 GBPm                                          2020   2019 
-------------------------------------------   -----  ----- 
 Cost of inventories recognised as 
  an expense                                    441    552 
 Write-down of inventories in the 
  year                                           14      4 
 Depreciation of property, plant and 
  equipment                                      43     41 
 Depreciation of right-of-use assets 
 - land and buildings                           105      - 
 - other                                          5      - 
 Amortisation of intangible assets               12      9 
 Impairment of property, plant and 
  equipment                                      39      1 
 Impairment of right-of-use assets               95      - 
 Impairment of Intangibles                        1      - 
 (Income) / expenses relating to leasing: 
 - expense relating to short-term                22      - 
  leases 
 - expense relating to variable lease            12      - 
  payments not included in the measurement 
  of the lease liability 
 - Income relating to Covid-19 related         (15)      - 
  rent reduction 
 Net operating lease charges 
 - land and buildings                             -    236 
 - equipment and vehicles                         -      - 
 Other occupancy costs                           49     69 
 Staff costs                                    217    248 
 Government grant income                       (22)      - 
--------------------------------------------  -----  ----- 
 

WH Smith PLC

Notes to the Unaudited Condensed Financial Statements

For the year ended 31 August 2020

   4.   Non-underlying items 

Items which are not considered part of the normal operating costs of the business are non-recurring and are considered exceptional because of their size, nature and incidence, are treated as non-underlying items and disclosed separately. Further details of the non-underlying items are included in Note 1, and in the Group Overview on page 10.

 
 GBPm                                                   2020   2019 
----------------------------------------------------   -----  ----- 
 Costs relating to business combinations 
 
   *    Transaction costs                                 11      6 
 
   *    Integration costs                                  9      5 
 Amortisation of acquired intangible 
  assets                                                   3      2 
 High Street business review                               -      7 
 Pension past service cost                                14      - 
 Costs directly attributable to Covid-19 
                                                          39      - 
   *    Impairment of property, plant and equipment 
 
   *    Impairment of intangible assets                    1 
                                                          95      - 
   *    Impairment of right-of-use assets 
                                                          14      - 
   *    Write-down of inventories 
                                                          25      - 
   *    Restructuring costs 
                                                           1      - 
   *    Other 
----------------------------------------------------   -----  ----- 
 Non-underlying items, before tax                        212     20 
 Tax credit on non-underlying items                     (25)    (1) 
-----------------------------------------------------  -----  ----- 
 Non-underlying items, after tax                         187     19 
-----------------------------------------------------  -----  ----- 
 

Non-underlying items recognised in the year are as follows:

Costs relating to business combinations

During the year, the Group incurred transaction and integration costs of GBP20m in relation to the acquisition of Marshall Retail Group ('MRG'), which completed on 20 December 2019. Further information on the acquisition of MRG is included in Note 18.

Amortisation of acquired intangible assets

Amortisation of acquired intangible assets primarily relates to the MRG and InMotion brands (see Note 11).

Pension past service cost

Past service cost of GBP14m has been recognised in the year ended 31 August 2020. This relates to equalisation of pension benefits between men and women over the period from 1 April 1992 to 29 July 1993 ('Barber equalisation'). The WHSmith Pension Trust has historically been administered assuming gender equalisation was achieved on 1 April 1992, and thus a Barber equalisation window of 17 May 1990 to 1 April 1992 applied. A new Trust Deed and Rules reflecting the equalisation of normal retirement ages at 65 was executed on 29 July 1993. It has since been determined that Barber equalisation was not effective until 29 July 1993. Accordingly, this past service cost is the expected cost of providing these benefits based on a normal retirement age of 60 rather than 65 for the period between 1 April 1992 and 29 July 1993. See Note 17.

Costs directly attributable to Covid-19

As described in the Preliminary announcement the Covid-19 pandemic has had a substantial impact on the Group's operations. As a result, the Group has incurred significant costs which have been separately recognised in non-underlying items, in accordance with the Group's accounting policy. The charges have arisen as a direct consequence of Covid-19, and reflect the impact of lost revenues as a result of store closures, and downward revisions to budgeted revenues following government interventions.

WH Smith PLC

Notes to the Unaudited Condensed Financial Statements

For the year ended 31 August 2020

   4.   Non-underlying items (continued) 

Impairment of Property, plant and equipment and Right-of-use assets

The impact on the Group's operations of Covid-19 is expected to continue during the next year and beyond. As a result, the Group has carried out a review for potential impairment across the entire store portfolio. The impairment review compared the value-in-use of individual store cash-generating units, based on managements' assumptions regarding likely future trading performance (taking into account the effect of Covid-19) to the carrying values at 31 August 2020. Following this review, a charge of GBP135m was recorded within non-underlying items for impairment of retail store assets, of which GBP39m relates to property, plant and equipment, GBP1m relates to intangible assets and GBP95m relates to right-of-use assets. Refer to Notes 12 and 13 for details of impairment of store cash-generating units.

Write-down of inventories

The Group assesses the recoverability of the carrying value of inventories at every reporting period and, where the expected recoverable amount is lower than the carrying value, a provision is recorded. Provisions of GBP9m have been recorded against inventory, which relates to dated and perishable stock and stock subject to obsolescence such as technology and some apparel where the sell through rate has significantly reduced due to store closures and lower footfall. In addition, since the outbreak of Covid-19 the Group has incurred stock write-offs of GBP5m mainly relating to perishable and dated product. The Group has recognised these charges as non-underlying as they meet the Group's definition of non-underlying.

Restructuring costs

As a result of the impact of Covid-19 on passenger numbers and lower footfall on the UK high street, in August 2020 the Group announced a review of store operations across both our Travel and High Street businesses. The charge of GBP21m is principally attributable to redundancies and restructuring costs relating to that and other corporate office restructuring undertaken by the Group. In addition, the Group has incurred GBP4m relating to costs of exiting the Paris bookshop and the Brazil joint venture both of which were as a result of Covid-19. These costs are presented as an adjusting item as they are part of a restructuring programme, and are considered material and one-off in nature.

A tax credit of GBP25m has been recognised in relation to the above items.

Prior year non-underlying items

Non-underlying items in 2019 relate to transaction and integration costs of GBP11m in relation to the acquisition of InMotion, which completed on 30 November 2018, amortisation of acquired intangible assets of GBP2m (primarily relating to the InMotion brand), and costs of GBP7m relating to the completed High Street business review announced in October 2018.

   5.   Finance costs 
 
 GBPm                                         2020   2019 
------------------------------------------   -----  ----- 
 Interest payable on bank loans and 
  overdrafts                                     9      5 
 Interest on lease liabilities                  11      - 
 Net interest cost on the defined benefit        -      - 
  pension liabilities 
                                                20      5 
 ------------------------------------------  -----  ----- 
 

Interest expense on lease liabilities of GBP11m has been recorded for the current year, as a result of the adoption of IFRS 16 'Leases'. Refer to Note 19 for details of adoption of IFRS 16.

WH Smith PLC

Notes to the Unaudited Condensed Financial Statements

For the year ended 31 August 2020

   6.   Income tax expense 
 
 GBPm                                     2020   2019 
--------------------------------------   -----  ----- 
 Tax on (loss) / profit                    (5)     32 
 Adjustment in respect of prior year 
  UK corporation tax                       (6)    (4) 
---------------------------------------  -----  ----- 
 Total current tax (credit) / expense     (11)     28 
---------------------------------------  -----  ----- 
 Deferred tax - current year               (7)    (1) 
 Deferred tax - prior year                   2      1 
---------------------------------------  -----  ----- 
 Tax on headline (loss) / profit          (16)     28 
---------------------------------------  -----  ----- 
 Tax on non-underlying items              (25)    (1) 
---------------------------------------  -----  ----- 
 Total tax on (loss) / profit             (41)     27 
---------------------------------------  -----  ----- 
 

The effective tax rate, before non-underlying items, was 23 per cent (2019: 18 per cent).

The UK corporation tax rate is 19 per cent effective from 1 April 2017. In the Spring Budget 2020, the UK government announced that from 1 April 2020 the corporation tax rate would remain at 19 per cent (rather than reducing to 17 per cent, as previously enacted). This new law was substantively enacted on 17 March 2020.

WH Smith PLC

Notes to the Unaudited Condensed Financial Statements

For the year ended 31 August 2020

   7.   (Loss)/ earnings per share 
 
 a)   (Loss) / earnings 
 
 
 GBPm                                            2020   2019 
--------------------------------------------   ------  ----- 
 (Loss) / profit for the year, attributable 
  to equity holders of the parent               (239)    106 
---------------------------------------------  ------  ----- 
 Non-underlying items (Note 4)                  (187)     19 
---------------------------------------------  ------  ----- 
 Headline (loss) / profit for the 
  year, attributable to equity holders 
  of the parent                                  (52)    125 
---------------------------------------------  ------  ----- 
 
 
 b)   Weighted average share capital 
 
 
 Millions                                    2020   2019 
-----------------------------------------   -----  ----- 
 Weighted average ordinary shares 
  in issue                                    120    108 
 Less weighted average ordinary shares          -      - 
  held in ESOP Trust 
-----------------------------------------   -----  ----- 
 Weighted average ordinary shares 
  for basic earnings per share                120    108 
 Add weighted average number of ordinary 
  shares under option                           -      1 
 Weighted average ordinary shares 
  for diluted earnings per share              120    109 
------------------------------------------  -----  ----- 
 
 
 c)   Basic and diluted (loss) / earnings per share 
 
 
 Pence                                    2020    2019 
----------------------------------    --------  ------ 
 Basic (loss) / earnings per 
  share                                (199.2)    98.1 
------------------------------------  --------  ------ 
 Adjustments for non-underlying 
  items                                  155.9    17.6 
------------------------------------  --------  ------ 
 Headline basic (loss) / earnings 
  per share                             (43.3)   115.7 
------------------------------------  --------  ------ 
 
 Diluted (loss) / earnings 
  per share                            (199.2)    97.2 
------------------------------------  --------  ------ 
 Adjustments for non-underlying 
  items                                  155.9    17.5 
------------------------------------  --------  ------ 
 Headline diluted (loss) / 
  earnings per share                    (43.3)   114.7 
------------------------------------  --------  ------ 
 

Diluted earnings per share takes into account various share awards and share options including SAYE schemes, which are expected to vest, and for which a sum below fair value will be paid. The calculation of EPS on a pre-IFRS 16 basis is provided in the Glossary on page 53.

   8.   Dividends 

Amounts paid and recognised as distributions to shareholders in the period are as follows:

 
 GBPm                                             2020   2019 
-----------------------------------------------  -----  ----- 
 Dividends 
 Final dividend for the year ended 31 August 
  2018 of 38.1p per ordinary share                   -     41 
 Interim dividend for the year ended 31 August 
  2019 of 17.2p per ordinary share                   -     19 
 Final dividend for the year ended 31 August        47      - 
  2019 of 41.0p per ordinary share 
                                                    47     60 
-----------------------------------------------  -----  ----- 
 

The Board of Directors have not declared an interim dividend and do not propose a final dividend in respect of the year ending 31 August 2020.

WH Smith PLC

Notes to the Unaudited Condensed Financial Statements

For the year ended 31 August 2020

   9.   Analysis of net debt 

Movement in net debt:

 
                                                       Recognised             On 
                                                               on    acquisition 
                                                         adoption             of 
                                                          of IFRS   subsidiaries    Cash               Currency 
 GBPm                                            2019          16     (non-cash)    flow   Other    translation    2020 
---------------------------------------------  ------  ----------  -------------  ------  ------  -------------  ------ 
 Borrowings 
 
   *    Borrowings - repayable after one year   (200)           -          (115)   (200)     115              -   (400) 
 
   *    Revolving credit facility                (15)           -              -      15       -              -       - 
 
   *    Lease liability                          (14)       (479)          (106)      78    (46)              8   (559) 
---------------------------------------------  ------  ----------  -------------  ------  ------  -------------  ------ 
 Liabilities from 
  financing activities                          (229)       (479)          (221)   (107)      69              8   (959) 
---------------------------------------------  ------  ----------  -------------  ------  ------  -------------  ------ 
 Cash and cash 
  equivalents                                      49           -              1      59       -            (1)     108 
---------------------------------------------  ------  ----------  -------------  ------  ------  -------------  ------ 
 Net debt                                       (180)       (479)          (220)    (48)      69              7   (851) 
---------------------------------------------  ------  ----------  -------------  ------  ------  -------------  ------ 
 
 
                                                                           On 
                                                                  acquisition 
                                                        Impact             of 
                                                       of IFRS   subsidiaries      Cash               Currency 
 GBPm                                           2018        16     (non-cash)      flow   Other    translation    2019 
---------------------------------------------  -----  --------  -------------  --------  ------  -------------  ------ 
 Borrowings 
 
   *    Borrowings - repayable after one year      -         -           (40)     (200)      40              -   (200) 
 
   *    Revolving credit facility               (33)         -              -        18       -              -    (15) 
 
   *    Lease liability                         (14)         -              -         6     (6)              -    (14) 
---------------------------------------------  -----  --------  -------------  --------  ------  -------------  ------ 
 Liabilities from 
  financing activities                          (47)         -           (40)     (176)      34              -   (229) 
---------------------------------------------  -----  --------  -------------  --------  ------  -------------  ------ 
 Cash and cash 
  equivalents                                     45         -              2         2       -              -      49 
---------------------------------------------  -----  --------  -------------  --------  ------  -------------  ------ 
 Net debt                                        (2)         -           (38)     (174)      34              -   (180) 
---------------------------------------------  -----  --------  -------------  --------  ------  -------------  ------ 
 

An explanation of Alternative Performance Measures, including Net debt on a pre-IFRS 16 basis, is provided in the Glossary on page 53.

Cash and cash equivalents

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 to their fair value.

Lease liabilities

The adoption of IFRS 16 on 1 September 2019 has resulted in the recognition of substantial right of use assets and corresponding lease liabilities on the Group balance sheet. On the transition date, GBP479m of lease liabilities have been recognised. In addition, lease liabilities of GBP106m have been recognised as a result of the acquisition of MRG. Other (non-cash) movements in lease liabilities mainly relate to new leases, modifications and re-measurements in the year.

Borrowings and revolving credit facilities

The Group has in place a five-year committed multi-currency revolving credit facility of GBP200m with Barclays Bank PLC, HSBC Bank PLC, BNP Paribas and Santander UK PLC. The revolving credit facility is due to mature on 8 December 2023. The utilisation is interest-bearing at a margin over LIBOR. As at 31 August 2020, the Group has drawn down GBPnil (2019: GBP15m) on this facility.

WH Smith PLC

Notes to the Unaudited Condensed Financial Statements

For the year ended 31 August 2020

   9.   Analysis of net debt (continued) 

In April 2020 the Group agreed an additional multi-currency revolving credit facility of GBP120m with BNP Paribas, HSBC Bank PLC and Santander UK PLC, for a period of 12 months (plus 7 months at the option of the Group). This facility will be in place until 8 November 2021 if the Group opts to use the available extension option. This is in addition to our existing facilities and includes a waiver on the existing bank covenants at 31 August 2020, 28 February 2021 and 31 August 2021.

The Group has a four-year committed GBP200m term loan with Barclays Bank PLC, HSBC Bank PLC, BNP Paribas and Santander UK PLC, that was drawn down at the time of the acquisition of InMotion (30 November 2018). This loan is interest bearing at a margin over LIBOR and is due to mature on 29 October 2022.

During the year, the Group agreed an additional syndicated GBP200m term loan with the above banks to fund the acquisition of MRG. This loan is interest bearing at a margin over LIBOR and is due to mature on 17 October 2022.

Transaction fees of GBP3m (2019: GBP1m) including arrangement fees associated with the securing of financing have been capitalised and are amortised through the income statement over the term of the relevant facility.

Other movements include the repayment of a GBP115m loan acquired as part of the acquisition of MRG (see Note 18). This payment is included within investing activities in the Group cash flow statement.

10 Cash generated from operating activities

 
 GBPm                                                            2020        2019 
------------------------------------------  -------------  ----------  ---------- 
 Group operating (loss)/profit                                  (260)         140 
 Depreciation and amortisation                                     55          50 
 Impairment losses                                                 40           1 
 Depreciation of right of use assets                              110           - 
 Impairment of right of use assets                                 95           - 
 Non-cash change in lease liabilities                            (15)           - 
 Non-cash movement in pension                                      14           - 
 Share-based payments                                               -           6 
 Profit on disposal of property, plant and 
  equipment                                                         -         (2) 
 Other non-cash items                                               2           1 
 Decrease / (increase) in inventories                              35         (2) 
 Decrease / (increase) in receivables                              27         (6) 
 Decrease in payables                                            (10)         (3) 
 Pension funding                                                  (3)         (3) 
 Income taxes paid                                               (32)        (27) 
 Income taxes refunded                                             37           - 
 Movement on provisions (through utilisation 
  or income statement)                                            (1)         (2) 
 Cash generated from operating activities                          94         153 
---------------------------------------------------------  ----------  ---------- 
 
 

WH Smith PLC

Notes to the Unaudited Condensed Financial Statements

For the year ended 31 August 2020

11. Intangible assets

 
                                                   Brands 
                                            and franchise   Tenancy 
 GBPm                           Goodwill        contracts    rights   Software   Total 
-----------------------------  ---------  ---------------  --------  ---------  ------ 
 Cost: 
 At 1 September 2019                 176               16        13        109     314 
 Additions                             -                -         -         11      11 
 Acquisitions (Note 18)              258               29         -          1     288 
 Disposals                             -                -         -       (25)    (25) 
 Foreign exchange                   (16)              (2)         -          -    (18) 
----------------------------- 
 At 31 August 2020                   418               43        13         96     570 
-----------------------------  ---------  ---------------  --------  ---------  ------ 
 Accumulated amortisation: 
 At 1 September 2019                   -                1         8         80      89 
 Amortisation charge                   -                3         -          9      12 
 Impairment charge                     -                -         -          1       1 
 Disposals                             -                -         -       (25)    (25) 
 Foreign exchange                      -                -         -          -       - 
 At 31 August 2020                     -                4         8         65      77 
-----------------------------  ---------  ---------------  --------  ---------  ------ 
 Net book value at 31 August 
  2020                               418               39         5         31     493 
-----------------------------  ---------  ---------------  --------  ---------  ------ 
 
 Cost: 
 At 1 September 2018                  41                1        13         97     152 
 Additions                             -                -         -         11      11 
 Acquisitions                        128               15         -          1     144 
 Foreign exchange                      7                -         -          -       7 
----------------------------- 
 At 31 August 2019                   176               16        13        109     314 
-----------------------------  ---------  ---------------  --------  ---------  ------ 
 Accumulated depreciation: 
 At 1 September 2018                   -                -         8         72      80 
 Amortisation charge                   -                1         -          8       9 
 Impairment charge                     -                -         -          -       - 
 Foreign exchange                      -                -         -          -       - 
----------------------------- 
 At 31 August 2019                     -                1         8         80      89 
-----------------------------  ---------  ---------------  --------  ---------  ------ 
 Net book value at 31 August 
  2019                               176               15         5         29     225 
-----------------------------  ---------  ---------------  --------  ---------  ------ 
 

Additions to Goodwill in the year relate to the acquisition of Marshall Retail Group. On 20 December 2019, the Group acquired the entire issued share capital of Marshall Retail Group ('MRG'), for a total cash consideration of USD $402m (GBP317m) resulting in the recognition of goodwill of GBP258m, including an GBP8m loss on a forward contract used to hedge the exposure on the US dollar purchase consideration.

The Goodwill arising on the acquisition of MRG has been allocated to the Travel segment. See Note 18 for further information. The carrying value of goodwill is allocated to the segmental businesses as follows:

 
 GBPm            2020   2019 
-------------   -----  ----- 
 Travel           403    161 
 High Street       15     15 
                  418    176 
 -------------  -----  ----- 
 

WH Smith PLC

Notes to the Unaudited Condensed Financial Statements

For the year ended 31 August 2020

11. Intangible assets (continued)

Included within Tenancy rights are certain assets that are considered to have an indefinite life of GBP4m (2019: GBP4m), representing certain rights under tenancy agreements, which include the right to renew leases, therefore no amortisation has been charged. Management has determined that the useful economic life of these assets is indefinite because the Company can continue to occupy and trade from certain premises for an indefinite period. These assets are reviewed annually for indicators of impairment.

Impairment of Goodwill and intangible assets

The Group tests goodwill for impairment annually or where there is an indication that goodwill might be impaired. For impairment testing purposes, the Group has determined that each store is a separate CGU, and Goodwill is allocated to groups of CGUs in a manner that is consistent with our operating segments, as this reflects the lowest level at which goodwill is monitored. All goodwill has arisen on acquisitions of groups of retail stores. These acquisitions are then integrated into either the High Street or Travel operating segments as appropriate. Acquired brands are considered together with goodwill for impairment testing purposes, and are therefore considered annually for impairment.

Goodwill has been tested for impairment by comparing the carrying amount of each group of cash-generating units ('CGUs'), including goodwill and acquired brands, with the recoverable amount determined from value-in-use calculations. The value-in-use of each group of CGUs has been calculated using cash flows derived from the Group's latest Board-approved budget and three year plan, initially extrapolated to five years and taking into account the projected impact of Covid-19. The forecasts reflect knowledge of the current market, together with the Group's expectations on the future achievable growth and committed store openings. Cash flows beyond the initial forecast period are extrapolated using estimated long-term growth rates.

For certain groups of CGUs, additional adjustments to cash flows have been made during the extrapolation process for an extended period of up to 15 years before calculating a terminal value. This extended period of time is required to establish a normalised cash flow base on which a terminal value calculation can be appropriately calculated. The main reasons for cash flow adjustments include the need to forecast lease renewals under IFRS 16, and the unwinding of certain cash flow benefits arising from acquisitions in North America.

The key assumptions on which forecast three-year cash flows of the CGUs are based include revenue growth, product mix and operating costs, long-term growth rates and the pre-tax discount rate:

-- The values assigned to each of the revenue growth, product mix and operating cost assumptions were determined based on the extrapolation of historical trends within the Group and external information on expected future trends in the travel and high street retail sectors.

-- The pre-tax discount rates are derived from the Group's weighted average cost of capital, which has been calculated using the capital asset pricing model, the inputs of which include a country risk-free rate, equity risk premium, Group size premium and a risk adjustment (beta). The pre-tax discount rate used in the calculation was 8.9%.

   --      The long-term growth rate assumptions are between 0% and 2%. 

The value-in-use estimates indicated that the recoverable amount of goodwill exceeded the carrying value for the groups of CGUs. As a result, no impairment has been recognised in respect of the carrying value of goodwill in the year (2019: GBPnil).

As disclosed in Note 1, Accounting policies, the forecast cash flows used within the impairment model are based on assumptions which are sources of estimation uncertainty and it is possible that significant changes to these assumptions could lead to an impairment of Goodwill and acquired brands. Given the significant uncertainty surrounding the impact of Covid-19 on the Group's operations and on the global economy, management have considered a range of sensitivities on each of the key assumptions, with other variables held constant. The sensitivities include applying a 10% reduction in the revenue assumption in the next financial year from the base cash flow projections, representing a slower recovery from the impact of Covid-19; increases in the discount rate by 1% and reductions in the long term growth rates to 0%. Under these severe scenarios, the estimated recoverable amount of Goodwill and acquired brands still exceeded the carrying value. The sensitivity analysis showed that no reasonably possible change in assumptions would lead to an impairment.

WH Smith PLC

Notes to the Unaudited Condensed Financial Statements

For the year ended 31 August 2020

12 Property, plant and equipment

 
                                          Freehold       Leasehold        Fixtures       Equipment 
 GBPm                                   Properties    improvements    and fittings    and vehicles   Total 
-----------------------------------  -------------  --------------  --------------  --------------  ------ 
 Cost or valuation: 
 At 1 September 2019                            15             236             168             120     539 
 Adjustment on initial application 
  of IFRS 16(1)                                  -             (3)             (5)            (22)    (30) 
------------------------------------  ------------  --------------  --------------  --------------  ------ 
 At 1 September 2019                            15             233             163              98     509 
 Additions                                       -              28              23              10      61 
 Acquisitions (Note 18)                          -              18              14               2      34 
 Disposals                                       -             (5)             (1)             (1)     (7) 
 Foreign exchange                                -             (2)             (1)             (1)     (4) 
------------------------------------ 
 At 31 August 2020                              15             272             198             108     593 
------------------------------------  ------------  --------------  --------------  --------------  ------ 
 Accumulated depreciation: 
 At 1 September 2019                            10             147             103              78     338 
 Adjustment on initial application 
  of IFRS 16 (1)                                 -               1             (1)            (12)    (12) 
------------------------------------  ------------  --------------  --------------  --------------  ------ 
 At 1 September 2019                            10             148             102              66     326 
 Depreciation Charge                             -              22              12               9      43 
 Impairment Charge                               -              20              14               5      39 
 Disposals                                       -             (5)             (1)             (1)     (7) 
 At 31 August 2020                              10             185             127              79     401 
------------------------------------  ------------  --------------  --------------  --------------  ------ 
 Net book value at 31 August 
  2020                                           5              87              71              29     192 
------------------------------------  ------------  --------------  --------------  --------------  ------ 
 
 Cost or valuation: 
 At 1 September 2018                            22             207             149             110     488 
 Additions                                       -              26              18              10      54 
 Acquisitions                                    -               6               3               1      10 
 Disposals                                     (7)             (4)             (3)             (1)    (15) 
 Foreign exchange                                -               1               1               -       2 
------------------------------------ 
 At 31 August 2019                              15             236             168             120     539 
------------------------------------  ------------  --------------  --------------  --------------  ------ 
 Accumulated depreciation: 
 At 1 September 2018                            15             134              93              67     309 
 Depreciation Charge                             1              16              12              12      41 
 Impairment Charge                               -               -               1               -       1 
 Disposals                                     (6)             (4)             (3)             (1)    (14) 
 Foreign exchange                                -               1               -               -       1 
------------------------------------ 
 At 31 August 2019                              10             147             103              78     338 
------------------------------------  ------------  --------------  --------------  --------------  ------ 
 Net book value at 31 August 
  2019                                           5              89              65              42     201 
------------------------------------  ------------  --------------  --------------  --------------  ------ 
 
 

(1) The adjustment is in respect of assets treated as finance leases under the previous standard, IAS 17 'Leases', transferred to right-of-use assets, with a net book value of GBP15m and impairment charge of GBP3m on the date of initial application of IFRS 16.

Impairment of property, plant and equipment

For impairment testing purposes, the Group has determined that each store is a separate CGU. Each CGU is tested for impairment at the balance sheet date if any indicators of impairment have been identified. The significant disruption to trading as a result of the Covid-19 pandemic has been identified as an indicator of impairment, and therefore all CGUs have been tested for impairment as at the balance sheet date.

WH Smith PLC

Notes to the Unaudited Condensed Financial Statements

For the year ended 31 August 2020

12. Property, plant and equipment (continued)

Property, plant and equipment and right of use assets have been tested for impairment by comparing the carrying amount of each CGU with its recoverable amount determined from value-in-use calculations. It was determined that value in use was higher than fair value less costs to sell as a result of the significant impact on fair values as a result of Covid-19. The value-in-use of each CGU has been calculated using discounted cash flows derived from the Group's latest Board-approved budget and three-year plan, taking into account the projected impact of Covid-19, and reflects historic performance and knowledge of the current market, together with the Group's views on the future achievable growth. Cash flows beyond this three-year period are extrapolated using growth rates and inflation rates appropriate to each store's location. Cash flows have been included for the remaining lease life for the specific store. These growth rates do not exceed the long-term growth rate for the Group's retail businesses in the relevant territory. Where stores have a relatively short remaining lease life, an extension to the lease has been assumed where management consider it likely that an extension will be granted.

The key assumptions on which the forecast three-year cash flows of the CGUs are based include sales and the pre-tax discount rate. Other assumptions in the model relate to gross margin, cost inflation and longer term growth rates. The forecasts used in the impairment review are based on management's best estimate of revenue reductions versus a 'pre-Covid' base, and the recovery in revenue over the forecast period. In developing these forecasts, management have used available information, including historical knowledge of the store level cash flows, and knowledge gained during the pandemic up to the year end date.

The forecasts for the year for our High Street business assume that like for like sales will be initially lower by around 25% on average and recover to around 14% below pre-Covid levels by the end of August 2021. The recovery is non-linear and is affected by monthly seasonality.

In Travel UK, revenue is assumed to be down around 65% on average across all formats, recovering to around 40% down by the end of the year. Our International locations outside of North America assume similar levels of decline. In North America, revenue is assumed to be down around 55% in the early part of the next financial year, improving to down 25% by the end of the year.

The second and third years of the three year plan include further gradual recoveries across all locations. Revenue is not assumed to recover to pre-Covid levels within the three year plan period.

The pre-tax discount rate is derived from the Group's weighted average cost of capital, which has been calculated using the capital asset pricing model, the inputs of which include the risk-free rate, equity risk premium, Group size premium and a risk adjustment (beta). The pre-tax discount rate used in the calculation was 8.9%.

Where the value-in-use was less than the carrying value of the CGU, an impairment of property, plant and equipment and right-of-use asset was recorded. These stores were impaired to their recoverable amount of GBP203m, which is their carrying value at year end. The Group has recognised an impairment charge of GBP39m to property, plant and equipment, GBP1m to intangible assets and GBP95m to right-of-use assets as a result of impairment testing (2019: GBP1m). These impairments have been presented as non-underlying items in the current year (see Note 4).

As disclosed in Note 1, Accounting policies, the forecast cash flows used within the impairment model are based on assumptions which are sources of estimation uncertainty and changes to these assumptions could lead to further impairments to assets. Given the significant uncertainty regarding the impact of Covid-19 on the Group's operations and on the global economy, management have considered sensitivities to the impairment charge as a result of changes to the estimate of future revenues achieved by the stores.

The Group has applied certain sensitivities in isolation to demonstrate the impact on the impairment of changes in key assumptions. The most significant assumption is the revenue assumption. A further decrease in revenue of 10% versus the pre-Covid base for the year ended 31 August 2021 to reflect a potential slower recovery from the pandemic, with no change to subsequent forecast revenue growth rate assumptions, would result in a GBP19m increase in the impairment charge of retail store assets in the year ended 31 August 2020. An increase or decrease of 1% in the discount rate would result in an increase or decrease in the impairment charge of GBP5m.

On 31 October 2020, the UK government announced a 4 week lockdown across England. We have concluded that this is a non-adjusting post balance sheet event. See Note 20 for the estimated financial impact of this announcement.

Other changes in assumptions have been modelled and have shown that any reasonably possible changes would not lead to a significant impact on the impairment charge. Other modelled assumption changes include margin reductions, growth rate reductions or further cost inflation in High Street. In Travel, we have modelled slower recovery in UK and North American airport traffic and reductions in long-term growth rate assumptions.

The impairment assessment has also been performed on a pre-IFRS 16 basis. See Glossary on page 53.

WH Smith PLC

Notes to the Unaudited Condensed Financial Statements

For the year ended 31 August 2020

13. Right-of-use assets

 
 GBPm                                  Land and   Other   Total 
                                      buildings 
----------------------------------  -----------  ------  ------ 
 
 At 1 September 2019                        439      18     457 
 Additions                                   98       -      98 
 Acquisitions (Note 18)                     108             108 
 Modifications and remeasurements          (35)       -    (35) 
 Disposals                                  (2)       -     (2) 
 Depreciation charge                      (105)     (5)   (110) 
 Impairment charge                         (95)       -    (95) 
 Foreign exchange                           (8)       -     (8) 
----------------------------------  -----------  ------  ------ 
 Net book value at 31 August 2020           400      13     413 
----------------------------------  -----------  ------  ------ 
 

Adoption of IFRS 16 'Leases'

The Group has adopted IFRS 16 'Leases' for the first time in the year ended 31 August 2020. The modified retrospective transition methodology has been applied as at the initial date of application, 1 September 2019, and prior period comparative results have not been adjusted. Further information regarding the impact of initial adoption of IFRS 16 is provided in Note 19. The information on the Group's leasing activities is included in Note 14, Lease liabilities.

On adoption of IFRS 16, the Group has performed an impairment test on the right-of-use assets on a lease by lease basis as at the transition date, in accordance with IAS 36. Further information regarding this impairment test is provided in Note 19. On transition the Group has recorded an impairment of GBP18m to the opening balance of the Right-of-use assets and GBP3m to property, plant and equipment with a corresponding adjustment to the opening reserves.

Land and buildings

Right-of-use assets of GBP95m have been impaired in the year as a result of the impact of Covid-19. This impairment charge has been presented in non-underlying items (see Note 4). The approach to impairment testing is described in detail in Note 12, Property, plant and equipment.

14. Lease liabilities

 
 GBPm                                   Land and   Other   Total 
                                       buildings 
-----------------------------------  -----------  ------  ------ 
 At 31 August 2019                             -      14      14 
 Adjustment on initial application 
  of IFRS 16                                 476       3     479 
-----------------------------------  -----------  ------  ------ 
 At 1 September 2019                         476      17     493 
 Additions                                    87       -      87 
 Acquisitions (Note 18)                      106       -     106 
 Interest costs                               11       -      11 
 Payments                                   (72)     (6)    (78) 
 Modifications and remeasurements           (50)       -    (50) 
 Disposals                                   (2)       -     (2) 
 Foreign exchange                            (8)       -     (8) 
-----------------------------------  -----------  ------  ------ 
 At 31 August 2020                           548      11     559 
-----------------------------------  -----------  ------  ------ 
 

WH Smith PLC

Notes to the Unaudited Condensed Financial Statements

For the year ended 31 August 2020

14. Lease liabilities (continued)

 
 GBPm                                      Total 
--------------------------------------    ------ 
 Analysis of total lease liabilities: 
 Non-current                                 429 
 Current                                     130 
----------------------------------------  ------ 
 Total                                       559 
----------------------------------------  ------ 
 

The Group leases land and buildings for its retail stores, distribution centres, storage locations and office property. These leases have an average remaining lease term of 4 years. Some leases include an option to break before the end of the contract term or an option to renew the lease for an additional term after the end of the term. Management assess the lease term at inception based on the facts and circumstances applicable to each property.

Other leases are mainly forklift trucks for the retail stores and distribution centres, office equipment and vehicles. These leases have an average remaining lease term of 3 years.

The Group reviews the retail lease portfolio on an ongoing basis, taking into account retail performance and future trading expectations. The Group may exercise extension options or negotiate lease extensions or modifications. In other instances, the Group may exercise break options, negotiate lease reductions or decide not to negotiate a lease extension at the end of the lease term. Certain property leases contain rent review terms that require rent to be adjusted on a periodic basis which may be subject to market rent or increases in inflation measurements.

Many of the Group's property leases, particularly in Travel locations, also incur payments based on a percentage of revenue (variable lease payments) achieved at the location. In line with IFRS 16, variable lease payments which are not based on an index or rate are not included in the lease liability. See Note 3 for the expense charged to the Income statement relating to variable lease payments not included in the measurement of the lease liability.

In response to the Covid-19 pandemic, an amendment was issued to IFRS 16 in June 2020. This amendment (practical expedient) allows the impact on lease liability of temporary rent reductions/waivers affecting rent payments due on or before June 2021, to be recognised in the Income statement in the period they are received, rather than as lease modifications, which would require the remeasurement of the lease liability using a revised discount rate with a corresponding adjustment to the right-of-use asset. The Group has applied this practical expedient to all Covid-19 rent reductions/waivers that meet the requirements of the amendment, and this has resulted in a credit to the Income statement of GBP15m for the year ended 31 August 2020.

The Group's accounting policy for leases is set out in Note 19. Details of Income statement charges and income for leases are set out in Note 3. The Right-of-use asset categories on which depreciation is incurred are presented in Note 13. Interest expense incurred on lease liabilities is presented in Note 5.

The total cash outflow for leases in the financial year was GBP101m. This includes cash outflow for short-term leases of GBP16m and variable lease payments (not included in the measurement of lease liability) of GBP7m. The total future income from sub-leasing the right-of-use assets is GBP1m.

WH Smith PLC

Notes to the Unaudited Condensed Financial Statements

For the year ended 31 August 2020

15. Called Up Share Capital

Allotted and fully paid

 
                                                    2020                                       2019 
--------------------------  ---  -----------------------------------------  ----------------------------------------- 
                                           Number of shares  Nominal value            Number of shares  Nominal value 
                                                 (millions)           GBPm                  (millions)           GBPm 
--------------------------       --------------------------  -------------  --------------------------  ------------- 
Equity 
Ordinary shares of 22 6/67p                             131             29                         108             24 
-------------------------------  --------------------------  -------------  --------------------------  ------------- 
Total                                                   131             29                         108             24 
-------------------------------  --------------------------  -------------  --------------------------  ------------- 
 

As part of the financing of the acquisition of MRG, on 17 October 2019, the Company issued 7,209,303 shares in a share placing at a price of GBP21.50 per share, raising proceeds of GBP152m net of issue costs.

In addition, as part of the Group's actions to mitigate the impact of Covid-19, on 9 April 2020 the Company issued 15,802,768 shares in a share placing at a price of GBP10.50 per share, raising proceeds of GBP160m net of issue costs.

During the year, 5,024 ordinary shares were allotted under the terms of the Company's Sharesave Scheme.

The effect of the above share issues was to increase share premium by GBP306m.

The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at the meetings of the Company.

The ESOP reserve of GBP4m (2019: GBP6m) represents the cost of shares in WH Smith PLC purchased in the market and held by the WH Smith Employee Benefit Trust to satisfy awards and options under the Group's executive share schemes. The total shareholding is 203,628 (2019: 315,306).

WH Smith PLC

Notes to the Unaudited Condensed Financial Statements

For the year ended 31 August 2020

16. Contingent liabilities and capital commitments

 
 GBPm                                         2020   2019 
------------------------------------------   -----  ----- 
Bank guarantees and guarantees in respect 
 of lease agreements                            31     27 
-------------------------------------------  -----  ----- 
 

Other potential liabilities that could crystallise are in respect of previous assignments of leases where the liability could revert to the Group if the lessee defaulted. Pursuant to the terms of the Demerger Agreement with Connect Group PLC (formerly Smiths News PLC), any such contingent liability which becomes an actual liability, will be apportioned between the Group and Connect Group PLC in the ratio 65:35 (provided that the actual liability of Connect Group PLC in any 12 month period does not exceed GBP5m). The Group's 65 per cent share of these leases has an estimated future rental commitment at 31 August 2020 of GBP1m (31 August 2019: GBP1m). The movement in the future rental commitment is due to the crystallisation of lease liabilities, lease expiries and the effluxion of time.

Contracts placed for future capital expenditure approved by the directors but not provided for amounted to GBP18m (2019: GBP17m).

17. Retirement benefit obligations

WH Smith PLC has operated a number of defined benefit schemes (which are closed to new entrants and future service accrual) and defined contribution pension schemes. The main pension arrangements for employees are operated through a defined contribution scheme, WH Smith Retirement Savings Plan, and a defined benefit scheme, WHSmith Pension Trust. The most significant scheme is the defined benefit WHSmith Pension Trust.

The retirement benefit obligations recognised in the balance sheet for the respective schemes at the relevant reporting dates were:

 
GBPm                                                         2020        2019 
--------------------------------------  -------------  ----------  ---------- 
WHSmith Pension Trust                                         (3)         (3) 
United News Shops Retirement Benefits 
 Scheme                                                       (1)         (1) 
--------------------------------------------  -------  ----------  ---------- 
Retirement benefit obligation recognised 
 in the balance sheet                                         (4)         (4) 
--------------------------------------------  -------  ----------  ---------- 
 
 

WHSmith Pension Trust

The amounts recognised in the balance sheet under IAS 19 in relation to this plan are as follows:

 
GBPm                                                           2020        2019 
----------------------------------------  -------------  ----------  ---------- 
Present value of the obligations                            (1,144)     (1,107) 
Fair value of plan assets                                     1,412       1,461 
--------------------------------------------  ---------  ----------  ---------- 
Surplus before consideration of asset 
 ceiling                                                        268         354 
Amounts not recognised due to effect 
 of asset ceiling                                             (268)       (354) 
Additional liability recognised due to 
 minimum funding requirements                                   (3)         (3) 
Retirement benefit obligation recognised 
 in the balance sheet                                           (3)         (3) 
 
 

In accordance with the requirements of IFRIC 14 we have recognised the schedule of contributions as a liability of GBP3m (2019: GBP3m). The defined benefit pension schemes are closed to further accrual. The Group does not have an unconditional right to derive economic benefit from any surplus, as the Trustees retain the right to enhance benefits under the Trust deed, and therefore the present value of the economic benefits of the IAS 19 surplus in the pension scheme of GBP268m (2019: GBP354m) available as a reduction of future contributions is GBPnil (2019: GBPnil). As a result, the Group has not recognised this IAS 19 surplus on the balance sheet. There is an ongoing actuarial deficit primarily due to the different assumptions and calculation methodologies used compared to those on interpretation of IAS 19.

WH Smith PLC

Notes to the Unaudited Condensed Financial Statements

For the year ended 31 August 2020

17. Retirement benefit obligations (continued)

Income Statement

The amounts recognised in the income statement were as follows:

 
GBPm                                        2020  2019 
-----------------------------------------   ----  ---- 
Net interest cost on the defined benefit       -     - 
 liability 
Past service cost                           (14)     - 
                                            (14)     - 
 

The net interest cost has been included in finance costs (Note 5). Actuarial gains and losses have been reported in the statement of comprehensive income.

Past service costs of GBP14m have been recognised in relation to equalisation of pension benefits relating to a period between 1 April 1992 and 29 July 1993 ('Barber equalisation'). The WHSmith Pension Trust has historically been administered assuming gender equalisation was achieved on 1 April 1992, and thus a "Barber window" of 17 May 1990 to 1 April 1992 applied. A new Trust Deed and Rules reflecting the equalisation of normal retirement ages at 65 was executed on 29 July 1993. It has since been determined that Barber equalisation was not effective until 29 July 1993. Accordingly, this past service cost is the expected cost of providing these benefits based on a normal retirement age of 60 rather than 65 for the period between 1 April 1992 and 29 July 1993.

This past service cost has been disclosed within Non-underlying items, in accordance with the accounting policy in Note 1.

Statement of comprehensive income

Total (expense) / income recognised in the Statement of Comprehensive Income ("SOCI"):

 
GBPm                                                                   2020        2019 
-----------------------------------------------  --------------  ----------  ---------- 
Total actuarial loss before consideration 
 of asset ceiling                                                      (43)       (141) 
(Loss) on plan assets excluding amounts 
 included in net interest cost                                         (38)         190 
Gain / (loss) resulting from changes 
 in amounts not recognised due to effect 
 of asset ceiling excluding amounts recognised 
 in net interest cost                                                    92        (52) 
Gain resulting from changes in additional                                 -           - 
 liability due to minimum funding requirements 
 excluding amounts recognised in net 
 interest cost 
Total actuarial gain / (loss) recognised 
 in other comprehensive income                                           11         (3) 
 
 

Actuarial losses recognised in the statement of comprehensive income on the United News Shops Retirement Benefits Scheme were GBPnil in the period to 31 August 2020 (2019: GBPnil).

Balance sheet

Movement in net retirement benefit liability during the period:

 
GBPm                                           2020  2019 
--------------------------------------------   ----  ---- 
At beginning of period                          (3)   (3) 
Current service cost                              -     - 
Past service cost                              (14)     - 
Contributions from the sponsoring companies       3     3 
Actuarial gains / (losses) on defined 
 benefit pension schemes                         11   (3) 
At end of period                                (3)   (3) 
 

WH Smith PLC

Notes to the Unaudited Condensed Financial Statements

For the year ended 31 August 2020

17. Retirement benefit obligations (continued)

A full actuarial valuation of the Scheme is carried out every three years with interim reviews in the intervening years. The latest full actuarial valuation of the Pension Trust was carried out as at 31 March 2020 by independent actuaries using the projected unit credit method and has been completed. At 31 March 2020 the deficit was GBP9m; at 31 March 2017 the deficit was GBP11m. The Group has agreed a continuation of the annual funding schedule with the Trustees from March 2020 for the following 5 years, which includes the deficit recovery contributions and other running costs of just under GBP3m.

During the year, the Group made a contribution of GBP3m to the WHSmith Pension Trust (2019: GBP3m) in accordance with the agreed pension deficit funding schedule, being GBP1m of deficit funding payable to the Trustee and GBP2m in relation to investment management costs.

The principal long-term assumptions used in the IAS 19 valuation were:

 
%                                        2020  2019 
--------------------------------------   ----  ---- 
Rate of increase in pension payments     3.04  3.13 
Rate of increase in deferred pensions    2.30  2.20 
Discount rate                            1.75  1.85 
RPI Inflation assumption                 3.10  3.20 
CPI Inflation assumption                 2.30  2.20 
 

WH Smith PLC

Notes to the Unaudited Condensed Financial Statements

For the year ended 31 August 2020

18. Acquisitions

On 20 December 2019, the Group acquired the entire share capital of Marshall Retail Group ('MRG') for a total cash payment of USD $402m (GBP317m) comprising $243m of enterprise value, $146m repayment of loan, $12m working capital, and $1m cash and restricted cash.

MRG is an independent travel retailer operating in high footfall airport and tourist locations in the United States. The acquisition builds further on the acquisition of InMotion in November 2018 and significantly strengthens the Group's offering in the United States, the world's largest travel retail market.

Included within the provisional fair value of the net identifiable assets on acquisition is an intangible asset of GBP29m (US$37m) representing the MRG brand. The Board believes that the excess of consideration paid over the net assets on acquisition of GBP258m is best considered as goodwill on acquisition representing future operating synergies. This amount is not tax deductible. The provisional goodwill calculation is summarised below:

 
                                              Provisional 
                                               fair value 
                                             at 31 August 
                                                     2020 
                                                     GBPm 
Acquiree's net assets / (liabilities) 
 at acquisition date: 
Intangible assets                                      30 
Right of use assets                                   108 
Property, plant and equipment                          34 
Inventories                                            14 
Cash and cash equivalents                               1 
Trade and other receivables                             5 
Deferred tax assets / liabilities                     (9) 
Trade and other payables - current                   (15) 
Other non-current liabilities                         (1) 
Lease liabilities                                   (106) 
Interest-bearing loans                              (115) 
Net identifiable assets / (liabilities)              (54) 
Non-controlling interest                              (2) 
Goodwill on acquisition                               258 
Total consideration - satisfied in 
 cash                                                 202 
 

The provisional goodwill calculation in the table above includes significant estimates that may be refined for a period of 12 months from the acquisition date. Transaction and integration costs totalling GBP20m have been incurred in the period to 31 August 2020 in respect of the acquisition.

Revenue of GBP48m and loss of GBP37m is included in the results for the financial year in respect of MRG. If the acquisition had taken place on 1 September 2019, total Group revenue would have been GBP1,073m and Group loss before tax would have been GBP275m.

Reconciliation of cash flows

 
                                             GBPm 
Cash consideration                            202 
Cash acquired                                 (1) 
Repayment of interest-bearing loans           115 
Net outflow of cash - investing activities    316 
 

WH Smith PLC

Notes to the Unaudited Condensed Financial Statements

For the year ended 31 August 2020

19. Impact of adoption of IFRS 16

IFRS 16 Leases

The Group has applied IFRS 16 effective from 1 September 2019 which superseded the lease guidance under IAS 17 and the related interpretation.

Nature of change

IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model as the distinction between operating and finance leases is removed. The only exceptions are short-term and low-value leases.

At the commencement date of a lease, a lessee will recognise a lease liability for the future lease payments and an asset (right-of-use asset) representing the right to use the underlying asset during the lease term. Lessees are required to separately recognise the interest expense on the lease liability and the depreciation expense on the right-of-use asset. There is no impact on cash flows, although the presentation of the Group cash flow statement has changed, with an increase in net cash inflows from operating activities being offset by an increase in net cash outflows from financing activities.

Impact on the Group

The standard has primarily affected the accounting for the group's operating leases relating to properties.

The Group has applied the simplified transition approach (modified retrospective approach) and has recognised the lease liability on transition at the present value of the remaining lease payments, discounted using the incremental borrowing rate (IBR) at the date of transition. Right of use assets are measured at either:

- their carrying amount as if IFRS 16 had been applied since the lease commencement date, discounted by the Group's incremental borrowing rate at transition date. The Group has applied this methodology to a small number of its property leases where sufficient historical information has been available to facilitate this.

- an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments. The Group has applied this methodology to the majority of its leases as sufficient historical data was not available to enable a retrospective calculation.

The weighted average discount rate applied on transition date is 1.78%.

The Group has not restated comparatives and the cumulative effect of initially applying IFRS 16 is recognised as an adjustment to the opening reserves at the date of transition.

The Group has elected to apply the following practical expedients as allowed under IFRS 16:

- Exclude short-term leases (lease with a remaining term of less than one-year) and low-value assets (defined as less than $5,000 at initial cost);

- Rely on its assessment of whether leases are onerous immediately before the date of transition as an alternative to performing an impairment review. This is applied on a lease by lease basis;

- Exclude initial direct costs from the measurement of the right-of-use asset on transition; and

- The use of hindsight, such as in determining the lease term if the contract contains options to extend or terminate the lease.

The Group has not applied the practical expedient of placing reliance on the previous identification of a lease under IAS 17 but has assessed all its existing lease contracts to determine whether they meet the new definition of a lease and therefore fall within the scope of IFRS 16. This has resulted in several contracts, where the landlord is considered to have substantive substitution rights over the associated assets, falling outside the scope of IFRS 16.

In addition to this, where Group has not taken the practical expedient of taking an onerous lease provision under IAS 37 as a proxy to the opening impairment charge, the Group has undertaken an impairment review at the date of transition. These are explained further below under section "key areas of judgement".

WH Smith PLC

Notes to the Unaudited Condensed Financial Statements

For the year ended 31 August 2020

19. Impact of adoption of IFRS 16 (continued)

Impact on the condensed financial statements

   (i)            Balance Sheet impact on transition 
 
                                                           At      IFRS 16           At 
GBPm                                              31 Aug 2019   Adjustment   1 Sep 2019 
Non-current assets 
Goodwill                                                  176            -          176 
Other intangible assets                                    49            -           49 
Property, plant and equipment 
 (1)                                                      201         (18)          183 
Right-of-use assets                                         -          457          457 
Investments in joint ventures                               4            -            4 
Deferred tax assets (2)                                     8            4           12 
Trade and other receivables                                10            -           10 
                                                          448          443          891 
Current assets 
Inventories                                               174            -          174 
Trade and other receivables 
 (3)                                                       73          (3)           70 
Derivative financial assets                                 2            -            2 
Cash and cash equivalents                                  49            -           49 
                                                          298          (3)          295 
Total assets                                              746          440        1,186 
Current liabilities 
Trade and other payables (4)                            (250)            4        (246) 
Bank overdrafts and other 
 borrowings                                              (15)            -         (15) 
Retirement benefit obligations                            (1)            -          (1) 
Obligations under finance 
 leases (5)                                               (5)            5            - 
Lease liability                                             -        (108)        (108) 
Current tax liabilities                                   (7)            -          (7) 
Short-term provisions                                     (1)            -          (1) 
                                                        (279)         (99)        (378) 
 
Non-current liabilities 
Retirement benefit obligations                            (3)            -          (3) 
Bank overdrafts and other 
 borrowings                                             (200)            -        (200) 
Long-term provisions (6)                                  (4)            2          (2) 
Obligations under finance 
 leases (5)                                               (9)            9            - 
Lease liability                                             -        (385)        (385) 
Deferred tax liabilities                                  (3)            -          (3) 
Other non-current liabilities 
 (4)                                                     (11)           11            - 
                                                        (230)        (363)        (593) 
Total liabilities                                       (509)        (462)        (971) 
Total net assets                                          237         (22)          215 
 
Shareholders' equity 
Called up share capital                                    24            -           24 
Share premium                                               9            -            9 
Capital redemption reserve                                 13            -           13 
Translation reserve                                         8            -            8 
Other reserve                                           (274)            -        (274) 
Retained earnings                                         455         (22)          433 
Total equity attributable 
 to equity holders of the parent                          235         (22)          213 
Non-controlling interest                                    2            -            2 
Total equity                                              237         (22)          215 
 
 

(1) In respect of transfer of former finance leases and impairment on the date of initial application of IFRS 16.

(2) Deferred tax recognised on transition impact on opening retained earnings.

(3) Adjustment mainly in respect of prepaid rent.

(4) Adjustment in respect of lease incentive and rent accrual.

(5) Adjustment in respect of former finance lease liability now reclassified as lease liability.

(6) Adjustment in respect of onerous lease provision.

WH Smith PLC

Notes to the Unaudited Condensed Financial Statements

For the year ended 31 August 2020

19. Impact of adoption of IFRS 16 (continued)

The table below shows a reconciliation from the total operating lease commitment as disclosed at 31 August 2019 to the total lease liability recognised in the financial statements on the date of transition:

 
                                                             At 1 Sep 2019 
                                                                     GBP'm 
Operating lease commitment at 31 August 2019 as 
 disclosed in the Group's consolidated financial 
 statements                                                            986 
Discounted using the incremental borrowing rate 
 at 1 September 2019                                                   920 
Leases where landlords have substantive substitution 
 rights (i.e., leases outside the scope of IFRS 16)(1)               (412) 
Leases with variable lease payment(2)                                 (12) 
Recognition exemption for short-term leases(3)                        (10) 
Extension options reasonably certain to be exercised(4)                  4 
Termination options reasonably certain to be exercised(4)             (11) 
Additional lease liabilities recognised at 1 September 
 2019                                                                  479 
Finance lease liabilities as at 31 August 2019                          14 
Total Lease liabilities recognised at 1 September 
 2019                                                                  493 
 

(1) Contracts that were considered to be a lease under IAS 17 which do not meet the definition of a lease under IFRS 16, principally because the landlord is considered to have substantive substitution rights over the associated assets. This is explained further below under the section "key areas of judgement".

(2) Contracts where the minimum lease payments are dependent upon a variable factor and therefore the lease payments are in substance variable in nature.

(3) The Group has applied the practical expedient to classify leases for which the leases term ends within 12 months of the date of initial application of IFRS 16 as short-term leases. The Group has also applied the recognition exemption for short term leases.

(4) Previously, lease commitments only included non-cancellable periods in the lease agreements. Under IFRS 16, the lease term includes period covered by options to extend or terminate the lease where the Group is reasonably certain that such options will be exercised.

   (ii)         Income statement impact 

As a result of applying IFRS 16, the Group has recognised depreciation and interest costs in respect of leases that are within the scope of IFRS 16 (which were previously classified as operating leases), rather than rental expense. During the year ended 31 August 2020, the Group recognised GBP105m of additional depreciation charges and GBP11m of additional interest costs and a gain of GBP15m due to Covid-19 rent reduction/ waiver in respect of these leases instead of recognising the rental expense of GBP102m, resulting in a net GBP1m impact on profit (before non-underlying items).

   (iii)        Cash flow impact 

As a result of applying IFRS 16, there is an increase in net cash inflows from operating activities by GBP66m being offset by an increase in net cash outflows from financing activities by GBP66m. There is no impact on the net cash flow.

WH Smith PLC

Notes to the Unaudited Condensed Financial Statements

For the year ended 31 August 2020

19. Impact of adoption of IFRS 16 (continued)

Key areas of judgement in applying IFRS 16

Substantive substitution rights

Judgement is involved in determining whether a contract meets the definition of a lease under IFRS 16. Management has determined that certain retail concession contracts give the landlord substantive substitution rights because the contract gives the landlord rights to relocate the retail space occupied by the Group. In such cases, management has concluded that there is not an identified asset and therefore such contracts are outside the scope of IFRS 16. For these contracts, the Group recognises the payments as an operating expense on a straight-line basis over the term of the contract unless another systematic basis is more representative of the time pattern in which economic benefits from the underlying contract are consumed. The value of such contracts excluded from the lease liability on transition to IFRS 16 is GBP412m, see Note 19 (i).

Determination of Incremental Borrowing Rate (IBR)

The application of IFRS 16 required judgement around the calculation of the IBR. This has been determined on a lease-by-lease basis based on the right-of-use asset in a similar economic environment and taking into account the risk-free rate, adjusted for factors such as the credit rating and the lease term.

Determination of lease term

In determining the lease term for contracts that have options to extend or terminate early, management has applied judgement in determining the likelihood of whether such options will be exercised. This is based on the length of time remaining before the option is exercisable, performance of the individual store and the trading forecasts.

Impairment assessment

The right of use asset is tested for impairment on a lease by lease basis as at the transition date in accordance with IAS 36 where the practical expedient has not been taken. Each store is regarded to be a cash generating unit. In estimating the future net cashflow, judgement is made around the lease term and estimated profit growth which is based on the underlying economics of the individual stores such as the store contribution and location. As part of estimating the value-in-use, future cash flows for each store are discounted based on the Group's weighted average cost of capital which is determined based on factors such as risk-free rate and risk premium.

The Group has recorded an impairment of GBP21m to the right-of-use assets and fixed assets with a corresponding adjustment to the opening reserves. The impairment predominantly resulted from the application of different discount rates in line with the applicable accounting standards. IFRS 16 requires using an incremental borrowing rate based on which the right-of-use assets is recorded whereas the value-in-use calculation under IAS 36 requires the cash flow to be discounted using a pre-tax discount rate, for which we have used the pre-tax weighted average cost of capital. The application of these standards caused an impairment on numerous right-of-use assets and fixed assets.

Revised accounting policy

Policies applicable from 1 September 2019

The Group as a lessee

The Group assesses whether a contract is or contains a lease, at inception of the contract. The Group recognises a right-of-use asset and a corresponding lease liability with respect to all lease arrangements in which it is the lessee, except for short-term leases (defined as leases with a lease term of 12 months or less) and leases of low value assets. For these leases, the Group recognises the lease payments as an operating expense on a straight-line basis over the term of the lease unless another systematic basis is more representative of the time pattern in which economic benefits from the leased assets are consumed.

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by using the rate implicit in the lease. If this rate cannot be readily determined, the lessee uses its incremental borrowing rate.

Lease payments included in the measurement of the lease liability comprise:

   --      Fixed lease payments, less any lease incentives receivable; 

-- Variable lease payments that depend on an index or rate, initially measured using the index or rate at the commencement date;

   --      The amount expected to be payable by the lessee under residual value guarantees; 

-- The exercise price of purchase options, if the lessee is reasonably certain to exercise the options; and

-- Payments of penalties for terminating the lease, if the lease term reflects the exercise of an option to terminate the lease.

WH Smith PLC

Notes to the Unaudited Condensed Financial Statements

For the year ended 31 August 2020

19. Impact of adoption of IFRS 16 (continued)

The lease liability is presented as a separate line in the consolidated balance sheet.

The lease liability is subsequently measured by increasing the carrying amount to reflect interest on the lease liability (using the effective interest method) and by reducing the carrying amount to reflect the lease payments made.

The Group remeasures the lease liability (and makes a corresponding adjustment to the related right-of-use asset) whenever:

-- The lease payments change due to changes in an index or rate, in which cases the lease liability is remeasured by discounting the revised lease payments using an unchanged discount rate.

-- A lease contract is modified, and the lease modification is not accounted for as a separate lease, in which case the lease liability is remeasured based on the lease term of the modified lease by discounting the revised lease payments using a revised discount rate at the effective date of the modification.

The right-of-use assets comprise the initial measurement of the corresponding lease liability, lease payments made at or before the commencement date, less any lease incentives received and any initial direct costs. They are subsequently measured at cost less accumulated depreciation and impairment losses.

Whenever the Group incurs an obligation for costs to dismantle and remove a leased asset, restore the site on which it is located or restore the underlying asset to the condition required by the terms and conditions of the lease, a provision is recognised and measured under IAS 37. To the extent that the costs relate to a right-of-use asset, the costs are included in the related right-of-use asset.

Right-of-use assets are depreciated over the lease term. The depreciation starts at the commencement date of the lease.

The right-of-use assets are presented as a separate line in the consolidated balance sheet.

The Group applies IAS 36 to determine whether a right-of-use asset is impaired and accounts for any identified impairment loss as described in the 'Property, Plant and Equipment' policy.

The lease contracts that include variable rents based on sales, which is the case with many of our retail concession contracts, are not included in the measurement of the lease liability and the right-of-use asset. The related payments are recognised as an expense in the period in which the event or condition that triggers those payments occurs and are included in profit or loss (see Note 3).

The Group has applied the Amendment to IFRS 16 issued in June 2020, and endorsed by the EU in October 2020. This practical expedient allows the impact on the lease liability of temporary rent reductions/waivers affecting rent payments due on or before June 2021, to be recognised in the Income statement in the period they are received, rather than as lease modifications, which would require the remeasurement of the lease liability using a revised discount rate with a corresponding adjustment to the right-of-use asset.

For leases acquired as part of a business combination, the lease liability is measured at the present value of the remaining lease payments. The right-of-use asset is measured at the same amount as the lease liability adjusted to reflect favourable or unfavourable terms of the lease when compared to market terms.

The Group as a lessor

The Group enters into lease agreements as an intermediate lessor with respect to some of its property leases. It accounts for the head lease and the sublease as two separate contracts. The sublease is classified as finance lease or operating lease by reference to the right-of-use asset arising from the head lease. Whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee, the contract is classified as a finance lease. All other leases are classified as operating leases.

Rental payments from operating leases are recognised on a straight-line basis over the term of the relevant lease.

Policies applicable prior to 1 September 2019

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

Assets held under finance leases are recognised as assets of the Group at their fair value determined at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the balance sheet as a finance lease obligation. These assets are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, over the term of the relevant lease. Lease payments are apportioned between finance charges and a reduction of the lease obligations so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognised directly in the income statement.

WH Smith PLC

Notes to the Unaudited Condensed Financial Statements

For the year ended 31 August 2020

19. Impact of adoption of IFRS 16 (continued)

Rentals payable and receivable under operating leases are charged to the income statement on a straight-line basis over the term of the relevant lease. Benefits received and receivable as an incentive to enter into an operating lease are also spread on a straight-line basis over the lease term. The Group has a number of lease arrangements in which the rent payable is contingent on revenue. Contingent rentals payable, based on store revenues, are accrued in line with revenues generated.

20. Events after the balance sheet date

On 31 October 2020, the UK government announced a 4 week lockdown across England. We have performed an assessment of this government action on the Group to ascertain if this constitutes an adjusting post balance sheet event under IAS 10 'Events after the Reporting Date'. Following our review, we have concluded that the November lockdown is a non-adjusting event.

Following the announcement of a second lockdown in England, we have 558 stores open in High Street and 243 stores open in Travel, including 206 Post Offices and 135 hospital stores. We are expecting a significant decline in passenger numbers as a result of travel bans with the majority of our stores at airports and railway stations temporarily closed. 135 stores located in hospitals across the UK remain open to serve key workers. Internationally, the majority of stores remain open.

We have estimated the impact of this lockdown on the value-in-use calculations use in the impairment assessments of Property, plant and equipment, Intangible assets and Right-of-use assets outlined in Notes 11, 12 and 13. The estimated impact on the Group income statement is an increase to the impairment charge on non-current assets of around GBP7m.

21. Related parties

Transactions between businesses within this Group which are related parties have been eliminated on consolidation and are not disclosed in this note.

Remuneration of key management personnel

The remuneration of the executive and non-executive directors, who are the key management personnel of the Group, is set out below in aggregate for each of the categories specified in IAS 24 Related Party Disclosures.

 
GBP'000                         2020   2019 
Short-term employee benefits   1,517  3,646 
Post employment benefits         186    264 
Share-based payments             (4)  2,095 
                               1,699  6,005 
 

There are no other transactions with directors.

WH Smith PLC

Glossary

Alternative Performance Measures

In reporting financial information, the Group presents Alternative Performance Measures, 'APMs', which are not defined or specified under the requirements of IFRS.

The Group believes that these APMs, which are not considered to be a substitute for or superior to IFRS measures, provide stakeholders with additional useful information on the underlying trends, performance and position of the Group and are consistent with how business performance is measured internally. The Alternative Performance Measures are not defined by IFRS and therefore may not be directly comparable with other companies' Alternative Performance Measures.

Non-underlying items

The Group has chosen to present a Headline measure of profit and earnings per share which excludes certain items that are considered non-underlying and exceptional due to their size, nature or incidence, and are not considered to be part of the normal operating costs of the Group. These costs may include the financial effect of non-underlying items which are considered exceptional and occur infrequently such as, inter alia, restructuring costs linked to a Board agreed programme, amortisation of acquired intangible assets, costs relating to business combinations, significant items related to pension schemes, and impairment charges and items meeting the definition of non-underlying specifically related to the Covid-19 pandemic, and the related tax effect of these items. The Group believes that they provide additional useful information to users of the financial statements to enable a better understanding of the Group's underlying financial performance.

IFRS 16

The Group has implemented IFRS 16 using the modified retrospective approach, which means that prior year balances have not been restated. IFRS 16 superseded the lease guidance under IAS 17 and the related interpretations. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model as the distinction between operating and finance leases is removed. The only exceptions are short-term and low-value leases. At the commencement date of a lease, a lessee will recognise a lease liability for the future lease payments and an asset (right-of-use asset) representing the right to use the underlying asset during the lease term. Lessees are required to separately recognise the interest expense on the lease liability and the depreciation expense on the right-of-use asset.

For the purposes of narrative commentary on the Group's performance and financial position in the Preliminary announcement, the effects of IFRS 16 have been excluded, in order to provide meaningful year on year comparisons.

The impact of the implementation of IFRS 16 on the Income Statement and Segmental information is provided in Notes A1 and A2 below. There is no impact on cash flows, although the classification of cash flows has changed, with an increase in net cash inflows from operating activities being offset by a decrease in net cash inflows from financing activities, as set out in Note A9 below. The balance sheet as at 31 August 2020 both including and excluding the impact of IFRS 16 is shown in Note A10 below.

Definitions and reconciliations

In line with the Guidelines on Alternative Performance Measures issued by the European Securities and Markets Authority ('ESMA'), we have provided additional information on the APMs used by the Group below, including full reconciliations back to the closest equivalent statutory measure

 
APM            Closest equivalent  Reconciling    Definition and purpose 
                IFRS measure        items to 
                                    IFRS measure 
Income Statement Measures 
Headline       Group (loss)        See Note       Headline Group (loss) / profit before 
 Group (loss)   / profit before     A1             tax excludes non-underlying items. 
 / profit       tax                                A reconciliation from Headline Group 
 before tax                                        (loss) / profit before tax to Group 
                                                   (loss) / profit before tax on an IFRS 
                                                   16 basis is provided on the Group 
                                                   income statement on page 17, and on 
                                                   an IAS 17 basis in Note A1. 
High Street    Group operating     See Note       Group profit from trading operations 
 and Travel     profit              A2             and High Street and Travel trading 
 trading                                           profit are stated after directly attributable 
 profit,                                           share-based payment and pension service 
 and Group                                         charges and before non-underlying 
 profit from                                       items, unallocated costs, finance 
 trading                                           costs and income tax expense. 
 operations 
                                                   A reconciliation from the above measures 
                                                   to Group operating profit and Group 
                                                   profit before tax on an IFRS 16 basis 
                                                   is provided in Note 2 to the condensed 
                                                   financial statements, and on an IAS 
                                                   17 basis in Note A2. 
 

WH Smith PLC

Glossary

 
APM             Closest     Reconciling     Definition and purpose 
                equivalent   items to 
                IFRS         IFRS measure 
                measure 
Income Statement Measures 
Non-underlying  None        Refer to        Items which are not considered part 
 items                       definition      of the normal operating costs of the 
                             and see Note    business, are non-recurring and considered 
                             A6              exceptional because of their size, 
                                             nature or incidence are treated as 
                                             non-underlying items and disclosed 
                                             separately. The Group believes the 
                                             separate disclosure of these items 
                                             provides additional useful information 
                                             to users of the financial statements 
                                             to enable a better understanding of 
                                             the Group's underlying financial performance. 
                                             An explanation of the nature of the 
                                             items identified as non-underlying 
                                             on an IFRS 16 basis is provided in 
                                             Note 4 to the condensed financial 
                                             statements, and on an IAS 17 basis 
                                             in Note A6. 
Headline        Earnings    Non-underlying  Headline earnings per share is defined 
 earnings       per          items and       as Headline (Loss) / profit for the 
 / (losses)     share        dilutive        year divided by the weighted average 
 per share                   effect of       number of ordinary shares in issue 
                             shares under    during the financial year, adjusted 
                             option see      for the effects of any potentially 
                             Note A4         dilutive share options. See Note 7 
                                             and Note A4. 
Effective       None        Non-underlying  Total income tax credit / charge excluding 
 tax rate                    items see       the tax impact of non-underlying items 
                             Notes A3        divided by Group Headline (loss) / 
                             and A6          profit before tax. See Note 6 on an 
                                             IFRS 16 basis, and Notes A3 and A6 
                                             on an IAS 17 basis. 
Fixed charges   None        Refer to        This performance measure calculates 
 cover                       definition      the number of times Profit before 
                                             tax covers the total fixed charges 
                                             included in calculating profit or 
                                             loss. Fixed charges included in this 
                                             measure are net finance charges (excluding 
                                             finance charges from IFRS 16 leases) 
                                             and net operating lease rentals stated 
                                             on an IAS 17 basis. 
                                             The calculation of this measure is 
                                             outlined in Note A5. 
Gross           Gross       Not applicable  Where referred to throughout the Preliminary 
 margin         profit                       announcement statement, gross margin 
                margin                       is calculated as gross profit divided 
                                             by revenue. 
Like-for-like   Movement    - Revenue       Like-for-like revenue is the change 
 revenue        in          change from      in revenue from stores that have been 
                revenue     non              open for at least a year, with a similar 
                per         like-for-like    selling space at a constant foreign 
                the income  stores           exchange rate. A reconciliation of 
                statement   - Foreign        these percentages is provided below.                          Travel  High Street  Group 
                            exchange         LFL revenue change         (43)%        (19)%  (33)% 
                            impact           Net new space impact          1%           -%     1% 
                                             Acquisitions                 10%           -%     5% 
                                             Foreign exchange impact       -%           -%     -% 
                                             Total revenue change       (32)%        (19)%  (27)% 
 
 
Balance Sheet Measures 
Net debt   None             Reconciliation  Net debt is defined as Cash and cash 
                             of net debt     equivalents, less Bank overdrafts 
                                             and other borrowings and both current 
                                             and non-current Obligations under 
                                             finance leases as defined on an IAS 
                                             17 basis. Lease liabilities recognised 
                                             as a result of IFRS 16 are excluded 
                                             from this measure. 
                                             A reconciliation of Net debt is provided 
                                             in Note A8. 
Other measures 
Free cash  Net cash inflow  See Group       Free cash flow is defined as the net 
 flow       from operating   Overview        cash inflow from operating activities 
            activities                       before the cash flow effect of non-underlying 
                                             items and pension funding, less net 
                                             capital expenditure. The components 
                                             of free cash flow are shown in Note 
                                             A7 and on page 12, as part of the 
                                             Group Overview. 
 

WH Smith PLC

Glossary

A1. Reconciliation of Headline to Statutory Group operating (loss) / profit and Group (loss) / profit before tax

 
                                                        2020                                        2019 
                                          IAS 17 Basis               IFRS 16 Basis 
                                          Non-underlying               IFRS 16                   Non-underlying 
GBPm                            Headline           items   Total   adjustments  Total  Headline           items  Total 
 
Revenue                            1,021               -   1,021             -  1,021     1,397               -  1,397 
Cost of sales                      (441)               -   (441)             -  (441)     (552)               -  (552) 
Gross profit                         580               -     580             -    580       845               -    845 
Distribution costs                 (545)               -   (545)             7  (538)     (592)               -  (592) 
Administrative expenses             (97)               -    (97)             5   (92)     (100)               -  (100) 
Other income                           2               -       2             -      2         7               -      7 
Non-underlying items                   -           (157)   (157)          (55)  (212)         -            (20)   (20) 
Group operating (loss) / 
 profit                             (60)           (157)   (217)          (43)  (260)       160            (20)    140 
Finance costs                        (9)               -     (9)          (11)   (20)       (5)               -    (5) 
(Loss) / profit before tax          (69)           (157)   (226)          (54)  (280)       155            (20)    135 
Income tax credit / (expense)         16              18      34             7     41      (28)               1     27 
(Loss) / profit for the period      (53)           (139)   (192)          (47)  (239)       127            (19)    108 
Attributable to: 
Equity holders of the parent        (53)           (139)   (192)          (47)  (239)       125            (19)    106 
Non-controlling interests              -               -       -             -      -         2               -      2 
                                    (53)           (139)   (192)          (47)  (239)       127            (19)    108 
 

WH Smith PLC

Glossary

A2. Reconciliation of Headline to Statutory Segmental trading (loss) / profit and Group (loss) / profit from trading operations

 
                                                       2020                                         2019 
                                         IAS 17 Basis                IFRS 16 Basis 
                                          Non-underlying               IFRS 16                   Non-underlying 
GBPm                           Headline            items   Total   adjustments  Total  Headline           items  Total 
 
Travel trading (loss) / 
 profit(1)                         (33)                -    (33)             6   (27)       117               -    117 
High street trading (loss) / 
 profit                            (10)                -    (10)             6    (4)        60               -     60 
Group (loss) / profit from 
 trading operations                (43)                -    (43)            12   (31)       177               -    177 
Unallocated costs                  (17)                -    (17)             -   (17)      (17)               -   (17) 
Headline Group operating 
 (loss) / profit                   (60)                -    (60)            12   (48)       160               -    160 
Non-underlying items                  -            (157)   (157)          (55)  (212)         -            (20)   (20) 
Group operating (loss) / 
 profit                            (60)            (157)   (217)          (43)  (260)       160            (20)    140 
 

(1) Includes International Trading loss of GBP32m under IAS 17 (2019: profit of GBP20m) and GBP26m under IFRS 16

A3. Reconciliation of Headline to Statutory tax (credit) / expense

 
                                                   2020                2019 
                                                      IFRS 16 
GBPm                                   Headline   adjustments  Total  Total 
(Loss) / profit before tax                 (69)             1   (68)    155 
Tax on profit                               (5)             -    (5)     32 
Standard rate of UK corporation tax 
 19.00% (2019: 19.00% 
Adjustment in respect of prior year 
 UK corporation tax                         (6)             -    (6)    (4) 
Total current tax charge                   (11)             -   (11)     28 
Deferred tax - current year                 (7)             -    (7)    (1) 
Deferred tax - prior year                     2             -      2      1 
Tax on Headline (loss) / profit            (16)             -   (16)     28 
Tax on non-underlying items                (18)           (7)   (25)    (1) 
Total tax on (loss) / profit               (34)           (7)   (41)     27 
 

WH Smith PLC

Glossary

A4. Reconciliation of Headline to Statutory (losses) / earnings per share

 
                                                    2020                                            2019 
                                     IAS 17 Basis                  IFRS 16 Basis 
                                    Non-underlying                  IFRS 16                      Non-underlying 
GBPm                     Headline            items      Total   adjustments     Total  Headline           items  Total 
 
(Loss) / profit for 
 the year, 
 attributable 
 to equity holders 
 of the parent               (53)            (139)      (192)      (47)         (239)       125            (19)    106 
 
Weighted average 
 shares in issue for 
 earnings per share                                       120                     120                              108 
Weighted average 
 shares in issued 
 for diluted earnings 
 per share                                                120                     120                              109 
 
Basic (loss) / 
 earnings 
 per share                (44.2)p         (115.8)p   (160.0)p       (39.2)p  (199.2)p    115.7p         (17.6)p  98.1p 
Diluted (loss) / 
 earnings per share       (44.2)p         (115.8)p   (160.0)p       (39.2)p  (199.2)p    114.7p         (17.5)p  97.2p 
 

A5. Fixed charges cover

 
GBPm                                                    2020  2019 
Net finance costs (pre-IFRS 16)                            9     5 
Net operating lease rentals (pre-IFRS 16)                210   236 
Total fixed charges                                      219   241 
Headline (Loss) / profit before tax                     (69)   155 
Headline (Loss) / profit before tax and fixed charges    150   396 
Fixed charges cover - times                             0.7x  1.6x 
 

WH Smith PLC

Glossary

A6. Non-underlying items on pre-IFRS 16 and IFRS 16 bases

 
                                                          2020        2019 
GBPm                                                 IAS 17  IFRS 16 
Costs relating to business combinations 
 
  *    Transaction costs                                 11       11     6 
 
  *    Integration costs                                  9        9     5 
Amortisation of acquired intangible 
 assets                                                   3        3     2 
High Street business review                               -        -     7 
Pension past service cost                                14       14     - 
Costs directly attributable to 
 Covid-19 
 
  *    Impairment of property, plant and equipment       54       39     - 
 
  *    Impairment of Intangible assets                    1        1     - 
                                                          -       95     - 
  *    Impairment of right-of-use assets 
                                                         25        -     - 
  *    Other property costs 
 
  *    Write-down of inventories                         14       14     - 
 
  *    Restructuring costs                               25       25     - 
 
  *    Other                                              1        1     - 
                                                             -------  ---- 
Non-underlying items, before tax                        157      212    20 
Tax credit on non-underlying items                     (18)     (25)   (1) 
                                                             -------  ---- 
Non-underlying items, after tax                         139      187    19 
                                                             -------  ---- 
 

Non-underlying items on a pre-IFRS 16 basis are calculated on a consistent basis with IFRS 16, with the exception of the below items.

A tax credit of GBP25m has been recognised in relation to the above items (GBP18m under IAS 17).

Impairment of property, plant and equipment and right-of-use assets

The impairment charge recognised on an IAS 17 basis differs from that recognised under IFRS 16. This is mainly due to a lower asset base under IAS 17, coupled with lower expected store cash flows, with rental expenses being included in the forecast cash flows (treated as financing costs under IFRS 16), and a higher discount rate. The calculation of the Group's weighted average cost of capital differs under IFRS 16 versus IAS 17. The pre-tax discount rate used in the IFRS 16 calculation was 8.9% and the pre-tax discount rate used in the IAS 17 calculation was 10.9%.

Right-of-use assets are not recognised under IAS 17.

Other property costs

Other property costs on a pre-IFRS 16 basis include provisions for onerous lease contracts; on an IFRS 16 basis, onerous lease contracts are recognised as an impairment of the right-of-use asset. As a result of the impact of Covid-19, the Group has carried out a review of leases where the obligations of those leases exceed the potential economic benefits expected to be received under them. We anticipate that a number of stores will not fully recover to pre-Covid-19 sales levels and have accelerated our internal forecasts for the rate of sales decline in those locations. As a result, we have recognised onerous provisions of GBP13m for stores where we now anticipate we will make a cash loss over the remaining term of their leases.

The Group's IAS 17 property provisions represent the present value of unavoidable future net lease obligations and related costs of leasehold property (net of estimated sublease income and adjusted for certain risk factors) where the space is vacant, loss-making or currently not planned to be used for ongoing operations. The unwinding of the discount is treated as an imputed interest charge. These provisions represent the best estimate of the liability at the time of the balance sheet date, the actual liability being dependent on future events such as economic environment and marketplace demand. Expectations will be revised each period until the actual liability arises, with any difference accounted for in the period in which the revision is made.

Other items included in Other property costs include GBP12m reinstatement liabilities for stores where the long-term viability has been impacted by Covid-19, and the Group has crystallised its obligation to restore the site on which it is located or restore the underlying asset to the condition required by the terms and conditions of the lease.

WH Smith PLC

Glossary

A7. Free cash flow

 
GBPm                                               Note  2020  2019 
Cash generated from operating activities             10    94   153 
Interest paid                                            (13)   (4) 
Net cash inflow from operating activities                  81   149 
Impact of IFRS 16                                        (66)     - 
Addback: 
 
  *    Cash impact of non-underlying items                 20    16 
 
  *    Pension funding                                      3     3 
Deduct: 
 
  *    Purchase of property, plant and equipment         (67)  (47) 
 
  *    Purchase of intangible assets                     (12)  (12) 
Free cash flow                                           (41)   109 
 

A8. Net debt

 
GBPm                                                      Note   2020   2019 
Borrowings 
 
  *    Revolving credit facility                                    -   (15) 
 
  *    Bank loans                                               (400)  (200) 
 
  *    Lease liabilities                                    14  (559)   (14) 
Liabilities from financing activities                           (959)  (229) 
Cash and cash equivalents                                         108     49 
Net debt (IFRS 16)                                           9  (851)  (180) 
 
  *    Add back lease liabilities recognised under IFRS 
       16(1)                                                      550      - 
Net debt (IAS 17)                                               (301)  (180) 
 

(1) Excludes lease liabilities previously recognised under IAS 17 as finance leases.

A9. Cash flow disclosure impact of IFRS 16

There is no impact on cash flows, although the classification of cash flows has changed, with an increase in net cash inflows from operating activities being offset by a decrease in net cash inflows from financing activities.

 
                                                2020                          2020 
GBPm                                          IAS 17  IFRS 16 Adjustment   IFRS 16 
Net cash inflows from operating activities        15                  66        81 
Net cash outflows from investing 
 activities                                    (395)                   -     (395) 
Net cash inflows from financing activities       440                (66)       374 
Net decrease in cash in the period                60                   -        60 
 

WH Smith PLC

Glossary

A10. Balance sheet impact of IFRS 16

The impact on the Balance Sheet of the IFRS 16 at 31 August 2020 was as follows:

 
 
                                             2020                             2020 
  GBPm                                     IAS 17     IFRS 16 Adjustment   IFRS 16 
                                                   --------------------- 
Goodwill and other intangible assets          495                    (2)       493 
Property, plant and equipment                 190                      2       192 
Right-of-use assets                             -                    413       413 
Investments in joint ventures                   2                      -         2 
                                                   --------------------- 
                                              687                    413     1,100 
                                                   --------------------- 
 
Inventories                                   150                      -       150 
Payables less receivables                   (226)                     43     (183) 
                                                   --------------------- 
Working capital                              (76)                     43      (33) 
                                                   --------------------- 
 
Derivative financial asset                      -                      -         - 
Net current and deferred tax liability         17                     11        28 
Provisions                                   (27)                     13      (14) 
                                                   --------------------- 
Operating assets employed                     601                    480     1,081 
Net (debt) / funds                          (301)                  (550)     (851) 
                                                   --------------------- 
Net assets excluding pension liability        300                   (70)       230 
Pension liability                             (4)                      -       (4) 
Deferred tax asset on pension liability         1                      -         1 
                                                   --------------------- 
Total net assets                              297                   (70)       227 
                                                   --------------------- 
 

Further information on the impact of the adoption of IFRS 16 can be found in Note 19 on page 47.

A11. Operating lease expense under IAS 17

Amounts recognised in Headline Group operating profit on a pre-IFRS 16 basis are as follows:

 
GBPm                                            2020  2019 
Minimum lease payments                           162   216 
Contingent rent payments                          49    21 
Total rent paid                                  211   237 
Sublease rentals received on operating leases    (1)   (1) 
Net operating lease charges                      210   236 
 

The Group has adopted IFRS 16 during the year, which requires lessees to account for all leases under a single on-balance sheet model as the distinction between operating and finance leases is removed. In order to provide comparable information, the Group has chosen to present Headline measures of operating profit/(loss) and profit/(loss) before tax, as explained in Note 2 Segmental analysis.

The table above presents the pre-IFRS 16 net operating lease charges, applying the principles of IAS 17, and Group accounting policies as applicable prior to 1 September 2019, per Note 1 to the condensed financial statements.

The Group leases various properties under non-cancellable operating lease agreements. The leases have varying terms, escalation clauses and renewal rights. The Group has a number of lease arrangements in which the rent payable is contingent on revenue. Contingent rentals payable, based on store revenues, are accrued in line with revenues generated.

The average remaining lease length across the Group is 4 years.

Rentals payable and receivable under operating leases are charged to the income statement on a straight-line basis over the term of the relevant lease. Benefits received and receivable as an incentive to enter into an operating lease are also spread on a straight-line basis over the lease term.

Temporary rent reductions due to Covid-19, affecting rent payments due on or before June 2021, have been recognised in the Income statement in the period they are received.

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