CNCT.L Regulatory News (CNCT)

6 November 2018

Connect Group PLC

('Connect Group' or 'the Group')

Audited Preliminary Results Announcement for the year ended 31 August 2018

A year of significant challenge and changes

Connect Group, a leading UK specialist distributor, today announces its audited preliminary results for the year ended 31 August 2018.

Headlines:

· Adjusted continuing profit before tax £28.4m, down £19.6m

· Performance driven by losses in Tuffnells and Pass My Parcel and weaker trading in Smiths News

· Free cash flow of £20.2m, down £8.5m

· No final dividend - making a full year dividend of 3.1p, down 68.4% (FY 2017: 9.8p)

· Smiths News - impacted by shortfalls to cost reduction targets and disappointing World Cup sales

· Pass My Parcel closed in light of continued losses

· Tuffnells materially impacted by operational integration, leading to service and efficiency shortfalls, and coinciding with more competitive trading conditions

· Statutory continuing loss before tax of £35.5m, includes a goodwill impairment for Tuffnells of £46.1m

· Appointment of Jos Opdeweegh as Chief Executive Officer from 1 September 2018

· Turnaround actions underway, spearheaded by Tuffnells recovery plan

· Full strategy for recovery and growth, including capital allocation, to be confirmed in January 2019

Gary Kennedy, Chairman, commented:

"A year of significant challenge exposed weaknesses in our strategy and its execution, with a consequent impact on results.

While it is disappointing not to succeed, we have taken decisive action to address underperformance and respond to the lessons learned. I am confident that under the new leadership of Jos Opdeweegh, and a return to more focused operations, we can reenergise the business, restoring stability and confidence."Enquiries:

A meeting for analysts will be held at the office of Buchanan, 107 Cheapside, London, EC2V 6DN on 6 November 2018 commencing at 9.30am. Connect Group PLC's Preliminary Results 2018 are available at www.connectgroupplc.com

An audio webcast of the analyst meeting will be available from 12 noon today via the following link:

http://webcasting.buchanan.uk.com/broadcast/5bb4ae6ec6ec681d9e06bbf5

About Connect Group

Connect Group PLC is a UK based specialist distributor and a leading provider of distribution solutions in complex and fragmented markets. The Group's networks are focused on serving high drop density early morning deliveries, and the demands of mixed and irregular sized freight.

The Group's core businesses are each leading players in their markets:

Smiths News is the UK's largest newspaper and magazine wholesaling business with an approximate 55 per cent market share. It distributes newspapers and magazines on behalf of the major national and regional publishers, delivering to approximately 27,000 customers across England and Wales on a daily basis. The speed of turnaround and density of Smiths News' coverage is critical to one of the UK's fastest physical supply chains.

Dawson Media Direct (DMD) supplies newspapers, magazines and inflight entertainment technology, serving 115 airports in 47 countries globally. Delivering to strict time windows with security accreditation, DMD serves the specialist needs of airlines and travel points in the UK and worldwide with printed and digital media.

Tuffnells is a leading distributor of mixed and irregular freight, serving approximately 5,000 small and medium sized enterprises across the UK. Its network of 37 depots collects and delivers mixed parcel freight consignments, specialising in items of irregular dimension and weight ("IDW"), examples of which include bulky furnishings, building materials and automotive parts. With a mix of local and national clients, Tuffnells completes up to 70,000 daily deliveries, offering a range of timed services that are responsive to customer demand.

Notes to Editors

This document contains certain forward-looking statements with respect to Connect Group PLC's financial condition, its results of operations and businesses, strategy, plans, objectives and performance. Words such as 'anticipates', 'expects', 'intends', 'plans', 'believes', 'seeks', 'estimates', 'targets', 'may', 'will', 'continue', 'project' and similar expressions, as well as statements in the future tense, identify forward-looking statements. These forward-looking statements are not guarantees of Connect Group PLC's future performance and relate to events and depend on circumstances that may occur in the future and are therefore subject to risks, uncertainties and assumptions. There are a number of factors which could cause actual results and developments to differ materially from those expressed or implied by such forward looking statements, including, among others the enactment of legislation or regulation that may impose costs or restrict activities; the re-negotiation of contracts or licences; fluctuations in demand and pricing in the industry; fluctuations in exchange controls; changes in government policy and taxation; industrial disputes; war and terrorism. For a more detailed description of these risks, uncertainties and other factors, please see the section titled "Principal Risks" in the preliminary announcement for the full year ended 31 August 2018. These forward-looking statements speak only as at the date of this document. Unless otherwise required by applicable law, regulation or accounting standard, Connect Group PLC undertakes no responsibility to publicly update any of its forward-looking statements whether as a result of new information, future developments or otherwise. Nothing in this document should be construed as a profit forecast or profit estimate. This document may contain earnings enhancement statements which are not intended to be profit forecasts and so should not be interpreted to mean that earnings per share will necessarily be greater than those for the relevant preceding financial period. The financial information referenced in this document does not contain sufficient detail to allow a full understanding of the results of Connect Group PLC. For more detailed information, please see the preliminary announcement for the full-year ended 31 August 2018 which can be found on the Investor Relations section of the Connect Group PLC website - www.connectgroupplc.com. However, the contents of Connect Group PLC's website are not incorporated into and do not form part of this document.

The Group uses certain performance measures for internal reporting purposes and employee incentive arrangements. The terms 'net debt', 'free cash flow', 'adjusted operating profit', 'adjusted profit before tax', 'adjusted earnings per share' 'adjusted EBITDA' and 'Adjusted' are not defined terms under IFRS and may not be comparable with similar measures disclosed by other companies.

(1) The following are the key non-IFRS measures identified by the Group in the consolidated financial statements as Adjusted results:

Adjusted operating profit is defined as statutory operating profit from continuing operations, excluding the impact adjusting items (defined above). This metric is reconciled on the face of the income statement, with detail of each adjusted item disclosed within note 4.

Adjusted profit before tax is defined as statutory profit before tax, excluding the impact of adjusting items (defined above). This metric is reconciled on the face of the income statement, with detail of each adjusted item disclosed within note 4.

Adjusted earnings per share; is defined as adjusted PBT, less taxation attributable to adjusted PBT and including any adjustment for minority interest to result in adjusted profit after tax attributable to shareholders; divided by the basic weighted average number of shares in issue. This metric is reconciled in note 10.

Adjusted items; are items of income or expense that are considered significant, in nature or value, and are excluded in arriving at Adjusted operating profit. The purpose of excluding these items from adjusted measures is to provide additional performance metrics to users of the financial statements that exclude the impact of the items the directors consider to have a significant impact on reported results and do not relate to the underlying trading activity of the Group. The specific items vary between financial years, and for the current year include certain disposal related costs, legal and regulatory provisions, amortisation and impairment of intangibles, impairment of property, plant and equipment, integration costs, business restructuring costs and network re-organisation costs including those relating to strategy changes which are not normal operating costs of the underlying business. They are disclosed and described separately in note 4 of the financial statements to provide further understanding of the financial performance of the Group. A reconciliation of adjusted profit to statutory profit is presented on the income statement.

(2) Free cash flow; is defined as cash flow excluding the following: payment of dividends, dividends from associates, acquisitions and disposals, the repayment of bank loans, EBT share purchase, proceeds of share issues and cash flows relating to pension deficit repair. This measures shows the cash retained by the Group in the year and is considered by the Directors to provide additional information on the cash available for shareholders returns. A reconciliation of free cash flow to the net movement in cash and cash equivalents is shown in note 35.

(3) Adjusted EBITDA is calculated as Adjusted operating profit (as defined above) before depreciation and amortisation. This metric is reconciled on page 16.

(4) Net debt; is calculated as total debt less cash and cash equivalents. Total debt includes loans and borrowings, overdrafts and obligations under finance leases. A reconciliation of net debt is presented in the Group Cash Flow Statement.

(5) Continuing operations excludes the sale of Education and Care sold on 30 June 2017 and Books division which was classified as held for sale as at 31 August 2017 and sold on 14 February 2018. Discontinued profit for the year is the Books division for the period after tax.

(6) FY2018 refers to the full year ended 31 August 2018, FY2017 refers to the full year ended 31 August 2017.

(7) All movements are calculated to round thousands.

OPERATING REVIEW

INTRODUCTION

In what has been a significantly challenging year, weaker trading in Tuffnells and Smiths News (including losses in Pass My Parcel) was compounded by operational inconsistency and shortfalls against efficiency targets. In the light of the underperformance, we have halted our integration and business transformation plans, appointed energetic and experienced new leadership, and taken decisive action to stabilise operations and improve accountability in our core businesses.

In January 2018 the Group announced that as a result of weaker trading it expected full year adjusted profit before tax for its continuing operations to be in the range of £42m to £45m. Following further poor trading, in June 2018 the Group announced that this forecast would not be achieved and the Board had materially reduced its expectations for full year Adjusted profit before tax. In September 2018 the Group further confirmed to the market that following a continuation of the challenging trends it expected the full year trading performance to be below our revised expectations.

Group Adjusted profit before tax for continuing operations of £28.4m is down by 40.8% (FY2017: £48.0m) and Adjusted Earnings per Share is down 40.0% to 9.3p.

Following an impairment of £46.1m in the goodwill of Tuffnells, Statutory continuing loss before tax is £35.5m (FY2017: profit of £34.2m) and Statutory continuing earnings per share is a loss of 15.5p (FY2017: earnings of 11.0p). The Statutory continuing and discontinued loss after tax is £47.0m (FY2017: profit £36.6m), and Statutory continuing and discontinued earnings per share is a loss of 19.1p (FY2017: earnings 14.9p). The Statutory continuing and discontinued results are also impacted by the closure of Pass My Parcel and the sale of the Books business for an enterprise value of £18.7m.

Free cash flow of £20.2m from continuing operations (FY2017: £28.7m), demonstrates the Group's underlying cash generative business model even in a difficult year. In the light of challenges in the year and mindful of the benefits of strengthening the balance sheet as we position the business for recovery, the Group has resolved not to recommend a final dividend, making the full year dividend 3.1p, down 68.4%.

GROUP INTEGRATION AND ORGANISATION RESTRUCTURE

In July 2017, following recent disposals, the Group restructured its leadership and operations in pursuit of a more integrated business model. Good progress was made in centralising support services, but it is now clear that there are not the same efficiencies to be achieved in sales & marketing and at an operating level. Indeed, the move to integrate into a single structure weakened operational performance and impacted internal accountability and controls. A detailed review of the Group's networks also concluded that opportunities for combining physical operations of Tuffnells with Smiths News are limited, giving further impetus to a return to more focused management.

In response, we have taken decisive action to address the lessons learned. The closure of Pass My Parcel, the appointment of new leadership and the return to focused business units were critical first steps in restoring stability to core operations. In order to address a weakening of controls and accountability which followed our integration programme, we have made improvements to business information and the control and accountability framework. This has helped to identify the root causes of underperformance and clarified our immediate priorities for FY2019.

On 1 September 2018 Jos Opdeweegh was appointed as Chief Executive Officer and we have subsequently further refreshed the senior management team strengthening the relevant experience and capabilities to lead our recovery. The appointment of Michael Holt as a non-executive director also enhances the Board's experience and knowledge of the parcels and freight markets.

Operationally, the integration activity across our two networks has ceased. We have re-established dedicated management teams and leadership for Smiths News and Tuffnells, returning accountability for revenue and costs to the individual businesses, while supporting them with the newly integrated central services. Both businesses remain leaders in their fields with strong market positions, giving confidence that by refocusing on core service and efficient operations, stability can be restored.

Strengthening the efficiency, operational excellence and network quality of Smiths News and Tuffnells will underpin the Group's recovery plan, driven also by improved capability in business analytics and an energised culture of continual improvement. We have actions underway to address the immediate priorities and aim to share details of the fully developed turnaround strategy in January 2019, including confirmation of our capital allocation plans.

SMITHS NEWS

Adjusted operating profit in Smiths News was £35.9m (FY2017: £40.4m) with revenue of £1,335.1m (FY2017: £1,383.4m). This performance includes the sales and costs of Pass My Parcel, amounting to a loss of £5.4m (FY2017: loss £6.3m). Sales and profit this year were boosted by sticker sales associated with the FIFA World Cup, albeit these were down on expectations and the levels achieved in previous tournaments.

While newspaper and magazine sales declined at the higher end of our strategic forecast, they continue to demonstrate an overall resilience and relative predictability that gives confidence to future revenue planning. Newspaper sales of £841.8m were down 3.9%, with price mitigating volume declines; magazine categories, including one-shots and partworks, were down by 3.8%.

Planned headcount reduction from network integration did not materialise and costs in the first half of the year were further impacted by service issues at the Hemel Hempstead depot that required an additional £0.6m of necessary service related costs to rectify. In hindsight, it is clear that the Group's integration strategy impacted operational focus and controls; in addition, planned savings were not fully achieved, resulting in a £3.3m shortfall to the target of £5m efficiencies in the year.

Distribution contracts were successfully renewed with two of our largest publisher clients: News UK (July 2018), and Frontline (October 2018). In total, these contracts account for circa 30% of Smiths News' current sales and the new agreements secure our territories with these publishers for a further five years. Discussions with a number of the other publishers are ongoing, and we are confident of renewing the long term agreements with all our key partners.

On 1 October 2018 Jonathan Bunting, formerly Chief Operating Officer, was appointed as Chief Executive of Smiths News. Jonathan has deep experience of the business and news industry, having embedded knowledge and strong relationships with our key publishers and retailers.

In what was a challenging year the capabilities of Smiths News were severely tested; its resilience in the face of these difficulties demonstrates its underlying value to the Group. Looking ahead, with the combination of renewed contracts, the closure of Pass My Parcel and a return to dedicated operational management, Smiths News is well positioned to continue delivering a relatively predictable flow of revenue and cash that will help to underpin the Group's recovery plans.

CLOSURE OF PASS MY PARCEL

Pass My Parcel made an Adjusted operating loss of £5.4m in the period up to 23 May 2018. Following a detailed review of its prospects, the Board resolved to close the operation and its associated network of local retailers. Consequently, a further £6.7m attributable to closure and ongoing onerous contracts has been charged to Adjusted Items.

Discussions with key clients to exit ongoing contracts have progressed more quickly than first anticipated, impacting costs in FY2018 but reducing the quantum and potential for ongoing impact. Deliveries and collections representing over 95% of volumes ceased during August 2018 and distribution services for the remaining clients will end by January 2019. The contractual arrangements for the provision of IT services to one client are, however, expected to continue throughout FY2019 at minimal cost.

The parcel-shop network is expected to transfer to a leading UK parcel carrier, and a migration plan is underway, completing June 2019. A wider costs removal plan is on track, ensuring other direct and indirectly associated expenses are removed as swiftly as possible.

DAWSON MEDIA DIRECT (DMD)

DMD, our specialist distributor of printed and digital media to airlines and travel points delivered a good result with Adjusted Operating profit of £3.0m up by 30.4% (FY2017: £2.3m) from revenue of £26.5m, (FY2017: £28.8m). Profit growth was driven by a combination of positive net contract changes, and cost efficiencies from internal restructure in the prior year. The business was not impacted by the Group's wider integration activity.

TUFFNELLS

Tuffnells made an Adjusted operating loss of £5.0m compared to an Adjusted operating profit of £12.0m in FY2017. External revenue of £175.2m was down by 4.4% (FY2017: £183.2m) with sales and volumes performance in the second half of the year materially behind expectations.

The market for IDW freight was increasingly competitive, putting pressure on both price and consignment volumes as the year progressed. In this more challenging environment, Tuffnells' performance was materially impacted by the execution of our integration plans leading to service shortfalls that culminated at the seasonal peak. The Group also discovered and rectified an historical misapplication of national minimum wage legislation, impacting Adjusted operating costs by £0.8m this financial year.

In May 2018 the Group reported that the level of change across the business had disrupted service and had given rise to a number of challenges, including increased driver vacancies and a high turnover of depot managers, limiting our ability to respond with sufficient experience and agility. Operational performance had been further undermined by the delivery and collection of Pass My Parcel volumes that also put pressure on core service.

With hindsight, the integration of the Group's operations and sales & marketing functions led to suboptimal service and a weakening of controls at a time when our competitors were more aggressively targeting our customers. The actions we have taken to strengthen management, improving service and accountability were implemented too late in the year to make a meaningful impact on peak trading. Volumes during the third quarter were down by 12.3% with a disproportionate impact on full year operating profits as the seasonal uplift would usually generate an important premium for the business.

In the light of the lessons learned, we have reintroduced dedicated operational and commercial management to Tuffnells. This supports a structured approach to recovery that will continue to address historical under investment in order to introduce a standard operating model, attracting and on-boarding high quality revenue and achieving a more flexible cost to serve. A sustainable recovery will take time to achieve in full but we expect to see a gradual improvement to performance as the actions are implemented over the course of FY2019.

On 1 October 2018 Peter Birks was appointed to role of Chief Executive Officer of Tuffnells. Peter brings a wealth of experience in logistics, having held senior executive roles across a number of successful and innovative UK-based distribution businesses.

DISCONTINUED OPERATIONS

On 14 February 2018, the Group completed the sale of the Books business at a loss of £10.5m, full details are provided in note 12. In the prior year, on 30 June 2017, the Group completed the sale of the Education & Care business at a profit of £19.0m full details are included in the Annual Report.

EXIT OF PASS MY PARCEL

In the light of continued losses the carrying value of Pass My Parcel was written down to £nil in February 2018. A detailed review of the proposition followed, concluding in May 2018 that the business model was unviable with no reasonable prospect of recovery. Trading from 23 May 2018, together with impairment of assets, the expenses of closure and the exiting of remaining agreements, resulted in costs of £6.7m included within Adjusted items.

The Adjusted discontinued profit before tax amounted to £1.7m over the full year compared to £2.0m in FY2017.

CAPITAL MANAGEMENT

In May 2018 the Company announced it would conduct a review of its capital allocation strategy, determining the most appropriate distribution of its surplus free cash flow. The Board's decision not to recommend a final dividend for FY2018 is a reflection of performance in the year, but it was also mindful of the interim dividend paid in July 2018, and our near term priority of strengthening the balance sheet while meeting the investment requirements of business recovery. Looking ahead, the Board is conscious of the importance of a dividend to shareholders and anticipates a dividend in FY2019, based on the earnings and free cash flow achieved in the year. A more detailed capital management policy will accompany our planned strategy announcement in January 2019.

PRIORITIES FOR 2019

The Group's immediate focus is on returning its operations to stability, arresting the decline in profit and establishing a platform for turnaround. The decision to return to two operating units, supported by a suite of central services, is indicative of our plan to recover performance by strengthening the individual businesses. We remain committed to finding efficiencies across the Group and believe that greater standardisation of processes, particularly in Tuffnells, can also deliver material improvements.

Our priorities for FY2019 include:

1. Returning Tuffnells to profitability through a reduction of the cost base, a more granular pricing methodology and net new customer wins;

2. Renegotiating the remaining Smiths News contracts with key publishers;

3. Implementing a standardised operating model in Tuffnells to enhance safety, productivity and customer experience;

4. Streamlining head office functions to improve financial reporting, robust business analytics, increased productivity and continuous improvement;

5. Maximising the amount of cost savings at Smiths News to diminish the impact of the price adjusted volume decline in the business; and

6. Embedding a new, entrepreneurial culture with a passion for excellence and customer centricity.

These priorities will establish the foundations for a sustainable improvement in profitability. Our strategy for long-term growth, including its relationship to capital allocation, is currently being finalised. We aim to update stakeholders with a detailed strategic plan, including the implications for capital allocation, in January 2019.

FINANCIAL REVIEW

A challenging year for the Group has been reflected in weaker results for Smiths News and a disappointing performance from Tuffnells, however we have continued to deliver a positive free cash flow.

CONTINUING ADJUSTED RESULTS (1) (5)

GROUP

Continuing adjusted operating profit was £33.9m, down £20.8m (38.0%) on the prior year, and driven by poor performances in both Tuffnells and Smiths News. Smiths News Adjusted operating profit was down by £4.5m to £35.9m, including £5.4m of losses in Pass My Parcel (FY2017: £6.3m loss) for the period up to 23 May 2018, when the Board made the decision to exit the click & collect market. Smiths News benefited from World Cup trading and network savings, but both fell short of expectations. DMD had a good trading year; although revenue was down, operating profit increased by £0.7m to £3.0m, following actions taken to reduce operational expenditure. Tuffnells reported an operating loss of £5.0m, down £17m on the prior year (FY2017: £12m profit). Tuffnells performance suffered from a more competitive trading environment and inconsistent service standards, resulting in lower parcel volumes, and a sub-optimal trunking and distribution network which drove a higher unit cost per consignment. Other factors included incremental wage and cost pressure, changes in depot management, and a one-off charge for a historical misapplication of National Minimum Wage legislation.

Net finance charges of £5.5m (FY2017: £6.7m) were down on prior year. Included within net finance charges are: interest costs on borrowing incurred in the period of £4.1m (FY2017: £4.4m), lower year-on-year as the drawn borrowing facility requirement was favourable from cash flow generation and cash proceeds from the disposal of the Books business; finance lease interest of £0.6m (FY2017: £1.0m); amortisation of bank arrangement fees £0.5m (FY2017: £1.0m); and pension interest costs £0.2m (FY2017: £0.3m).

Adjusted profit before tax was £28.4m, down 40.8% on last year.

Taxation of £5.5m resulted in an effective tax rate of 19.4%, effective tax rate was lower than last year due to the reduction in UK corporation tax rate.

STATUTORY CONTINUING & DISCONTINUED RESULTS

GROUP

Statutory continuing loss before tax of £35.5m is lower to prior year by £69.7m (FY2017: £34.2m profit), primarily driven by: impairment charge relating to goodwill at Tuffnells £46.1m (FY2017: £nil); amortisation of acquired intangibles £7.1m (FY2017: £7.3m); Pass My Parcel exit costs of £6.7m (FY2017 £nil); and network and reorganisation costs of £3.1m (FY2017: £8.0m).

At the divisional level Smiths News statutory operating profit was £25.0m, down 30.7% on prior year after £10.9m of adjusted items which included Pass My Parcel exit costs of £6.7m, Tuffnells Statutory operating loss was £57.7m down £62.0m after impairment of goodwill of £46.1m and amortisation of acquired intangibles of £7.1m.

The effective statutory income tax rate for continuing operations was (7.3%) (FY2017: 21.1%), as the tax impact of Adjusted items was £2.9m (FY2017: £2.7m).

Statutory continuing & discontinued loss after tax of £47.0m is down by £83.6m (FY2017: £36.6m profit), and Statutory continuing & discontinued loss per share of 19.1p is down 34.0p (FY2017:14.9p profit). The Statutory continuing & discontinued results are impacted by the sale of the Books business in February 2018 for an enterprise value of £18.7m and a loss of £10.5m on disposal.

As a consequence of the Tuffnells impairment, the disposal of the Books business and the distribution of dividends in the year the net assets on the balance sheet have reduced £71.0m to a reported net liability at 31 August 2018 of £45.9m.

EARNINGS PER SHARE

Earnings attributable to shareholders on a continuing adjusted basis of £22.9m resulted in an adjusted EPS of 9.3p, a decrease of 6.2p on last year, driven by the more challenging trading conditions in Tuffnells, Smiths News network efficiencies savings not being achieved, and continuing losses at Pass My Parcel prior to the decision to exit.

The fully diluted weighted number of shares was 246.7m (FY2017: 247.0m). Fully diluted shares includes a 0.7m diluted share adjustment for employee incentive schemes (FY2017: 1.6m).

Including Adjusted items, statutory continuing earnings per share is down 26.5p to 15.5p (loss per share) (FY2017: 11.0p).

Statutory continuing and discontinued loss attributable to shareholders of £47.0m (FY2017: £36.6m profit) resulted in a loss per share of 19.1p, down 34p on FY17, driven by the loss on disposal of the Books business.

DIVIDEND

After careful consideration of performance in the year and immediate priorities of the business, the Board has resolved not to recommend a final dividend, leaving the full year dividend as 3.1p paid as an interim dividend in July 2018, a reduction of 6.7p or 68.4% (FY2017: 9.8p).

SMITHS NEWS (including Pass My Parcel)

Revenue in the news distribution business was £1,335.1m (FY2017: £1,383.4m) down 3.5%. Newspaper and magazine sales have continued to perform in line with long term trends, with a relatively stronger performance than expected from newspapers helping to offset weaker magazine sales. Newspaper sales of £841.8m were down 3.9%, with price increases helping to offset volume declines. Combined sales of all magazine categories were down by 3.8%, which includes the benefit of the FIFA World Cup album and sticker sales.

Adjusted operating profit was £35.9m (FY2017: £40.4m) down £4.5m (11.1%). Operating profit was favourably impacted by the World Cup sales, although the profit from these at £2.8m was materially lower than in previous tournaments. As a consequence of the integration strategy and the consequent impact on focus and accountability, targeted annual savings of £5m were not achieved, Inflationary pressure in contractor rates costs also adversely eroded operating margins. In addition, operating challenges at the new Hemel Hempstead depot resulted in incremental operating costs throughout the year of £1.0m. Pass My Parcel incurred a net loss of £5.4m in the period up to 23 May 2018 (FY2017: £6.3m), when the decision to exit the business was made by the Board. An additional Pass My Parcel exit charge of £6.7m is reported within Adjusted items.

TUFFNELLS

Tuffnells had a particularly challenging year, achieving total revenue of £175.2m down 4.4%, (FY17: £183.2m), and driving an Adjusted operating loss of £5.0m, down £17m (FY2017: £12.0m profit).

In what became an increasingly competitive market, variability in service standards and disruptive price competition for larger customers, led to lower volumes, particularly in the second half of the year. Tuffnells did not therefore benefit from its usual seasonal peak, which in previous years has contributed a substantial proportion of annual profit. The decline in parcel volumes combined with the semi-fixed operating cost base at a depot level resulted in incremental operational inefficiencies within our trunking network. Separately, operational costs rose from increases in national living wage, higher sub-contractor rates and continuing challenges in the recruitment of drivers.

As part of the integration strategy, Tuffnells handled Pass My Parcel deliveries in those areas outside of Smiths News' territories. The combination of delivering large consignments of irregular dimension and weight (IDW) and handling, much smaller packets for Pass My Parcel, resulted in further operating inefficiencies. The exit of the Pass My Parcel proposition will allow Tuffnells to give greater focus efficiency in its core trunking and delivery routes.

DMD

DMD is our specialist distributor of printed and digital media to airlines and travel points. Revenue of £26.5m (FY2017: £28.8m) is down 8.0% due to reduction in newspaper distribution arrangements with two publishers and one established airline customer ceasing to provide newspapers. Adjusted operating profit of £3.0m (FY2017: £2.3m) is up 30.4% due to cost efficiencies from prior year restructuring activities resulted in a combination of recurring savings £0.5m and a one-off benefit of £0.2m.

ADJUSTED ITEMS (1)

Continuing Operations (5)

The Group incurred a total of £61.0m of adjusted items on a continuing basis, after tax (FY2017: £11.1m).

This comprises:

(a) Network and re-organisation costs

There are £3.1m (FY2017: £8.0m) network and reorganisation costs. In the current year this includes abortive integration costs of £1.6m (FY2017: £nil) with regard to the integration programme announced at the end of the previous financial year. There are further costs of £1.8m (FY2017: £nil) relating to redundancies announced in August 2018 arising from the decision to streamline head-office functions, which is separate to the network restructuring in the previous financial year. There is a credit of £0.3m relating to the release of the remaining redundancy provision related to network restructuring.

The total of £8.0m in the prior year comprised: a £4.0m charge for the FY2017 redundancy provision relating to network restructuring; £2.0m related to network rationalisation costs incurred in the Smiths News network; £0.6m related to the restructuring of the Smiths News joint venture FMD Limited; £0.5m in rationalising overseas operations in DMD and the remaining £0.9m related to redundancy costs within Smiths News and Tuffnells.

Costs associated with network and reorganisation are considered adjusted items given they are part of a strategic programme to drive future cost savings and are significant in value to the results of the Group.

(b) Property

There is a £0.7m credit (FY2017: £0.6m charge) relating to property costs. During the year the Group made the strategic decision to transfer the previously vacant Slough depot to the Tuffnells business, resulting in a credit from the release of its onerous lease provision of £0.7m (FY2017: £0.9m charge relating to three properties). In the prior year £0.3m of reversionary lease provisions were released as they were no longer required. Onerous charges on property are charged through adjusted items as they form part of the Group's strategic restructuring programme. The reversal of charges has also been made in adjusted items for consistency.

(c) Acquisition and disposal costs

There are £nil (FY2017: £2.2m) costs in the current year relating to acquisition and disposal costs. Prior year acquisition costs included the release of deferred contingent consideration which was payable conditional on the financial performance of Tuffnells and the continued employment of its former owners. This amounted to £2.7m comprising equity based amounts and amounts provided for cash rewards (see note 27) which were offset by £0.5m fees relating to disposal activity in the prior year that did not meet the criteria to be included within discontinued. Deferred contingent consideration charges and credits in respect of previous acquisitions and costs relating to disposal activity are considered to be adjusted items as they do not form part of normal operating costs/ credits of the business.

(d) Amortisation of acquired intangibles

A charge of £7.1m (2017: £7.3m) has been recognised relating to amortisation of acquired intangibles. This is considered an adjusting item as it allows comparison between segments as shown in note 2.

(e) Pension

There is £nil (2017: £0.7m) of pension credits in the current year. The prior year £0.7m pension credit relates to a trivial commutation of benefits to members in the Group's section of the WH Smith Pension Trust. The prior year pension credit is not considered to be part of normal operations and is therefore considered to be an adjusted item.

(f) Settlement of interest rate swap

There is £nil (2017: £0.8m) relating to settlement of interest costs. The costs related to the settlement of swap instruments after the Group took a strategic decision to no longer enter into hedging arrangements. The settlement followed a change in Treasury policy (see note 20). The cost is classified as an adjusted item because it is of significant value and is not expected to be recurrent in nature.

(g) Impairment of Tuffnells goodwill

During the year management reviewed the carrying value of Tuffnells goodwill and concluded that an impairment charge of £46.1 million (2017: £nil) was required. The recoverable amount of goodwill (in both the current and prior year) is calculated with reference to its value in use based on future cash flow projections. The key assumptions used in the calculation are disclosed in note 13. It is considered adjusting due to its one off nature and significant value.

(h) Pass My Parcel (PMP) exit costs

Following a review of the PMP proposition on 23 May 2018, the Board decided to terminate the contracts in relation to PMP and close the division, as a result of this decision a charge of £6.7m (2017: £nil) was booked.

Management concluded that losses on winding down the division represented an onerous contract with a cost of £4.7m recognised which comprises the forecast excess of costs over income from the date the Group took the decision to close the division. It is considered adjusting due to its one off nature and significant value. Of this balance, £2.5m remains in provisions to cover the costs to close all contracts (see note 24). In the period from 1 September 2017 to the date of the decision to close, PMP incurred losses of £5.4m (these losses were included in our adjusted operating results).

A further £2.0m of impairment charges split £1.0m tangible and £1.0m intangible were recognised to write off the non-current assets relating to the division (note 13 and 14).

(i) Impairment of tangible assets

The Group took the decision to consider the sale of the Jacks Beans division to focus on its core businesses, bids received indicated an excess of net book value of £1.1m therefore the Group has impaired the assets and moved them into non-current assets held for sale. Given the magnitude, the one-off nature and the Group's strategy to focus on its core businesses it is considered to be an adjusting item.

(j) NMW regulatory compliance

The Group has been in discussion with HMRC regarding an historical underpayment in relation to a misapplication of national minimum wage legislation in Tuffnells. Although dialogue continues, a provision amounting to £1.3m has been made in the Financial Statements in respect of any potential liabilities, of which £0.5m relating specifically to the estimated fine is classified as adjusting due to its one off nature. £0.8m has been included within adjusted operating results as it did not meet the definition of an adjusting item.

Discontinued Adjusted items

(Loss)/Profit on disposal of subsidiary

On 14 February 2018, the Group completed the sale of the Books business at a loss of £10.5m, full details are provided in note 12. In the prior year, on 30 June 2017, the Group completed the sale of the Education & Care business at a profit of £19.0m full details are included in the Annual Report.

Re-organisation costs

Re-organisation costs of £0.1m (2017 £0.3m) were incurred by the Books business during the year. Reorganisation costs are considered to be adjusted items as they are part of the Group's wider restructuring programme to deliver cost savings and were incurred prior to the disposal these are disclosed separately from other reorganisation costs on the basis the Books business was discontinued.

Amortisation and impairment of discontinued intangibles

Included within discontinued operations results are items of £nil (2017 £11.2m) relating to amortisation and impairment of discontinued intangibles. The prior year includes impairments of £9.9m relating to the Books business and £1.3m of amortisation of acquired intangibles. The impairment is considered to be adjusting due to magnitude, the one-off nature and as it does not relate to underlying trade. Amortisation of acquired intangibles is considered adjusting as it skews the results of the non-acquired businesses.

CONTINUING FREE CASH FLOW (2)

Free cash flow generation remains one of the Group's key strengths. Free cash flow (2) includes finance leases, Adjusted items, interest and tax; it excludes pension deficit recovery payments.

We have focused on cash performance in the period, with the Group generating £20.2m in free cash flow, a decrease of £8.5m (29.6%) on the prior year.

Adjusted EBITDA of £45.8m compared to FY2017 of £66.4m, is down by 31.0% driven by trading performance, although the increase in capital expenditure since acquiring Tuffnells in December 2014 is now resulting in marginally higher depreciation and amortisation charges of £11.9m (FY2017: £11.7m).

The decrease in working capital in the period was £7.7m (FY2017: decrease £0.4m) driven largely by favourable timing of weekly receipt and monthly payment cycles relative to the year end date.

Capital expenditure in the year was £8.5m (FY2017: £13.8m) a decrease of £5.3m. New and existing depot and network investments were £2.1m (FY2017: £5.9m) a decrease in the year as no new depots were opened. Technology and equipment investment was £4.7m (FY2017: £5.2m).

Cash tax costs of £6.5m (FY2017: £9.1m) have decreased in the year reflecting the decline in trading performance.

Net interest and fees of £5.8m (FY2017: £4.4m) has increased by £1.4m following bank arrangement fees of £1.6m which were paid on the agreement of a new £175m bank facility concluded in October 2017. Bank interest paid was £4.2m, down £0.2m on prior year, as the average net debt requirement is lower compared to last year following the disposal of the Education & Care business in June 2017 and the Books business in February 2018.

The total net cash impact of Adjusted items was £8.3m (FY2017: £6.9m). This comprised £6.8m (FY2017: £5.4m) of network reorganisation and restructuring costs.

NET DEBT

Net debt closed the period at £83.4m, of which £5.3m (FY17: £8.5m) relates to finance leases.

Net debt increased on the prior year and our Net debt/EBITDA ratio rose to 1.8x, (FY2017: 1.2x) The cash impact of the deterioration in EBITDA from trading challenges was partially offset by the disposal proceeds from the sale of the Books business. The intra-month working capital cash flow cycle at Smiths News generates a routine and predictable cash swing of around £40m which utilises the Revolving Credit Facility (RCF) of £125m. This results in a predictable fluctuation of net debt during the course of the month compared to the closing net debt position. However, the free cash flow generation (after Adjusted items) in year was not sufficient to cover the announced dividend payments of £24.1m (FY2017: £23.6m).

Pension funding remained consistent at £4.7m (FY2017: £4.8m). Pension deficit repair payments are considered as a non-free cash flow item.

We were comfortably within our bank facilities of £175m and our covenant ratios at year end. In October 2017 we entered a new bank facility commitment of £175m with six relationship banks which runs from October 2017 to January 2021. The new facility comprises of a term loan of £50m with no amortisation and an RCF for £125m on a higher interest margin, but similar covenant terms to the previous facility.

PENSION

The Group operates two defined benefit schemes, both closed to new entrants and WH Smith Pension Trust closed to future accrual.

The Smiths News section of the WH Smith Pension Trust has assets of £583.1m and had an actuarial deficit of £17.5m as at 31 March 2015. As at 31 August 2018 the IAS19 surplus of £154.5m (FY2017: £149.3m) was not recognised in the accounts as the amount available on a reduction of future contributions is £nil.

The Group recognises the present value of the agreed schedule of future contributions as a pension liability of £5.1m on the balance sheet (FY2017: £8.7m).

The Tuffnells defined benefit scheme has assets of £9.6m and an actuarial deficit of £4.3m as at 1 April 2016. As at 31 August 2018 the IAS19 deficit was £2.2m.

The total cash contribution of defined benefit schemes, which include pension administration fees and disclosed within the cash flow statement, amounted to £4.7m for FY2018 (FY2017: £4.8m).

DISCONTINUED OPERATIONS

On 14 February 2018, the Group completed the sale of the Books business at a loss of £10.5m. The sales price was lower than anticipated, but allows the Group to focus on its core operations. Full details are provided in note 12. In the prior year, on 30 June 2017, the Group completed the sale of the Education & Care business at a profit of £19.0m full details are included in note 12.

Discontinued operations contributed Adjusted operating profit of £1.8m for the period they remained part of the Group (HY2017: £3.3m - of which the Books business contributed £1.6m and the Education & Care business £1.7m).

The discontinued operations contributed £1.7m profit before tax during the year for the period they remained part of the Group (FY2017: £2.0m).

GOING CONCERN

The Group meets its day-to-day working capital requirements through its new bank facilities of £175m, agreed in October 2017, with a term to January 2021. The Group's forecasts, taking into account the Board's future expectations of the Group's performance, indicate that there is sufficient headroom within these bank facilities and the Group will continue to operate well within the covenants attaching to those facilities.

Considering the principal risks discussed in this report, the directors have a reasonable expectation that the Group has adequate resources to continue in operation and meet its liabilities as they fall due for both the foreseeable future and for the period of the three year viability assessment. Thus, the Group continues to adopt the going concern basis in preparing its consolidated financial statements and includes disclosure regarding its three year viability assessment based the principal risks.

PRINCIPAL RISKS

The Group has a clear framework in place to continuously identify and review the principal risks. The Audit Committee report describes how we manage risk from Board level and throughout the organisation. Further details can be found in the Annual Report. Key risks are plotted on risk maps with descriptions, owners, and mitigating actions, reporting against a level of materiality consistent with its size. These risk maps are reviewed and challenged by the Executive Team and Audit Committee. Additional risk management support is provided by external experts in areas of technical complexity to complete our bottom-up and top-down exercises.

As part of the Board's ongoing assessment of the principal risks, the Board has considered the performance of the Group, its markets, the changing regulatory landscape and future strategic plans. Principal risks previously reported have been reviewed in detail and they have been refined and made more specific. Compared to the principal risks reported in the Annual Report 2017:

· the risks relating to failure to deliver robust financial performance, failing to attract, engage and retain talent and inadequate processes in place to support people initiatives are new;

· the risk relating to constraints on capacity and/or failure to execute restructuring and other change management programmes has been removed and incorporated into the existing risk relating to the failure to define the Group's strategy and direction and a new risk relating to the loss of key people, lack of engagement and loss of depth knowledge and specialist skills; and

· the risk relating to a non-adherence to transport operator licence condition has been removed as the mitigating actions undertaken by management have reduced the materiality and foreseeability of the principal risk and it remains well managed.

These risks are still subject to ongoing monitoring and appropriate mitigation.

The table below details each principal business risk, those aspects that would be impacted were the risk to materialise, our assessment of the current status of the risk and how it is mitigated.

Statement of viability

1 How Connect Group assesses its prospects

Connect Group's business activities and strategy are central to assessing its future prospects. These, together with factors likely to affect its future development, performance and position, are set out in the Annual Report. The financial position of the Group, its cash flows and liquidity are highlighted in the Financial Review. The Group manages its financing by structuring core borrowings and the availability of facilities for draw down. The Group's prospects are assessed primarily through its business planning process. This includes an annual review which considers profitability, the Group's cash flows, committed funding and liquidity positions and forecast future funding requirements over the assessment period of three years. The most recent was signed off in October 2018, and it is part of the Board's role to consider the appropriateness of any key assumptions, taking into account the external environment and business strategy.

2 The assessment period

The directors have determined that the three years to August 2021 is an appropriate assessment period over which to provide its viability statement. This period is consistent with that used for the Group's corporate planning process as detailed above, and reflects the directors' best estimate of the future prospects of the business including the nature and potential impact of the principal risks that face the business. The Board noted in considering the appropriate assessment period that the Group's current banking facilities are due to expire in January 2021. The Board also considered whether there are specific foreseeable events relating to the principal risks that could occur beyond the three year period that should be taken into account when setting the assessment period and concluded there were none. In the Board's assessment of viability, the scenarios have assumed that external debt is repaid as it becomes due, or will be refinanced as and when required (see note 20).

3 Assessment of viability

In generating its plan the Board has considered the overall strategy of the Group, the principal risks and uncertainties inherent within the business, as well as making a number of key strategic planning assumptions which are noted below:

1. No significant impact on trading as a result of the EU Exit or other political change;

2. Modest revenue growth in Tuffnells in the assessment period;

3. Delivery of margin improvement in Tuffnells driven by efficiencies both in operating and overhead costs in the assessment period;

4. Continued decline in sales of printed media during the assessment period offset by overhead efficiencies in the assessment period;

5. Retention of major contracts in Smiths News at rates which maintain acceptable margins;

6. No major changes in working capital profile;

7. Successful renewal of banking facilities in January 2021; and

8. No significant acquisitions or disposals in the assessment period.

In making this statement, the directors have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity. This included the availability and effectiveness of mitigating actions that could realistically be taken to avoid or reduce the impact or occurrence of the underlying risks. In assessing the likely effectiveness of such actions, the Board considered the conclusions from their regular review of risk management and internal control systems.

To make the assessment of viability, stress scenarios have been tested over and above those in the business plan, based upon a number of the Group's principal risks and uncertainties. The scenarios were overlaid into the business plan to quantify the potential impact of one or more of these crystallising over the assessment period. Whilst each of the principal risks has a potential impact and has been considered as part of the assessment, only those that represent severe but plausible scenarios were selected for modelling through the business plan. These were:

As noted above, the scenarios have assumed that external debt is repaid as it becomes due, or will be refinanced as and when required.

The scenarios above are hypothetical and severe for the purpose of creating outcomes that have the ability to threaten the viability of the Group; however, multiple measures are in place to prevent and mitigate any such occurrences from taking place.

In each of the stress scenarios 1-5, the Group would be able to continue operating within existing debt covenants and liquidity headroom. Scenario 6 required such an extreme set of factors in unison that it is considered to be a very remote likelihood and therefore does not represent a realistic threat to the viability of the Group but rather illustrates the factors that would result in a banking covenant breach. The directors considered mitigating factors that could be deployed to counter the negative effects of the crystallisation of each of these risks. The main actions included reducing any non-essential capital expenditure and operating expenditure on projects, as well as not paying dividends.

The Board also considered the impact of the EU Exit on the business and does not foresee any significant negative impact which will impact on the viability assessment.

4 Viability statement

Taking into account the Group's current position and principal risks and uncertainties, the directors confirm that they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the three years to August 2021.

5 Going concern

The directors also considered it appropriate to adopt the going concern basis in preparing the Group Financial Statements.

DIRECTORS' RESPONSIBILITIES STATEMENT

The responsibility statement has been prepared in connection to the Company's full Annual Report for the year ended 31 August 2018. Certain parts of the Annual Report are not included in this announcement, as described in note 1.

Responsibility statement

We confirm that to the best of our knowledge:

· the financial statements, prepared in accordance with the relevant financial reporting framework, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole; and

· the Operating Review and Financial Review includes a fair review of the development and performance of the business and the position of the company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

This responsibility statement was approved by the board of directors on 6 November 2018 and is signed on its behalf by:

Connect Group PLC

Group Income Statement for the year ended 31 August 2018

* This measure is described in Note 1(c) of the accounting policies. Adjusted items are set out in note 4 to the Group financial statements.

Group Statement of Comprehensive Income for the year ended 31 August 2018

Group Balance Sheet at 31 August 2018

Group Balance Sheet at 31 August 2018 (continued)

The accounts were approved by the Board of Directors and authorised for issue on 6 November 2018 and were signed on its behalf by:

Registered number - 05195191

Jos Opdeweegh Tony Grace

Chief Executive Officer Chief Financial Officer

Group Statement of Changes in Equity for the year ended 31 August 2018

Group Cash Flow Statement for the year ended 31 August 2018

During the year cash outflow from operating activities attributed to discontinued operations amounted to £8.8m (2017: £3.8m inflow) and paid £4.3m (2017: £3.7m) in respect of investing activities. There were no cash flows associated with financing activities attributable to discontinued operations.

Analysis of net debt

Cash and cash equivalents includes cash of £18.0m (2017: £6.4m) offset by £9.2m (2017: £nil) of overdrafts.

Notes to the accounts

1. Accounting policies

(a) Basis of preparation

The financial information contained within this preliminary announcement for the 12 months to 31 August 2018 and 12 months to 31 August 2017 does not comprise statutory financial statements for the purpose of the Companies Act 2006, but is derived from those statements. The statutory accounts for Connect Group Plc for the 12 months to 31 August 2017 have been filed with the Registrar of Companies and those for the 12 months to 31 August 2018 will be filed following the Company's annual general meeting. The auditor's reports on the accounts for both the 12 months to 31 August 2018 and 12 months to 31 August 2017 were unqualified and did not include a statement under Section 498 (2) or (3) of the Companies Act 2006. The Annual Report and Accounts will be available for shareholders in December 2018.

(b) Going concern

The Group agreed a new bank facility commitment of £175m with associated covenants which is in place until January 2021. The Group's forecasts and projections, taking account of reasonable potential variations in trading performance, show that the Group should be able to operate within the level of its current financing covenants for the foreseeable future defined as a period not less than 12 months from the balance sheet date.

Despite the uncertain economic environment the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Thus the Group continues to adopt the going concern basis in preparing its consolidated financial statements.

(c) Alternate performance measures

The directors believe that the alternate performance measures provide additional information for users of the accounts on the performance of the business. These measures are consistent with how business performance is measured internally by the Board and Operating Committee.

The Group uses certain performance measures for internal reporting purposes and employee incentive arrangements. The terms 'net debt', 'Free cash flow (excluding adjusted items)', 'Free cash flow', 'adjusted profit', 'adjusted and adjusted diluted earnings per share', 'adjusted EBITDA' are not defined terms under IFRS and may not be comparable with similar measures disclosed by other companies.

Adjusted items; are items of income or expense that are considered significant, in nature or value, and are excluded in arriving at Adjusted operating profit. The purpose of excluding these items from adjusted measures is to provide additional performance metrics to users of the financial statements that exclude the impact of the items the directors consider to have a significant impact on reported results and do not relate to the underlying trading activity of the Group. The specific items vary between financial years, and for the current year include certain disposal related costs, legal and regulatory provisions, amortisation and impairment of intangibles, impairment of property, plant and equipment, integration costs, business restructuring costs and network re-organisation costs including those relating to strategy changes which are not normal operating costs of the underlying business. They are disclosed and described separately in note 4 of the financial statements to provide further understanding of the financial performance of the Group. A reconciliation of adjusted profit to statutory profit is presented on the income statement.

The following are the key non-IFRS measures identified by the Group in the consolidated financial statements as adjusted results:

Adjusted operating profit is defined as statutory operating profit from continuing operations, excluding the impact adjusting items (defined above). This metric is reconciled on the face of the income statement, with detail of each adjusted item disclosed within note 4.

Adjusted profit before tax is defined as statutory profit before tax, excluding the impact of adjusting items (defined above). This metric is reconciled on the face of the income statement, with detail of each adjusted item disclosed within note 4.

Adjusted EBITDA is calculated as Adjusted operating profit (as defined above) before depreciation and amortisation. This metric is reconciled on page 16.

Adjusted earnings per share; is defined as adjusted PBT, less taxation attributable to adjusted PBT and including any adjustment for minority interest to result in adjusted profit after tax attributable to shareholders; divided by the basic weighted average number of shares in issue. This metric is reconciled in note 10.

Free cash flow; is defined as cash flow excluding the following: payment of dividends, dividends from associates, acquisitions and disposals, the repayment of bank loans, EBT share purchase, proceeds of share issues and cash flows relating to pension deficit repair. This measures shows the cash retained by the Group in the year and is considered by the Directors to provide additional information on the cash available for shareholders returns. A reconciliation of free cash flow to the net movement in cash and cash equivalents is shown in note 35.

Net debt; is calculated as total debt less cash and cash equivalents. Total debt includes loans and borrowings, overdrafts and obligations under finance leases. A reconciliation of net debt is presented in the Group Cash Flow Statement.

Operating profit; is stated after charging Adjusted items relating to operating activities and after the share of results of associates but before investment income and finance costs.

Gross Profit; is stated after charging the direct cost of sales. Gross profit has been restated after reclassifying costs between distribution and cost of inventories expensed see note 3 for details.

Contribution; is stated after charging the distribution costs to gross profit. Contribution is considered to be a key performance measure as it is considered to represent the direct cost of running each business within the Group as distribution is primary operation of the Group. Contribution is reconciled in note 3.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

(d) Estimates and judgements

The preparation of accounts requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.

Sources of estimation uncertainty

The key assumption concerning the future, and other key sources of estimation uncertainty at the end of the reporting period that may have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year.

Estimated impairment of goodwill

The group tests annually whether goodwill has suffered any impairment, in accordance with the accounting policy. The carrying amounts of cash-generating units (CGU's) have been determined based on value in use calculations. These calculations require the use of estimates (note 13).

An impairment charge of £46.1m arose on the Tuffnells CGU during the course of the 2018 year, resulting in the CGU being written down to its recoverable amount. Note 13 include details of management's assumptions and impact of changing these estimates.

Key accounting judgements

The significant judgements made in the accounts for the year ended 31 August 2018 are:

Onerous contracts

Present obligations arising under onerous contracts are recognised and measured as provisions. An onerous contract is considered to exist where the Group has a contract under which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received from the contract. The calculation of onerous contract provisions includes estimates of all future costs and income to occur. Significant judgement is applied in the determination of when contracts become onerous. With reference to Pass My Parcel, management have determined the date at which the contracts became onerous, is the date on which the Board approved to wind down the operations and cease further investment. See note 24 for further details.

(e) Non-current assets held for sale and disposal groups

Non-current assets held for sale and disposal groups are classified as assets held for sale when their carrying amount is to be recovered principally through a sale transaction and a sale is considered highly probable. They are stated at the lower of carrying amount and fair value less costs to sell.

(f) Discontinued operations

In accordance with IFRS 5 'Non-current assets held for sale and Discontinued operations', the net results of discontinued operations are presented separately in the Group Income statement (and the comparatives restated) and the assets and liabilities of these operations are presented separately in the Group balance sheet.

(g) Revenue

Smiths News and DMD

Revenue is recognised on the despatched value of goods sold. Revenue represents the amounts receivable for goods and services provided in the normal course of business, net of discounts, returns (including expected returns), VAT and other sales related taxes. Goods are sold to retailers on a sale or return basis. Revenue for goods supplied with a right of return is stated net of the value of any returns.

Tuffnells

Revenue is recognised on delivery of the service to which it relates, based on agreed rates net of discounts, VAT and other sales related taxes.

(h) Taxation

Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the income statement, except to the extent it relates to items recognised in other comprehensive income or directly in equity. Current tax is the expected tax payable based on the taxable profit for the year, using tax rates enacted, or substantively enacted at the balance sheet date and any adjustment to tax payable in respect of previous years.

Deferred tax is provided on the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is calculated using tax rates enacted or substantively enacted at the balance sheet date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled. Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which these temporary differences can be utilised.

(i) Dividends

Interim and final dividends are recorded in the financial statements in the period in which they are paid.

(j) Capitalisation of internally generated development costs

Expenditure on developed software is capitalised when the Group is able to demonstrate all of the following: the technical feasibility of the resulting asset; the ability (and intention) to complete the development and use it; how the asset will generate probable future economic benefits; and the ability to measure reliably the expenditure attributable to the asset during its development. Subsequent to initial recognition, internally generated intangible assets are reported at cost less accumulated amortisation and accumulated impairment losses, on the same basis as intangible assets that are acquired separately.

 (k) Joint ventures

The Group Accounts include the Group's share of the total recognised gains and losses in its joint ventures on an equity accounted basis.

Investments in joint ventures are carried in the balance sheet at cost adjusted by post-acquisition changes in the Group's share of the net assets of the joint ventures, less any impairment losses. The carrying values of investments in joint ventures include acquired goodwill. Losses in joint ventures that are in excess of the Group's interest in the joint venture are recognised only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the joint venture.

(l) Business combinations and goodwill

The Group uses the acquisition method of accounting to account for business combinations. The cost of an acquisition is measured at the fair value of the assets given, equity instruments issued, liabilities incurred or assumed at the date of exchange. Acquisition related costs are recognised in profit or loss as incurred. Any deferred or contingent purchase consideration is recognised at fair value over the period of entitlement. If the contingent purchase consideration is classified as equity, it is not remeasured and settlement is accounted for in equity. Any deferred or contingent payment deemed to be remuneration as opposed to purchase consideration in nature is recognised in profit or loss as incurred, and excluded from the acquisition method of accounting for business combinations. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured, initially, at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The non-controlling interest is measured, initially, at the non-controlling interest's proportion of the net fair value of the assets, liabilities and contingent liabilities recognised. Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer's previously held equity interest in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed.

Goodwill arising on all acquisitions is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses.

The carrying value is reviewed annually for impairment or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Intangible assets arising under a business combination (acquired intangibles) are capitalised at fair value as determined at the date of exchange and are stated at fair value less accumulated amortisation and impairment losses. Amortisation of acquired intangibles is charged to the income statement on a straight-line basis over the estimated useful lives as follows:

Customer relationships - 2.5 to 7.5 years

Trade name - 5 to 10 years

Software and development costs - 3 to 7 years

Computer software and internally generated development costs which are not integral to the related hardware are capitalised separately as an intangible asset and stated at cost less accumulated amortisation and impairment losses.

Assets held under finance leases are amortised over their expected useful lives on the same basis as owned assets or, where shorter, over the term of the relevant lease. All intangible assets are reviewed for impairment in accordance with IAS 36 'Impairment of Assets' when there are indications that the carrying value may not be recoverable.

(m) Property, plant and equipment

Property, plant and equipment assets are stated at cost less accumulated depreciation and any recognised impairment losses. No depreciation has been charged on freehold land. Other assets are depreciated, to a residual value, on a straight-line over their estimated useful lives, as follows:

Freehold and long term leasehold properties - over 20 years

Short term leasehold properties - shorter of the lease period and the estimated remaining economic life

Fixtures and fittings - 3 to 15 years

Equipment - 5 to 12 years

Computer equipment - up to 5 years

Vehicles - up to 5 years

Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, over the term of the relevant lease. All property, plant and equipment is reviewed for impairment in accordance with IAS 36 'Impairment of Assets' when there are indications that the carrying value may not be recoverable.

(n) Leasing

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Property, plant and equipment held under finance leases is capitalised in the balance sheet at the lower of the fair value or the present value of the minimum lease payments and is depreciated over its useful life. The capital elements of future obligations under leases are included as liabilities in the balance sheet. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of return on the remaining balance of the liability.

Property and equipment and vehicle rentals paid under operating leases are charged to income on a straight line basis over the lease term. The benefits of rent free periods and similar incentives are credited to the income statement on a straight-line basis to the first break clause.

(o) Inventories

Inventories comprise goods held for resale and are stated at the lower of cost or net realisable value. Inventories are valued using a weighted average cost method. Cost comprises direct materials and, where applicable, direct labour costs and those overheads that have been incurred in bringing the inventories to their present location and condition.

(p) Trade receivables

Trade receivables do not carry any interest and are initially recognised at their fair value. They are subsequently remeasured at amortised cost using the effective interest rate method. Appropriate allowances for estimated irrecoverable amounts are recognised in the income statement when there is evidence that the asset is impaired.

(q) Trade payables

Trade payables are initially measured at fair value, and are subsequently remeasured at amortised cost, using the effective interest rate method.

(r) Treasury

Cash and bank deposits

Cash and cash equivalents in the balance sheet comprise cash at bank and in hand and short term deposits with an original maturity of three months or less. In the consolidated balance sheet, bank overdrafts are shown within borrowings in current liabilities. Cash and cash equivalents in the cash flow statement comprise cash at bank and in hand and bank overdrafts held for trading purposes.

Financial liabilities and equity

Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. Equity instruments issued are recorded at the proceeds received, net of direct issue costs.

Bank borrowings

Interest bearing bank loans and overdrafts are initially measured at fair value (being proceeds received, net of direct issue costs), and are subsequently measured at amortised cost, using the effective interest rate method. Finance charges, including premiums payable on settlement or redemptions and direct issue costs are accounted for on an accruals basis and taken to the income statement using the effective interest rate method and are added to the carrying value of the instrument to the extent that they are not settled in the period in which they arise.

Foreign currencies

Financial statements of foreign operations

The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and are translated at foreign exchange rates ruling at the balance sheet date. The revenues and expenses of foreign operations are translated at an average rate for the period where this rate approximates to the foreign exchange rates ruling at the dates of the transactions.

Net investment in foreign operations

Exchange differences arising from this translation of foreign operations, and of related qualifying hedges are taken directly to equity. They are recycled into the income statement upon disposal.

Foreign currency transactions

Transactions in foreign currencies are recorded using the rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated at foreign exchange rates ruling at the dates the fair value was determined.

(s) Provisions

Provisions are recognised when the Group has a present legal or constructive obligation as a result of a past event and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are measured at the directors' best estimate of the expenditure required to settle the obligation at the balance sheet date and if this amount is capable of being reliably estimated. If such an obligation is not capable of being reliably estimated, no provision is recognised and the item is disclosed as a contingent liability where material. Where the effect is material, the provision is determined by discounting the expected future cash flows.

(t) Retirement benefit costs

The Group operates a number of defined contribution schemes for the benefit of its employees. Payments to the Group's schemes are recognised as an expense in the income statement as incurred. The Group operates two defined benefit pension schemes. The largest scheme The WH Smith Pension Trust is closed to further accrual. The charge to the Group of providing benefits for these two schemes is determined by the Projected Unit Credit Method, with actuarial calculations being carried out at the balance sheet date. Actuarial gains and losses are recognised in full in the period in which they occur in the group statement of comprehensive income. The retirement benefit obligation recognised in the balance sheet represents the present value of the defined benefit, reduced by the fair value of scheme assets. An asset ceiling cap is applied in accordance with IFRIC 14 with an additional liability recognised where there is a contractual obligation to make further payments into the scheme.

(u) Employee Benefit Trust

Smiths News Employee Benefit Trust

The shares held by the Smiths News Employee Benefit Trust are valued at the historical cost of the shares acquired. This value is deducted in arriving at shareholders' funds and presented as the own share reserve in line with IAS 32 'Financial Instruments: Disclosure and Presentation'.

(v) Share schemes

Share based payments

The Group operates several share-based payment schemes, being the Sharesave Scheme, the Executive Share Option Scheme, the LTIP and the Deferred Bonus Plan. Details of these are provided in the Directors' Remuneration report and in note 31.

Equity-settled share-based schemes are measured at fair value at the date of grant. The fair value is expensed with a corresponding increase in equity on a straight-line basis over the period during which employees become unconditionally entitled to the options. The fair values are calculated using an appropriate option pricing model. The income statement charge is then adjusted to reflect expected and actual levels of vesting based on non-market performance related criteria.

Administrative expenses and distribution and marketing expenses include the cost of the share-based payment schemes.

(w) Changes in accounting policies

New Standards and Interpretations applied for the first time:

The following Standards have been adopted without any significant impact on the amounts reported in these financial statements:

Recognition of Deferred Tax Assets for Unrealised Losses (Amendments to IAS 12).

Disclosure initiative (amendments to IAS 7) - The amendment to IAS 7 requires a disclosure of changes in liabilities arising from financing activities. This has been presented in note 19.

Annual improvements 2014 - 2016 cycle effective 1 January 2017.

New Standards and Interpretations not yet applied

At the date of authorisation of these financial statements, the following Standards and Interpretations that are potentially relevant to the Group and which have not been applied in these financial statements were in issue but not yet effective (and in some cases had not yet been adopted by the EU):

IFRS 9 'Financial Instruments' - effective for accounting periods beginning on or after 1 January 2018 therefore effective on the Group financial statements for the year ending 31 August 2019.

The standard introduces changes to three key areas:

· new requirements for the classification and measurement of financial instruments;

· a new impairment model based on expected credit losses for recognising provisions; and

· simplified hedge accounting through closer alignment with an entity's risk management methodology.

The Group has completed an assessment of the impact of IFRS 9 and has concluded that adoption will not have a material impact on either the Consolidated Income Statement or the Consolidated Balance Sheet. The Group will apply all aspects of the new standard at the transition date of 1 September 2018 by adjusting opening retained earnings in the balance sheet and no restatement of comparative periods.

IFRS 15 'Revenue from Contracts with Customers'- effective for accounting periods beginning on or after 1 January 2018 therefore effective for the Group financial statements for the year ending 31 August 2019.

IFRS 15 establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. IFRS 15 will supersede the current revenue recognition guidance including IAS 18 Revenue, IAS 11 Construction Contracts and the related Interpretations when it becomes effective.

The core principle of IFRS 15 is that an entity should recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Specifically, the Standard introduces a 5-step approach to revenue recognition:

· Step 1: Identify the contract(s) with a customer

· Step 2: Identify the performance obligations in the contract

· Step 3: Determine the transaction price

· Step 4: Allocate the transaction price to the performance obligations in the contract

· Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation

Under IFRS 15, an entity recognises revenue when (or as) a performance obligation is satisfied, i.e. when 'control' of the goods or services underlying the particular performance obligation is transferred to the customer.

Far more prescriptive guidance has been added in IFRS 15 to deal with specific scenarios.

Furthermore, extensive disclosures are required by IFRS 15.

In April 2016, the IASB issued Clarifications to IFRS 15 in relation to the identification of performance obligations, principal versus agent considerations, as well as licensing application guidance.

Substantially all revenue earned by the Group is recognised at the point of service or on delivery of goods, and revenue recognised does not vary materially from the consideration to which the Group is entitled therefore no material adjustment is predicted. Were any adjustment to be required, the modified retrospective approach would be adopted with the cumulative impact of any adjustment recognised in retained earnings on transition date.

IFRS 16 'Leases' - effective for accounting periods beginning on or after 1 January 2019 therefore effective in the Group financial statements for the year ending 31 August 2020.

Transition to IFRS 16 will take place for the Group on 1 September 2019. The standard introduces a comprehensive model for the identification of lease arrangements and accounting treatments for both lessors and lessees and will replace the current lease accounting requirements including IAS 17 Leases and the related interpretations.

For lessees, IFRS 16 removes distinctions between operating leases and finance leases. These are replaced by a model where a right of use asset and a corresponding liability are recognised for all leases except for short-term leases and low value assets. In contrast to lessee accounting, IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17, and continues to require a lessor to classify a lease either as an operating lease or a finance lease.

From the work performed to date and based on the undiscounted lease commitments presented in note 25, it is anticipated that implementation of the new standard will have a significant impact on the reported assets and liabilities of the Group. In addition, the implementation of the standard will impact the income statement and classification of cash flows. A reliable estimate of the financial impact on the Group's consolidated results is dependent on a number of unresolved areas, including; choice of transition option, refinement of approach to discount rates, estimates of lease-term for leases with options to break and renew and conclusion of data collection.

In addition, the financial impact is dependent on the facts and circumstances at the time of transition. For these reasons, it is not yet practicable to determine a reliable estimate of the financial impact on the Group.

The directors anticipate that the adoption of the following Standards and Interpretations in future periods will have no material impact on the financial statements of the Group:

Amendments to IFRS 2 Classification and Measurement of Share-based Payment Transactions - effective for accounting periods beginning on or after 1 January 2018.

Annual Improvements 2014-2016 Cycle - effective 1 January 2018.

IFRIC 22 Foreign Currency Transactions and Advance Consideration - effective date 1 January 2018.

IFRIC 23 Uncertainty over Income Tax Treatments - effective date 1 January 2019.

Annual Improvements to IFRS 2015-2017 cycle - effective date 1 January 2019.

Amendments to IAS 19 Plan Amendment, Curtailment or Settlement - effective date 1 January 2019.

2. Segmental analysis

In accordance with IFRS 8 'Operating Segments', management has identified its operating segments. The performance of these operating segments is reviewed, on a monthly basis, by the Board. The Board monitors the tangible, intangible and financial assets attributable to each segment to determine the allocation of resources and the performance of each segment.

The continuing operating segments are:

As explained in note 11, the Books business, a leading UK distributor of physical and digital books was disposed of on 14 February 2018. The business has been presented as a discontinued operation and has been included below where necessary for the purpose of reconciliation. As detailed in note 12, the Education & Care business was sold on 30 June 2017 and the results for the period to this date are also presented within Discontinued operations.

The following is an analysis of the Group's revenue and results by reportable segment:

The accounting policies of the reportable segments are the same as the Group's accounting policies described in note 1.

Intra group revenue relates to services provided by Tuffnells to Smiths News in respect of Pass My Parcel.

*Discontinued operations in the table above are pre-tax measures. Presentation in the Group income statement for discontinued operations are post tax measures.

Information about major customers

Included in revenues arising from Smiths News are revenues of approximately £141.3m (2017: £147.5m) which arose from sales to the Group's largest customer. No other single customer contributed 6% or more of the Group's revenue in 2018 (2017: 5%).

Segment assets and liabilities

Segment depreciation, amortisation and non-current asset additions

Additions to non-current assets include intangible assets and property, plant and equipment.

Geographical analysis

3. Operating profit

The Group's results are analysed as follows:

\* The above note has been restated to move £79.2m out of cost of inventory recognised as an expense in to distribution costs as this is considered the most appropriate allocation. A subtotal of contribution has been added as this is considered a key performance metric for the Group.

The operating profit is stated after charging/ (crediting):

Included in administrative expenses are amounts payable to Deloitte LLP and their associates by the Company and its subsidiary undertakings in respect of audit and non-audit services which are as follows:

Details of the Company's policy on the use of auditors for non-audit services and how the auditor's independence and objectivity was safeguarded are set out in the Audit Committee Report in the Annual Report.

4. Adjusted items

The Group incurred a total of £48.3m of adjusted items on a continuing basis, after tax (2017: £11.1m).

This comprises:

(a) Network and re-organisation costs

There are £3.1m (2017: £8.0m) network and reorganisation costs. In the current year this includes abortive integration costs of £1.6m (2017: £nil) with regard to the integration programme announced at the end of the previous financial year. There are further costs of £1.8m (2017: £nil) relating to redundancies announced in August 2018 arising from the decision to streamline head-office functions which is separate to the network restructuring in the previous financial year. There is a credit of £0.3m relating to the release of the remaining redundancy provision related to network restructuring.

The total of £8.0m in the prior year comprised: a £4.0m charge for the 2017 redundancy provision relating to network restructuring; £2.0m related to network rationalisation costs incurred in the Smiths News network; £0.6m related to the restructuring of the Smiths News joint venture FMD Limited; £0.5m in rationalising overseas operations in DMD and the remaining £0.9m related to redundancy costs within Smiths News and Tuffnells.

Costs associated with network and reorganisation are considered adjusted items given they are part of a strategic programme to drive future cost savings and are significant in value to the results of the Group.

(b) Property

There is a £0.7m credit (2017: £0.6m charge) relating to property costs. During the year the Group made the strategic decision to transfer the previously vacant Slough depot to the Tuffnells business, resulting in a credit from the release of its onerous lease provision of £0.7m (2017: £0.9m charge relating to three properties). In the prior year £0.3m of reversionary lease provisions were released as they were no longer required. Onerous charges on property are charged through adjusted items as they form part of the Group's strategic restructuring programme. The reversal of charges has also been made in adjusted items for consistency.

(c) Acquisition and disposal costs

There are £nil (2017: £2.2m) costs in the current year relating to acquisition and disposal costs. Prior year acquisition costs included the release of deferred contingent consideration which was payable conditional on the financial performance of Tuffnells and the continued employment of its former owners. This amounted to £2.7m comprising equity based amounts and amounts provided for cash rewards (see note 27) which were offset by £0.5m fees relating to disposal activity in the prior year that did not meet the criteria to be included within discontinued. Deferred contingent consideration charges and credits in respect of previous acquisitions and costs relating to disposal activity are considered to be adjusted items as they do not form part of normal operating costs/ credits of the business.

(d) Amortisation of acquired intangibles

A charge of £7.1m (2017: £7.3m) has been recognised relating to amortisation of acquired intangibles. This is considered an adjusting item as it allows comparison between segments and, therefore, consistency in the performance of the Group at a consolidated level as shown in note 2.

(e) Pension

There is £nil (2017: £0.7m) of pension credits in the current year. The prior year £0.7m pension credit relates to a trivial commutation of benefits to members in the Group's section of the WH Smith Pension Trust. The prior year pension credit is not considered to be part of normal operations and is therefore considered to be an adjusted item.

(f) Settlement of interest rate swap

There is £nil (2017: £0.8m) relating to settlement of interest costs. The costs related to the settlement of swap instruments after the Group took a strategic decision to no longer enter into hedging arrangements. The settlement followed a change in Treasury policy (see note 20). The cost is classified as an adjusted item because it is of significant value and is not expected to be recurrent in nature.

(g) Impairment of Tuffnells goodwill

During the year management reviewed the carrying value of Tuffnells goodwill and concluded that an impairment charge of £46.1 million (2017: £nil) was required. The recoverable amount of goodwill (in both the current and prior year) is calculated with reference to its value in use based on future cash flow projections. The key assumptions used in the calculation are disclosed in note 14. It is considered adjusting due to its one-off nature and significant value.

(h) Pass My Parcel (PMP) exit costs

Following a review of the PMP proposition on 23 May 2018, the Board decided to close the division and as a result a charge of £6.7m (2017: £nil) was booked.

Management concluded that losses on winding down the division represented an onerous contract with a cost of £4.7m recognised which comprises the forecast excess of costs over income from the date the Group took the decision to close the division. It is considered adjusting due to its one off nature and significant value. Of this balance, £2.5m remains in provisions to cover the costs to close all contracts (see note 24). In the period from 1 September 2017 to the date of the decision to close, PMP incurred losses of £5.4m (these losses were included in our adjusted operating results).

A further £2.0m of impairment charges split £1.0m tangible and £1.0m intangible were recognised to write off the non-current assets relating to the division (note 13 and 14).

(i) Impairment of tangible assets

The Group took the decision to consider the sale of the Jack's Beans division to focus on its core businesses, bids received indicated an excess of net book value of £1.1m therefore the Group has impaired the assets and moved them into non-current assets held for sale. Given the magnitude, the one-off nature and the Group's strategy to focus on its core businesses it is considered to be an adjusting item.

(j) NMW regulatory compliance

The Group has been in discussion with HMRC regarding an historical underpayment in relation to a misapplication of national minimum wage legislation in Tuffnells. Although dialogue continues, a provision amounting to £1.3m has been made in the Financial Statements in respect of any potential liabilities, of which £0.5m relating specifically to the estimated fine is classified as adjusting due to its one off nature. £0.8m has been included within adjusted operating results as it did not meet the definition of an adjusting item.

(k) (Loss)/Profit on disposal of subsidiary

On 14 February 2018, the Group completed the sale of the Books business at a loss of £10.5m full details are provided in note 12. In the prior year, on 30 June 2017, the Group completed the sale of the Education & Care business at a profit of £19.0m full details are included in note 12.

(l) Re-organisation costs

Re-organisation costs of £0.1m (2017 £0.3m) were incurred by the Books business during the year. Reorganisation costs are considered to be adjusted items as they are part of the Group's wider restructuring programme to deliver cost savings and were incurred prior to the disposal. These are disclosed separately from other reorganisation costs on the basis the Books business was discontinued.

(m) Amortisation and impairment of discontinued intangibles

Included within discontinued operations results are items of £nil (2017 £11.2m) relating to amortisation and impairment of discontinued intangibles. The prior year includes impairments of £9.9m relating to the Books business and £1.3m of amortisation of acquired intangibles. The impairment is considered to be adjusting due to magnitude, the one-off nature and as it does not relate to underlying trade. Amortisation of acquired intangibles is considered adjusting as it skews the results of the non-acquired businesses.

5. Staff costs and employees

(a) Staff costs

The aggregate remuneration of employees (including executive directors) was:

Pension costs shown above exclude charges and credits for pension scheme financing and actuarial gains and losses arising on the pension schemes. Wages and salaries shown above exclude amounts related to share based payment charges. On a continuing basis there was a credit of £nil in 2018 (2017: credit £1.6m) relating to share based payments (refer to note 3). There was £6.7m (2017: £23.7m) of staff costs relating to discontinued operations these are not included in the above table.

(b) Employee numbers