CNCT.L Regulatory News (CNCT)

12 Oct 2006 07:01

Smiths News PLC12 October 2006 Smiths News PLC Preliminary Results Announcement For the twelve months ended 31 August 2006 Smiths News is the UK's leading newspaper and magazine wholesaler delivering over 60 million publications to 22,000 retailers every week. OPERATIONAL HIGHLIGHTS • Major contracts renegotiated - 81% of revenues covered by contracts with average remaining term of four years until expiry • Additional £50m of annualised sales revenue won from magazine distributor Frontline • Consolidation of newspaper sales and marketing operation from 36 depots to 2 centres of excellence • Good start to 2007: + New contracts won from Northcliffe Newspapers and Johnston Press to distribute titles in the Plymouth and Peterborough areas + The Returns Company is working with Waterstone's to process book returns from Ottakars stores during integration FINANCIAL HIGHLIGHTS - CONTINUING • Trading profit(1) up 5.9% to £39.5m (2005: £37.3m) (2) • Profit before interest and tax up 4.3% to £34.3m (2005: £32.9m) (2) • Profit before tax up 0.9% to £32.0m (2005: £31.7m) (2) • Free cash flow of £27.5m (2) • Basic earnings per share up 6.3% to 15.1p (2005: 14.2p) (2) • Dividend proposed of 4.0p FINANCIAL HIGHLIGHTS - GROUP (Including discontinued operations) • Basic earnings per share of 33.7p (2005: 26.6p) (1) Profit before interest and tax stated before central overheads, share based payments and pension service charges (2) Stated on a continuing basis Commenting on the results, Mark Cashmore, Chief Executive said: "Despite the challenging trading environment, these positive results highlightthe inherent strengths of the Smiths News business. The newspaper and magazine distribution markets continue to provideopportunities for growth and development. Trading in the first 5 weeks of 2007has been in line with expectations. In terms of future trading prospects, whilstwe believe strongly in the resilience of the newspaper and magazine markets, weare planning on the basis of limited underlying sales growth this year, probablysimilar to the levels achieved in 2006. The combination of a resilient market place, a programme of cost savings andefficiencies and the business's strong market position underpins the Board'sconfidence in the underlying prospects for Smiths News in its first year as apublic company." Enquiries (for 12 October only): Smith News PLC Alan Humphrey Investor Relations 020 7404 5959Mark Charlton Media Relations 020 7404 5959 BrunswickKate Holgate 020 7404 5959Giles Croot An interview with Mark Cashmore in video/audio and text is available on: http://www.smithsnews.co.uk and on http://www.cantos.com OPERATIONAL REVIEW Smiths News has made good progress in a busy year, which culminated in theseparation from the Retail business of WHSmith PLC as an independent company.Smiths News produced a market leading performance in a challenging tradingenvironment with increased profitability, improved service delivery to ourpublishers and retailers and the successful renewal of key contracts, togetherwith some new contract gains. In addition, Smiths News has laid the foundationsfor developing new revenue growth opportunities. During the year to 31 August 2006, Smiths News successfully renewed itscontracts with Associated Newspapers, Financial Times, Guardian Newspapers andNorthern & Shell. Consequently, Smiths News now has approximately 81% of itsrevenue covered by contracts with an average remaining term of four years untilexpiry. In addition, we were delighted to win new contracts with publishers inthe Derby area and extend our existing contract with Frontline, principally inNewcastle, Northamptonshire, Oxfordshire and Cambridgeshire. The newspaper market has remained resilient over the year with a continuation ofthe trends seen in the last few years of publishers increasing cover prices tocounter-balance circulation declines. The magazine market continues to showinnovation with a number of new launches, predominantly in the weeklies market,which has offset the declines in the monthlies market as consumers switch toweekly titles. Smiths News has continued to focus on driving business efficiency in order toimprove service to publishers and retailers and reduce costs. We have re-sitedour newspaper buying and marketing processes from 36 depots into two centres ofexcellence to both improve customer service levels and reduce costs. Inaddition, we have improved our order picking and distribution processes. Inanticipation of more challenging market conditions, we implemented a plan in theautumn of 2005 to reduce costs across all areas of head office. In July 2006 the Office of Fair Trading issued a draft opinion on the status ofmagazine and newspaper distribution contracts under competition law. It alsoannounced its intention to review the Newspaper Code of Practice that wasestablished after the Monopolies and Mergers Commission enquiry into newspaperdistribution in 1993. A final opinion is expected in the spring of 2007,together with the outcome of the Newspaper Code review. We believe the currentarrangements serve consumers well. For some time our plans have recognised themarket is becoming more retailer focused. Regardless of the outcome, ourstrategy of improving service and efficiency will not alter, and the business iswell placed to respond to change and capitalise on opportunities that may arise. Smiths News has made progress this year in developing new growth opportunities.In the core business, Smiths News has recently won contracts with two regionalnewspaper publishers to distribute regional newspaper titles in the Plymouth(Northcliffe Newspapers) and Peterborough (Johnston Press) areas. The annualisedsales value of these two contracts is expected to be £8m. The Returns Company is working with Waterstone's to process the return of booksfrom Ottakars during its integration into the Waterstone's estate. Thisdemonstrates the opportunities available to Smiths News as a result of theseparation from the Retail business of WHSmith ("Retail Business"). Smiths Newsis continuing to work with SAP to develop the Newsworks business. FINANCIAL REVIEW Smiths News PLC completed the separation of the Retail Business on 31 August2006. The results of the Retail Business are classified in the financialstatements as discontinued operations for the years ended 31 August 2005 and2006. The information disclosed in this financial review relates solely to thecontinuing Smiths News business, unless otherwise stated. Smiths News has made good progress over the year. Sales and profitability havecontinued to grow in a more challenging market. This has been achieved throughmanagement's continued focus on cost control and high levels of service forpublishers and retailers. Smiths News profit before interest and tax of £34.3m is up 4.3% from £32.9m in2005. Profit before tax of £32.0m is up 0.9% from £31.7m. Basic earnings pershare from continuing operations increased by 6.3% to 15.1p (2005: 14.2p). The Directors of Smiths News PLC have proposed a dividend of 4.0p. REVENUE Underlying sales Growth growth (1)£m 2006 2005 % %_______________________________________________________________________________RevenueReported revenue 1,094.7 1,074.1 1.9%Sales to WH Smith PLC(2) 115.9 113.0 2.5%________________________________________________________________Total revenue 1,210.6 1,187.1 2.0%________________________________________________________________ Comprising:Newspapers 628.7 620.0 1.4% 2.3%Magazines 531.6 519.8 2.3% (0.9%)Other 50.3 47.3 6.3% 6.3%_______________________________________________________________________________Total revenue 1,210.6 1,187.1 2.0% 1.1%_______________________________________________________________________________ (1) Underlying sales growth excludes publisher contract gains and one-off prior year book promotions. (2) Smiths News' sales to the Retail Business are reported as inter-segment sales to discontinued operations and are not included in reported revenue. Total sales were up 2.0% to £1,210.6m (2005: £1,187.1m). Underlying sales growthwas 1.1%. Newspaper sales increased by 1.4% on last year. This figure includes newbusiness gained in the recent contract renegotiation process, mainly in theDerby area. This partially compensated for the loss of the book promotionalsales carried out by Associated Newspapers and Northern and Shell (ExpressNewspapers) in 2005, which have not been repeated in 2006. Excluding these twoitems, underlying newspaper sales growth was 2.3%, driven by price increaseswhich more than offset volume declines. Total Magazines sales were up 2.3% in the year. In April 2006 we won additionalterritories with the magazine distributor Frontline, equating to circa £50m ofannualised revenue. This more than compensated for the loss of some Bauerbusiness in April 2005. If these contract changes are excluded underlyingmagazines sales were 0.9% down year on year. We have experienced differing trends in the weekly, monthly and partworkcomponents of our magazine business. Weekly sales have been buoyant, fuelled by the continued growth in the celebrityand men's lifestyle sectors and new launches. By contrast monthly magazines, asexpected, have declined in the year as there has been significant switching byconsumers from monthly to weekly titles. Overall the net position of weekliesand monthlies is broadly flat compared to last year. Partwork sales have fallenby 25% in the year ended 31 August 2006. However, this performance needs to beviewed in the context of two exceptional years, fuelled by CD/DVD collectableproduct. Partwork sales have now reverted to the levels experienced in 2003. The growth in other revenues is driven by our two fledgling new businesses,Newsworks and The Returns Company. Other revenues also comprise income frompublisher services and carriage service charges. PROFITS Growth________________________________________________________________ £m 2006 2005 %________________________________________________________________Revenue 1,210.6 1,187.1 2.0%________________________________________________________________Gross contribution 129.1 130.8Operating costs (90.9) (93.9)Profits on property transactions 1.3 0.4________________________________________________________________Trading profit(1) 39.5 37.3 5.9%Central costs (5.2) (4.4)________________________________________________________________Profit before interest and tax 34.3 32.9 4.3%Finance costs (2.3) (1.2)________________________________________________________________Profit before taxation 32.0 31.7 0.9%________________________________________________________________ (1) Profit before interest and tax stated before central overheads, share based payments and pension service charges. Gross contribution was down £1.7m in 2006, largely due to margin dilutionarising from the renewal of contracts and a change in the sales mix. This hasreduced gross margin from 11.0% to 10.6%. Operating costs reduced by £3.0m compared to 2005. These cost savings have beenachieved through process consolidation, greater efficiency and tight costmanagement. On process consolidation, we have this year, re-sited our newspaperbuying and marketing processes into 2 centres of excellence, whereas in the pastthis was carried out in the majority of our depots. Our focus on service hasbrought savings in rectification costs, enabling us to reduce significantly ourovertime and agency costs. In addition, costs were reduced across all areas ofhead office. Trading profit(1) of £39.5m is up 5.9% on the previous year, which represents a50% increase on the trading profit of £26.0m reported in the year ended 31August 2001. Central costs of £5.2m included share based payments, defined benefit pensionservice charges and central overheads. Profit before interest and tax of £34.3m (2005: £32.9m) is up 4.3%. Financecosts for 2006 are £1.1m higher than last year due to increased pensioninterest. Profit before tax of £32.0m is up 0.9% (2005: £31.7m). Taxation The tax charge for the year was £6.4m (2005: £7.3m). The effective tax rate oncontinuing activities was 20% benefiting from settling some of the outstandingprior year issues. This compares to 23% last year. We anticipate that our effective tax rate will continue to be lower than thestandard rate in the medium term. Earnings per share and dividend Smiths News generated basic earnings per share from continuing operations of15.1p (2005: 14.2p), an increase of 6.3%. See Appendix 1 for further detail. The Board has proposed a dividend of 4.0p per ordinary share. Subject toshareholder approval, the dividend will be paid on 9 February 2007 toshareholders registered at the close of business on 12 January 2007. The Board intends to adopt a progressive dividend policy, targeting a dividendthat would, over time, be broadly covered twice by earnings. Pro forma At the balance sheet date the Group had drawn down £50m of term loan. At 1September 2006 £20m was drawn from the revolving credit facility, bringing thetotal debt drawn to £70m, from which a one-off payment of £25m was made into thepension fund. The effect of these transactions, had they taken place at 1September 2005, would have been to increase finance costs by circa £2.7m for theyear ended 31 August 2006. This comprises increased interest and feeamortisation on the credit facilities being partially offset by reduced pensioninterest. On this pro forma basis we estimate profit before tax for the year ended 31August 2006 would be £29.3m and taking into account the group's effective taxrate for the year of 20%, earnings per share would be 13.6p. Discontinued Operations Following the demerger of the Retail Business on 31 August 2006, the results ofthe Retail Business have been classified as discontinued operations for both theyear ended 31 August 2005 and 2006. The profit after tax from the discontinued business was £32m (2005: £22m). Anexceptional charge after tax of £12m in relation to costs associated with thedemerger were charged against the discontinued operations in the Group IncomeStatement. A £3m exceptional gain after tax was also recognised in the yearagainst discontinued operations as a result of post retirement medical benefitliabilities being settled. Basic earnings per share including the discontinued business was 33.7p (2005:26.6p). CASH FLOW Continuing Operations£m 2006___________________________________________________________________________Profit before interest and tax 34.3Depreciation & Amortisation 6.6Non cash items 1.2Working capital (8.1)Capital expenditure (2.1)Tax (4.4)___________________________________________________________________________Free cash flow 27.5___________________________________________________________________________ A reconciliation to the statutory cash flow is included in Appendix 2. The outflow on working capital in 2006 is the reversal of timing differences,from which we had benefited in 2005. Capital expenditure was tightly managed during the year. Going forward we wouldexpect capital expenditure to be broadly in line with depreciation. BALANCE SHEET £m ___________________________________________________________________________ Non current assets 21.6 ___________________________________________________________________________Working capital (36.1) Deferred tax asset 13.8 Corporation tax (14.6) Provisions (1.3) ___________________________________________________________________________ Operating liabilities employed (16.6) ___________________________________________________________________________Net debt (41.7) ___________________________________________________________________________Net liabilities excluding pension liability (58.3) ___________________________________________________________________________Pension liability (49.0) ___________________________________________________________________________Total net liabilities (107.3) ___________________________________________________________________________ Smiths News PLC is financed through a mixture of debt, comprising a term loanand revolving credit facility, finance leases and equity. On 26 June 2006, Smiths News entered into a £100m facility agreement withAlliance and Leicester Commercial Bank plc, Barclays Bank plc, Lloyds TSB Bankplc and The Royal Bank of Scotland plc comprising a £50m term loan facility, anda £50m revolving credit facility. At 31 August 2006, the Group had drawn down£50m of the term loan facility. This was used principally to settle intercompanyindebtedness arising on the demerger of the Retail Business. At 31 August 2006 net debt of £42m comprised £11m cash, £50m floating rate debtand £3m finance leasing. Subsequent to 31 August 2006, the Group drew down £20mfrom the available revolving credit facility to fund a one-off £25m contributionto the Smiths News section of the WH Smith Pension Trust. On a pro forma basis, taking into account these transactions, net debt wouldhave been £67m. On 1 September 2006 the Group entered into an interest rate swapto fix 75% of the term loan facility at 5.13% for 5 years. Pensions In September 2005, the Trustees of the Pension Trust adopted a new investmentpolicy in order to substantially reduce the volatility in the fund. The assetsin the investment fund were restructured in order to adopt this policy. Thisinvolved the assets being invested such that they are expected to alter in valuein line with changes in the pension liability caused by changes in interest andinflation ("a Liability Driven Investment 'LDI' policy"). On the date of demerger, 31 August 2006, the assets and liabilities of thePension Trust and WH Smith Retirement Savings Plan were split between SmithsNews and the WH Smith Retail business by way of a 'sectionalisation', and areexpected to be apportioned 35% to Smiths News and 65% to WH Smith Retail. Eachsection contains the accounts of members who are or were employed by therelevant business. At 31 August 2006, the Smiths News gross defined benefit pension deficit underIAS 19 was £49m, approximately £34m net of related deferred taxes. On 1 September 2006, a one-off contribution of £25m was made to the Smiths Newssection of the Pension Trust. In addition to the one-off payment Smiths News has agreed with the Trustees tomake aggregate ongoing pension deficit funding payments of approximately £5meach year for the next five years. Appendix 1 - Earnings per share Profit after tax from continuing operations 26(£m) Basic number of shares (millions) 172 DilutedBasic EPS 15.1p Diluted number of share (millions) 173Diluted EPS 15.0p Appendix 2 - Free cash flow Continuing Discontinued Operations Operations Group£m 2006 2006 2006 Profit before interest and tax 34 60 94Depreciation & Amortisation 7 37 44Non cash items 1 1 2Working capital (8) 9 1Capital expenditure (2) (29) (31)Tax (4) (2) (6)Net interest paid - (5) (5)Net provisions spend - (3) (3)_______________________________________________________________________________Free cash flow 28 68 96_______________________________________________________________________________ This information is provided by RNS The company news service from the London Stock Exchange