CNCT.L Regulatory News (CNCT)

Connect Group PLC

("Connect Group" or "the Group")

Unaudited Interim Results for the six months ended 28 February 2017

Resilient H1 performance in more challenging market conditions, no change to outlook

Connect Group, a leading specialist distributor operating in four divisions; News & Media, Parcel Freight, Books and Education & Care, announces its interim results for the six months ended 28 February 2017.

Highlights:

· Proposed sale of Education & Care, a significant milestone in the Group's strategy

· Robust continuing Adjusted profit, driven by a resilient performance in News distribution

· News distribution, on track to achieve £10m of efficiencies by FY2018

· Pass My Parcel - new returns services with Amazon and French Connection, and a contract with UK Mail for returns and 'failed household deliveries', expected to go live in the second half

· Parcel Freight revenue growth of 5.1%, helping support £1.5m of planned investment

· Good free cash flow generation after allowing for increased capital expenditure

· Leverage reduced to 1.8x with a further reduction to circa 1.2x on completion of the sale of Education & Care

· Interim dividend of 3.1p reflects confidence in the ongoing strength of the Group

· No change in management expectations for the full year performance

Mark Cashmore, Group Chief Executive, commented:

"In line with our plans to focus the Group's investment on the two larger divisions, the proposed sale of Education & Care is an important milestone in our strategy. The resilience of News & Media and revenue growth in Tuffnells has underpinned our overall performance, allowing for continued investments to drive growth opportunities."

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

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

Continuing Adjusted revenue - is defined as revenue including the revenue of businesses from the date of acquisition and excludes revenue of businesses disposed of in the prior year or held for sale.

Continuing Adjusted operating profit - is defined as operating profit including the operating profit of businesses from the date of acquisition and excludes exceptional items and operating profit of businesses disposed of in the prior year or held for sale.

Continuing Adjusted profit before tax - is defined as Continuing Adjusted operating profit less finance costs attributable to Continuing Adjusted operating profit and before exceptional items; including amortisation of intangibles and network and reorganisation costs.

Continuing Adjusted earnings per share - is defined as continuing adjusted PBT, less taxation attributable to adjusted PBT and including any adjustment for minority interest to result in adjusted PAT attributable to shareholders; divided by the basic weighted average number of shares in issue.

Exceptional items - are material items of income or expense excluded in arriving at Adjusted operating profit to enable a more representative view of underlying performance. These include certain Mergers & Acquisitions related costs, amortisation of intangibles, integration costs, business restructuring costs and network re-organisation costs including those relating to strategy changes which are not normal operating costs of the underlying business. They are disclosed and described separately in the accounts where necessary to provide further understanding of the financial performance of the Group.

(2) Free cash flow - is defined as cash flow excluding the following: payment of the dividend, acquisitions and disposals, the proceeds on the disposal of freehold properties, payments of obligations under finance leases, the repayment of bank loans, EBT share purchase and cash flows relating to exceptional items.

(3) Operating cash flow is defined as operating profit adding back non-cash items amortisation, depreciation, share based payments, share of profits of jointly controlled entities, and non cash pension costs, adjusting the increase/ decrease in working capital then deducting pension contributions and tax payments in accordance with presentation in note 10.

(4) Adjusted EBITDA - is calculated as Adjusted operating profit before depreciation and amortisation. In line with loan agreements Adjusted Bank EBITDA used for covenant calculations is calculated as Adjusted operating profit before depreciation, amortisation, exceptional items and share based payments charge but after adjusting for the last 12 months of profits for any acquisitions or disposals made in the year.

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

(6) HY2017 - refers to the half year ended 28 February 2017. HY2016 refers to the half year ended 29 February 2016 and FY2016 refers to the full year ended 31 August 2016.

(7) In accordance with IFRS5 'Non-Current Assets Held for Sale and Discontinued Operations', the Education & Care division has been classified as 'held for sale' in the period and prior periods have been restated on a consistent basis. The Interim results have been prepared and presented on a continuing operations basis.

Enquiries:

A meeting for analysts will be held at the office of Buchanan, 107 Cheapside, London, EC2V 6DN on 25 April 2017 commencing at 9.30am. Connect Group PLC's Interim Results 2017 are available at www.connectgroupplc.com

An audio webcast will be available on:

http://vm.buchanan.uk.com/2017/connect250417/registration.htm

About Connect Group PLC:

Connect Group PLC is a leading specialist distributor operating in large and diverse markets. The Group has four divisions, connecting suppliers to customers in an efficient, knowledgeable and service oriented way:

• Connect News & Media- Encompassing Smiths News, Dawson Media Direct and Pass My Parcel. Smiths News is the UK's largest news wholesaling business with an approximate 55 per cent. market share. It distributes newspapers and magazines on behalf of the major national and regional publishers serving over 30,000 customers across England and Wales on a daily basis. Pass My Parcel, is a 'click and collect' delivery service; it is operated by the Smiths News business and has a network of over 3,500 parcelshops, with clients that include Amazon, ASOS and French Connection. Dawson Media Direct supplies newspapers, magazines, and digital technology and content, to over 80 airlines in 50 countries.

• Connect Parcel Freight- Encompassing Tuffnells, a leading distributor of mixed parcel freight consignments, specialising in items of irregular dimension and weight ("IDW"), examples of which include bulky furnishings, building materials and automotive parts. Tuffnells delivers over 13 million consignments a year to over 4,700 customers, the majority of which are SMEs. Distribution coverage of the UK is provided by a network of 37 depots.

• Connect Books- Combining a number of recognised brands in print and digital bookselling, including Bertrams, Dawson Books and Wordery. The division supplies a mix of traditional and online booksellers, academic and public libraries, as well as selling direct to consumers through Wordery.

• Connect Education & Care- A leading independent supplier of consumable products to the Education and Care markets through The Consortium and West Mercia Supplies. The division supplies more than 30,000 customers with a range of over 40,000 products, including stationery, arts and craft and cleaning.

Notes to Editors

This document contains certain forward-looking statements with respect to Connect Group PLC's financial condition, its results of operations and businesses, strategy, plans, objectives and performance. Words such as 'anticipates', 'expects', 'intends', 'plans', 'believes', 'seeks', 'estimates', 'targets', 'may', 'will', 'continue', 'project' and similar expressions, as well as statements in the future tense, identify forward-looking statements. These forward-looking statements are not guarantees of Connect Group PLC's future performance and relate to events and depend on circumstances that may occur in the future and are therefore subject to risks, uncertainties and assumptions. There are a number of factors which could cause actual results and developments to differ materially from those expressed or implied by such forward looking statements, including, among others the enactment of legislation or regulation that may impose costs or restrict activities; the re-negotiation of contracts or licences; fluctuations in demand and pricing in the industry; fluctuations in exchange controls; changes in government policy and taxations; industrial disputes; war and terrorism. These forward-looking statements speak only as at the date of this document. Unless otherwise required by applicable law, regulation or accounting standard, Connect Group PLC undertakes no responsibility to publicly update any of its forward-looking statements whether as a result of new information, future developments or otherwise. Nothing in this document should be construed as a profit forecast or profit estimate. This document may contain earnings enhancement statements which are not intended to be profit forecasts and so should not be interpreted to mean that earnings per share will necessarily be greater than those for the relevant preceding financial period. The financial information referenced in this document does not contain sufficient detail to allow a full understanding of the results of Connect Group PLC. For more detailed information, please see the interim announcement for the half-year ended 28 February 2017 and the Report and Accounts for the year ended 31 August 2016 which can be found on the Investor Relations section of the Connect Group PLC website - www.connectgroupplc.com. However, the contents of Connect Group PLC's website are not incorporated into and do not form part of this document.

INTERIM MANAGEMENT REPORT

OPERATING REVIEW

INTRODUCTION

The Group has delivered a resilient performance in more challenging market conditions. While trading across the divisions has been mixed, each made progress with their strategic and operational priorities.

Announced in February 2017, the proposed sale of the Education & Care division for an enterprise value of £64.4m is a major milestone in the Group's strategy. The sale will reduce net debt and enable the Group to focus on opportunities and synergies in its two larger divisions, prioritising the capabilities of these businesses, in pursuit of operational efficiency and organic growth.

Performance headlines from continuing operations (7) include:

· News & Media is on track to deliver £5m of sustainable efficiencies in FY2017 and a further £5m in FY2018.

· Pass My Parcel has grown the volume of outbound and returns, implemented new services with Amazon and French Connection (encompassing returns) and secured a new contract with UK Mail for returns and failed deliveries.

· Parcel Freight has maintained gross margins above 30% while increasing revenue from a combination of price increases and new customer growth.

· lnvestments in Smiths News' Hemel Hempstead depot, Pass My Parcel, and improvements to facilities and operating processes in Parcel Freight.

· Books revenue benefited from strong sales in UK Wholesale and Wordery. We have continued our investment in automation to deliver future efficiencies.

CONNECT NEWS & MEDIA

Total revenue for the division was £706.7m compared to £730.9m prior year and Adjusted Operating Profit was £20.7m compared to £20.9m in the prior year.

News distribution's revenue of £692.5m compares to £717.7m prior year, the reduction in core sales of 3.5% remains within the Group's strategic forecast and reflects the long-term trend in printed media. Adjusted Operating Profit of £19.6m compares to £19.9m prior year. The net impact of the new National Living Wage was a cost of £0.1m and the investment in Pass My Parcel was £2.4m compared to £2.1m cost in the prior year.

Newspaper revenue has shown continued resilience with price rises helping to offset volume declines. Magazines sales have been more challenging, declining 7.8%, with weeklies performing better than monthlies.

Operationally, Smiths News continues to deliver a high quality service in parallel to consolidating the network and improving process efficiency. Our largest ever regional hub in Hemel Hempstead is now open and when fully operational it will deliver substantial efficiencies to our operations across London and the Thames Valley. Taking all our efficiency plans together, the business is on track to deliver the expected £10m of cumulative savings over this year and next. Meanwhile, we continue to explore and target further opportunities to support the business' medium term requirements.

Pass My Parcel has increased the volume of deliveries and returns in the period to 0.38m units from 0.27m in the prior year. This level of growth is lower than was expected, a consequence of weaker than predicted outbound volumes, delays to securing contracts for new services and lower initial volumes from new clients. Despite this, by managing the increase in investment in the proposition carefully, the net cost of supporting the operation over the period has been contained to £2.4m compared to £2.1m in the prior year. Given that progress has been slower than anticipated, we no longer expect to achieve our ambitious volume target of three million for this year.

Feedback from end consumers remains positive, from independently managed customer feedback channels but the service offering and overall customer awareness is taking longer than we expected to develop at scale.

More recently, new services have been launched that we expect to deliver additional volumes in the second half. These include:

· A returns service for Amazon (launched, February 2017) and French Connection (launched, March 2017).

· A consumer to consumer delivery service ('SEND') aimed at EBay and Marketplace users (also launched in March 2017).

In the period, we have agreed a nationwide contract with UK Mail, encompassing returns and a new service, under which UK Mail's 'failed household deliveries' will be sent to Pass My Parcel outlets for collection. The implementation of the contract is planned to commence in the second half.

On the client side, we continue to see high levels of retailer interest in Pass My Parcel services with an extensive pipeline of online sellers, which we expect will increase the number of retailers on the platform in the second half of the year.

DMD, the division's media business supplying international airlines and travel points, has benefited from new contracts secured last year; revenue of £14.2m compares to £13.2m and Adjusted Operating Profit of £1.1m compares to £1.0m in the prior year. The recent withdrawal by two major airlines from supplying on-board newspapers will, however, impact revenue in the second half. In order to mitigate this loss of business, we are pursuing new geographic markets, as well as continuing to develop alternative revenue streams through digital services and delivering cost efficiencies in our operations network and processes.

CONNECT PARCEL FREIGHT

Revenue for the division of £86.6m compares to £82.4m prior year, while Adjusted Operating Profit of £4.3m compares to £5.0m prior year.

The division maintained gross margins of over 30% with price increases offsetting cost pressures from fuel increases and the National Living Wage. We have seen competitors seeking to increase volumes by price discounting to win business; however, net new customers grew by 220 (5%), building on the 258 net customer wins in the prior year period.

Despite uncertainty in the wider economy, our customer demand has held up well - consignment volumes were similar to last year and revenue per consignment has increased although the trend of lighter weight per consignment has continued. Service KPIs have also remained strong, supporting price increases that were implemented towards the end of the period. As the impact of January 2017 price increases come through, we expect the division to deliver a greater proportion of its annual profitability in the second half, compared to last year's weighting.

Our previously stated plans include addressing a range of legacy weaknesses in management, process and infrastructure that we believe would otherwise hinder sustainable growth. In practical terms, this means the division is working to transform the quality and consistency of operating procedures, while also pursuing new growth opportunities. While Health & Safety is a driving factor, it is intrinsically linked to the consistency and quality of processes across the network. Increased costs in pursuit of these goals amount to £1.5m in the period, including a review of pay frameworks for general managers and other key roles, standardisation of operating procedures, health & safety improvements and additional resources in each of training, sales, marketing and leadership. This investment in the overhead base, together with increases in capital expenditure, while impacting near term profitability and cash flow, will enhance our long term capability. Since acquisition in December 2014, we continue to leverage procurement synergies from being part of a larger group.

The division's network strategy encompasses ongoing investment to improve the quality, efficiency and capacity of operations. This combines improvement to existing facilities, the replacement of depots where required, and the commissioning of new depots in response to demand. Given lower than anticipated consignment growth we have been able to rebalance our network plan towards the improvement of existing facilities, reducing capex requirements in the first half to less than our planned investment. Nonetheless, in the period we invested £4.0m (up £2m compared to prior year) in upgrading existing facilities, including a major project to relocate the Sheffield operation, due for completion in FY2018.

CONNECT BOOKS

Divisional revenue of £118.5m compares to £103.5m in the prior period, driven by increased sales in UK Wholesale and Wordery. Adjusted Operating Profit of £1.6m compares to £1.9m in the prior period, a consequence of weaker margin mix and increases in external carriage costs. The net impact of the new National Living Wage was £0.3m.

Performance across segments of the books market remains mixed. Revenue from UK Wholesale was up 18%, helped by continued improvement in stock availability and customer service, with a strong performance over peak and growing market share. Wordery revenues grew by 27%. Academic and public library sales were down by 7.4% as a consequence of continued austerity and our further withdrawal from unprofitable public library contracts, mitigated by Dawson Books benefiting from the contract signed last year to supply a new library in the UAE.

While the Group is prioritising investment in its two larger divisions, we continue to support the Books business in operating as efficiently as possible. The installation of automated 'pick and pack' machinery in the second half of the year will provide greater capacity, especially over peak, while helping to mitigate the impact of the National Living Wage by reducing the cost of processing orders.

CONNECT EDUCATION & CARE- discontinued operation

The proposed sale of Education & Care announced in February 2017 for a £64.4m enterprise value is proceeding in line with our expectations. Shareholders of RM PLC gave their approval to the transaction on 22 March 2017 and the transaction is now being reviewed by the Competition & Markets Authority (CMA) following the parties voluntary notification. The transaction will complete following approval from the CMA.

In accordance with IFRS5 'Non-Current Assets Held for Sale and Discontinued Operations' the Education & Care division has been classified as 'held for sale' in the period and the results have been separately disclosed as 'discontinued operations'. The assets and liabilities of the division have been separately disclosed on the balance sheet.

In what was a particularly challenging period, revenue for the full six months, was £28.7m, compared to £31.6m in the prior year. Adjusted operating profit of £1.7m compared to £2.8m in the prior year.

The result for the period reflects a tightening of school budgets and has also been influenced by what was a complicated and lengthy sale process, which drew heavily on management time and impacted on priorities.

Following the announcement of the proposed sale we have recently secured a contract to be one of two companies supplying exercise books and classroom stationery into Northern Ireland schools. The division's E-Commerce offer continues to make progress with the launch of a portal for teachers to share ideas, experience and expertise. Over 45% of schools orders are now placed online compared to 35% in the prior year.

BOARD CHANGES

Colin Child, non-executive director and Chairman of the Audit Committee resigned from the Board on 21 March 2017. The Company has started the process to appoint his successor. Until this concludes, Gary Kennedy, Group Chairman, will act as interim Chairman of the Audit Committee given his relevant and recent financial and business planning experience. We would like to take this opportunity to thank Colin for his contribution during his time on the Board.

SUMMARY AND OUTLOOK

The proposed sale of Education & Care achieves an important strategic goal, allowing the Group to focus its priorities on the opportunities in its two largest divisions. Financially, the overall performance demonstrates the resilience of the Group in more challenging market conditions, while maintaining investment to support future growth.

Looking ahead, we are focusing our resources and investment on the News & Media and Parcel Freight divisions, developing the capabilities of these businesses to secure further efficiencies and generate organic growth opportunities. The proceeds from the disposal of Education & Care will materially reduce the Group's debt, providing greater flexibility in the pursuit of these goals.

The Group remains committed to providing strong returns for shareholders and the interim dividend of 3.1p reflects our confidence in the ongoing prospects of the Group.

There is no change in management expectations for the full year performance.

FINANCIAL REVIEW

GROUP INCOME STATEMENT EXTRACTS - CONTINUING ADJUSTED

Continuing revenue of £911.8m was down by 0.6%, with News & Media revenue declining by £24.2m, (3.3%) in line with expectations, partially offset by revenue growth of £4.2m (5.1%) in Parcel Freight and £15.0m (14.4%) in Books.

Gross profit of £111.2m was down by £0.6m, (0.5%), while gross margin remained flat at 12.2%.

Operating costs of £84.6m were up £0.6m on the prior year, as a result of increased costs in the Parcel Freight and Books divisions, offset by savings in News & Media. Savings of £4m compared to the prior year in News & Media result from ongoing efficiency projects and annualised benefits of the previous years' network restructuring programme. Cost increases of £1.5m at Parcel Freight included planned increases to wages and headcount, standardisation of the operating model including Health & Safety, and increased resources in sales, marketing and leadership. The increase of £2.3m at Books results from increased volumes, the impact of the National Living Wage, and additional increases in the price of external carriage costs. Across all the divisions the impact of the National Living Wage in the period was £0.5m, in line with our expectations.

Adjusted operating profit of £26.6m was down by £1.2m (4.4%) on the prior year. A resilient performance in News & Media saw Adjusted operating profits down only £0.2m (1.3%) and in line with expectations. Parcel Freight was down £0.7m as a consequence of tougher trading and continuing investment in the cost base of the business to build longer-term capability. Books was down £0.3m with increased revenue but a mix of lower margin sales.

Net finance costs of £3.3m were in line with prior year. Interest cost on borrowings incurred in the period was £2.3m compared to £2.4m for the prior year period. Other finance costs include finance lease interest and the interest cost on pension obligations of £0.7m (Feb 2016: £0.6m) and amortisation of banking arrangement fees of £0.3m (Feb 2016: £0.3m).

Adjusted profit before tax was down by 4.8% to £23.3m.

The tax charge for the period of £4.8m was £0.3m down on prior year, reflecting an effective tax rate of 20.6% (Feb 2016: 21.0%). This was in line with the reduction in the UK Corporation Tax rate.

Consequently, Adjusted profit after tax of £18.5m was £0.9m (4.3%) down on prior year.

EPS AND DIVIDEND

On an Adjusted continuing basis, profit after tax of £18.5m resulted in a basic EPS of 7.6p, a decrease of 5.3% on the prior year. Including exceptional items and discontinued operations, statutory profit after tax of £14.3m was attributable to equity shareholders. This resulted in a basic statutory EPS of 5.9p, a decrease of 0.4p on the prior year.

The weighted average number of shares has increased by 2.4m to 245.0m reflecting the issue of shares to meet the deferred consideration obligations in relation to the acquisition of Tuffnells.

Dilutive shares increased the basic number of shares at 28 February 2017 by 3.6m to 248.6m. This resulted in a diluted adjusted EPS of 7.4p, a decrease of 5% on the prior year.

The calculation of diluted EPS includes the potential dilutive effect of employee incentive schemes of 2.1m shares (Feb 2016: 2.1m) and the weighted impact of 1.5m shares (Feb 2016: 4.4m) expected to be issued relating to the deferred consideration for the acquisition of Tuffnells.

The Board has approved an interim dividend of 3.1p, up 3.3% on last year.

The interim dividend will be paid on 7 July 2017 to shareholders on the register at the close of business on 9 June 2017.

CONNECT NEWS & MEDIA - NEWS DISTRIBUTION INCOME STATEMENT

News distribution's revenue of £692.5m declined 3.5% on the prior year. The period saw resilience in the newspaper market; revenue was down by 0.8% with cover price inflation mitigating volume declines. Magazine revenue was down by 7.8% with weekly titles performing more strongly than higher priced monthlies.

Gross profit of £55.9m was down £4.3m (7.1%) compared to the prior year, as a result of lower volumes of higher margin weekly and monthly magazines.

Operating costs of £36.3m were £4.0m favourable to the prior year. The cost ratio of 5.1% improved by 50bps reflecting £3.1m of network and operational process savings. The impact of the National Living Wage was £0.1m in period.

Pass My Parcel incurred a loss of £2.4m (Feb 2016: £2.1m) in the period with volumes increasing to 0.38m from 0.27m in the prior year. This volume growth was lower than expected as a consequence of weaker than predicted uplifts in outbound volumes, lower initial volumes from new clients, and delays to securing contracts for new services.

News distribution's Adjusted operating profit of £19.6m was £0.3m lower than the prior year. Excluding the impact of increased costs in Pass My Parcel the business's Adjusted operating profit was flat.

CONNECT NEWS & MEDIA - MEDIA INCOME STATEMENT

Media revenue of £14.2m was up by £1.0m (6.9%) on the prior year.

This was driven by a combination of higher UK volumes, increases to the range of titles handled, and growing digital revenues from new customers. It should be noted, however, that late in the period, two major airlines have materially curtailed the provision of newspaper and magazines on flights - this will impact revenue in the second half, and while mitigating action is being taken it is unlikely to offset the full impact.

Gross profit of £7.3m is up £0.6m on the prior year; gross margin of 51.3% has increased 70bps.

Operating costs of £6.2m are up £0.5m including costs for establishing the DMD commercial offering in further overseas markets.

Adjusted operating profit of £1.1m is up by £0.1m on prior year and operating margin of 7.5% is down 10bps versus prior year.

CONNECT PARCEL FREIGHT INCOME STATEMENT

Parcel Freight revenue was £86.6m, up £4.2m (5%) on the prior year, supported by price rises late in the period and the net acquisition of 220 new customers (prior year 258 net new customers), despite competitive pressures in the market. Consignment volume was broadly flat although the picture differs regionally, with softer growth in the West region offsetting progress in the other regions.

Gross profit of £26.6m was up £0.8m (3%) driven by revenue growth. Gross margin was down 70bps compared to the prior year, but remains above 30%, as price increases offset increased fuels costs and the absorption of increased net National Living Wage costs of £0.1m. Strong service KPIs meant revenue per consignment improved although a trend towards lighter weight per consignment continued.

Operating costs of £22.3m were up £1.5m (7.2%) on the prior year. The primary factors were incremental costs of £0.6m in operations including a review of the pay framework and standardisation of operating procedures; annualised incremental costs of £0.6m in the sales & marketing, HR and Executive teams to lead transformational change and build the new business pipeline; and an increase in depreciation costs of £0.4m from higher annualised capex investment.

Adjusted operating profit was £4.3m, down 13.9% on the prior year, due to continuing investment in the service proposition and operational capability impacting overheads. Operating performance varied significantly across the regions, hence our efforts and investments are focussed on achieving a more consistently improved performance across all areas of the UK.

Capex spend of £4.0m was up £2m on prior year, but lower than expectations. We have continued to invest in upgrading the quality and capacity of facilities, however, with consignment volumes broadly flat we have not needed to expand the network at the pace originally planned.

CONNECT BOOKS INCOME STATEMENT

Books revenue of £118.5m was up 14.4% on prior year as a result of strong growth in UK wholesale and Wordery. In contrast, the UK libraries markets remain challenging with revenue below last year.

Wholesale revenue of £56.8m was up 18% driven by higher volumes from a continued improvement in stock availability and customer service. A strong trading performance over peak and a healthy new business pipeline has resulted in a growing market share. Wordery revenue grew to £31.8m, up 26.9% on the prior year. This strong growth was driven by continued expansion of its presence as a seller on 'market place' sites, and further growth in sales from the Wordery.com web presence in the UK and internationally.

Gross margin was down 70bps to 18.5% due to a change in the weighting towards wholesale and Wordery and away from higher margin libraries.

Operating costs of £20.3m were up £2.3m (12.7%) on prior year. The cost ratio of 17.1% improved 30bps. Transport and packaging costs were higher by £1.2m driven by volume and price increases, direct labour costs were up by £0.5m (of which the net impact of the National Living Wage was £0.3m). Other operational costs increased by £0.6m. Capital investment is being made to further automate the 'pick and pack' of books, which will improve service levels and raise productivity.

Overall, the adjusted operating profit of £1.6m was down £0.3m (13.5%) on prior year.

CONNECT EDUCATION AND CARE INCOME STATEMENT - DISCONTINUED OPERATIONS

Education & Care revenue of £28.7m was down £2.9m (9.1%) on the prior year.

The division has faced a challenging competitive environment, combined with a tightening of expenditure in the education sector as a whole. Core sales in Education, Care and Early Years decreased 9.2%, primarily as a result of the budgetary pressures in Primary and Secondary schools.

Gross profit of £12.7m was down £1.0m driven by the decline in revenue, but gross margins were up 60bps to 44.1% as the mix of sales favoured higher margin products in our core markets.

Operating costs of £11.0m were up £0.1m (0.9%) on prior year. The cost ratio of 38.2% increased by 340bps, as a consequence of the decline in revenue. There was no net impact from the National Living Wage.

Adjusted operating profit of £1.7m was down £1.1m on the prior year, which resulted in an operating margin of 5.9% down 280bps driven by the decline in trading in the period.

EXCEPTIONAL ITEMS

Total continuing exceptional items were £4.5m after tax, compared to £5.3m in the prior year.

Total exceptional items including discontinued were £5.5m after tax, compared to £6.2m in the prior year.

Amortisation of continuing intangibles for acquisitions, for which there is no associated cash cost, was £4.1m compared to £4.4m in the prior year.

Continuing network and reorganisation costs of £1.4m includes £0.4m for the News distribution network rationalisation programme, predominantly directed at the commissioning of a new depot in Hemel Hempstead which, when fully operational, will serve 8000 customers and become the regional 'hub' for London and the Thames Valley; corporate restructuring of £0.5m relating to FMD Limited (one of the Group's joint ventures); and back-office re-organisation costs of £0.3m which were incurred in the period.

Continuing acquisition and disposal costs of £0.9m includes deferred consideration of £0.7m, compared to £1.8m in the prior year, in relation to Parcel Freight and Wordery. Professional fees relating to corporate development activities £0.2m compared to prior year of £nil.

An exceptional past service pension credit of £0.7m was incurred in the period from a commutation of 330 Smiths News scheme members in the WH Smiths Pension Trust.

The total cash impact of exceptional items for the period, including those from prior periods, was £4.2m compared to the prior year figure of £6.9m.

FREE CASH FLOW

The Group generated free cash flow of £12.4m in the period, a decrease of £5.6m or 31.2% on the prior year. Working capital in the period was £2.0m lower than the prior period, despite being adversely impacted by two fewer regular weekly direct debit runs compared to the same period last year. The prior year included the stock build up in News distribution for sticker albums ahead of the UEFA European Football Championship in the summer of 2016.

Adjusted EBITDA of £35.2m was down £2.0m on trading performance.

Capital expenditure of £9.4m is up £3.7m year on year as a result of increased investment in Parcel Freight of £2.0m. News distribution increased capex of £1.7m including Pass My Parcel investment of £0.9m and the Hemel Hempstead hub of £0.6m.

Net interest of £2.3m is down £0.2m on prior year, as net debt continues to reduce despite the payment of increasing dividends.

Tax paid of £5.3m compared to £3.1m in the prior year, a consequence of the annualised impact of Tuffnells cash tax payments, and the prior year including a one-off £0.9m refund of overpaid tax.

Pension paid of £2.6m, in respect of News distribution, Parcel Freight and the Consortium's CARE scheme, payment consistent with prior year.

Free cash flow from continuing operations was £9.4m and discontinued operations £3.0m.

NET DEBT AND BANK FACILITIES

Net debt at the end of the period was £149.9m compared to £141.7m at August 2016 and £160.9m at February 2016. Debt at the end of the first half year is usually higher than the year end position given the weighting of free cash generation in the second half and a higher dividend payment in the first half of the year.

Other items include the net movement in the finance lease creditor of £1.2m offset by proceeds from issue of shares of £0.6m.

Net debt: EBITDA at the end of February 2017 was 1.8x versus 1.7x at August 2016 and 2.0x at February 2016. This remains comfortably within our main covenant ratio of 2.75x. The disposal of Education & Care is expected to generate gross cash proceeds of £56.5m which will be applied to reduce net debt.

The Group has a banking facility through a syndicate of five banks. The original committed facilities of £250m provided funding for over three and a half years to November 2018 and comprises a term loan, with limited amortisation, and a revolving credit facility with margin and covenants favourable to the previous facility. The first term loan repayment of £10m was made in February 2017 and the overall facility reduced to £240m. Under the terms of the agreement, the facility will reduce further with the disposal of the Education & Care business. As previously announced, we expect to renew our facility prior to the preliminary announcement of full year results in October 2017.

PENSION

The Group operates a combination of defined benefit schemes, the most significant of which is closed to new members and future accrual, as well as defined contribution schemes.

The largest scheme across the Group is the Smiths News defined benefit pension scheme (the Trust) which as at 28 February 2017 had an IAS 19 surplus of £139.6m (Aug 2016: £151.3m). However, as the pension scheme is closed to future accrual, this IAS 19 surplus is not available as a reduction of future contributions or through a funding holiday, and as a result the Group has not recognised this surplus on the balance sheet.

The Smiths News section of the WH Smith Pension Trust completed the actuarial triennial valuation as at 31 March 2015 and had an actuarial deficit of £17.5m. Smiths News has agreed with the Trust an unchanged schedule of contributions of £4.1m to March 2018, then a reduction thereafter to £3.3m to March 2020.

The Group continues to recognise the present value of the agreed deficit repair contributions as a pension liability of £10.6m (31 August 2016: £10.3m).

The Education & Care CARE and Platinum Pension defined benefit schemes had a combined IAS19 deficit at 28 February 2017 of £7.2m (Aug 2016: £7.9m). On completion of the disposal of the division, the actuarial liability will transfer to the acquirer.

The Tuffnells defined benefit scheme deficit at 28 February 2017 was £2.3m (Aug 2016: £3.0m).

RISKS AND UNCERTAINTIES

The Group has a clear framework in place to continuously identify and review its principal risks. This includes, amongst others, an annual risk appetite review performed by the Board, self-assessments performed by functional directors in each division and regular reporting to and robust challenge from the Audit Committee.

The directors' assessment of the Group's principal risks is aligned to the strategic business planning process. Across the Group, each division holds a quarterly Internal Risk Committee which is responsible for identifying, assessing and monitoring its own risks. Key risks are plotted on risk maps with descriptions, owners and mitigating actions, with each division reporting against a level of materiality consistent with its size.

Divisional risk maps are consolidated and calibrated to produce the Group's principal risk map which is reviewed and challenged quarterly by the Group Executive and Audit Committee, including the appropriateness of mitigating actions. Additional risk management support is provided by external experts in areas of technical complexity to complete our bottom-up and top-down exercise.

As part of the Board's ongoing assessment of the principal risks affecting the Group, the Board has considered the performance of the Group, its markets, the changing regulatory landscape and the Group's future strategic plans. Principal risks previously reported have been reviewed in detail and they have been refined and made more specific. Compared to the principal risks reported in the Annual Report 2016 the risk relating to Non-Adherence to Operator Licence Conditions is new, and the risk relating to a breach of airside security within the Media business has been removed as it is no longer considered to be a principal risk. This risk is still subject to ongoing monitoring and appropriate mitigation.

The table below profiles those risks that the Board believes to be most significant, together with the activity which we undertake to mitigate them.

Connect Group PLC

Condensed Consolidated Income Statement (Unaudited)

For the 6 months to 28 February 2017

Condensed Consolidated Statement of Comprehensive Income (Unaudited)

For the 6 months to 28 February 2017

Total comprehensive income for the period was fully attributable to the equity holders of the parent company.

Condensed Consolidated Balance Sheet (Unaudited)

As at 28 February 2017

Condensed Consolidated Statement of Changes in Equity (Unaudited)

For the 6 months to 28 February 2017

Condensed Consolidated Group Cash Flow Statement (Unaudited)

For the 6 months to 28 February 2017

Analysis of net debt

The movement in net debt includes £0.3m loan fee amortisation. Loan fees incurred in respect of the Group's borrowing facilities which expire in November 2018 are amortised over a 3.5 year period. The value of unamortised fees outstanding at 28 February 2017 was £0.6m.

Notes to the Condensed Unaudited Interim Financial Statements

For the 6 months to 28 February 2017

1 General Information

As in past years, these Interim Financial Statements are unaudited and not reviewed.

The information for the year ended 31 August 2016 does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. A copy of the statutory accounts for that year has been delivered to the Registrar of Companies. The auditors' report on those accounts was not qualified, did not draw attention to any matters by way of emphasis and did not contain statements under section 498(2) or (3) of the Companies Act 2006.

Going Concern

The Group meets its day to day working capital requirements through its committed bank facility of £240m which runs until November 2018.

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 within the covenants attaching to those facilities. Those bank facilities together with renewed long term contracts within News distribution with a number of publishers mean that the Group is well placed to manage its business risks successfully.

As a result, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Thus, they continue to adopt the going concern basis in preparing the condensed consolidated interim financial information.

The Group's principal areas of estimation and judgement remain unchanged since the year end and are set out in note 1 (c) on page 75 of the Annual Report for the year ended 31 August 2016.

2 Significant Accounting Policies

The unaudited condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34 'Interim Financial Reporting', as adopted by the European Union. The same accounting policies, presentation and methods of computation are followed in these unaudited condensed financial statements as were applied in the preparation of the Group's financial statements for the year ended 31 August 2016.

3 Segmental Analysis of Results

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:

As explained in note 9 Connect Education & Care, a leading distributor of education and care consumable products is held for sale with completion of the proposed transaction to be concluded following expected approval of the transaction from the Competition & Markets Authority. The division is presented as a discontinued operation and has been included below where necessary for the purpose of reconciliation.

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

Segment assets and liabilities

Segment depreciation, amortisation and non-current asset additions

Geographical analysis

4 Exceptional Items