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Smiths News PLC

Preliminary Results Announcement for the year ended 31 August 2012

Smiths News PLC, the largest UK newspaper and magazine wholesaler, a leading UK book wholesaler and a leading distributor of consumable products to the education market, is pleased to announce preliminary results for the year ended 31 August 2012.

2012 HIGHLIGHTS:

·; Performance ahead of market expectations with underlying profit before tax up 23%

·; Significant momentum on diversification strategy

o Acquisition of The Consortium giving access to growing markets

o 28% of proforma(6) profits from outside of newspaper and magazine wholesaling

·; Growth and progress across the business

o Secured £200m revenue per annum from the News International Contract to 2019

o Strong performance from international and digital books markets

·; Excellent performance on cost savings and efficiencies

o £5m efficiencies delivered from Smiths News with a further £20m expected by 2015

o £2.5m year 1 synergies from integration of Dawson Holdings

·; Continuing to enhance shareholder value

o EPS of 19.9p up 28%

o Full year dividend of 8.6p up 7.5%

Mark Cashmore, Group Chief Executive commented:

"I am delighted to report another 12 months of strong financial performance with underlying profits, cash flow and earnings all up by over 20% per annum coupled with significant strategic progress. We have shown tremendous resilience in our core newspaper and magazine distribution business and made substantial progress in our books division, Bertrams. Our more recent acquisition of The Consortium represents another step forward in our diversification strategy as we look to broaden our market reach in new areas of specialist distribution. Looking ahead, we have a clear strategy for growth with opportunities in all our divisions."

The following definitions have been applied consistently throughout this document:

(1) Underlying 2012 and 2011 results exclude non-recurring items and amortisation of acquired intangibles.

(2) Free cash flow is the cash flow excluding the following; payment of the dividend, acquisitions, repayments of obligations under finance leases, the repayment of bank loans, EBT share purchase and non-recurring and other items.

(3) Net debt is calculated as total debt less cash and cash equivalents. Total debt includes loans and borrowings, overdrafts and obligations under finance leases.

(4) Smiths News like for like revenues exclude magazine and newspaper publisher contract gains and losses during the year, and the annualisation impact of gains and losses made in the prior year. Magazine and Total like for like revenues exclude the impact of part works and one shots. Bertrams like for like revenues exclude the impact of the fraudulent trading account identified in March 2011 together with contract gains and losses during the year, and the annualisation impact of gains and losses made in the prior year.

(5) Smiths News is also referred to as the Newspaper and Magazine wholesaling segment. Bertrams including Dawson Books is also referred to as the Book wholesaling segment. Dawson Media Direct (DMD) and Marketlink Marketing Communications (MMC) are also referred to as the Media and Marketing segment. The Consortium or Hedgelane Limited is also referred to as The Education and Care segment.

(6) Full year pro forma is the contribution of acquired businesses to the results of the Group, as if the acquisitions had been made at the beginning of the year.

A meeting for analysts will be held at the office of Buchanan, 107 Cheapside, London, EC2V 6DN on Tuesday 16 October commencing at 9.30am.

Smiths News PLC's Preliminary Results 2012 are available at www.smithsnews.co.uk

About Smiths News PLC:

Smiths News PLC comprises: Smiths News, the UK's leading wholesaler of newspapers and magazines; a Media and Marketing division which supplies airlines and travel points; Bertrams, a leading UK book wholesaler; and The Consortium, a leading distributor of consumable products to the UK education market.

Smiths News distributes newspapers and magazines on behalf of all the major national publishers as well as a large number of regional publishers. The business serves approximately 30,000 customers across England and Wales, supplying large general retailers as well as smaller independent newsagents. Smiths News has an approximate 55% share of the newspaper and magazine wholesaling market in the UK.

The Media and Marketing Division includes DMD a specialist supplier to airlines and travel points, and MMC a marketing services and fulfilment business.

Bertrams supplies books and ebooks to a mix of independent booksellers, on-line and multiple retailers, public and academic libraries both in the UK and 102 countries internationally. Bertrams has an approximate 45% share of the wholesale book market.

The Consortium is a leading distributor of educational consumable products. The business serves approximately 30,000 customers and has a 6% market share in the large and growing education market in the UK.

Notes to Editors

This announcement contains certain forward-looking statements with respect to Smiths News 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 Smiths News 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 taxations; industrial disputes; war and terrorism. For a more detailed description of these risks, uncertainties and other factors, please see "Risks and Uncertainties". These forward-looking statements speak only as at the date of this announcement. Unless otherwise required by applicable law, regulation or accounting standard, Smiths News PLC undertakes no responsibility to publicly update any of its forward-looking statements whether as a result of new information, future developments or otherwise.

OPERATING REVIEW

INTRODUCTION

We are pleased to announce another strong Group performance, showing significant progress across all our operating divisions and delivery of a number of strategic objectives.

Smiths News continues to maintain its market leading position, increasing profits, achieving its efficiency targets and delivering on a number of core strategic goals. In August a new contract was agreed with News International securing £200m per annum of revenues through to 2019 and giving greater certainty to our network strategy and efficiency initiatives.

Our Media and Marketing services division also produced another credible performance driven by a combination of new contract wins and a number of print contract renewals.

Bertrams has outperformed market trends, helped by the acquisition of Dawson Books and a strong trading performance from international sales, its library services division and in academic digital ebook sales.

Our most recently acquired business, The Consortium, is a significant step in our diversification strategy and is already proving to be an excellent strategic and cultural fit with the Group. In the six months since taking ownership we have been delighted with its performance both in terms of financial progress and in the opportunities it brings to the Group.

Group underlying profit before tax increased to £47.5 million, an increase of 23.1% on the previous year, generated from revenue of £1.8bn (2011: £1.7bn), reflecting the integration of Dawson Holdings and the more recent acquisition of The Consortium. A full year dividend of 8.6p represents an increase of 7.5%, the sixth consecutive year of dividend growth, and reflecting the Board's continued confidence in the Group's future prospects.

STRATEGY

We have sought to grow our newspaper and magazine business through a combination of market share gains and by extracting substantial cost efficiencies. This approach has underpinned our success and will continue to form an important part of our future plans.

We have also undertaken a selective acquisition strategy to diversify our revenue base into new specialist distribution sectors. To that end, we have successfully entered the Book, Education and Care markets through the acquisitions of Bertrams, Dawson Holdings and The Consortium.

In each of its markets the Group is a leading player with a clear reputation for sector expertise and service delivery; each division has clear and tangible growth plans. We will continue to invest in all our trading divisions and are targeting 50% of Group profits to be generated from activities outside of newspaper and magazine wholesaling by 2016, from the 2012 proforma of 28%.

SMITHS NEWS

Smiths News delivered a robust performance in what remain challenging market conditions. Underlying operating profit was £39m (2011: £38m) an increase of 2.6%.

The newspaper market produced a broadly consistent performance with LFL sales down (2.1%) compared to (2.5%) in the previous year. As in previous years, cover price inflation continues to partly offset the impact of volume decline.

As highlighted at the half-year results, the closure of the News of the World and the subsequent launch of the Sun on Sunday has been broadly earnings neutral for the Group. The Sunday market has seen significant price reductions and discounting affecting overall sales value in the short term. At a margin level, our contractual agreements with publishers protect the Group from short-term promotional pricing.

The magazine market has remained challenging with LFL sales down (6.6%) versus (9.0%) the previous year. The Jubilee, Euro 2012 and the Olympic Games generated an additional £7m in sales.

The combined LFL performance of the newspaper and magazine markets (down 4.3%) was in the middle of our forecast range of down between (3%) and (5%). This forecast continues to underpin Smiths News' medium term business plan.

In August, we were delighted to extend our contract with News International worth over £200m per annum through to 2019. This significant contract win secures our existing revenue base, and increases our market share. Importantly, it gives us clear direction for our network strategy and helps underpin our long-term efficiency plans.

Looking ahead, Smiths News remains the largest part of the Group and we have a clear plan to maintain current levels of profit, delivering continued cost savings and generating strong free cash flow. Whilst our diversification plans have been widely articulated, we believe there are substantial opportunities that continue to exist within Smiths News. These include further network rationalisation, investment in new and more efficient facilities, process re-engineering to deliver sustainable industry-wide savings and developing new organic revenue streams.

Our track record in securing efficiencies is clear, having already achieved £25m of our target of £30m savings by 2013. We are confident that the network and process work streams allow us to look beyond the remaining £5m and are therefore revising our target to £20m of cost savings over the next three years, representing £15m of new initiatives to be delivered up to 2015.

In May, Jonathan Bunting was appointed Managing Director of Smiths News. Jonathan has already established a senior team, blending industry experience with external expertise and fresh perspectives. Looking ahead, the business has a clear and focused strategy that will continue to underpin the Group's profits and cash flow.

BERTRAMS

Bertrams has had a transformational year with revenue up 31% to £174.3m and profit before tax up 84% to £6.8m. Central to this performance was the acquisition in August 2011 and the successful integration of Dawson Books.

Looking at the broader books market, it is clear that our diverse customer base is an on-going strength. Bertrams' revenues now come from a balanced portfolio of traditional and internet retailers, academic and public libraries, international customers, and a leading academic ebook platform.

Bertrams' UK wholesale sales grew 2.5% despite the wider UK consumer market contracting 7%. This performance is driven by our strength in serving the growing base of internet retailers.

International sales delivered a strong performance increasing LFL sales by 12.3% and almost 70% on an absolute basis after acquisition. The strength of the international book market, particularly Europe, the Middle East and Asia Pacific will allow us to capitalise on the growth in demand for English language books abroad. In June Bertrams acquired Houtschild a specialist supplier to academic customers based in the Netherlands; the acquisition gives Bertrams further access to customers in Northern Europe.

Sales to public libraries increased by 11.2% LFL after a difficult period in the previous year when confidence was affected by government spending cuts. Academic library sales are flat and do not appear to have been affected by changes to student funding.

Our leading academic ebook platform continues to gather momentum increasing sales by 44% year on year. Already a market leader in the UK academic market, we have targeted a number of international opportunities, as well as introducing the digital platform into markets such as the Far East.

The integrated distribution hub at Norwich has enabled significant efficiencies. We have secured in full, the targeted £2.5m of efficiencies from the integration of Dawson Books and the closure of Dawson Holdings head office. A further £1.3m is targeted for 2013 and 2014.

Looking ahead Bertrams has an enviable range of opportunities, including plans to capitalise on the growth of internet retailing, international demand and ebooks.

THE CONSORTIUM

The Consortium, has performed well since we acquired the business in April 2012. Sales are up 8.1% LFL to £26.5m with profits of £3.6m, up 9.7%. As forecast, this acquisition has been immediately earnings enhancing and has contributed 8% accretion to EPS. This performance was driven by a good performance from the core education segment which increased 9% and early years up 8%. Care, representing only 5% of the business, produced a strong performance growing revenue by 28%.

The integration of the West Mercia Supplies ('WMS') business, which was acquired by The Consortium immediately prior to our own acquisition, is progressing to plan. Our integration teams are now focusing on bringing both businesses closer which will include consolidating their product ranges, developing a single ERP platform, aligning internal processes, and creating a 'virtual' combined warehouse.

The Consortium represents an important step in a broader diversification strategy. Operating in markets which are both fragmented and growing - two key criteria highlighted at the time of acquisition - it offers substantial opportunity for the Group to leverage its core skills in new specialist distribution sectors. The Group is bringing new people, processes and investment to the Consortium; already we have strengthened the management team, expanded the sales function and are in the process of installing a new CRM system and upgraded website.

Looking ahead, there is a clear opportunity to grow the existing business and broaden it into adjacent markets. We plan to achieve a greater share of existing customer spend by expanding our sales force, better promotional campaigns and further developing the product range. Closely aligned to this we aim to further penetrate the Education sector by taking advantage of the spending flexibility that 'academy status' will give many schools. In the Care sector we are targeting contracts with care home providers (both public and private) as they expand in response to an increasingly ageing population.

Finally, we remain alert to opportunities in both the Education and Care markets for selective bolt-on acquisitions.

MEDIA AND MARKETING

Media and Marketing has delivered a very credible performance following its acquisition and subsequent reorganisation with an operating profit of £1.8m.

DMD, which supplies airlines and travel points with newspapers, magazines and inflight entertainment, is by far the largest contributor to the media and marketing division. It has had a pleasing first year in the Group, renewing contracts with (amongst others) Cathay Pacific, US Airways, Delta Airlines and Air France. Sales to other major customers, such as Ryanair, also grew as result of supplying additional routes and greater sales to on-board passengers.

New digital contracts have been secured from airline customers including Thai Airlines, El Al, Scoot and Jetairfly. We now have contracts to supply and service 5,500 iPads to a range of airlines including British Airways and Jetstar.

MMC, the marketing and fulfilment services operation has had a more challenging year, affected by the wider UK economy. To secure longer-term benefit we have focused this year on operational efficiencies and controls. In August 2012 a new management team was put in place that will help to ensure these disciplines remain a priority.

OUTLOOK

Our medium term outlook remains positive and we have a clear strategic vision to grow market share and increase profitability. Our diversification strategy is well underway and we are now targeting for 50% of Group profits to be generated from activities outside of newspaper and magazine wholesaling by 2016.

Within Smiths News we remain confident that the combination of network rationalisation and service excellence will allow the Group to generate significant cash flow whilst maintaining current levels of profitability. We have announced a further £15m of cost savings which underpins our confidence in the performance of this division.

The Media and Marketing division has opportunities for growth and expansion in the supply of both print and digital content to airlines; we are targeting 10-20% growth per annum.

Bertrams continues to trade ahead of UK market trends and we are pursuing a number of initiatives to drive medium term growth targets. Our previously stated targets of £200m of sales and £10m of profits by 2014 remains, and we expect our faster growing digital and international segments to help achieve those targets.

The Consortium continues to trade strongly in both education and care markets and we have plans to further increase share and expand into new markets. Top line revenue growth will be supported by the integration of WMS and an ongoing programme of investment which underpins our belief that this business can grow organically by c10% per annum.

The Group has started FY2013 trading in line with forecasts, and remains on track to grow profits in the current financial year in line with market expectations. It is with such confidence that the proposed 8% dividend increase is announced today.

FINANCIAL REVIEW

GROUP

Group revenues were £1,803.9m, up 4.0%.

Underlying Group operating profit of £51.2m was up 22.8% underpinned by revenue growth, ongoing cost efficiencies and acquired businesses.

Finance costs at £3.7m (2011: £3.1m) were up £0.6m in the year due to increased borrowings as a result of the acquisition of Dawson Holdings in August 2011 and The Consortium in April 2012.

Underlying Group profit before tax of £47.5m was up 23.1%.

The tax charge for the year of £11.4m represented an effective rate of 24.0% (2011: 26.9%).

Underlying profit after tax of £36.1m was up 28.0%.

EPS AND DIVIDEND

On an underlying basis, profit after tax of £36.1m resulted in an EPS of 19.9p, an increase of 4.4p or 28.4% on prior year.

Including non-recurring and other items, statutory profit after tax of £27.5m resulted in an EPS of 15.2p, up 3.1p or 25.6% on prior year.

The calculation of diluted EPS reflected the potential dilutive effect of employee incentive schemes which account for 4.3m dilutive shares (2011: 2.9m) and 1.5m shares being the weighted impact of 4.5m deferred share capital relating to the acquisition of The Consortium (2011: nil) which will be issuable in January 2014 on the achievement of financial performance targets and on continued employment to or around 30 September 2013.

Together dilutive shares increased the number of shares in FY2012 by 5.8m to 187.1m and resulted in a diluted underlying EPS of 19.3p, up 4.0p or 26.1% on prior year.

The full year dividend of 8.6p is an increase of 0.6p or 7.5% on prior year.

The proposed final dividend for the year ended 31 August 2012 of 5.8p is subject to approval by shareholders at the Annual General Meeting on 24 January 2013 and has not been included as a liability in these accounts. The proposed dividend, if approved, will be paid on 8 February 2013 to shareholders on the register at close of business on 11 January 2013.

SMITHS NEWS

Smiths News total revenues were down (1.9%) on the prior year with like for like revenues down (4.3%). This sales performance remains in the middle of our forecast range.

Gross margin rate was down 10bps as a result of sales mix as higher margin magazines declined more than newspapers.

The cost ratio improves 20bps, as a result of total cost savings of over £5m. Network savings, continued operational efficiencies and central cost savings combined to deliver our targeted cost savings for the year, now totalling £25m from the three year programme announced in October 2010.

Smiths News underlying operating profit of £39.0m increased 2.6% and resulted in an operating margin of 2.5%, up 10bps versus the prior year.

BERTRAMS

Bertrams total revenues were up 31.2% versus prior year to £174.3m with like for like revenues up 5.8%.

Revenue was up across all three of Bertrams existing channels of wholesale, library services and international. Acquired revenues from Dawson Books and Houtschild have added £44.2m to revenue.

Gross margin rate was up 200bps to 19.0% due to the mix within Bertrams existing channels and the inclusion of higher academic books margins.

The cost ratio of 15.1% has declined (90bps) on prior year with the inclusion of Dawson Books. The migration of the Rushden facility completed successfully in May and is delivering the cost benefits outlined at the time in full.

The net impact of the integration of Dawson Books has helped to increase Bertrams profitability with underlying operating profit of £6.8m resulted in an operating margin of 3.9%, versus £3.7m last year, an increase of 83.8%.

THE CONSORTIUM

The Consortium is trading well post-acquisition with revenue of £26.5m, an increase of 8% on their prior year comparison.

Gross profit was £10.2m, a margin of 38.5% and operating costs were £6.6m which represented a cost ratio of (24.9%).

Operating profit for the 4 months post acquisition was £3.6m, giving a margin of 13.6%.

On a full year equivalent basis for 2012 revenues would be £64m and underlying operating profit £6.4m.

MEDIA AND MARKETING

Media and Marketing was acquired on 23 August 2011 as part of the Dawson Holdings acquisition. Total revenues were £32.4m for the year benefitting from a full year of trading.

Gross Profit was £13.7m, a margin of 42.3%.

The cost ratio was (36.7%) resulting in operating profit for the year of £1.8m, a margin of 5.6%.

NON-RECURRING AND OTHER ITEMS

Non-recurring and other items totalled £10.9m before tax and £8.6m after tax for the financial year.

Integration costs

In FY12 the integration of the ex-Dawson Holdings businesses has resulted in a number of non-recurring costs, the largest amounts relate to redundancy costs totalling £1.1m and £0.8m related to the closure of the Rushden site and migration of the academic library book operations to Norwich. These costs bring the total to date to £5.1m (including deal fees), with no further material expenses expected.

Network reorganisation costs

During the period we have expensed a further £2.0m as a result of the network restructuring program, designed to deliver £30m of costs savings over 3 years targeted by the Group. This brings the total expensed to £4.7m since the process began. This is against the expected £5m announced in October 2010 that would be required to deliver the £30m of cost savings over 3 years. Key activities in the period include the Birmingham re-site and the announced closure of the Manchester depot. Of the costs in the period the largest amount relates to redundancy costs of £1.1m. Future costs of approximately £4m are expected to be incurred in FY13 to support the delivery of a new cost saving target to deliver a further £15m of savings up to 2015.

Acquisition costs

Acquisition costs include advisor costs associated with the acquisition of Hedgelane Ltd (The Consortium) and Houtschild Internationale Boekhandel B.V. during the year, being £2.1m. In addition to this, deferred consideration costs relating to The Consortium acquisition (£2.6m) have been recognised in the P&L reflecting the fact that the payments are contingent on future employment. The costs have been spread over the earn out periods at the expected payout levels. For further detail see note 11a. Future costs of approximately £3m are expected to be incurred in FY13.

Amortisation of acquired intangibles

Intangible assets relating to acquisitions are amortised over their expected economic lives. The charge to the income statement in the year to 31 August 2012 is £2.1m (2011: £0.9m), for which there is no associated cash impact. This comprises £0.8m relating to the acquisition of Bertrams in March 2009, £0.9m relating to the acquisition of Dawson Holdings in August 2011 and £0.4m for a part year charge in relation to the acquisition of Hedgelane Limited in April 2012. For further details see note 10. Future costs of approximately £3m are expected to be incurred in FY13.

Gain on sale of investment

Represents £0.5m profit on the disposal of a minority stake in eBooks Corporation Limited.

FREE CASH FLOW

The Group continued to generate strong free cash flow, delivering £27.2m in FY2012 and now a cumulative of £142m since demerger.

Working capital outflow of £9.1m related to the investment in stock to support sales initiatives as well as the expected impact relating to timing of retailer receipts relative to the year end in Smiths News.

Capital expenditure was £5.1m in the year, an increase of £2.0m on FY11 the main items of expenditure being resites (incl Birmingham) of £1.2m and SAP upgrade £1.0m.

Net interest paid was £3.3m, a decrease of £1.6m compared to 2011 despite increased borrowings, due to 2011 being impacted by arrangement fees of £1.9m on the facility.

Tax payments were £8.0m in the year reflecting increased profitability of the Group and 2011 having benefited from a prior year rebate of £2.8m.

Pension funding of £6.8m for the year predominantly related to the Smiths News defined benefit scheme annual pension deficit funding of £5.8m agreed at the last triennial valuation in March 2009. The movement of £0.6m on 2011 reflected pension funding costs in The Consortium.

NET DEBT

Closing net debt was £100.5m (2011: £63.3m).

Acquisitions represent a net cash outflow on the acquisition of The Consortium of £37.4m and £0.7m payable on the acquisition of Houtschild offset by £1.0m cash received for the sale of a minority investment.

We remained comfortably within our banking covenants with net debt : EBITDA at 1.6x versus a covenant test of 2.5x. We also remain comfortably within our other covenants of fixed charge cover and interest cover.

BANK FACILITIES

The Group has total facilities of £177m, comprising committed bank facilities of £142m through to November 2014 with further committed facilities of £35m secured against Group assets. Net debt as at 31 August 2012 is £100.5m representing a net debt:EBITDA ratio of 1.6x. The Group continues to operate well within its banking covenants and maintains strong relationships with its syndicate of 5 major lenders.

GOING CONCERN

The Group meets its day to day working capital requirements through its bank facilities of up to £142m, which do not expire until 30 November 2014. The Group's forecasts, taking into account the Board's future expectations of the Group's performance, indicate that there is substantial headroom within these bank facilities and the Group will continue to operate well within the covenants attaching to those facilities.

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.

RISKS AND UNCERTAINTIES

The Group operates in large and stable markets. Strong cost control is a core competency and, given the relative predictability of sales, the Group is well placed to mitigate any major risks. The Board and Executive Management Team have assessed the Group's appetite for risk and continue to monitor the key risks on an on-going basis.

The Group's key businesses have relatively secure revenues. Smiths News has agreements with the major newspaper and magazine publishers for the next four years for the vast majority of its revenues. Bertrams has contracts for its library business that run for an average of three years, whilst the remainder of trading is with established customers. Dawson Books and Dawson Media Direct have similar characteristics with the vast majority of revenues secured by contractual agreements.

The Group has robust internal procedures to monitor sales, costs, profits and risks. The Executive and Risk Committees review the principal strategic and financial risks on a quarterly basis. The Audit Committee oversees the overall risk process and reviews the outcome of this process twice a year. The business completes a detailed reforecast at least twice a year and more regularly if any significant issues arise and these forecasts are reviewed by the Board.

Our assessments of the principal risks are as follows.

·; Consumer confidence and spending

The economic environment remains uncertain, and Government spending cuts and unemployment levels have also contributed to reduced consumer confidence and discretionary spending, including the sales of newspapers, magazines and books.

The habitual nature of newspapers and magazines helps to limit the impact. Demand for books is similarly resilient and the Group strategy remains to increase sales by targeting growth sectors such as the internet and international sales. The vast majority of newspapers, magazines and books have a relatively low cover price; nonetheless, it remains possible that consumers seeking to economise could regard these as discretionary items and either stop or reduce the frequency of purchasing.

The Consortium's core markets, have very limited exposure to consumer spending.

·; Digital Media

The increasing penetration of e-book readers and tablet devices (such as the Apple ipad and Amazon Kindle), together with publishers' increased investment in digital publishing could lead to a sharper than anticipated decline in sales of traditional newspapers, magazines and books. More generally, the move from traditional printed media to digital alternatives could have an adverse impact on sales and growth opportunities.

The Group is aware that digital media will have an impact on traditional markets. However, it supports the view that the impact on newspapers, magazines and books is likely to be an evolutionary rather than revolutionary process. Printed products continue to represent the vast majority of revenues in newspapers, magazine and books. Most publishers are heavily reliant on revenues from traditional channels and have strong incentives for the continued support of these formats and brands.

The Group is aware of the increase in e-book sales, particularly in fiction, but it is important to remember that the UK consumer market for printed books has an estimated value of £1.5bn. Academic libraries, public libraries and international sales increase the market opportunity further.

Bertrams' e-book platform is facilitating our entry into the growing market for digital books in the academic sector.

The Group will continue to monitor market developments in the digital arena closely and is currently undertaking a strategic review as to how best to benefit from any move from traditional printed media to digital alternatives.

·; Impact of industry regulation in the newspaper and magazine market

The OFT's decision not to prioritise further review of the newspaper and magazine industry has been challenged by some retail associations and is under review by the Competition Appeals Tribunal (CAT).

If the appeal is upheld, the OFT would be required to look again at the basis of its prioritisation decision, reopening the possibility of a further review of the industry. This could lead to uncertainty and reluctance by publishers to commit to long term contracts.

The appeal to the CAT, even if successful, would not directly trigger further review. The Group would continue to maintain its position, supported by many other industry stakeholders that the supply chain serves consumers well and efficiently.

Whilst the possibility of a wider industry review is outside of the Group's direct control, the combination of leading service and the most efficient operation means Smiths News is well placed to respond to any realistic outcome.

The Group is always conscious of the unique arrangements in the newspaper and magazine industry and is vigilant of its responsibilities under competition law.

·; Accelerated declines in sales impacting on newspaper and magazine and book publishers

An accelerated decline in sales of newspapers, magazines or books could have an adverse effect on revenues and undermine the business model of publishers. This could lead to title closures, reduced investment in products and promotions, or even the failure of some publishers.

National newspapers have a long-term trend of price increases mostly offsetting the impact of volume declines; they continue to demonstrate relative resilience.

Magazines have been more severely impacted by the wider economy with reduced sales and fewer new launches. Nonetheless, more than 3,500 consumer magazines are in circulation in the UK and publishers continue to regard these as valuable brands.

Over recent years we and the publishers have adjusted our respective business models to account for anticipated reductions in sales and, in the event of accelerated sales declines, additional cost saving actions could be taken. In any case, the current run rate of sales performance decline remains within our medium term strategic forecast of 3% to 5% per annum.

·; Contract renewal

At the time of contract renewal, publishers could seek alternative routes to market in some of Smiths News' current territories, which would result in lower sales. There also remains the risk of contract renewals at lower margin.

Smiths News has the majority of its major contract revenues secured until at least 2015 and is well positioned to renegotiate its contracts as and when they come up for renewal.

In August 2012, the Group announced a major new contract with News International through to 2019. The contract awarded an increased market share to Smiths News in place of News International's in-house operation.

News International's titles represent approximately 35% market share of national newspaper sales and our market share of these titles has increased from 38.6% to 48.6%. The NI contract significantly de-risks the potential impact of further contract renewals, and gives greater certainty over the future of the network.

·; Impact of Public Sector spending

The Government's plan to reduce spending in the public sector has had a detrimental impact on budgets for public libraries, reducing the value of on-going expenditure and future contracts. In the academic sector, the changes to student funding could also, over time, reduce the number of students with a consequential impact on library purchases.

Changes to funding in the education and care sectors could see similar cutbacks with consequential impacts on The Consortium.

The Group has planned on the basis that available funds in the public sector will be more limited. After a volatile period in 2011, spending levels and order patterns in libraries have settled into a more consistent pattern - indeed, in 2012 some 'bounce back' in spending was experienced in the public library consortia. Looking ahead, the Group expects the position to remain stable, though further increases in core spending are unlikely.

The impact of changes to student funding in the academic library market remains less clear, as the Group has research to suggest the increase in student fees may also lead to improved library resources. The Group will monitor the market closely and respond accordingly.

The Consortium supplies the Education and Care sectors, both of which are forecast to grow on the basis of demographic factors. Whilst a degree of budget tightening has been experienced with some customers, The Consortium's core product lines are day-to-day consumable items that schools and care providers require on a regular basis and are less discretionary than, for example, capital investments.

·; Property and lease commitments

Potential liabilities could crystallise in respect of previous assignments of leases where the liability could revert to the Group if the lessee defaulted. Pursuant to the terms of the 2006 Demerger Agreement with WH Smith PLC, any other such contingent liability which becomes an actual liability will be apportioned between Smiths News PLC and WH Smith PLC in the ratio 35:65 (provided that the actual liability of Smiths News PLC in any 12 month period does not exceed £5m). The Group's share of these leases has an estimated future cumulative gross rental commitment at 31 August 2012 of £10.9m (2011: £13.9m).

Although the total liability is significant, many of the leases were assigned to retail companies that continue to trade well and are financially robust. Given the expiry of time, it is also likely that many of the leases included within the contingent liability have been renegotiated such that any liability has been extinguished. The maximum potential lease liability will continue to decline, with an estimated maximum liability of below £5m by August 2015.

The Group, working with WH Smith PLC, has either sub-let or reached a mediated settlement in relation to five leases following a Creditor Voluntary Agreement made by, and subsequent administration of, Focus (DIY) Limited. The cost of the mediated settlements to the Group totalled £1.6m and liability for three properties remains outstanding.

The cash impact resulting from the estimated future cumulative gross rental commitment would spread over more than 10 years.

·; Financial exposure to key retailers and publishers

The failure of one or more of the Group's major customers and suppliers could affect the Group's profitability and cash flows.

The Group monitors payments carefully and has a strong track record of cash collection from its customer base. Payment for newspapers and magazines from smaller retailers is generally received on a weekly basis and their reliance on these products means that settlement of our invoice is generally prioritised.

The Group's largest credit exposure is to some of the UK's major retailers who have strong credit ratings. Of our larger retailer customers, the top five are major UK PLCs with good payment records and credit ratings. We also have credit insurance against a number of smaller retail chains. The average credit period taken on sale of goods is 21 days (2011: 21 days). We continue to manage our credit risk tightly to ensure our customers comply with payment terms.

Our largest suppliers are large companies, and in some cases part of larger quoted companies, with established and stable business models.

The Group is aware thatfailure of one or more of our publisher / distributor suppliers could result in exposure to a significant cash shortfall if the credits due to retailers for unsold copies are greater than any outstanding payments due to the failed publisher / distributor. The Group monitors stock and unsold levels on a regular basis and where appropriate it phases payments to publishers to ensure any exposure is minimised; we also use external data to monitor credit ratings on a regular basis. Furthermore, in May 2012, we have put in place credit insurance over some (but not all) of the publishers / distributors in order to further mitigate this risk.

·; Treasury Risk

The Group finances its operations partly through draw down of interest bearing bank loans and overdrafts. Adverse movements in interest rates could therefore impact profitability and net assets.

The Group has a centralised treasury function to manage Group treasury risk with clear guidelines laid down by the Board. Treasury's role is to ensure that appropriate financing is available for running the businesses of the Group on a day to day basis, allowing for investments and acquisitions whilst minimising interest cost. No transactions of a speculative nature are undertaken. Dealings are restricted to those banks with suitable credit ratings and counterparty risk and credit exposure is monitored frequently.

The Group uses derivative financial instruments to reduce exposure to interest rate movements. As at 31 August 2012, 60% of the Group's borrowings were at fixed rates.

·; International Governance

The Group has growing interests in overseas operations, with offices and staff in over 30 countries.

The management and governance of these distant operations has potential to expose the Group to risks such as fraud, contractual irregularities and other legal and regulatory breaches of local law.

The Group has invested in additional resources and instructed external advisors to help ensure high standards in the management of its international operations.

Whilst important for future opportunities and growth, the Group's overseas operations remain a relatively small proportion of overall staff and revenues and exposure is, in part, limited as a result. Furthermore a significant amount of international trade is routed and invoiced through the UK operations, again reducing exposure to potential financial irregularities.

Governance of overseas operations is overseen locally with specialist advice but also from the UK by the Group's management, who routinely review operational and governance effectiveness.

Smiths News PLC

Group Income Statement for the year ended 31 August 2012

* Before non-recurring and other items

Non-recurring and other items are set out in Note 4.

Group Statement of Comprehensive Income for the year ended 31 August 2012

Total comprehensive income and expense for the year is fully attributable to the equity holders of the parent company.

Smiths News PLC

Group Balance Sheet at 31 August 2012

* £1.3m of accruals in the prior year have been restated within provisions due within one year to agree with current year treatment.

Smiths News PLC

Group Balance Sheet at 31 August 2012 (continued)

The accounts were approved by the Board of Directors and authorised for issue on 16 October 2012 and were signed on its behalf by:

Registered number - 05195191

Mark Cashmore Nick Gresham

Group Chief Executive Chief Financial Officer

Smiths News PLC

Group Statement of Changes in Equity for the year ended 31 August 2012

Smiths News PLC

Group Cash Flow Statement for the year ended 31 August 2012

Analysis of net debt

Smiths News PLC

Notes to the preliminary announcement

1. Preparation of the preliminary announcement

(a) Basis of preparation

Whilst the financial information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards (IFRS), this announcement does not itself contain sufficient information to comply with IFRSs.

The preliminary announcement for the 12 months to 31 August 2012 has been prepared on the basis of the accounting policies set out in the accounting policies section of the Smiths News PLC Annual Report and Accounts 2012.

As detailed in Note 12, the Group has committed bank facilities in place of £142m, plus additional flexibility to secure further borrowings on Group assets of up to £35m. The Group's forecasts and projections, taking account of reasonable potential variations in trading performance and the Group's negative working capital position, show that the Group should be able to operate within the level of its current financing for the foreseeable future.

Despite the current economic uncertainty 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.

(b) Preliminary announcement

The financial information set out above does not constitute the Group's statutory accounts for the years ended 31 August 2011 or 2012, but is derived from those accounts. The statutory accounts for Smiths News PLC for the 12 months ended 31 August 2011 have been delivered to the Registrar of Companies and those for the 12 months ended 31 August 2012 will be delivered following the company's annual general meeting.

The auditors have reported on those accounts; their reports were unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain statements under s498(2) or (3) Companies Act 2006.

The Company intends to publish the Annual Report and Accounts that comply with IFRSs. The Annual Report and Accounts will be available for shareholders in December 2012 at www.smithsnews.co.uk.

2. Segmental analysis

In accordance with IFRS 8 'Operating Segments', Group 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.

These operating segments are:

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.

Information about major customers

Included in revenues arising from Newspaper and magazine wholesaling are revenues of approximately £170m (2011: £180m) which arose from sales to the Group's largest customer.

Segment assets and liabilities

Segment depreciation, amortisation and non-current asset additions

Geographical analysis

3. Operating profit

The Group's results are analysed as follows:

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 Corporate Governance Report of the annual report. No services were provided pursuant to contingent fee arrangements.

Other services includes non-audit services related to work reporting accountant performed in relation to the acquisition of The Consortium, where it was appropriate for this work to be undertaken by the Group's auditor.

During the year the Group commissioned a digital strategy review of the books market. After careful consideration of proposals from a number of providers the Board appointed a Deloitte digital strategy team based on market understanding, service and price.

Within the next financial year the Board intends to hold a tender for the provision of audit services.

4. Non-recurring and other items

The Group incurred a total of £8.6m in non-recurring and other costs, after tax. This comprises:

Integration costs

In FY12 the integration of the ex-Dawson Holdings Plc businesses has resulted in a number of non-recurring costs, the largest amounts relate to redundancy costs totalling £1.1m and £0.8m related to the closure of the Rushden site and migration of the academic library book operations to Norwich. These costs bring the total to date to £5.1m (including deal fees), with no further material expenses expected.

Network reorganisation costs

During the period we have expensed a further £2.0m as a result of the network restructuring program, designed to deliver £30m of costs savings over 3 years targeted by the Group. This brings the total expensed to £4.7m since the process began. This is against the expected £5m announced in October 2010 that would be required to deliver the £30m of cost savings over 3 years. Key activities in the period include the Birmingham re-site and the announced closure of the Manchester depot. Of the costs in the period the largest amount relates to redundancy costs of £1.1m. Future costs of approximately £4m are expected to be incurred in FY13 to support the delivery of a new cost saving target to deliver a further £15m of savings up to 2015.

Acquisition costs

Acquisition costs include advisor costs associated with the acquisition of Hedgelane Ltd (The Consortium) and Houtschild Internationale Boekhandel B.V. during the year, being £2.0m. In addition to this, deferred consideration costs relating to The Consortium acquisition (£2.6m) have been recognised in the P&L reflecting the fact that the payments are contingent on future employment. The costs have been spread over the earn out periods at the expected payout levels. For further detail see note 11a. Future costs of approximately £3m are expected to be incurred in FY13.

Amortisation of acquired intangibles

Intangible assets relating to acquisitions are amortised over their expected economic lives. The charge to the income statement in the year to 31 August 2012 is £2.1m (2011: £0.9m), for which there is no associated cash impact. This comprises £0.8m relating to the acquisition of Bertrams in March 2009, £0.9m relating to the acquisition of Dawson Holdings in August 2011 and £0.4m for a part year charge in relation to the acquisition of Hedgelane Limited in April 2012. For further details see note 10. Future costs of approximately £3m are expected to be incurred in FY13.

Gain on sale of investment

Represents £0.5m profit on the disposal of a minority stake in eBooks Corporation Limited.

5. Retirement benefit obligation

Defined benefit pension schemes

The Group operates three defined benefit schemes, of which the WH Smith Pension Trust (the 'Pension Trust') represents over 96% of the total obligation at 31 August 2012. As part of the acquisition of the Consortium, the Group acquired the assets and liabilities in respect of two other defined benefit schemes (the 'Consortium CARE' and 'Platinum' schemes).

The amounts recognised in the balance sheet are as follows:

The Pension Trust is closed to further accrual and given the LDI policy adopted by the Pension Trustee, the present value of the economic benefits of the IAS 19 surplus in the pension scheme of £40.3m (2011: £26.8m) available on a reduction of future contributions is £nil (2011: £nil). As a result the Group has not recognised this IAS 19 surplus on the balance sheet.

Future cash contributions are agreed between the Group and the Trustees of the schemes based on funding valuations carried out every three years using a different measure of the obligations (most notably using a discount rate that reflects the actual investment strategy, rather than corporate bond yields as required under IAS 19).

The valuation of the defined benefit schemes for the IAS 19 disclosures have been carried out by independent qualified actuaries based on updating the most recent funding valuations of the respective schemes, adjusted as appropriate for membership experience and changes in the actuarial assumptions.

The Pension Trust

The Trust closed to future accrual in 2007. The last funding valuation at 31 March 2009 showed a deficit of £50m and the Group agreed with the Trustee to make deficit contributions of £5.8m p.a. plus £0.5m p.a. to cover expenses until 31 March 2019. These amounts are currently being reviewed as part of the 31 March 2012 funding valuation, current forecasts for FY13 include the £5.8m. The assets in the Trust include an interest rate and inflation swap portfolio to remove the majority of the exposure to movements in both variables on a funding valuation measure. The Trust invests in a series of asset classes targeting a return above LIBOR to generate its required payments under the swaps. There is also a small investment in a portfolio of equity call options to retain an exposure to equity markets with limited downside risk.

Other defined benefit schemes

For the Consortium CARE and Platinum schemes, the Group contributed £0.5m in 2012 and expects to contribute £0.4m in 2013. The next funding valuation of the Consortium CARE scheme is due on 31 December 2013. The next funding valuation of the Platinum scheme is due at 31 December 2012.

The principal long-term assumptions used to calculate scheme liabilities on all Group schemes are:

A summary of the movements in the net balance sheet asset/(liability) and amounts recognised in the Group Income Statement and Other Comprehensive Income are as follows:

The charge for the current service cost is included within administrative expenses. Interest cost and expected return on scheme assets are included within investment revenues.

An analysis of the assets at the balance sheet date is detailed below:

1. Investments with the aim of generating a return above Libor to finance the interest and inflation swaps in the Pension Trust (at 31 August 2012 this comprised £289m in asset and total return swap contracts and £102m in a fund comprising a range of assets from government bonds to hedge funds that targets a return above LIBOR.

2. The equity option portfolio represents a notional upside exposure to equities of around £200m.

The actual return on scheme assets during 2012 was a gain of £53.8m (2011: a loss of £27.1m).

The expected rate of return on these investments, calculated as a weighted average of the expected return on the individual asset classes was 3.7% p.a. at 31 August 2012 (4.8% p.a. at 31 August 2011).

Sensitivity of results to changes in the main assumptions:

The history of experience adjustments is as follows:

The cumulative amount of actuarial gains and losses recognised in the statement of comprehensive income since the adoption of IFRS is a loss of £28.6m (2011: a loss of £20.6m).

Defined contribution schemes

The Group operates a number of defined contribution schemes. After contributions have been made, the Group does not have any further liability in respect of these schemes. For the year ended 31 August 2012, company contributions totalled £2.0m (2011: £1.7m) which is included in the Income Statement. The Group expects to make contributions of around £2.5m for the year ending 31 August 2013.

6. Finance income and expense

7. Income tax expense

The effective underlying income tax rate for the year was 24.0% (2011: 26.9%). After adjusting for the impact of non-recurring and other items of £2.3m (2011: £0.2m), the effective statutory income tax rate was 24.9% (2011: 31.8%).

Reconciliation of the tax charge

Tax charges to other comprehensive income

8. Dividends

Amounts recognised as distributions to equity shareholders in the year are as follows:

The proposed final dividend for the year ended 31 August 2012 of 5.8p is subject to approval by shareholders at the Annual General Meeting on 24 January 2013 and in line with IAS10 - 'Events after the reporting period', this dividend has not been included as a liability in these accounts. The proposed dividend, if approved, will be paid on 8 February 2013 to shareholders on the register at close of business on 11 January 2013.

9. Earnings per share