WH SMITH PLC - PRELIMINARY RESULTS ANNOUNCEMENT

10 October 2013                                                                                                                                                                                                                                                                                                                                                        

WH SMITH PLC

PRELIMINARY RESULTS ANNOUNCEMENT

FOR THE YEAR ENDED 31 AUGUST 2013

Strong performance across the Group with profit ahead of expectations, final dividend up 15% and further £50m share buyback

KEY POINTS

·   Total Group profit before tax up 6% to £108m (2012: £102m)

·   Group profit from trading operations¹ up 4% to £122m (2012: £117m)

o Good performance from Travel with trading profit¹ up 5% to £66m (2012: £63m)

o Further growth from High Street with trading profit¹ up 4% to £56m (2012: £54m)

·   Earnings per share² up 15% to 68.5p (2012: 59.7p restated)³

·   Final dividend proposed of 21.3p, up 15% on the prior year; giving a total ordinary dividend per share of 30.7p, a 14% increase on the prior year

·   Additional £50m share buyback programme announced today, having completed the £50m share buyback announced in August 2012

·   Strong cash generation and balance sheet

o Strong free cash flow⁴ of £95m

o Net cash of £31m as at 31 August 2013

·   Group total sales down 5% with like-for-like (LFL) sales down 5%

o Travel total sales flat with LFL sales down 4%

o High Street total sales down 7% with LFL sales down 6%

·   Gross margin improved by 180 basis points

·   Good progress in Travel's growing international channel with 40 units won this year, taking the total to 141⁵ units now open or won

·   Increased target cost savings in High Street to £22m over the next three years

Commenting on the results, Stephen Clarke, Group Chief Executive said:

"We continue to deliver on our strategy with a strong performance and good profit growth in both businesses. Travel increased profit to £66m and in High Street profit increased to £56m. The Group remains highly cash generative enabling us to invest in our businesses and in new opportunities, whilst returning cash to shareholders, including a further £50m share buyback announced today.

"Looking to the year ahead, we continue to plan cautiously in an uncertain environment, however we are a resilient business and are well positioned for continued growth in both the UK and internationally."

Enquiries:

WH Smith PLC

Nicola Hillman                                    Media Relations                                  020 7406 6350

Mark Boyle                                         Investor Relations                               020 7406 6320

Brunswick

Simon Sporborg / Catriona McDermott                                                          020 7404 5959

WH Smith PLC's Preliminary Results 2013 are available at www.whsmithplc.co.uk. A copy of the Preliminary Results 2013 will shortly be available for inspection at the UK Listing Authority, 25 The North Colonnade, London E14 5HS.

FINANCIAL REVIEW

Group Summary

Group profit from trading operations¹ increased 4% on the prior year to £122m (2012: £117m) and the Group generated profit before tax of £108m (2012: £102m), an increase of 6% on the prior year.

Total Group sales were £1,186m (2012: £1,243m) with LFL sales down 5%. Travel sales were flat compared to last year and down 4% on a LFL basis. High Street sales were down 7% and down 6% on a LFL basis.

Travel delivered another good performance with trading profit¹ increasing by 5% to £66m with further improvement in gross margin and good cash generation.  We continue to invest in the business, and in the UK we opened 30 new units during the year taking us to a total of 579 units in this country.  We expect to open a similar number of new units in the year ahead. The business is well positioned for recovery when the economy improves. In our international channel we won a further 40 new units in the year.  We now have 94 units open in this channel and 47 units yet to open, giving us a total of 141 units either open or won. As at 31 August 2013, Travel operated from 673 units.

High Street delivered a resilient performance in challenging trading conditions with further good cash generation and trading profit¹ up 4% to £56m.  We saw a good gross margin performance and costs were tightly controlled.  Cost savings of £18m were delivered in the year. An additional £10m of cost savings have been identified making a total of £22m over the next three years. We opened 4 new stores in the year and as at 31 August 2013 High Street operated from 615 stores.

Earnings per share² increased by 15% to 68.5p (2012: 59.7p)³. This reflects the increase in profit, a lower basic weighted average number of shares in issue following the share buyback, and a decrease in the effective tax rate from 21%³ to 19%.

The Group remains highly cash generative and has a strong balance sheet. Net cash was £31m at 31 August 2013, with a Group free cash flow⁴ of £95m. The Group has a committed multi-currency revolving credit facility of £70m through to January 2016.

During the year we completed the £50m return of cash to shareholders announced in August 2012 and we have today announced a further return of cash to shareholders of up to £50m through a rolling share buyback programme. 

The Board has proposed a final dividend of 21.3p per share, a 15% increase on last year, giving a total ordinary dividend per share of 30.7p, a 14% increase on the prior year. The proposed increase in final dividend reflects the Board's confidence in the future prospects of the Group and the strong cash generative nature of the business. We have a progressive dividend policy and expect that over time dividends would be broadly covered twice by earnings calculated on a normalised tax basis.

We invest in the business, including capital expenditure in the year of £38m, whilst consistently growing dividends and returning cash to shareholders as part of our long-term strategy to create value for shareholders. Including the share buyback announced today and the proposed final dividend, we will have returned £536m of cash to shareholders since 2007 through a combination of ordinary dividends, share buybacks and a special dividend.

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¹ Cash dividend paid

² Proposed final dividend for year ended 31 August 2013

³ Buyback announced on 10 October 2013

Trading Operations

Travel

Travel delivered another good performance, with strong cash generation, demonstrating the strength of the business model, which enables us to continue to grow despite the uncertain economic environment.  Travel's trading profit¹ increased by 5% to £66m (2012: £63m) with a further improvement in gross margin and good cost control.  We continue to benefit from variable rents based on turnover and are well positioned when the economy improves.

Total Travel sales were flat, with LFL sales down by 4%.  Gross margin increased by 180bps during the period, primarily driven by active category mix management.

We continue to identify opportunities for growth in the UK and opened 30 new units in the UK during the year, including: 8 in air, 5 in rail, 8 in hospitals, 1 in a motorway service area, 6 workplace units and 2 Funky Pigeon stores. We plan to open a similar number of units in the current year, including all the CTN units in the new Terminal 2 at Heathrow, and anticipate opening around 10 hospital units and 8 workplace units a year over the next five years.

We actively manage margins, costs and space across all of our channels, whilst investing for the future. We have continued to focus on category mix management to best meet customer and landlord needs, improve service and efficiency, to grow market share and to drive margins. Additional space has been allocated, for example, to travel accessories, digital accessories, food, drink, gifts and souvenirs as well as creating space for self checkouts, which improve efficiency and service. We have also invested in both improved technology, such as handheld scanners and self checkouts, and format development, building on the strength of our relationships with landlords. This includes extending the WHSmith brand as well as developing new brands and partnerships.

During the year we opened a new concept WHSmith Express store, and three Zoodle stores with a dedicated children's offer; two in Manchester Airport and one in Melbourne Airport. In addition, we can offer our operating expertise to partners, such as M&S Simply Food, where there is a mutually beneficial opportunity. We now have two WHSmith M&S Simply Food units open, in Salford Hospital and Manchester Royal Infirmary, and further units are planned to open later this year.  We have also partnered with the Musgrave Group (owners of the Londis and Budgens brands) to trial a convenience offer in railway stations, hospitals and airport arrival stores.

Our International units are performing well, with the WHSmith brand and offer well received in each location by customers and landlords. We continue to demonstrate that we can add value and deliver improved performance and, where we have replaced the previous operator, we have outperformed. Further progress has been made in a number of regions, including Australia, South East Asia, India and the Middle East and we have invested in additional resources to develop our international business and support further growth.

During the year we renewed the contract for our first international units in Copenhagen Airport, securing an additional sixth unit. We have today announced 20 new units: 4 units in Dublin, 6 units in Australia, 1 unit in Malaysia, 1 unit in Fiji, 4 units in the Middle East, 1 unit in India, 2 units in Russia and 1 unit in Azerbaijan.  We now have 141 international units either open or won, across four channels: air, rail, hospitals and malls. In addition, we have won 30 small kiosks in China in the year.

We continue to utilise our three operating models and, of the 141 units we have already won, 56% are franchise, 35% direct lease and the remainder are joint venture.

The Travel business now operates from 673 units (2012: 619 units), including motorway service area franchise units and coffee shops. 8 UK units were closed in the period, primarily due to landlord redevelopment.  We renewed 22 contracts and completed 7 refits during the year.  Excluding franchise units, Travel occupies 0.52m square feet (2012: 0.51m square feet). 

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High Street

High Street delivered a resilient profit performance in challenging trading conditions, delivering an increase in trading profit¹ to £56m (2012: £54m), up 4% on the prior year. This was achieved by continuing to strengthen our core categories, whilst focusing on optimising margins, controlling costs and delivering the retailing basics.  Cash generation in the division continues to be strong.

High Street sales were down 7% in total and down 6% on a LFL basis, reflecting some challenging markets and the strong publishing schedule in the second half of the prior year. Gross margin improved by around 200bps, through rebalancing the mix of our business, better buying, improved sourcing and markdown management.

Optimal use of space is a fundamental part of the strategy for High Street, as we look to maximise profitability today whilst setting ourselves up for the future shape of the business. We have a dedicated team and a substantial amount of data on both space and product elasticity, with major space changes made at least twice a year. This year space changes have included changes which have allowed us to reduce operating costs (for example, increasing stock room space in some stores), create an additional 150 Kobo shops and extend Kids books. We have also announced today that we have renewed our contract with Post Office Limited to operate the existing 82 Post Office branches in our stores for a further five years.  In addition, we have signed a new agreement and anticipate opening a further 16² Post Office branches, giving us a total of 98 Post Offices within our stores.

Cost savings remain a core part of our strategy and we focus on all areas of cost in the business. We have made good progress again this year, delivering cost savings of £18m. These came from right across the business, including the rollout of energy efficient tills to all High Street stores, the introduction of voice picking in our distribution centres, the remodelling of our transhipment routes to stores and other operational efficiencies. We also have a number of initiatives on trial such as: improving trailer configuration in our distribution centres; centralising energy management for stores; more self checkouts; and changing our website hosting. We have identified an additional £10m of new cost savings, taking the target to £22m over the next three years.

The High Street business now operates from 615 stores (2012: 619 stores), which occupy 3.00m square feet (2012: 3.05m square feet).  We opened 4 new stores in the year and closed 7.

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² Subject to public consultation

Category Performance

Stationery:

Our strategy to build on our market leading position in Stationery remains unchanged. Like-for-like sales were down 3%, with gross margin up. We managed our stock tightly in all categories, which helped support this further improvement in gross margin. Our range of Gadgetshop products performed well over Christmas and we have recently acquired the Past Times and Modelzone brands, which we intend to use in a similar way to Gadgetshop. During the year, Stationery continued to benefit from active management of space, for example adding new ranges such as specialist art materials, digital accessories and partyware.  We saw a strong performance from Funkypigeon.com over the key seasons and we continue to develop the offer, including the launch of new personalised gifting products.  During the year we have also launched new Funky Pigeon smartphone and tablet apps and have further invested in website development and functionality.

Books:

In Books, the market continues to vary by sub-category, with the quality of publishing having a significant impact on market movements. In Kids, we annualised the strong sales from the very successful Hunger Games series in 2012, but we saw the biggest impact in Fiction, where the Fifty Shades trilogy had a substantial impact in the second half of the previous year. As a consequence, like-for-like sales were down 10% (down 6% excluding the Fifty Shades trilogy and the Hunger Games series) but gross margin was up year on year.  We have further developed our presence in the eBooks market through our partnership with Kobo and have now successfully rolled out 250 Kobo shops into our largest High Street stores.  We have also recently launched this season's new Kobo device line-up, including a new HD e-ink eReader with a new range of tablets available in November.

News and Impulse:

News and Impulse like-for-like sales were down 4% year on year with further improvement in gross margin. The newspaper and magazine market continues to be challenging but we grew our market share further through successful promotions, such as free Lego with the Daily Mail and free water with The Telegraph. We continue to develop the strongly-growing bookazine category which helps improve our margins. Our bookazine range now includes over two hundred and fifty titles and bestsellers in the year included a number of titles celebrating the birth of Prince George.  We actively manage space in news and impulse, and in Travel, we have increased our chilled space by around 12%, enabling us to increase our food and drink offer.  In High Street, we will roll out new till front displays to over 400 stores this autumn.  Impulse categories continue to perform well. 

Group profit

The Group generated a profit before tax of £108m (2012: £102m), an increase of 6% on the prior year. 

Tax

The effective tax rate was 19% (2012: 21%)², reflecting the lower statutory rate combined with the agreement with the tax authorities of open items from prior years. In the current year we expect the effective tax rate to be around 19%.  The exact tax rate achieved will depend on the underlying profitability of the Group, movement on the pension deficit and continued progress in agreeing outstanding tax assessments with the tax authorities.

Fixed Charges Cover

Fixed charges, comprising property operating lease rentals and net finance charges, were covered 1.6 times (2012: 1.6 times) by profit before tax and fixed charges.

Dividends

The Board has proposed a final dividend of 21.3p per share, an increase of 15% on the prior year, giving a total ordinary dividend per share of 30.7p, a 14% increase on the prior year. This increase on the prior year, together with the return of cash to shareholders announced today, reflects the cash generative nature of the Group and the Board's confidence in its future prospects. Subject to shareholder approval the dividend will be paid on 30 January 2014 to shareholders registered at the close of business on 10 January 2014. The Board has a progressive dividend policy and expects that over time dividends would be broadly covered twice by earnings calculated on a normalised tax basis.

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Cash Flow 

The Group generated free cash flow of £95m. The cash generative nature of both the High Street and Travel businesses is one of the key strengths of the Group.

Cash inflows from working capital were £1m as we continue to focus on working capital management, and capital expenditure was £38m in the year. This includes investment in new stores in both Travel and High Street together with ongoing investment in technology (including new tills in the High Street) and the existing estate.  In the current year we expect capital expenditure to be around £34m.  Net corporation tax paid was £19m, compared to £17m last year reflecting the increase in profit.

Net Cash

The movement in net cash is as follows:

¹ Dividends paid include 2013 interim and 2012 final dividends paid.

In addition to the £95m of free cash flow generated in the year, the Group has seen a net cash outflow of £50m in relation to non trading operations.  This includes £34m of dividend payments, £12m pension funding and net ESOP trust purchases of £1m. During the year, the Group completed the £50m return of cash to shareholders by way of a share buyback programme.  As at 31 August 2013 net cash was £31m. The Group has a committed multi-currency revolving credit facility of £70m through to January 2016. 

Balance Sheet

The Group had net assets of £152m (2012: £150m) at the end of the period, before the net effect of the pension liability less deferred tax asset, reflecting the cash generated during the year and the £50m return of cash to shareholders through the share buyback.

¹ Restated to recognise an IFRIC14 pension liability and associated deferred tax asset. See note 1

Return on Capital Employed

Total capital employed and ROCE were as follows:

¹ Net assets adjusted for net funds and retirement benefit obligations.

² Return on capital employed is calculated as the operating profit as a percentage of operating capital employed.

³ Return on capital employed after capitalised net operating leases including internal rent is calculated as the adjusted profit as a percentage of operating assets after capitalising operating leases.  Adjusted profit is stated after adding back the annual net rent and charging depreciation on the value of capitalised leases. The value of capitalised operating leases is based on the net present value of future rent commitments.

For the prior year, comparable ROCE was 89 per cent (20 per cent - after capitalised operating leases).

Pensions

The latest triennial valuation of the main defined benefit pension scheme, the WHSmith Pension Trust, was at 31 March 2012 at which point the actuarial deficit was £75m and the Group agreed a revised schedule of contributions of approximately £13m per annum for the following seven years.  The scheme has been closed to new members since 1996, and, from 2007, closed to defined benefit service accrual.

The WHSmith Pension Trust has an IAS 19 surplus of £108m at 31 August 2013 (2012 surplus: £113m) which the Group has not recognised.  There is an actuarial deficit due to the different assumptions and calculation methodologies used compared to those under IAS 19. We have amended our accounting in respect of the schedule of contributions and have recognised an IFRIC 14 pension liability of £62m (2012: £70m)¹. The IAS 19 pension deficit on the relatively small UNS defined benefit pension scheme was £nil (2012: £1m). 

IAS 19 (Revised), effective for our financial year ending 31 August 2014, is a change in accounting policy to require pension interest in the Income Statement to be calculated on the net balance sheet position at the beginning of the period.  We estimate the resulting non-cash pension charge to be approximately £3m in the year ending 31 August 2014.  The comparatives for the year ending 31 August 2013 will be restated to also reflect a non-cash £3m charge following this required change in accounting policy. 

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Operating leases

The Group's stores are held mainly under operating leases that are not capitalised and therefore are not included as debt for accounting purposes. The High Street leases are on standard 'institutional' lease terms, subject to five year upwards-only rent reviews.  The Travel stores operate mainly through turnover related leases, usually with minimum rent guarantees, and generally varying in length from five to ten years.

The business has an annual minimum net rental commitment of £167m (2012: £166m) (net of £2m of external rent receivable (2012: £4m)).  The total future rental commitment at the balance sheet date amounted to £987m (2012: £1,043m) with the leases having an average life of six years.

Contingent liabilities

The Group has contingent liabilities relating to reversionary property leases. Any such contingent liability which crystallises will be apportioned between the Group and Smiths News PLC in the ratio 65:35 pursuant to the terms of the Demerger Agreement (provided that the Smiths News PLC liability is limited to £5m in any 12 month period).  We have estimated the Group's 65 per cent share of the future cumulative contingent rental commitment at approximately £12m (2012: £18m). 

Principal risks and uncertainties

There are a number of potential risks and uncertainties that could have a material impact on the Group's financial performance and position. These include: economic, political, competitive and market risks; reliance on the WHSmith brand; key suppliers and supply chain management; store portfolio; business interruption; reliance on key personnel; treasury, financial and credit risk; and pensions and investment risk. A full description of these risks and our mitigating actions will be provided in the Annual Report and Accounts 2013.

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.