CNCT.L Regulatory News (CNCT)

18 Oct 2007 07:01

Smiths News PLC18 October 2007 Smiths News PLC Preliminary Results Announcement for the year ended 31 August 2007 Smiths News PLC is the UK's leading newspaper and magazine wholesaler serving 22,000 retailers across England and Wales FINANCIAL HIGHLIGHTS 2007 2006 2007 2006 Underlying(1) Proforma(2) Increase Increase ----------------------------------------------------------------------------Revenue £1,232.4m £1,210.6m 1.8% £1,232.4m £1,210.6m 1.8%Operating profit £36.0m £33.0m 9.1% £41.4m £34.3m 20.7%Profit before tax £31.0m £28.0m 10.7% £36.4m £32.0m 13.8%Earnings per share 14.0p 13.0p 7.7% 16.1p 14.9p 8.1% •Free cash flow of £27.1m(3) •Final dividend of 4.3p (2006: 4.0p)(4); total dividend 6.4p (2006: 6.0p)(4) OPERATING HIGHLIGHTS •Market leading service with continued improvement across the network •Costs reduced through efficiency improvements and tight cost control •Significant progress in creating further efficiencies -depot consolidation in several locations -customer service and administration rationalisation into regional centres of excellence •Agreement with News International to supply South London and Derby areas commencing June 2008 •Regional press gains in Peterborough, Plymouth, Cambridge, and Manchester •Continued progress in developing new revenue streams - agreements reached with Martin McColl, Alpha Retail and Newspread, part of Independent News & Media PLC Commenting on the results, Mark Cashmore, Chief Executive said: "In our first full year as an independent company, Smiths News has delivered agood performance. We have improved our profitability and cash generation in achallenging market by continuing to manage costs rigorously while furtherconsolidating our position as the market leader in terms of scale, technology,efficiency and service to our customers. We have made a good start to the new financial year. Looking ahead, acombination of improving service, new revenues, and continued efficiency savingsthroughout the business means we are well placed to deliver another year ofprogress." The following definitions are applied consistently throughout this preliminaryresults announcement: (1) Underlying 2007 results exclude the actuarial curtailment credit on thepension scheme of £5.4m and the related tax charge of £1.6m. (2) Proforma 2006 results assume the £70m of debt funding introduced at the timeof the demerger, and the one off pension payment of £25.0m, had been made at thebeginning of the 2006 period, giving rise to a finance cost of £2.7m, with arelated tax charge of £0.5m. Proforma 2006 results also exclude propertyprofits of £1.3m. (3) Excludes the one-off pension funding payment of £25.0m, dividend payment of£10.9m and finance lease repayments of £1.6m. (4) 2006 dividend is the Smiths News apportionment of old WH Smith PLC dividend. For further information: Smiths News PLCAlan Humphrey Finance Director 020 7404 5959 BrunswickKate Holgate Media Relations 020 7404 5959Giles Croot About Smiths News: Smiths News was formed on 31st August 2006 following the demerger of WH SmithPLC. Smiths News is the UK's leading newspaper and magazine wholesaler serving 22,000retailers across England and Wales. Smiths News also collects and processesreturns, supplies sales information to publishers and provides a range ofservices for its retail customers. Smiths News has an approximate 40 per cent share of the magazine wholesalingsector and an approximate 35 per cent share of the newspaper wholesaling sectorin the UK. Smiths News has 44 distribution centres across England and Wales, employing4,100 staff. OPERATING REVIEW In our first year as an independent PLC, we have delivered a good performance.Even though our markets have remained challenging, rigorous cost management hasenabled the business to increase its profits, whilst making good progressagainst all key objectives. Service & Efficiency Operational service levels have improved across the business, improving theconsistency of standards throughout the network. The policy of ensuringtransparency of performance at all levels of the business has been successful.Objectivity of reporting has improved communication with publishers andretailers, helping all parties to work together to improve mutual performanceand consolidate our position as market leader. This year a number of improvements were made to the network. In March, a newdepot opened in Plymouth, replacing three old buildings with one modernfacility. As part of the plan to improve service and efficiency in the ThamesValley area, the newspaper depot in Oxford was fully refurbished which enabledthe closure of the High Wycombe depot. Similarly, the newspaper operation inStoke has been consolidated into one building and the magazine packing moved toWednesbury, completing the consolidation of depots in the North Birmingham area. Efficiency initiatives have been pursued at all levels of the business, frommajor projects such as the restructuring of customer services and administrationsupport, down to local initiatives such as the implementation of free faxfacilities to reduce phone calls to depots. Improvements to the network will continue and there are plans for further newfacilities and consolidations. Core contracts There were no major publisher contracts due for renewal during the year, howeverregional press gains worth £8m in annualised sales were secured in thePeterborough, Plymouth, Cambridge and Manchester areas. We have also reachedagreement with News International to supply the South London and Derby areascommencing in June 2008. This agreement represents an additional £10m inannualised sales. The improvements in service levels and performance over the last two yearsposition Smiths News well for major distribution contracts when they become duefor renewal. Markets The newspaper and magazine markets remain large and relatively stable. Marketconditions for newspapers have been challenging, but the long-term trend ofvalue growth has continued with price increases more than offsetting the impactof volume declines. This trend is expected to continue although it is likelythere will be only modest underlying revenue growth over the coming year. The magazine market has seen a reduction in both volume and value. Sales throughSmiths News were boosted by contract gains; although excluding these gains, thegrowth of weekly titles was not sufficient to offset the decline in monthliesand partworks. More recently we have seen increased investment in the weeklymarket and signs of stabilisation in monthly magazines. New revenues The business continues to seek opportunities to use its competencies to buildnew revenue streams. The Group's independence from WH Smith PLC has allowed thecompany to build stronger relationships with other retailers. We continue to strengthen our services providing a comprehensive categorymanagement service by combining our distribution offer with information andmarketing expertise, returns handling, merchandising, and promotional brokerage. During the year solid progress has been made in this regard. We are due to run atrial with 100 Tesco stores to broaden our offer to other papershop products andan agreement has recently been reached with Martin McColl, the largest of theCTN convenience chains, to manage the magazine ranges and promotions in all oftheir 1,400 stores across the UK. In addition, The Returns Company has recently reached an agreement with AlphaRetail, one of the UK's leading airport retailers, to handle their returns. Smiths News is the industry leader in data management, operating a technologyplatform facilitating the complex information exchange between retailers,publishers and Smiths News. We market this under our NewsWorks banner.Newspread, a subsidiary of Independent News and Media PLC, has engaged NewsWorks todesign a systems solution for their wholesale operation in Ireland. Pensions In May 2007, the WH Smith Pension Trust (a defined benefit scheme) was closed tofurther accrual. The closure affected 700 staff members, representing 17% ofthe total workforce. The decision limits the risk and volatility in the schemeand helps protect the long-term future of the Trust. We remain committed tocompetitive pension provision for all staff, through the WH Smith RetirementSavings Plan, a defined contribution scheme. Outlook We have made a good start to the new financial year with trading in the firstsix weeks in line with market expectations. Looking ahead, a combination ofimproving service, new revenues, and continued efficiency savings throughout thebusiness means we are well placed to deliver another year of progress. FINANCIAL REVIEW REVENUE Like for like Aug 2007 Aug 2006 Change growth (5) £m £m % % ---------- --------- --------- ----------Newspapers 640.8 628.7 1.9% 1.0%Magazines 541.2 531.6 1.8% (3.6%)Other 50.4 50.3 0.2% 0.2%-------------------- ---------- --------- --------- ----------Total revenue 1,232.4 1,210.6 1.8% (1.1%)-------------------- ---------- --------- --------- ---------- (5) Like for like revenue growth excludes publisher contract gains. Total revenues are 1.8% above last year with like for like(5) revenues down 1.1% onlast year. Newspaper revenues of £640.8m are up 1.9% on last year, benefiting from nationalnewspaper contract gains in Derby and regional press contract gains in Peterborough,Plymouth, Cambridge and Manchester. Like for like(5) newspaper revenues,excluding contract gains are up 1.0%. This year has again seen the continuing trend experienced over the past decadeof value growth in newspapers, with price increases outstripping volumedeclines. Magazine revenues of £541.2m are up 1.8% on 2006 benefiting from additionalbusiness won from the distributor Frontline in April 2006 and contract gains inDerby in June 2006. Excluding these contract gains like for like(5) magazine revenues are down 3.6%on last year. Across our four categories of magazine revenues we have seengrowth in weekly magazines and sticker collection revenues offset by declines inmonthly magazines and partworks. OPERATING PROFIT Aug 2007 Aug 2006 Fav/(Adv) £m £m % ----------- ----------- -------------Gross profit 125.2 129.1 (3.0%)Gross margin 10.2% 10.7%Operating costs (89.2) (96.1) 7.2%---------------------- ----------- ----------- -------------Underlying operating profit 36.0 33.0 9.1%Non-recurring items 5.4 1.3---------------------- ----------- ----------- -------------Operating profit 41.4 34.3 20.7%---------------------- ----------- ----------- ------------- Gross margin has reduced from 10.7% to 10.2% owing to the effect of contractrenewals finalised during the prior year. Operating costs reduced by £6.9m compared to 2006, despite absorbing additionalcosts incurred as a result of becoming an independent plc. We have continued todrive our cost saving programme at pace knowing that we were facing tough grossmargin pressures. We have made significant savings from the consolidation of processes such asnewspaper copy marketing and call centre operations, which were previouslycarried out in all depots but which now operate from regional centres ofexcellence. Further savings were made through the consolidation of our depot network inareas such as Plymouth, High Wycombe and Stoke. We have also made considerable savings in overtime and agency costs throughbetter management of product flow. The cost reductions have contributed to an improvement in underlying operatingprofit of 9.1% to £36.0m (2006: £33.0m). Operating profit has improved by 20.7% to £41.4m (2006: £34.3m). Operating profithas further benefited from a non-recurring item, being an actuarial curtailmentcredit of £5.4m in 2007 relating to the closure of the defined benefit pensionscheme. Operating profit in 2006 included a £1.3m one-off profit on the disposalof freehold properties. PROFIT BEFORE AND AFTER TAX Underlying Proforma Increase Aug 2007 Aug 2006 % £m £m ----------- ----------- -----------Operating profit 36.0 33.0 9.1%Finance Costs (5.0) (5.0)------------------------ ----------- ----------- -----------Profit before tax 31.0 28.0 10.7%Tax (6.1) (5.6)------------------------ ----------- ----------- -----------Profit after tax 24.9 22.4 11.2%------------------------ ----------- ----------- ----------- Underlying profit before tax for 2007 was £31.0m, an increase of 10.7% on the2006 proforma result. Proforma results for 2006 exclude the profit on the sale of our Newcastle andDurham properties of £1.3m and includes additional finance costs of £2.7m toreflect comparable debt and pension positions post demerger. The tax charge for the year of £6.1m represents an effective tax rate onunderlying profit of 20%, resulting from the release of a prior year provision of £3.9m. This is due to the successful conclusion of some prior year matters with HMRC. Over time we would expect the effective tax rate to trend back to the standard rate ofcorporation tax for the UK. EARNINGS PER SHARE AND DIVIDEND PER SHARE Underlying Proforma Aug Aug Aug Aug 2007 2006 2007 2006 --------- --------- ------- -------Profit after tax from continuingoperations (£m) 24.9 22.4 28.7 25.6Basic number of shares (millions) 177.8 172.2 177.8 172.2Basic EPS 14.0p 13.0p 16.1p 14.9pDividend per share 6.4p 6.0p 6.4p 6.0p The increase in EPS has been driven by improved underlying profits. The weightedaverage number of shares increased by 5.6m due to the early vesting of someshare schemes and the allocation of share trust assets, both as a direct resultof the demerger. The Board has proposed a final dividend of 4.3p per ordinary share, whichrepresents a 7.5% increase on the 4.0p allocation of the old WH Smith PLCdividend. The dividend will be paid on 8 February 2008 to shareholdersregistered at the close of business on 18 January 2008. Total dividend per share for the year is 6.4p, an increase of 6.7% on last year. FREE CASH FLOW Underlying Year to Year to 31 Aug 2006 31 Aug 2007 £m £m ------------ ---------- Operating profit 36.0 34.3Working capital 6.4 (8.1)Depreciation & Amortisation 5.5 6.6Non cash items 0.5 1.2Capital expenditure (3.2) (2.1)Tax (8.1) (4.4)Net Interest paid (3.8) -Additional pension deficit funding (6.2) (7.0)--------------------------------- ------------ ----------Free cash flow 27.1 20.5--------------------------------- ------------ ---------- We have generated £27.1m of free cash flow in the year to 31 August 2007. Tight working capital management, together with some timing benefits added £6.4mof cash. Since investing £23m on our IT infrastructure in the period to 2001, thebusiness has not required significant further investment. During this year,total capital expenditure of £5.4m, of which £3.2m was financed by cash and£2.2m by new finance leases, has matched depreciation of £5.5m. There was a cash outflow in the year of £10.4m (2006: Inflow £3.6m) arising froma one-off payment into the pension fund of £25.0m, a dividend payment of £10.9mand repayment of finance lease obligations of £1.6m that offset the free cashflow of £27.1m. NET DEBT Year to 31 Aug 2007 £m ------------ Free cash flow 27.1Dividend (10.9)New finance leases (2.2)--------------------------------- ------------Decrease in net debt before one-off pension payment 14.0--------------------------------- ------------ Opening net debt (41.7)One-off pension payment (25.0) ------------Proforma opening net debt (66.7)Decrease in net debt before one-off pension payment 14.0--------------------------------- ------------Closing net debt (52.7)--------------------------------- ------------ Net debt of £52.7m has reduced by £14.0m compared to the proforma net debt at 31August 2006. The £14.0m reduction arises from a positive free cash flow, offsetby dividend payments and new finance leases. The total movement in net debt of £11.0m comprises a £10.4m cash outflow and anet movement in finance leases of £0.6m. PENSION Year to 31 Aug 2007 £m ------------ Opening IAS 19 deficit (49.0)One off contribution 25.0Additional funding 5.4Charge to income statement and other cash movement (0.4)Actuarial gains 23.5Plan curtailment 5.4Effect of IAS 19 asset cap (9.9)--------------------------------- ------------Closing IAS 19 balance ---------------------------------- ------------ The Smiths News defined benefit pension deficit under IAS 19 of £49.0m at 31August 2006 now stands at zero. There have been a number of significantmovements during the year. On 1 September 2006, a one-off contribution of £25.0mwas made to the Smiths News section of the Pension Trust and we have paid thefirst of five additional payments of £5.4m per annum as agreed with theTrustees. Actuarial gains of £23.5m were achieved in the year, due to the out-performanceof the equity call options and the widening spread between corporate bond yieldsand the swap yields underlying the LDI assets. The scheme was closed to futureservice accrual in May 2007, resulting in an actuarial curtailment credit of£5.4m. It is uncertain whether the resultant surplus after these movements canever be realised by the Company, therefore an asset cap of £9.9m has beenapplied to result in a zero funding position under IAS 19 at 31 August 2007. Group Income Statement for the year ended 31 August 2007 2007 2006£m Note Underlying* Non-recurring Total Underlying* Non-recurring Total items** items** ----- --------- -------- ------- -------- -------- ------- Continuing operationsRevenue 1,232.4 - 1,232.4 1,210.6 - 1,210.6------------- ----- -------- -------- -------- ------- -------- -------Operating profit 2 36.0 5.4 41.4 33.0 1.3 34.3Investment revenues 4 0.7 - 0.7 - - -Finance costs 5 (5.7) - (5.7) (2.3) - (2.3)------------- ----- -------- -------- -------- ------- -------- -------Profit before tax 31.0 5.4 36.4 30.7 1.3 32.0Income tax expense 6 (6.1) (1.6) (7.7) (6.4) - (6.4)------------- ----- -------- -------- -------- ------- -------- -------Profit after tax fromcontinuing operations 24.9 3.8 28.7 24.3 1.3 25.6Profit for the year fromdiscontinued operations - - - 32.1 - 32.1------------- ----- -------- -------- -------- ------- -------- -------Profit for the year 24.9 3.8 28.7 56.4 1.3 57.7------------- ----- -------- -------- -------- ------- -------- ------- Earnings per shareFrom continuing operations Basic 8 16.1p 14.9pDiluted 8 15.8p 14.8p From continuing and discontinued operations Basic 8 16.1p 33.5pDiluted 8 15.8p 33.3p---------------------------------------------------------------------------------------------------------Non GAAP MeasuresEquity dividends per share 7 6.4p 6.0p--------------------------------------------------------------------------------------------------------- *Before non-recurring items described below. **Non-recurring items include an actuarial curtailment credit on the pensionscheme in 2007 and a profit on property disposals in 2006 as set out innote 2. Group Balance Sheet at 31 August 2007 £m Note 2007 2006 ---------- ----------- ----------Non-current assetsIntangible assets 3.4 2.6Property, plant and equipment 18.2 19.2Deferred tax assets 6.0 15.6Interest in associate 0.2 0.3Derivative financial instruments 0.9 -------------------------- ----------- ---------- 28.7 37.7 ----------- ----------Current assetsInventories 11.9 12.2Available for sale investments 1.1 -Trade and other receivables 53.0 70.0Cash and cash equivalents 0.4 10.8------------------------- ----------- ---------- 66.4 93.0 ----------- ----------Total assets 95.1 130.7------------------------- ----------- ----------Current liabilitiesTrade and other payables (108.0) (118.5)Current tax liabilities (8.8) (14.6)Obligations under finance leases (1.5) (1.3)Bank loans and other borrowings (5.0) -------------------------- ----------- ---------- (123.3) (134.4) ----------- ----------Non-current liabilitiesBank loans and other borrowings (44.6) (49.6)Retirement benefit obligation 3 - (49.1)Deferred tax liabilities (1.6) (1.7)Long-term provisions (0.5) (0.7)Obligations under finance leases (2.0) (1.6)Other non-current liabilities (0.5) (0.9)------------------------- ----------- ---------- (49.2) (103.6) ----------- ----------Total liabilities (172.5) (238.0)------------------------- ----------- ----------Total net liabilities (77.4) (107.3)------------------------- ----------- ---------- EquityCalled up share capital 9.1 9.1ESOP reserve (3.7) (7.1)Other reserve (280.1) (280.1)Hedging reserve 0.9 -Retained earnings 196.4 170.8------------------------- ----------- ----------Total equity (77.4) (107.3)------------------------- ----------- ---------- Group Cash Flow Statement for the year ended 31 August 2007 £m Note 2007 2006 ------- ---------- ----------Net cash inflow from operating activities 9 9.0 105.3------------------------------ ------- ---------- ----------Investing activitiesInterest received 0.7 1.6Loan repaid by associate 0.1 -Proceeds on disposal of property, plant and equipment - 10.5Proceeds on settlement of loan notes - 11.3Non-operating disposal costs - (3.0)Net cash in subsidiaries disposed - (66.4)Purchase of property, plant and equipment (1.4) (26.4)Purchase of intangible assets (1.8) (5.0)------------------------------ ------- ---------- ----------Net cash used in investing activities (2.4) (77.4)------------------------------ ------- ---------- ----------Financing activitiesInterest paid (4.5) (7.3)Dividend paid (10.9) (25.0)Repayments of obligations under finance leases (1.6) (5.6)New bank loans raised (net of financing costs) - 49.2Repayments of borrowings - (76.6)Derivative cash movements - (0.5)Issue of shares to satisfy employee share - 5.8schemesRepurchase of equity component of "C" shares - (3.3)------------------------------ ------- ---------- ----------Net cash used in financing activities (17.0) (63.3)------------------------------ ------- ---------- ---------- Net (decrease) / increase in cash and cash equivalents - (10.4) 3.6continuing operationsNet increase in cash and cash equivalents - discontinued - 27.4operationsNet cash in subsidiaries disposed - discontinued - (66.4)operations ------- ---------- ----------------------------------------Net decrease in cash and cash equivalents in year (10.4) (35.4)Opening net cash and cash equivalents 10.8 46.2------------------------------ ------- ---------- ----------Closing net cash and cash equivalents 0.4 10.8------------------------------ ------- ---------- ---------- Group Statement of Recognised Income and Expense for the year ended 31 August 2007 £m Note 2007 2006 ------ --------- ---------Exchange differences arising on translation of foreign operations - (2.2)Gain / (loss) on cash flow hedges 0.9 (2.0)Actuarial gains / (losses) on defined benefit pension scheme 3 23.5 (32.8)Effect of asset limit on defined benefit pension scheme 3 (9.9) UK deferred tax attributable to defined benefit pension scheme liabilities (8.2) 7.3UK current tax attributable to the additional defined benefit pension schemecontributions 3.9 4.0 -------------------------------- ------ --------- ---------Net income/(expense) recognised directly in equity 10.2 (25.7)Profit for the year 28.7 57.7-------------------------------- ------ --------- ---------Total recognised income and expense for the year 38.9 32.0-------------------------------- ------ --------- --------- Total recognised income and expense for the year is fully attributable to theequity holders of the parent company. Notes to the financial statements 1. Segmental analysis of results Revenue and profit before tax are derived from the one principal activity ofthe group, being the wholesaling of newspapers and magazines. The group operatessolely in the UK. Revenue for the year to 31 August 2006 includes £115.9m of sales to WH SmithPLC. Prior to the demerger these were treated as inter-company revenue andtherefore excluded from revenue in the published accounts for the year. 2. Operating profit Non-recurring items included within operating profit from continuing operationsamounted to £5.4m (2006: £1.3m). These are: 2007: Actuarial curtailment credit of £5.4m included within administrativeexpenses arising on the closure of the defined benefit pension scheme, see note3. There is an associated deferred tax impact of £1.6m which has beenseparately disclosed. 2006: One-off property profits of £1.3m included within administrative expensesarising on the disposal of freehold properties. £m 2007 2006 ----------- -----------Revenue 1,232.4 1,210.6Cost of sales (1,107.2) (1,081.5)-------------------------------- ----------- -----------Gross profit 125.2 129.1Distribution costs (60.2) (63.2)Administrative expenses (23.6) (31.6)-------------------------------- ----------- -----------Operating profit 41.4 34.3-------------------------------- ----------- ----------- The operating profit is stated after charging: £m 2007 2006 ----------- -----------Cost of inventories recognised as an expense 1,059.4 1,034.7Depreciation and amounts written off property, plant & equipment 4.5 4.1Amortisation of intangible assets 1.0 2.5Net operating lease charges • land and buildings 5.2 5.2 • equipment and vehicles 2.5 2.9Staff costs 73.1 76.5Auditors' remuneration (see below) 0.5 2.2-------------------------------- ----------- ----------- Fees payable in the continuing & discontinued operations to Deloitte & ToucheLLP, the Group's auditors, included in the income statement related to: Audit Fees 0.1 0.3Non-audit fees 0.4 1.9-------------------------------- ----------- ----------- 0.5 2.2 ----------- ----------- Fees payable to Deloitte & Touche LLP, the Group's auditors, included in theincome statement relating to audit fees amount to £0.1m (2006: £0.3m),consultancy services £0.4m (2006: £nil) and fees related to further assuranceservices associated with the demerger of WH Smith PLC £nil (2006: £1.9m). 3. Retirement benefit obligation Pension arrangements for employees are operated through a defined benefit schemeWH Smith Pension Trust ("Pension Trust"), and a defined contribution scheme, WHSmith Retirement Savings Plan. The most significant is the Pension Trust whichis described in note 3 (a). The scheme is independent of the Company and isadministered by a Trustee. The Trustee of the Pension Trust has extensive powersover the pension plan's arrangements, including the ability to determine thelevels of contribution. On the date of demerger, 31 August 2006, the assets and liabilities of thePension Trust and the WH Smith Retirement Savings Plan were split between SmithsNews PLC and WH Smith PLC by way of a 'sectionalisation'. The Smiths Newssection only contains the accounts of members who are or were employed by SmithsNews. There is no cross-subsidy or cross-guarantee between the sections of thePension Trust. The assets and liabilities of the Pension Trust were allocated to the SmithsNews section in proportion so as to reflect the related liabilities of active,deferred, pensioner and orphan members belonging to Smiths News. The amounts recognised in the balance sheet within non-current liabilities inrelation to these plans are as follows: £m 2007 2006 ------------ -----------Present value of the obligation (311.3) (334.0)Fair value of plan assets 321.2 285.0Amounts not recognised due to asset limit (9.9) --------------------------------- ------------ -----------Deficit - (49.0)-------------------------------- ------------ -----------Retirement medical benefit liability - (0.1)-------------------------------- ------------ -----------Retirement benefit obligation recognised in the balance sheet - (49.1) ------------ ------------------------------------------- An amount of £9.9m has not been recognised in the balance sheet due to theeffect of IAS 19 ("Employee Benefits") paragraph 58b, as it is uncertain whetherthis surplus can ever be realised by the Company. (a) Defined benefit pension scheme The Pension Trust On 1 September 2006, a one-off contribution of £25.0m was made to the PensionTrust by the Group. In addition, the Group has paid £5.4m to the Pension Trustover the course of the year. As agreed with the Trustees, the Group will makefour further payments of this amount over the next four years. The Group announced its proposal to change the future benefit structure of thePension Trust on 9 January 2007 and issued details of the new arrangements forconsultation. Following a period of consultation the Trust closed to futureservice accrual from 1 May 2007. Accrued benefits will be linked to RPI growtheach year (capped at 5 per cent). The closure to future accrual will not affectthe pensions of those who have retired or the deferred benefits of those whohave left service or opted out before 1 May 2007. This amendment to the schemehas created a £5.4m actuarial curtailment credit included within operatingprofit. A full actuarial valuation of the Scheme is carried out every three years withinterim reviews in the intervening years. The latest full actuarial valuation ofthe Pension Trust was carried out as at 31 March 2006 by independent actuaries,Mercer Human Resource Consulting, using the projected unit basis. On an ongoingbasis, the actuarial gross defined benefit pension deficit at 31 March 2006 wasapproximately £63m (approximately £44m net of related deferred taxes) for theSmiths News PLC section of the Pension Trust. The ongoing deficit wasgreater than the IAS19 deficit primarily due to the different assumptions andcalculation methodologies. The Pension Trust Trustee has adopted a Liability Driven Investment 'LDI' policyin order to substantially reduce the volatility in the underlying investmentperformance and reduce the risk of a significant increase in the deficit in thefund. The assets are invested such that they are expected to alter in value inline with changes in the pension liability caused by changes in interest andinflation. The key features of the investment policy are: • 94% of the Pension Trust's assets were invested in an LDI policy with a leading international institutional fund manager; and • 6% of the Pension Trust's assets were used to purchase a portfolio of long-dated equity call options. These represent a notional exposure to underlying equities of some £98m. The valuation of the defined benefit pension scheme used for the accountdisclosures are based upon the most recent valuation. Scheme assets are statedat their market value at the relevant reporting date. The principal long-term assumptions used to calculate scheme liabilities underIAS 19 are: % 2007 2006 ------------- --------------Rate of increase in salaries 4.22 4.00Rate of increase in pension payments and deferred 3.22 3.00pensionsDiscount rate 5.69 5.10Inflation assumptions 3.22 3.00--------------------------- ------------- -------------- The amounts recognised in the income statement for continuing and discontinued operationswere as follows: £m 2007 2006 ------------- --------------Current service cost (2.1) (9.5)Interest cost (16.9) (46.9)Expected return on scheme assets 15.7 42.4Plan curtailment 5.4 ---------------------------- ------------- -------------- 2.1 (14.0) ------------- -------------- The charge for the current service costs and the actuarial curtailment credithas been included within administrative costs. Movements in the present value of the defined benefit scheme obligation in theyear were as follows: £m 2007 2006 ------------- -------------At 1 September (334.0) (967.6)Current service cost (2.1) (9.5)Interest cost (16.9) (46.9)Actuarial gains / (losses) 21.9 (16.6)Benefits paid 14.4 32.8Plan curtailment 5.4 -Subsidiaries disposed - 673.8--------------------------- ------------- -------------As at 31 August (311.3) (334.0)--------------------------- ------------- ------------- Movements in the fair value of defined benefit scheme assets in the year were asfollows: £m 2007 2006 ------------- -------------At 1 September 285.0 871.5Expected return on scheme assets 15.7 42.4Net actuarial gains / (losses) 1.6 (16.2)Contributions 33.3 28.4Benefits paid (14.4) (32.8)Subsidiaries disposed - (608.3)--------------------------- ------------- -------------As at 31 August 321.2 285.0--------------------------- ------------- ------------- An analysis of the defined benefit scheme assets at the balance sheet date isdetailed below: £m 2007 2006 ------------- -------------Cash 315.8 274.9Inflation swaps (13.8) (6.9)Equity call options 19.2 17.0--------------------------- ------------- ------------- 321.2 285.0 ------------- ------------- The actual return on plan assets was £17.3m (2006: £26.2m). The expected rate of return on these investments, calculated as a weightedaverage of the expected return on the LDI fund and the equity call options, was5.68 per cent at 31 August 2007 (5.01 per cent at 31 August 2006). The mortality assumptions (in years) underlying the value of the accruedliabilities are: Male Female ------------- -------------Life expectancy at age 65Member currently aged 65 20.1 22.9Member currently aged 45 21.4 24.1--------------------------- ------------- -------------Life expectancy at age 60Member currently aged 60 24.9 27.7Member currently aged 45 25.9 28.7--------------------------- ------------- ------------- The mortality assumptions are based on the standard PA92 medium cohort tables(as published by the Institute of Actuaries). The mortality rates underlying thetable have been increased by 25% to reflect the Trust's actual experience. The history of experience adjustments is as follows: £m 2007 2006 2005 2004 2003 ------- ------- ------- ------- -------Present value of defined benefit obligation (311.3) (334.0) (967.6) (883.0) (846.0)Fair value of scheme assets 321.2 285.0 871.5 678.0 631.0Amounts not recognised due to asset limit (9.9) - - - -------------------------- ------- ------- ------- ------- -------Deficit in the scheme - (49.0) (96.1) (205.0) (215.0)------------------------- ------- ------- ------- ------- -------Experience adjustments on scheme liabilitiesAmount (£m) 21.9 (16.6) (114.7)Percentage of scheme liabilities 7% (5%) (12%)------------------------- ------- ------- ------- ------- -------Experience adjustments on scheme assetsAmount (£m) 1.6 (16.2) 70.8Percentage of scheme assets 1% (6%) 8%------------------------- ------- ------- ------- ------- ------- (b) Defined contribution pension scheme The pension cost charged to income for the defined contribution scheme, WH SmithRetirement Savings Plan, amounted to £0.7m for the year ended 31 August 2007(2006: £3.0m). (c) Disposals Year ended 31 August 2006 WH Smith PLC On 31 August 2006, the assets and liabilities of the Pension Trust were divided into two different sections (the Smiths News PLC and the WH Smith PLC section).The gross deficit attributable to WH Smith PLC at the date of disposal was £65.5m. On demerger, the post retirement medical benefits of £0.1m were transferred toWH Smith PLC. The amount included in non-current liabilities for the WH Smith PLC portion of the defined benefit scheme is as follows: £m 2007 2006 ----------- -----------Present value of defined benefit obligation - (673.8)Fair value of scheme assets - 608.3--------------------------------- ----------- -----------Deficit - (65.5)--------------------------------- ----------- ----------- 4. Investment revenues £m 2007 2006 -------------- -------------Interest on bank deposits 0.1 -Interest received on prior year tax overpayment 0.6 ---------------------------- -------------- ------------- 0.7 - -------------- ------------- 5. Finance costs £m 2007 2006 -------------- -------------Interest on bank overdrafts and loans 4.3 0.2Interest payable on finance leases 0.2 0.3Net charge on pension schemes (Note 3) 1.2 1.8--------------------------- -------------- ------------- 5.7 2.3 -------------- ------------- 6. Income tax expense £m 2007 2006 -------- -------------Current tax 10.6 10.5Adjustment in respect of prior year UK corporation tax (3.9) (3.6)-------------------------------- -------- -------------Total current tax charge 6.7 6.9Deferred tax - current year (0.6) (0.5)Deferred tax - non-recurring items 1.6 --------------------------------- -------- -------------Tax on profit on continuing activities 7.7 6.4Discontinued operations - 11.8-------------------------------- -------- -------------Total tax on profit 7.7 18.2-------------------------------- -------- -------------Effective tax rate on continuing activities 21% 20% The effective tax rate of 21% benefits from the adjustment in respect of prioryear UK corporation tax. Over time it is expected that the effective tax ratewill trend back to the standard rate of UK corporation tax. Reconciliation of the tax charge £m 2007 2006 -------- -------------Profit before tax: continuing operations 36.4 32.0Profit before tax: discontinued operations - 43.9-------------------------------- -------- -------------Total 36.4 75.9 -------- -------------Tax on profit at the standard rate of UK corporation tax 30% 10.9 22.8Differences in connection with discontinued operations - (1.4)Permanent differences 0.7 0.4Adjustment in respect of prior year UK corporation tax (3.9) (3.6)-------------------------------- -------- -------------Total tax charge 7.7 18.2-------------------------------- -------- ------------- 7. Dividends Amounts recognised as distributions to equity shareholders in the year are asfollows: £m 2007 2006 --------- ---------Final dividend for the year ended 31 August 2006 of 4.0p (2005:9.2p) per share 7.1 15.8Interim dividend for the year ended 31 August 2007 of 2.1p (2006:5.1p) per share 3.8 8.8 --------- --------- 10.9 24.6'B' share dividend paid on capital reorganisation - 0.1'C' share dividend paid on capital reorganisation - 0.3------------------------------------ --------- --------- 10.9 25.0 --------- --------- --------- ---------Dividend in specie relating to the demerger of WH Smith PLC - 168.0 --------- --------------------------------------------- On demerger, Smiths News PLC paid a dividend in specie of £168.0m representing thenet assets demerged. The proposed final dividend of 4.3p is subject to approval by shareholders atthe Annual General Meeting and has not been included as a liability in thesefinancial statements. The proposed dividend will be paid on 8 February 2008 toshareholders on the register at close of business on 18 January 2008. 8. Earnings per share 2007 2006 Continuing Continuing Discontinued Total -------- -------- --------- -------- £m £m £m £m -------- -------- --------- --------Profit for the financial year 28.7 25.6 32.1 57.7 -------- -------- --------- -------- Number m Number m Number m Number m -------- -------- --------- --------Weighted average number of shares in issue 182.9 181.1 181.1 181.1Shares held by ESOP (weighted) (5.1) (8.9) (8.9) (8.9)Weighted average number of shares in issue for basic earnings per share 177.8 172.2 172.2 172.2Shares issuable (weighted) 3.7 1.3 1.3 1.3Weighted average number of sharesin issue for diluted earnings per share 181.5 173.5 173.5 173.5 -------- -------- --------- -------- Pence Pence Pence Pence -------- -------- --------- -------- Basic earnings per share 16.1 14.9 18.6 33.5Diluted earnings per share 15.8 14.8 18.5 33.3----------------------- -------- -------- --------- -------- 9. Net cash inflow from operating activities £m 2007 2006 ---------- ----------Operating profit from continuing operations 41.4 34.3Operating profit from discontinued operations - 52.4 ---------- ---------- 41.4 86.7Exceptional items(6) - 7.0Adjustment for pension funding (11.6) (18.9)Depreciation of property, plant and equipment 4.5 34.5Loss / (profit) on sale of property, plant and equipment 0.1 (6.0)Impairment of property, plant and equipment - 2.6Amortisation of intangible assets 1.0 6.8Non cash items 0.5 8.5Decrease in inventories 0.3 7.3Decrease / (Increase) in receivables 17.0 (6.7)(Decrease) / Increase in payables (10.9) 1.3Income taxes paid (8.1) (6.0)Decrease in provisions (0.2) (3.3)----------------------------------- ---------- ----------Net cash inflow from operating activities before exceptional items 34.0 113.8One-off pension funding payment (25.0) -Cash outflow relating to exceptional(6) item (PRMB settlement) - (2.1)Cash outflow relating to exceptional(6) item (Demerger costs) - (6.4) ---------- ---------------------------------------------Net cash inflow from operating activities 9.0 105.3----------------------------------- ---------- ---------- (6) Exceptional items are material items of income or expense that are disclosedseparately due to their nature or amount. 10. Preparation of the Preliminary Announcement (a) Basis of preparation The preliminary announcement for the 12 months to 31 August 2007 has beenprepared on the basis of the accounting policies set out in the accountingpolicies section of the Smiths News PLC Annual Report and Accounts 2006. (b) Preliminary announcement The financial information for the 12 months to 31 August 2007 and the 12 months to31 August 2006 does not comprise statutory accounts for the purpose of Section240 of the Companies Act 1985 and has been extracted from the Company'sconsolidated accounts for the year to 31 August 2007. The statutory accounts forSmiths News PLC for the 12 months to 31 August 2006 have been filed with theRegistrar of Companies and those for the 12 months to 31 August 2007 will befiled following the Company's annual general meeting. The auditors' reports onthe accounts for the 12 months to 31 August 2007 were unqualified and did notinclude a statement under Section 237 (2) or (3) of the Companies Act 1985. Whilst the financial information included in this preliminary announcement hasbeen prepared in accordance with the recognition and measurement criteria ofIFRSs, this announcement does not itself contain sufficient information tocomply with IFRSs. The Company intends to publish full financial statements that comply with IFRSs.The Annual Report and Accounts or Annual Review and Summary Financial Statementwill be posted to shareholders in December 2007. This information is provided by RNS The company news service from the London Stock Exchange